financial management exam 2
True or false: The APR is always the same as the EAR. True false question.
false
When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year.
the same
The formula for the present value of an annuity due is _____. Multiple choice question.
(1 + r) × (PV of an ordinary annuity)
If you invest for a single period at an interest rate of r, your money will grow to ______ per dollar invested. Multiple choice question.
(1+r)
Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?
FV = $100 × (1.10)^3
basic present value equation
PV = FV/(1+r)^t
Why is a dollar received today worth more than a dollar received in the future? Multiple choice question.
Today's dollar can be reinvested, yielding a greater amount in the future.
The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is ____. Multiple choice question.
[1 − (1/1.0820)]/.08
The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______. Multiple choice question.
[1 − (1/1.10^30)]/.10]
A project should be __________ if its NPV is greater than zero. Multiple choice question.
accepted
Payback period tells the time it takes to break even in an ____ sense. Discounted payback period tells the time it takes to break even in an ______ or financial sense.
accounting, economic
The formula for the ___________present value is C × [(1 − Present value factor)/r].
annuity
The idea behind ______ is that interest is earned on interest.
compounding
discounting is the opposite of
compounding
With a fixed payment loan, the amount of interest paid (decreases/increases) each period.
decreases
With a fixed payment loan, the amount of interest paid _________(decreases/increases) each period.
decreases
The concept of the time value of money is based on the principle that a dollar today is worth __________ a dollar promised at some time in the future.
more than
The loan balance on _ amortization loans declines so slowly because the payments are mostly interest.
partial
Versus a similar fixed payment loan, the total interest on a fixed_______ loan is less.
principal
If the IRR is greater than the _______ ________, we should accept the project.
required return
What is the formula to calculate the future value of an annuity due of $100 per year for 10 years at 10 percent per year?
$100[(1.10^10 − 1)/0.10][1.10]
Which formula shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year? Multiple choice question.
$100{[1 − (1/(1.10)3)]/0.10}
Suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem?
=NPER(0.06,0,−6000,10000)
___________________budgeting is the decision-making process for accepting and rejecting projects.
capital
Future value is the ________ value of an investment at some time in the future.
cash
The _________rate is the rate used to calculate the present value of the future cash flows.
discount
Which capital budgeting decision method finds the present value of each cash flow before calculating a payback period? Multiple choice question.
discounted payback period
The discounted payback is the time it takes to break even in an __________________ or financial sense.
economic
True or false: Small changes in the interest rate affect the future value of a small-term investment more than they would affect the value of a long-term investment. True false question.
false
True or false: When using the time value of money features of a financial calculator, you should key in the interest rate as a decimal. True false question.
false
The equation that results in the _______ value interest factor for a single deposit is as follows: (1 + r)t
future
The greater the number of time periods, the (smaller/greater) the impact of compounding.
greater
Assuming the same interest rate, the future value of an amount compounded semiannually is ______ the future value of that amount compounded annually. Multiple choice question.
greater than
One of the main disadvantages of the discounted payback period rule is that the cutoff is arbitrarily set and cash flows beyond that point are _____.
ignored
A(n) _________ (decrease/increase) in the size of the first cash inflow will decrease the payback period, all else held constant.
increase
A perpetuity is a constant stream of cash flows for a(n) ______ period of time. Multiple choice question.
infinite
A dollar received one year from today has _____ value than a dollar received today.
less
All else equal, the longer time period you have before you will need the money, the (less/more) you will need to deposit today to have the same amount in the future.
less
Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is ___.
less
Compared to a comparable fixed payment loan, the total interest on a fixed principal loan is ___. Multiple choice question.
less
According to Graham and Harvey's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are most used by firms in the United States? Multiple select question.
net present value, internal rate of return
One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. Multiple choice question.
one year
According to Graham and Harvey's 1999 survey of 392 CFOs, in addition to IRR and NPV, which were the two most widely used techniques, over half of the respondents always, or almost always, used which of the following methods? Multiple choice question.
payback method
If we know the interest rate is 10 percent per year and the money is invested for 10 years, then we can use the _____ to find the present value
present value factor
versus a similar fixed payment loan, the total interest on a fixed _______________loan is less.
principal
According to the basic IRR rule, we should _____. Multiple choice question.
reject a project if the irr is less than the required return
Internal rate of return (IRR) must be compared to the ________ in order to determine the acceptability of a project. Multiple choice question.
required return
The discount rate is also called the rate of
return
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
sales growth and dividend growth
Which of the following processes can be used to calculate future value for multiple cash flows?
Calculate the future value of each cash flow first and then add them up Compound the accumulated balance forward one year at a time
Interest earned on the original principal amount invested is called _____.
simple interest
By ignoring time value, the payback period rule may incorrectly accept projects with a (positive/negative) NPV.
negative
According to Graham and Harvey's 1999 survey of 392 CFOs, in addition to IRR and NPV, which were the two most widely used techniques, over half of the respondents always, or almost always, used which of the following methods?
payback method
This capital budgeting method allows lower management to make smaller, everyday financial decisions effectively. Multiple choice question.
payback method
The IRR can lead to the wrong decision when cash _____________(inflows/outflows) occur before cash ________________(inflows/outflows). Listen to the complete question
inflows, outflows
According to Graham and Harvey's 1999 survey of 392 CFOs, which of the following two capital budgeting methods are most used by firms in the United States?
net present value, internal rate of return
The spreadsheet function for calculating net present value is ____.
npv()
The amount of time needed for the cash flows from an investment to pay for its initial cost is the _____ period.
payback
The loan balance on partial amortization loans declines so slowly because the ___. Multiple choice question.
payments are mostly interest
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. Multiple choice question.
perpetuity
Which of the following show the steps you would apply using a financial calculator to find the future value of an annuity of $100 per year for 10 years at 15%? Multiple choice question.
Enter 100 for PMT, 10 for N, and 15 for I/Y. Solve for FV.
You are planning to buy a CD for $1,352. You will receive $1,500 in 2 years. Which inputs will you use in a financial calculator to find the interest rate you will receive on that investment, assuming annual compounding?
Enter −1,352 for PV, 2 for N, and 1,500 for FV. Solve for I/Y.
You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, which of the following show the steps you will apply using a financial calculator to solve for the number of months will it take to pay off your credit card? Multiple choice question.
Enter −50 for PMT, 1,200 for PV, and 1.5 for I/Y. Solve for N.
The discounted payback period has which of these weaknesses?
Loss of simplicity as compared to the payback method Exclusion of some cash flows Arbitrary cutoff date
Which of the following are weaknesses of the payback method? Multiple select question.
Time value of money principles are ignored. Cash flows received after the payback period are ignored. The cutoff date is arbitrary.
The three attributes of NPV are that it:
1. uses all the cash flows of a project 2. uses cash flows 3. discounts the cash flows properly
If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value.
present
In capital budgeting, the net ______ determines the value of a project to the company.
present value
The difference between _______ interest and compound interest is that the amount of compound interest earned gets (bigger or smaller) ___________ every year.
simple, bigger
The payback period method allows lower management to make ___________(smaller/larger), everyday financial decisions effectively.
smaller
The payback period rule ______ a project if it has a payback period that is less than or equal to a particular cutoff date.
suggests accepting
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest.
true
True or false: The formula for a present value factor is 1/(1+r)t.
true
If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?
133.10
To find the present value of an annuity of $100 per year for 5 years at 10 percent per year using the tables, look up the present value interest factor which is ______ and multiply that by ______.
3.7908; $100
