FINA 363 Final Exam

An investor is considering the purchase of 20 acres of land. An analysis indicates that if the land is used for cattle grazing, it will produce a cash flow of $1,000 per year indefinitely. If the investor requires a return of 10% on investments of this type, what is the most he or she should be willing to pay for the land? A. $1,000 B. $150,000 C. $1,000,000 D. $100,000 E. $10,000

E. $10,000

How much does Ralph need to invest today to have $150,000 in five years if he will earn 8% interest compounded quarterly on his investment? Round to the nearest whole dollar. A. $102,041 B. $100,946 C. $73,171 D. $105,453 E. $101,351

B. $100,946

A Hummer H3 sells for $96,000 tax included. GMAC lends money at the rate of 8.6% APR. If you buy the car and borrow through GMAC, then what are the monthly (endofmonth) payments for a 6year term?

$1,711.45

Francis Scott Key just won a "Name That Tune" contest with a grand prize of $220,000. However, the contest stipulates that the winner will receive $100,000 immediately, and the remainder divided equally at the end of each of the next 12 years. Assuming that he can earn 5% on his money, what is the present value of his winnings?

$188,632.52

You will receive a $90,000 inheritance in 7 years. You could invest that money today at 7% compounded semi annually. What is the present value of your inheritance?

$55,600.36

Sally wants to buy a Ford Mustang. The MSRP is $28,478. Ford offers a purchase financing plan with no money down and 48 endofmonth payments of $690. Should she buy the car for cash or take Ford's purchase financing? Assume that she has the cash and that she could invest her money and earn at least 5%. A. Sally should borrow money to buy the car because its present value is lower. B. Sally should borrow money to buy the car because its present value is higher. C. Sally should pay cash to buy the car because its present value is higher. D. Sally should pay cash to buy the car because its present value is lower.

$29,961.84 D. Sally should pay cash to buy the car because its present value is lower.

You are 30 years old today. You want to retire at the age of 65. You expect to live until age 95. You would like to have a monthly income of $14,000 per month in retirement. How much do you have to save per month during your working years in order to achieve your retirement goal? Assume end of period payments. Assume an annual interest rate of 2.5% in retirement and 4% during your working life.

$3,877.75

Ethan sells his car to Seamus. Seamus promises to pay Ethan $1,140 at the end of each year for 8 years. What is the present value of Seamus's promised payments if the interest rate is 7%?

$6,807.28

Starting one month from now, you need to withdraw $190 per month from your bank account to help cover the costs of your university education. You will continue the monthly withdrawals for the next four years. If the account pays 0.6% interest per month, how much money must you have in your bank account today to support your future needs?

$7,903.78

Suppose that the NASDAQ Composite index hit a level of 2,100 in February of 2000. In February of 1991 it was at a level of 4,688. What was the annual average compound growth rate over the period?

-8.54%

You have a savings account that pays 3.9% interest compounded semiannually, but you are considering transferring your funds into a savings account that pays 3.7% interest compounded monthly. Calculate the difference in the effective interest rates of the two accounts. What is the difference in the effective interest rates of your existing and potential new accounts?

0.0018

In February of 2000 the NASDAQ Composite index peaked at a level of 4,696 (just before the Tech Bubble popped). In February of 2006 it was at a level of 2,028. The NASDAQ index has historically grown at an average annual rate of 9.0%. If the index continues to grow at its historic rate, then how many years will it take for the index to grow from its Feb 2006 level back to the Feb 2000 level?

10 years

You bought stock in your favorite online retail company at a price of $60 per share. You recently sold the stock for a price of $71 per share. While holding the stock, you received dividends of $1.92. What was your holding period return?

21.53

You are late paying a bill for $14,854.50. You have made arrangements to pay off the bill in installments of $360 per month, and you will be charged monthly interest of 1.4% on the overdue balance. How many months will it take you to pay off the account balance?

62 months

You've graduated from college and landed a good job. You want to replace your car, but don't want to take out a car loan. Instead, you decide to invest $300 per month in the stock market and hope to earn 9%. If the market performs as you're hoping, how many years will it take to accumulate $35,000? Ignore taxes.

