Ch 6 - Fin 303

Tariq Aziz will receive from his investment cash flows of $3,125, $3,450, and $3, 800. If he can earn 7.5 percent on any investment that he makes, what is the future value of his investment cash flows at the end of three years? (Round to the nearest dollar.) A) $11,120 B) $10,944 C) $10,812 D) $12,770

A) $11,120

Stiglitz, Inc., is expecting the following cash flows starting at the end of the year—$113,245, $132,709, $141,554, and $180,760. If their opportunity cost is 9.6 percent, find the future value of these cash flows. (Round to the nearest dollar.) A) $644,406.10 B) $732,114 C) $685,312 D) $900,810

A) $644,406.10

Which one of the following statements is NOT true? A) The APR is the appropriate rate to do present and future value calculations. B) The EAR is the appropriate rate to do present and future value calculations. C) The EAR is the true cost of borrowing and lending. D) The EAR takes compounding into account.

A) The APR is the appropriate rate to do present and future value calculations.

Which one of the following statements is true about amortization? A) With an amortized loan, a bigger proportion of each month's payment goes toward interest in the early periods. B) With an amortized loan, a bigger proportion of each month's payment goes toward interest in the later periods. C) With an amortized loan, a smaller proportion of each month's payment goes toward interest in the early periods. D) None of the above.

A) With an amortized loan, a bigger proportion of each month's payment goes toward interest in the early periods.

If your investment pays the same amount at the end of each year forever, the cash flow stream is called A) a perpetuity. B) an ordinary annuity. C) an annuity due. D) none of the above.

A) a perpetuity.

In computing the present and future value of multiple cash flows, A) each cash flow is discounted or compounded at the same rate. B) each cash flow is discounted or compounded at a different rate. C) earlier cash flows are discounted at a higher rate. D) later cash flows are discounted at a higher rate.

A) each cash flow is discounted or compounded at the same rate.

The future value of multiple cash flows is A) greater than the sum of the cash flows. B) equal to the sum of all the cash flows. C) less than the sum of the cash flows D) none of the above.

A) greater than the sum of the cash flows.

International Shippers, Inc., have forecast earnings of $1, 233,400, $1,345,900, and $1,455,650 for the next three years. What is the future value of these earnings if the firm's opportunity cost is 13 percent? (Round to the nearest dollar.) A) $4,214,360 B) $4,551,446 C) $3,900,865 D) $4,875,212

B) $4,551,446

Which one of the following steps is NOT involved in solving present value problems? A) First, draw a time line to make sure that each cash flow is placed in the correct time period. B) Second, compound each cash flow for its time period. C) Third, add up the values. D) All of the above are necessary steps.

B) Second, compound each cash flow for its time period.

Which one of the following steps is NOT involved in solving future value problems? A) First, draw a time line to make sure that each cash flow is placed in the correct time period. B) Second, discount each cash flow for its time period. C) Third, add up the values. D) All of the above are necessary steps.

B) Second, discount each cash flow for its time period.

Cash flows associated with annuities are considered to be A) an uneven cash flow stream. B) a cash flow stream of the same amount (a constant cash flow stream). C) a mix of constant and uneven cash flow streams. D) none of the above.

B) a cash flow stream of the same amount (a constant cash flow stream).

A firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called A) an annuity due. B) a growing perpetuity. C) an ordinary annuity. D) a growing annuity.

B) a growing perpetuity.

In computing the present and future value of multiple cash flows, A) earlier cash flows are discounted at a lower rate. B) each cash flow is discounted or compounded at the same rate. C) earlier cash flows are discounted at a higher rate. D) none of the above.

B) each cash flow is discounted or compounded at the same rate.

The true cost of borrowing is the A) annual percentage rate. B) effective annual rate. C) quoted interest rate. D) periodic rate.

B) effective annual rate.

The true cost of lending is the A) annual percentage rate. B) effective annual rate. C) quoted interest rate. D) none of the above.

B) effective annual rate.

Which one of the following statements is NOT true? A) The correct way to annualize an interest rate is to compute the effective annual interest rate (EAR). B) The APR is the annualized interest rate using simple interest. C) The correct way to annualize an interest rate is to compute the annual percentage rate (APR). D) You can find the interest rate per period by dividing the quoted annual rate by the number of compounding periods.

C) The correct way to annualize an interest rate is to compute the annual percentage rate (APR).

Which one of the following statements is NOT true about amortization? A) Amortization refers to the way the borrowed amount (principal) is paid down over the life of the loan. B) With an amortized loan, each loan payment contains some payment of principal and an interest payment. C) With an amortized loan, a smaller proportion of each month's payment goes toward interest in the early periods. D) A loan amortization schedule is just a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal.

C) With an amortized loan, a smaller proportion of each month's payment goes toward interest in the early periods.

If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called A) a perpetuity. B) an ordinary annuity. C) an annuity due. D) none of the above.

C) an annuity due.

The annuity transformation method is used to transform A) a present value annuity to a future value annuity. B) a present value annuity to an annuity due. C) an ordinary annuity to an annuity due. D) a perpetuity to an annuity.

C) an ordinary annuity to an annuity due.

Calculating the present and future values of multiple cash flows is relevant A) for businesses only. B) for individuals only C) for both individuals and businesses. D) none of the above.

C) for both individuals and businesses.

