Chapter 4 | Discounted Cash Flow Valuation

If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ________.

$121

The formula for finding the net present value of a cash outflow now, a positive cash flow in 1 year, a positive cash flow in 2 years, and a positive cash flow in 3 years is __________.

-C0+ C1/(1 + r)1 + C2/(1 + r)2+ C3/(1 + r)3

What is a difference in the future value of $100 at 7 percent interest for 5 years if the interest is compounded semiannually rather than annually?

100(1+(.07/2))^5=118.77 100(1+(.07/1))^5=140.26

Which of the following would lower the present value of a future amount? A higher interest rate A shorter time period A longer period of time A higher level of risk

A higher interest rate A longer period of time A higher level of risk

Distinguish the difference between Annual Percentage Rate and Effect Annual Rate

APR is meaningful only if the compounding interval is given. EAR is meaningful without a compounding interval

The __________ is the annual interest rate without consideration of compounding.

Annual percentage rate (APR)

What's the formula of an investment compounding m times a year which provides end-of-year wealth?

C0(1+r/m)^m

True or false: Receiving $10 today has the same value as receiving $1 today and $9 one year from now

False

True or false: The Rule of 72 is a short cut approach to estimate the time needed to double your interest rate.

False

Discounting is the process of converting _________ dollars into a __________ value.

Future; present

Which of the following are annuities? Installment load payments Tips to a waiter Monthly grocery bill Monthly rent payments to a lease

Installment load payments Monthly rent payments in a lease

The idea behind _________ is that interest is earned on interest.

compounding

If you increase the risk level of a project, the discount rate should __________ which will __________ the project's present value.

increase; decrease

A perpetuity is a constant stream of cash flows for a(n) __________ period of time.

infinite

For a positive annual percentage rate (APR) and multiple (more than one) compounding periods per year, the EAR is always ______ the APR.

larger than

A traditional (non-growing) annuity consists of a(n) ________ stream of cash flows for a fixed period of time.

level

The value of a firm can be found by taking the __________ value of all __________ cash flows.

present; future

Amortization is the process of paying off loans by regularly reducing the __________.

principal

Semiannual compounding means that interest is paid __________ per year.

two times

The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.

uneven

The annual percentage rate is the annual interest rate without consideration of __________.

Compounding

Which of the following will result in a lower present value for a given future cash flow? More risk A lower interest rate Less risk A higher interest rate Less time More time

More risk A higher interest rate More time

Which of the following are real-world examples of annuities? Mortgages Common stock dividends Pensions Preferred stock dividends

Mortgages Pensions

According to the Rule of 72, to find the amount of time required for a sum of money to double in value, you _________.

Divide 72 by the interest rate (%)