7.01 years

You are expecting to receive $70 per year at the end of each of the next five years. If you invest the money in account that pays 5%, then how much interest will you earn over the five years? (Round to the nearest whole dollar) A. $37 B. $75 C. $350 D. $387 E. $18

A. $37

Julian was given a gold coin originally purchased for $1 by his great grandfather 50 years ago. Today the coin is worth $450. The rate of return realized on the sale of this coin is approximately equal to: A. 13% B. 50% C. 7.5% D. 10% E. 15%

A. 13%

When you turned 20, you deposited $1,500 into an account paying interest that is compounded quarterly. You just turned 30, and there is now $2,233.30 in the account. What nominal annual interest rate is the account paying? A. 4.00% B. 1.00% C. 4.06% D. 16.24% E. 3.75%

A. 4.00%

If you could borrow at 9.5% compounded semi − annually or at 9.4% compounded monthly, which would you prefer? A. 9.5% compounded semi − annually B. 9.4% compounded monthly C. Indifferent

A. 9.5% compounded semi − annually

In future value or present value problems, unless stated otherwise, cash flows are assumed to be: A. At the end of the time period. B. Spread out evenly over a time period. C. In the middle of the time period. D. At the beginning of the time period.

A. At the end of the time period.

_______ is an annuity with an infinite life making continual annual payments. A. Perpetuity B. Principal C. APR D. Amortized loan

A. Perpetuity

Sarah found her dream lakefront home, valued at $250,000. She plans to buy a home just like it when she retires in 15 years. Sarah can earn 11% per year on her investments. The price of the house will increase 3% per year for the next 15 years. How much must she invest at the end of each of the next 15 years to finance the purchase? A. $10,198.81 B. $11,320.67 C. $7,266.31 D. $8,952.82 E. $12,565.95

B. $11,320.67

Molly, president of Molly's Muffins, is considering franchising. She has a potential franchise agreement that would see her receive payments of $28,000, $24,000, and $20,000 at the end of years 1, 2, and 3 respectively, and then $12,000 per year after that for 17 years. If Molly requires a return of 10%, then what is the present value of this stream of cash flows? (Round answer to the nearest whole dollar) A. $143,354 B. $132,636 C. $156,574 D. $124,440 E. $145,900

B. $132,636

Gina has planned to start college education in four years from now. To pay for her college education, she has decided to save $1,000 a quarter for the next four years in a bank account paying 12 percent interest (compounded quarterly). How much will she have at the end of fourth year? (Round to the nearest whole dollar) A. $19,116 B. $20,157 C. $16,000 D. $1,574

B. $20,157

Actively managed mutual funds charge higher management fees than passive funds. Assume that the net return to an active fund (after fees) is 9.5% (0.79% per month) and the net return to a passive fund is 10.5% (0.875% per month). Assume that an investor saves $600 per month (end − of − month) over thirty years. What is the difference in the future value of savings between investing in an active fund and a passive fund? A. $120,519.40 B. $295,152.00 C. $301,732.21 D. $247,352.36

B. $295,152.00

Suzanne has identified a project with the following cash flows. What is the present value of the cash flows at time 0 if the interest rate is 9%? Year- Cash Flow 1 - $2,000 2 - $650 3 - $375 4 - $1,200 A. $3,488.90 B. $3,521.63 C. $3,230.86 D. $4,225.00 E. $3,838.58

B. $3,521.63

Suppose someone offered you your choice of two equally risky annuities, each paying $5,000 per year for 5 years. One is an annuity due, while the other is a regular (or deferred) annuity. If you are a rational wealth maximizing investor, which annuity would you choose? A. The deferred annuity. B. The annuity due. C. Either one, because as the problem is set up, they have the same present value. D. Without information about the appropriate interest rate, we cannot find the value of the two annuities, hence we cannot tell which is better. E. The annuity due; however, if the payments on both were doubled to $10,000, the deferred annuity would be preferred.