The present value of multiple cash flows is A) greater than the sum of the cash flows. B) equal to the sum of all the cash flows. C) less than the sum of the cash flows. D) none of the above.

C) less than the sum of the cash flows.

Shane Matthews has invested in an investment that will pay him $6,200, $6,450, $7,225, and $7,500 over the next four years. If his opportunity cost is 10 percent, what is the future value of the cash flows he will receive? (Round to the nearest dollar.) A) $27,150 B) $29,900 C) $30,455 D) $31,504

D) $31,504

To solve future value problems with multiple cash flows involves which of the following steps? A) First, draw a time line to make sure that each cash flow is placed in the correct time period. B) Second, calculate the future value of each cash flow for its time period. C) Third, add up the future values. D) All of the above are necessary steps.

D) All of the above are necessary steps.

To solve present value problems with multiple cash flows involves which of the following steps? A) First, draw a time line to make sure that each cash flow is placed in the correct time period. B) Second, calculate the present value of each cash flow for its time period. C) Third, add up the present values. D) All of the above are necessary steps.

D) All of the above are necessary steps.

Which one of the following statements is NOT true? A) The Truth-in-Lending Act was passed by Congress to ensure that the true cost of credit was disclosed to consumers. B) The Truth-in-Savings Act was passed to provide consumers an accurate estimate of the return they would earn on an investment. C) The above two pieces of legislation require by law that the APR be disclosed on all consumer loans and savings plans. D) All of the above are true statements.

D) All of the above are true statements.

Which ONE of the following statements is true about amortization? A) Amortization refers to the way the borrowed amount (principal) is paid down over the life of the loan. B) With an amortized loan, each loan payment contains some payment of principal and an interest payment. C) A loan amortization schedule is just a table that shows the loan balance at the beginning and end of each period, the payment made during that period, and how much of that payment represents interest and how much represents repayment of principal. D) All of the above are true.

D) All of the above are true.

Which one of the following statements is TRUE about the effective annual rate (EAR)? A) The effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account. B) The EAR conversion formula accounts for the number of compounding periods and, thus, effectively adjusts the annualized interest rate for the time value of money. C) The EAR is the true cost of borrowing and lending. D) All of the above are true.

D) All of the above are true.

Your investment in a small business venture will produce cash flows that increase by 15 percent every year for the next 25 years. This cash flow stream is called A) an annuity due. B) a growing perpetuity. C) an ordinary annuity. D) a growing annuity.

D) a growing annuity.

If your investment pays the same amount at the end of each year for a period of six years, the cash flow stream is called A) a perpetuity. B) an ordinary annuity. C) an annuity due. D) none of the above.

D) none of the above.

A fertilizer manufacturing company enters into a contract with a county parks and recreation department that calls for the company to sell 10 percent more of its best lawn feed every year for the next five years. If they also agree to maintain the total price as constant over the contract period, this growth in revenue is an example of a growing perpetuity.

False

Calculating the present and future values of multiple cash flows is relevant for businesses only.

False

Calculating the present and future values of multiple cash flows is relevant only for individual investors.

False

In computing the present and future value of multiple cash flows, each cash flow is discounted or compounded at a different rate.

False

In ordinary annuities, cash flows occur at the beginning of each period.

False

In today's financial markets, the best example of a perpetuity is the common stock issued by firms.

False

Only the APR or some other quoted rate should be used as the interest rate factor for present or future value calculations.

False

The APR is the annualized interest rate using compound interest.

False

The correct way to annualize an interest rate is to compute the annual percentage rate (APR).

False

The future value of an annuity due is equal to the future value of an ordinary annuity.

False

The present value of an annuity due is equal to the present value of an ordinary annuity.

False

The present value of an annuity due is less than the present value of an ordinary annuity.

False

The quoted interest rate is by definition a simple annual interest rate, such as the EAR.

False

When you pay the same amount every month as your insurance premium for a term life policy for a period of five years, the stream of cash flows is called a perpetuity.

False

Cash flow streams that increase at a constant rate over time are called growing annuities or growing perpetuities.

True

In an annuity due, cash flows occur at the beginning of each period.

True

Since the issuers of preferred stock promise to pay investors a fixed dividend, usually quarterly, forever, these are the most important perpetuities in the financial markets.

True

The APR is defined as the simple interest charged per period multiplied by the number of periods per year.

True

The EAR is the true cost of borrowing and lending.

True

The Truth-in-Lending Act and the Truth-in-Savings Act require by law that the APR be disclosed on all consumer loans and savings plans and that it be prominently displayed on advertising and contractual documents.

True

The correct way to annualize an interest rate is to compute the effective annual interest rate.

True

The effective annual interest rate (EAR) is defined as the annual growth rate that takes compounding into account.

True

The future value of an annuity due is greater than the future value of an ordinary annuity.

True

The lease payments by a business on a warehouse rental are an example of an annuity due.

True

The present value of a perpetuity is the promised constant cash payment divided by the interest rate (i).

True

The quoted interest rate is by convention a simple annual interest rate, such as the APR.

True

Trey Hughes opened a pizza place last year. He expects to increase his revenue from last year by 7 percent every year for the next 10 years. This is an example of a growing annuity.

True

When you pay the same amount every month on your car loan for a period of three years, the stream of cash flows is called an annuity.

True

You have received news about an inheritance that will pay you $5,000 next year. Beginning the following year, your inheritance will increase by 5 percent every year forever. This is a growing perpetuity.

True