Chapter 6, Finna Exam 2

Your father is about to retire, and he wants to buy an annuity that will provide him with $91,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

$1,328,557 PVA = [$91,000 × {1-1/ (1.0515)25 / 0.0515} x 1.0515= $1,328,557Financial Calculator: BGN Mode N =25, i=5.15, PMT = 91,000, FV = 0; CPT PV = 1,328,557.

You have won the lottery and will receive 20 annual payments of $10,000 starting today. If you can invest these payments at 8.5%, what is the present value of your winnings? (Round the final answer to the nearest dollar.)

$102,677

Ransport Company has made an investment in another company that will guarantee it a cash flow of $37,250 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment?

$124,868

James Perkins wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 8 percent annually. How much does he need to save each year, beginning at the end of this year to reach his target? Assume he could earn 8 percent on any investment he makes.

$13,464

You are purchasing a used car and will make 5 annual payments of $3,500 starting one year from today. If your funds could be invested at 9%, what is the present value of the car? (Round the final answer to the nearest dollar.

$13,614

Sid Phillips has funded a retirement investment with $250,000 earning a return of 6.75 percent. What is the value of the payment that he can receive in perpetuity? (Round to the nearest dollar.)

$14,900

What constant annual cash payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $2,500?

$162.50 CF = PVP x i= $2,500 x 0.065 = $162.50

Ralf Wilson wants to receive $25,000 in perpetuity and will invest his money in an investment that will earn a return of 14 percent annually. What is the value of the investment that he needs to make today to receive his perpetual cash flow stream?

$178,571

Tim Dodson has borrowed $8,600 to pay for his new car. The annual interest rate on the loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual payment if he begins his payment beginning now?

$2,448

Cassandra Dawson wants to save for a trip to Australia. She will need $12,000 at the end of four years. She can invest a certain amount at the beginning of each of the next four years in a bank account that will pay her 6.8 percent annually. How much will she have to invest annually to reach her target?

$2,538

Cassandra Dawson wants to save for a trip to Australia. She will need $12,000 at the end of four years. She can invest a certain amount at the beginning of each of the next four years in a bank account that will pay her 6.8 percent annually. How much will she have to invest annually to reach her target? (Round to the nearest dollar.)

$2,538

What is the value of this 20 year lease? The first payment, due one year from today is $2,000 and each annual payment will increase by 4%. The discount rate used to evaluate similar leases is 9%. (Round final answer to the nearest whole dollar.)

$24,361 PVAn = (CF1 / (i - g)) × [1 - ((1+g) / (1+i))n] = ($2,000 / (9% - 4%)) × [1 - ((1 + 4%) / (1+9%))20] = $40,000 × 0.60903 = $24,361

Lloyd Harrisis planning to invest $3,500 every year for the next six years in an investment paying 13 percent annually. What will be the amount he will have at the end of the six years?

$29,129

Shaun Barringer has started on his first job. He plans to start saving for retirement. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn a return of 10 percent. How much will Shaun have at the end of 45 years? (Round to the nearest dollar.)

$3,594,524

Damien McCoy has loaned money to his brother at an interest rate of 5.85 percent. He expects to receive $987, $1,012, $1,062, and $1,162 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.)

$3,657

Brandon Ramirez wants to set up a scholarship at his alma mater. He is willing to invest $320,000 in an account earning 11 percent. What will be the annual scholarship that can be given from this investment?

$35,200

David Stephens has made an investment that will pay him $11,455, $16,376, and $19,812 at the end of the next three years. His investment was to fetch him a return of 14 percent. What is the present value of these cash flows?

$36,022

David Stephens has made an investment that will pay him $11,455, $16,376, and $19,812 at the end of the next three years. His investment was to fetch him a return of 14 percent. What is the present value of these cash flows? (Round to the nearest dollar.)

$36,022

If they can reinvest these cash flows to earn a return of 9.2 percent, what is the future value of this cash flow stream at the end of five years? (Round to the nearest dollar.)

$4,429,046

Nick invested $2,000 in a bank savings account today and another $2000 a year from now. If the bank pays interest of 10 percent per year, how much money will Nick have at the end of two years?

$4,620

Dawson Electricals has borrowed $27,850 from its bank at an annual rate of 8.5 percent. It plans to repay the loan in eight equal installments, beginning in a year. What is its annual loan payment? (Round to the nearest dollar.)

$4,938.66

What is the market value of a stock that paid a dividend of $3.80 last year if the dividend is increasing at 10% annually and the required rate of return on the stock is 20%? (Round the final answer to the nearest two decimals.)