B. The annuity due.

Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000 and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents to cruise? (Round to the nearest whole dollar) A. $1,862 B. $2,234 C. $2,457 D. $3,000 E. $2,135

C. $2,457

An ordinary annuity may be defined as: A. A series of payments, which may or may not be equal in value, that are received at regular intervals at the end of each period. B. A series of equal payments made any time over the course of a year, extending for a period of several years. C. A series of equal payments made at regular intervals that are received at the end of each period. D. A series of equal payments made at regular intervals that are paid at the beginning of each period. E. Any series of payments that occur in the future.

C. A series of equal payments made at regular intervals that are received at the end of each period.

Which of the following is a false statement? A. Historical returns can be calculated with more confidence than expected returns. B. Expected returns may differ from actual returns because of an unforeseen recession. C. Although expected returns may differ from actual returns, they seldom do. D. Accurate predictions of expected returns depend on the analyst's ability to estimate probabilities. E. Expected returns are not always predicted accurately.

C. Although expected returns may differ from actual returns, they seldom do.

Compaq recently adjusted the probabilities for its expected cash flows in light of the Asian currency crisis. It revised the probability of favorable conditions from 32% to 18% and the probability of poor earnings from 7% to 17%. Which of the following is the most likely result from this revision? A. It would lower its historical return. B. It would raise expected returns. C. It would lower expected returns. D. The probabilities cannot be revised once they have been estimated. E. It would have no effect on expected returns.

C. It would lower expected returns.

Your grandfather has left you $150,000 in a trust fund that you cannot have for another seven years. You have decided that you really need this money now to pay for your college expenses. Your attorney offers you $80,000 for an assignment of the proceeds of the trust. If you can get a student loan at 10%, should you accept your attorney's offer? A. No, because the $150,000 is worth more than $80,000 today. B. Yes, because the $150,000 is worth more than $80,000 today. C. Yes, because the $150,000 is worth less than $80,000 today. D. No, because the $150,000 is worth less than $80,000 today.

C. Yes, because the $150,000 is worth less than $80,000 today.

Gary has $1,400 to invest with the goal of having $4,000 available to purchase a used car. If he can earn 12% compounded semiannually on his investment, how long will he have to wait to acquire his car? A. Eighteen months B. Nine years C. Nine months D. Four years E. Eighteen years

C. nine months

What is the present value of $2,000 to be received in six years if interest rates are 8% compounded semiannually? (Round to the nearest whole dollar) A. $1,258 B. $1,158 C. $1,923 D. $1,249 E. $1,852

D. $1,249

In three years you will begin receiving an annual payment of $600 that will be made for two years. If the annual interest rate is 12%, what will be the balance in your account at the end of the fourth year? A. $1,344 B. $2,025 C. $1,260 D. $1,272 E. $1,200

D. $1,272

What is the future value of a 5 − year ordinary annuity with annual payments of $200, evaluated at a 15% interest rate? A. $670.44 B. $842.91 C. $1,169.56 D. $1,348.48 E. $1,522.64

D. $1,348.48

If you buy a factory for $250,000 and the terms are 20% down, the balance to be paid off over 30 years at a 12 percent rate of interest on the unpaid balance, what are the 30 equal annual payments? (Round to the nearest whole dollar) A. $50,212 B. $31,036 C. $6,667 D. $24,829 E. $20,593

D. $24,829

A real estate agent wants you to buy a plot of land today for $60,000 and he promises that you can sell it back to him in 7 years for $100,000. If you can earn 9% on alternative investments, then what is the present value of the sales proceeds? Is this a worthwhile investment? A. $61,294.51 ; it is not a worthwhile investment. B. $61,294.51 ; it is a worthwhile investment. C. $60,000 ; not enough information. D. $54,703.42 ; it is not a worthwhile investment. E. $54,703.42 ; it is a worthwhile investment.

D. $54,703.42 ; it is not a worthwhile investment.

Penny just won the state lottery that offers a choice of payments. She may opt for either receiving $1,000,000 today or $2,000,000 at the end of ten years. If she can invest her funds at 5% annually, which is the better choice? A. The earlier payment since the present value of the $2,000,000 payment is $876,000. B. The earlier payment since the future value of $1,000,000 in ten years is $1,628,894. C. The later payment since $1,000,000 invested at 5% for ten years will be worth $1,500,000. D. The later payment since the present value of the $2,000,000 payment is $1,227,827. E. The immediate payment since the present value of the $2,000,000 payment is $1,200,000.

