Corporate Finance Exam 2

The formula for the present value of an annuity due is _____.

(1 + r) × (PV of an ordinary annuity)

Which of the following is a perpetuity?

A constant stream of cash flows forever

_______ is most commonly quoted by lender

APR

The ________ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.

Annual

Which of the following processes can be used to calculate future value for multiple cash flows?

Compound the accumulated balance forward one year at a time Calculate the future value of each cash flow first and then add them up

___________ is the interest rate stated as though it were compounded once per year

EAR

with the same APR, the rate that compound monthly has a higher

EAR

Given the same APR, more frequent compounding results in _____.

Higher EARS

You may use which of the following sets of inputs together to solve for the present value of an annuity using a financial calculator?

N, I/Y, PMT, PV

C/r is the formula for the present value of a(n) ____.

Perpetuity

An annuity due is a series of payments that are made ____.

at the beginning of each period

annuity due is a series of payments made at the __________ of each period

beginning

The effective annual rate (EAR) takes into account the ______ of interest that occurs within a year.

compounding

An annuity _____ is an annuity for which the cash flows occur at the beginning of each period.

due

Assume interest is compounded monthly. The ______ annual rate will express this rate as though it were compounded annually.

effective

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the _____ of each period.

end

The present value of a series of future cash flows is the amount you would need today to _____.

exactly duplicate those future cash flows

Assuming the same interest rate, the future value of an amount compounded semiannually is ______ the future value of that amount compounded annually.

greater than

If the interest rate is greater than zero, the value of an annuity due is always ______ an ordinary annuity.

greater than

The future value of $100 at 10 percent compounded semiannually is ______ the future value of $100 at 10 percent compounded annually.

greater than

the value of an annuity due is _________ an ordinary annuity

greater than

For a positive stated annual interest rate and multiple (more than one) compounding periods per year, the EAR is always (smaller/larger) than the APR.

larger

For a positive stated annual interest rate 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

When valuing cash flows, you can either value multiple cash flows or a single sum, also known as a(n) _____ sum.

lump

One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time.

one year

The present value of an annuity due is equal to the present value of a(an) ______ annuity multiplied by (1 + r).

ordinary

The present value formula for a(n) ______ is PV = C/r, where C is the constant and regularly timed cash flow to infinity, and r is the interest rate.

perpetuity

An effective annual rate of 7.12 percent is equal to 7 percent compounded ______.

semiannually

The APR is also called the ______ rate and it differs from the EAR.

stated

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

$500 per month perpetuity is ____________ $500 per month annuity

worth more than

If the interest rate is greater than ____ the value of an annuity due is always greater than an ordinary annuity.

zero