$41.80 $3.80*(1+10%) / (20% - 10%) = $41.80

Noel Klinger is planning to invest in an insurance company product. The product will pay $12,500 at the end of this year. Thereafter, the payments will grow annually at a 2.5 percent rate forever. Jack will be able to invest his cash flows at a rate of 5.5 percent. What is the present value of this investment cash flow stream?

$416,667

You are starting college this month, and your favorite aunt has agreed to give you $4,000 at the end of each of your four years and you can save $8,000 at the end of each year for the first two years after you graduate. If all of these amounts are invested at 14%, how much will you have to start graduate school, six years from now? (Round the final answer to the nearest dollar.)

$42,702

You have received a share of preferred stock that pays an annual dividend of $10. Similar preferred stock issues are yielding 22.5%. What is the value of this share of preferred stock? (Round answer to two decimal places.)

$44.44 PVP = CF / i; $10 / 22.5% = $44.44

You are invited to participate in a new company. The company is projected to payout $10,000 in the first year, and after that the payouts will grow by an annual rate of 6 percent forever. If you can invest the cash flows at 8 percent, how much will you be willing to pay for this perpetuity?

$500,000 PVP = CF1 / (i - g) = $10,000 / (8% - 6%) = $500,000

You plan to buy a new car. The price is $30,000 and you will make a down payment of $4,000. Your annual interest rate is 10% and you intend to pay for the car over five years. What will be your monthly payment? (Round intermediate calculation to four decimal places. Round the final answer to the nearest of two decimals.)

$552.42 N = 5 years × 12 = 60; i = 10% ÷ 12 = 0.8333 By entering the following data into a financial calculator, PMT can be calculated as $552.42.

Shelton Enterprises is expecting tremendous growth from its newest boutique store. Next year the store is expected to bring in net cash flows of $675,000. The company expects its earnings to grow annually at a rate of 13 percent for the next 15 years. What is the present value of this growing annuity if the firm uses a discount rate of 18 percent on its investments?

$6,448,519

Shelton Enterprises is expecting tremendous growth from its newest boutique store. Next year the store is expected to bring in net cash flows of $675,000. The company expects its earnings to grow annually at a rate of 13 percent for the next 15 years. What is the present value of this growing annuity if the firm uses a discount rate of 18 percent on its investments? (Round to the nearest dollar.)

$6,448,519

Milner is saving for her retirement. She will make a deposit into her IRA account at the end of each quarter for the next 36 years. The expected return on the account is 8%. How much will she have to deposit each quarter to have $650,000 in the account when she retires 36 years from today? (Round the final answer to the nearest two decimals.)

$796.81

Milner is saving for her retirement. She will make a deposit into her IRA account at the end of each quarter for the next 36 years. The expected return on the account is 8%. How much will she have to deposit each quarter to have $650,000 in the account when she retires 36 years from today? (Round the final answer to the nearest two decimals.)

$796.81 N = 36 years × 4 = 144; i = 8% ÷ 4 = 2% By entering the following data into a financial calculator, PMT can be calculated as $796.81.

Cavincare has 50 years remaining on a service contract with Martin, Inc. Today, Martin paid $120,000 for services received last year and the annual payment increases by 2.5% each year. The firm's required rate of return is 15%. What is the value of the contract to Cavincare? (Do not round intermediate calculations. Round the final answer to the nearest whole dollar amount.)

$980,879

Cavincare has 50 years remaining on a service contract with Martin, Inc. Today, Martin paid $120,000 for services received last year and the annual payment increases by 2.5% each year. The firm's required rate of return is 15%. What is the value of the contract to Cavincare? (Do not round intermediate calculations. Round the final answer to the nearest whole dollar amount.)

$980,879 PVAn = (CF1 / (i - g)) × [1 - ((1+g)n/ (1+i))n] = ($123,000 / (15% - 2.50%)) × [1 - ((1+2.5%)50 / (1+15%))50] = $984,000 × 0.996828 =$980,879

Beautinator Cosmetics borrowed $152,300 from a bank for three years. If the quoted rate (APR) is 11.75 percent, and the compounding is daily, what is the effective annual rate (EAR)?

12.5%

An investment pays 18 percent interest compounded quarterly. What is the effective annual interest rate? (Do not round intermediate calculations. Round the final answer to the nearest one decimal.)

19.3%

An investment pays 18 percent interest compounded quarterly. What is the effective annual interest rate? (Do not round intermediate calculations. Round the final answer to the nearest one decimal.)

19.3% EAR = (1 + Quoted interest rate/m)m - 1 = (1 + 18% / 4)4 - 1 = (1 + (0.045))4 - 1 = 19.3%

A perpetuity is ___?