D. The later payment since the present value of the $2,000,000 payment is $1,227,827.

An expected return from a portfolio: A. cannot be computed if there are fewer than three securities in the portfolio. B. can be calculated more accurately than the expected return from any of the securities in the portfolio. C. will be lower than the expected return from the security in the portfolio with the lowest yield because portfolios have less risk than individual securities. D. will lie somewhere between the highest and lowest expected returns from securities in the portfolio. E. will exceed the highest expected return from any of the securities in the portfolio.

D. will lie somewhere between the highest and lowest expected returns from securities in the portfolio.

Henry purchased stock in Nortel Networks for $120 per share. Unfortunately the stock did not perform very well in the 3 years that Henry has owned it as it is now trading at $3.93 per share. Feeling that the value of the stock will only continue to drop, Henry sold his shares today. What annual rate of return did Henry make on his investment? A. −66% B. −67% C. −69% D. −70% E. −68%

E. -68%

You are late paying a bill for $11,200.66. You have made arrangements to pay off the bill in installments of $260 per month, and you will be charged monthly interest of 1.2% on the balance owing. How long will it take you to pay off the account balance? (round your answer to nearest month) A. 62 months B. 60 months C. 63 months D. 64 months E. 61 months

E. 61 months

If you presently have $6,000 invested at a rate of 15%, how many years will it take for you investment to triple? (Round up to obtain a whole number of years if necessary.) A. 2 B. 6 C. 4 D. 10 E. 8

E. 8

A bank pays a quoted annual (nominal) interest rate of 8%. However, it pays interest (compounded) daily using a 365−day year. What is the effective annual rate of return? A. 7.86% B. 9.21% C. 7.54% D. 8.57% E. 8.33%

E. 8.33%

The price of a Wendy's Cheeseburger is $0.99, the same it was 5 years ago. Had the price of this sandwich increases at the same 3% annual rate as U.S. consumer prices did over the last 5 years, what would its price be today? a. $1.15 b. $1.22 c. $1.02 d. $1.12 e. $0.84

a. $1.15

Today you invested $27,500 in an investment that pays 10% and will mature in 2 years. Once the investment matures, you will reinvest your funds for another 6 years in another investment that pays 6%. What will be the value of your investment after 8 years? a. $47,201.22 b. $83,619.85 c. $72,284.28 d. $61,505.26

a. $47,201.22

The future value of a dollar _____________ as the interest rate increases and ____________ the farther in the future an initial deposit is to be received. a. increases; increases b. decreases; decreases c. increases; decreases d. decreases; increases

a. increases; increases

The largest providers of funds in the financial system are: a. individuals b. businesses c. Bill and Melinda Gates d. government agencies

a. individuals

$1,200 is deposited today into an account paying 6% interest compounded semiannually. How much interest will have been earned after 25 years? a. $3,950.24 b. $20,904.19 c. $5,260.69 d. $4,060.69 e. $1,312.53

d. $4,060.69

You plan to invest $2,500 in a money market account which will pay an annual stated (nominal) interest rate of 8.75%, but which compounds interest on a weekly basis. If you leave this money on deposit for one year (52 weeks), what will be your ending balance when you close the account? a. $2,681.00 b. $2,728.40 c. $2,582.28 d. $2,611.72 e. $2,703.46

b. $2,728.40

What word do we use for the ease with which assets can be converted into cash? a. solvency b. liquidity c. agency d. efficiency e. accuracy

b. liquidity

Most people prefer to receive money today rather than ten years from now because: a. most people are afraid they will spend future cash payments foolishly b. receiving cash today enables one to take advantage of current investment opportunities c. people are unsure about their future employment prospects and wish to provide themselves with a source of future income d. U.S. prices have been falling recently and a dollar received today will buy more than one received in the future e. future investment returns are expected to be less variable than current ones

b. receiving cash today enables one to take advantage of current investment opportunities

