Managerial Finance Ch.5 TVM

(T/F): The multi-period formula for future value using compounding is FV = (1+r)^t

False; FV = PV * (1+r)^t

(T/F): Discounting is the opposite of compounding

True compounding increases money forward in time, discounting reduces money back in time

The _______ (smaller/greater) the interest rate changes, the greater the impact to the future value of an amount invested.

greater

The greater the number of time periods, the (smaller/greater) the impact of compounding

greater

All else equal, the longer time period you have before you will need the money, the ______ (less/more) you will need to deposit today to have the same amount in the future.

less

If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4000 in 5 years, you will need to find a _____ value.

present

Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?

r = (1000/100)^(1/10) - 1 r = (FV/PV)^(1/t) - 1

The discount rate is also called the rate of _______

return

Interest earned only on the original principal amount invested is called _____ interest.

simple

The difference between ______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) _______ every year.

simple; bigger

Which of the following methods can be used to calculate present value? a. An algebraic formula b. A financial calculator c. RNG d. A time value of money table

a,b,d An algebraic formula, a financial calculator, a time value of money table

If you invest $100 at 10 percent compounded anually, how much money will you have at the end of 3 years? a. $133.10 b. $121.00 c. $131.00 d. $130.00

a. $133.10 FV = $100 * 1.10^3 = $133.10

What is the future value of $1000 invested for 8 years at 6%? a. $1586.87 b. $1593.85 c. $1480.00

a. $1586.87 PV = 1000, n = 8, i/y = 6. Solve for FV

If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested. a. (1+r) b. (1-r) c. (1/r) d. (1*r)

a. (1+r)

Which formula below represents a present value factor? a. 1 / (1+r)^t b. 1 / (1+n)^t c. (1+r) / t d. 1/n + 1/r

a. 1 / (1+r)^t

(T/F): Small changes in the interest rate affect the future value of a small-term investment more than they would affect the value of a long-term investment.

False; small rate differences can be worth thousands of dollars, especially when either the amount or the time period is large.

(T/F): When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal.

False; the calculator is programmed to interpret 10 as 10%, and 0.1 as 0.1%

_______ value is the cash value of an investment at some time in the ______.

Future value is the cash value of an investment at some time in the future.

The basic present value equation is

PV = FVt/(1 + r)^t

(T/F): The correct future value interest factor in a time value money table for $1 in 10 years at 10 percent per year is 2.5937.

True

(T/F): The formula for a present value factor is 1 / (1+r)^t

True, this is the present value interest factor, not present value itself.

(T/F) Given the same rate of interest, more money can be earned with compound interest than with simple interest.

True, with compound interest you earn interest on interest as well as interest on the principal.

In general, if you invest for one period at an interest rate of r, your investment will grow to 1 ________ (plus/minus) r.

Your investment will grow to 1+r

Which of the following can be determined using the future value approach to compound growth developed in this chapter? a. Dividend growth b. sales growth c. erratic growth

a, and b Dividend growth and sales growth

Which of the following are correct spreadsheet functions? a. Future Value = FV (rate, nper,pmt,pv) b. Present Value = PV(rate, nper,pmt,fv) c. Interest rate = DISCOUNT (nper,pmt,pv,fv) d. Discount rate = RATE(nper,pmt,pv,fv)

a, b, and d

Why is a dollar today worth more than a dollar received in the future? a. A dollar will be worth as much in the future as it is today b. Today's collar can be reinvested, yielding in a greater amount in the future c. A dollar today is not worth more than a dollar in the future

b. Today's dollar can be reinvested, yielding in a greater amount in the future

Future value is the ________ value of an investment at some time in the future. a. indirect b. cash c. interest d. relational

b. cash

A dollar received one year from today has _____ value than a dollar received today. a. more b. less c. the same

b. less

Discounting is the opposite of ______

compounding

Calculating the present value of a future cash flow to determine its value today is called ______. a. discounted cash flow valuation b. discounted inflation modeling c. future period modeling d. presented cash flows valuation

a. discounted cash flow valuation

The equation that results in the _____ value interest factor for a single deposit is as follows: (1+r)^t a. future b. present c. past d. compound

a. future

What is the future value of $100 compounded for 50 years at 10 percent annual interest? a. $868.5 b. $11,739.09 c. $14,987.45 d. $500.00

b. $11,739.09 FV = $100 * 1.10^50 = $11.739.09

The equation that results in the _____ value interest factor for a single deposit is as follows: 1 / (1+r)^t a. future b. present c. compound d. past

b. present 1 / (1+r)^t

When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year. a. different b. the same c. stair-stepped d. regressing

b. the same

The equation that results in the ______ value interest factor for a single deposit is as follows: (1+r)^t a. compound b. past c. present d. future

c. future (1+r)^t

The basic present value equation underlies many of the ______ a. basic principles of the U.S tax code b. most crucial ideas about portfolio risk c. most important ideas in corporate finance

c. most important ideas in corporate finance

The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called ________

compounding

You invest $500 at 10 percent interest. At the end of 2 years with simple interest you will have _____ and with compound interest you will have ____. a. $550; $600 b. $605; $600 c. $550; $605 d. $600; $605

d. $600; $605

Using a time value money table, what is the future value interest factor for 10 percent for 2 years? a. 121 b. 1.10 c. 2.00 d. 1.21

d. 1.21

Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year? a. FV = $100 * 1.10 * 3 b. FV = $100 / (1.10)^3 c. FV = $100 * 0.10 * 3 d. FV = $100 * (1.10)^3

d. FV = $100 * (1.10)^3

The idea behind _____ is that interest is earned on interest. a. Simplification b. Reinsurance c. rebounding d. compounding

d. compounding

If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value. a. times interest earned b. ROE c. future value factor d. present value factor

d. present value factor

The _____ rate is the rate used to calculate the present value of future cash flows.

discount