A constant stream of cash flows that goes on forever

How do you calculate the future value of a series of cash flows

Add up all the cash flows and then calculate their compounded value at the given rate of interest.

A growing annuity is an annuity in which cash flows increase at a constant rate. An inflation-adjusted 25-year lease is an example of growing annuity as the value of 25-year lease adjusts annually for the expected rate of inflation over the life of the contract. Which of the following examples represents a growing annuity?

An inflation-adjusted 25-year lease

Which of the following examples represents a growing annuity?

An inflation-adjusted 25-year lease.

The Truth-in-Lending Act requires borrowers to disclose the ___?

Annual Percentage Rate (APR)

Which of the following equations is correct?

Annuity due value = Ordinary value × (1+i)

An annuity due is a series of equal cash flows where a cash flow occurs at the ___?

Beginning of each period

Which of the following alternatives involve calculating the future value of multiple cash flows?

Calculating income after retirement

-Amortizing a home mortgage

Calculating income after retirement involves calculation of future value of multiple cash flows

Why is the present value of an annuity due is larger than the present value of an ordinary annuity?

Cash flows of the annuity due are shifted forward one year and, thus, are discounted less

Which of the following is not a typical way in which interest rates are quoted in the marketplace?

Discounted interest.

How to determine monthly payment on 1-yr loan

Divide loan amt by 12 and factor in the interest rate

Cash flows take place at the ____ of each period in case of an annuity due

End

In a typical loan amortization schedule involving a consumer loan, the amount of each loan payment is fixed.

False

Rachael Steele wants to borrow $6,000 for a period of four years. She has two choices. Her firm is offering to lend her the amount at 7.25 percent compounded annually. She can also borrow from her bank and will have to repay a total of $8,130.93 at the end of four years. Should Rachael go with her bank or her firm, and what is the interest rate if the borrows from her bank?

Firm: 8%

Anytime you do a future value or a present value calculation, what must you use?

Interest rate per period or the EAR

The future value of an ordinary annuity is ___ the future value of an annuity due.

Less than

Which of the following problems involve calculating the future value of multiple cash flows?

Planning a retirement nest egg

The three ways interest rates are quoted in the market place:

Quoted interest rate, interest rate per period, effective annual interest rate (EAR)

Julie R. won a lottery. She will have a choice of receiving $25,000 at the end of each year for the next 30 years, or a lump-sum payment of $200,500 today. If she can earn a return of 10 percent on any investment she makes, should she choose the cash (lump-sum) option or the annual payment option?

She should choose the annual payment option because its present value is higher than the lump-sump payment of 200,500

amortization

The amortization schedule provides the data of equated monthly payments for which the classification of principal and interest along with unpaid principal balance is provided.

Which of the following interest rates is annualized using simple interest?

The annual percentage rate (APR)

What is the appropriate interest rate to use when making future or present value calculations?

The effective annual interest rate (EAR)

When will effective annual rate (EAR) will equal the annual percentage rate (APR)?

When interest is compounded annually

Which of the following statements is true of amortization?

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

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 growing perpetuity

A preferred stock would be an ideal example of:

a perpetuity

A consol, issued by the British government to finance the Napoleonic Wars is an example of

a perpetuity.

To prepare a loan amortization schedule, we must first compute the:

amount of each loan payout.

An annuity in which the payments are made at the beginning of each period is

an annuity due

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:

an ordinary annuity

An annuity in which the payments are made at the end of each period is called:

an ordinary annuity.

The simple interest rate charged per period multiplied by the number of payment periods per year gives the:

annual percentage rate

The EAR will equal the APR if interest is compounded

annually

A typical present value of an annuity formula assumes that:

cash flows occur at the end of each period.

The amount borrowed on a loan equals the

discounted value of the loan payments

The amount borrowed on a loan equals:

discounted value of the loan payments.

An annuity due is a series of equal cash flows where a cash flow occurs at the end each period.

false

To determine the monthly payment on a one-year loan, divide the amount of the loan by 12

false

to calculate the future value of a series of cash flows we can add up all the cash flows and then calculate their compounded value at the given rate of interest.

flase

A consol, issued by the British government to finance the Napoleonic Wars is an example of:

perpetuity.

The future value of an annuity is typically used when analyzing:

retirement plans.

A modern day example of a perpetuity is a

share of preferred stock

A modern day example of a perpetuity is a:

share of preferred stock.

In a typical loan amortization schedule, the amount of interest paid for each period does not remain constant. In a typical loan amortization schedule:

the amount of interest paid each period does not remain constant.

An appropriate method for evaluating different cash flow scenarios is to compare their present values

true

In a typical loan amortization schedule involving a consumer loan the amount of each loan payment is fixed

true