Money markets are markets for: a. long-term bonds b. short-term debt securities c. preferred securities d. foreign currency exchanges e. corporate stocks

b. short-term debt securities

In 1958, the average tuition for one year at an Ivy League school was $1,800. Thirty years later, in 1988, the average cost was $13,700. What was the growth rate in tuition over the 30 − year period? a. 9% b. 6% c. 7% d. 8% e. 12%

c. 7%

The primary role of a financial system is to: a. enable financial managers to evaluate investment projects with a system that always selects the correct opportunity for their firm b. make savvy investors rich c. channel funds from savers to borrowers who need funds for investment projects d. provide employees in financial institutions with a code of ethics e. regulate the banking system

c. channel funds from savers to borrows who need funds for investment projects

Given some amount to be received several years in the future, if the interest rate increases, the present value of the future amount will be a. higher b. variable c. lower d. cannot tell e. stay the same

c. lower

The amount of money that would have to be invested today at a given interest rate over a specific period in order to equal a future amount is called: a. present value interest factor b. future value c. present value d. future value interest factor

c. present value

You have determined the profitability of a planned project by finding the present value of all the cash flows from the project. Which of the following would cause the project to look more appealing in terms of the present value of those cash flows? a. the cash flows are extended over a longer period of time and the the total amount of the cash flows remains the same, but the cash flows are larger toward the end of the project b. the cash flows are extended over a longer period of time, but the total amount of the cash flows remains the same c. the discount rate decreases d. the cash flows occur over the same time period and total the same amount, but the cash flows are larger toward the end of the project e. the discount rate increases

c. the discount rate decreases

$1,200 is received at the beginning of year 1, $2,200 is received at the beginning of year 2, and $3,300 is received at the beginning of year 3. If these cash flows are deposited at 12%, their combined future value at the end of year 3 is: a. $7,504 b. $17,000 c. $12,510 d. $8,141 e. $6,700

d. $8,141

What do we call a market in which the price of a security is an accurate estimate by the market of its try value? a. law of one price b. effective market c. secondary d. efficient market e. primary market

d. efficient market

Information Asymmetry is: a. false information spread by competitors b. when information is not reflected properly in the market c. incomplete information d. when some know more than others e. when two pieces of information counteract each other

d. when some know more than others

Compute the simple interest earned on a 1-year $200 deposit that earns 6% per year. a. $200 b. $60 c. $6 d. $120 e. $12

e. $12

The primary difference between simple and compound interest is that: a. simple interest is only paid at the end of the investment period b. simple interest is not taxed by the federal government c. compound interest is paid up front and not when the investment matures d. simple interest earns a higher interest rate on reinvested interest than compound interest e. compound interest entails receiving interest payments on previously earned interest

e. compound interest entails receiving interest payments on previously earned interest

$100 today is worth: a. the same as $100 to be received in one year, since the inflation rate has been how low recently and funds received in the near future should have the same purchasing power that they have today b. less than $100 received by someone ten years ago, since many products have been improved over this time period c. the same as a future received in one year, since the physical characteristics of U.S. currency are unchanged for long periods of time d. less than $100 to be received in one year, since many peoplewill spend money foolishly today and will become more careful in their spending habits as they mature e. more than $100 to be received in one year, since you can invest the money received today for this period, leaving you with more than $100 in the future

e. more than $100 to be received in one year, since you can invest the money received today for this period, leaving you with more than $100 in the future

The _____________ is the financial market in which securities are initially issued a. secondary market b. private placement c. OTC d. NASDAQ e. primary market

e. primary market

Current assets values may be estimated by calculating: a. the cash flows expected from the asset without adjusting for the time value of money b. only the present value of the cash flows to be received in the first two years since later cash flows are too uncertain to be considered c. a sum of all cash flows expected from the asset d. the future value of all cash flows expected from the asset e. the present value of all future cash flows expected from the asset

e. the present value of all future cash flows expected from the asset

The relationship between risk and return in finance can best be described by which of the following statements? a. high risk always brings it high returns b. the riskier the security, the lower the return expected from it c. high risk securities always beat low risk securities d. risk and return are inversely related e. the riskier the security, the greater the return the investors expect from it

e. the riskier the security, the greater the return the investors expect from it