Exam Prep Ch.6 Discounted Cash Flows And Valuation 5e

Fundamentals of Corporate Finance, 5e (Parrino)

Chapter 6 Discounted Cash Flows and Valuation

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

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

2) In calculating the present value or the future value of a cash flow stream one must either discount or compound the cash flows to the same point in time.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

3) Calculating the present or future values of multiple cash flows is relevant for businesses only.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

4) Each cash flow is discounted at the same rate when calculating the present values of multiple cash flows.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

5) The present value of multiple cash flows is greater than the sum of those cash flows assuming the discount rate is greater than zero.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

6) The future value of multiple cash flows is greater than the sum of those cash flows when the discount rate is zero.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

7) Jacob Oram pays the same insurance premium amount every month for a term life policy for a period of five years. The stream of cash flows is called a perpetuity.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

8) Allen Bell pays the same amount every month on a car loan for a period of three years. The stream of cash flows is called an annuity.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

9) The future value of the annuity due exceeds the future value of the ordinary annuity, but the present value of the annuity due will be lower than the present value of the ordinary annuity.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

10) The present value of a perpetuity exceeds the present value of a 100-year ordinary annuity as long as the discount rate is positive.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

13) Since the issuers of preferred stock promise to pay investors a fixed quarterly dividend, forever, this is an example of perpetuities in the financial markets.

Learning Objective: LO 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 3

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

15) In an ordinary annuity, cash flows occur at the beginning of each period.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

17) The lease payments by a business for renting a warehouse are an example of an annuity due.

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 2, 3

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

23) 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 unit price as constant over the contract period, this growth in revenue is an example of a growing perpetuity.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

25) Natalia Greenberg opened a pizza place last year. She expects to increase her revenues from last year by 7 percent every year for the next 10 years. This is an example of a growing annuity.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

26) The annual percentage rate (APR) is the annualized interest rate using compound interest.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

27) Credit card issuers are required to disclose the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 23.50 percent, with interest compounded monthly, the Effective Annual Interest Rate (EAR) will be less than 23.50 percent.

Learning Objective: LO 5

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

28) The annual percentage rate (APR) is defined as the simple interest charged per period multiplied by the number of periods per year.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

32) The effective annual interest rate (EAR) is the true cost of borrowing and lending.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

33) The quoted interest rate is by convention a simple annual percentage interest rate (APR).

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Legal/Regulatory Perspective

36) Only the annual percentage rate (APR) or some other quoted rate should be used as the discount rate for present or future value calculations.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

37) A car manufacturer enters into a contract for 25-years lease of warehouse rental that adjusts annually for the expected rate of inflation over the life of the contract. This is an example of growing perpetuity.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

38) A growing annuity for an infinite number of periods is called a growing perpetuity.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

39) For computation of the present value of growing annuity with n periods, the cash flow for the current period is used and not the cash flow to be received in the next period.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

40) Growing perpetuity is widely used in the valuation of common stock of firms that have a policy of paying dividends that grow at a constant rate every year.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

41) The present value of a growing perpetuity is computed as the cash flow occurring at the end of the first period divided by the difference between the interest or discount rate and the growth rate.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

42) A growing annuity is a series of cash flows that grow at a constant rate for a specified number of periods.

Learning Objective: LO 4

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

43) Which of the following is used as the denominator when calculating the present value for a growing perpetuity that begins next period (PVP)?

A) The difference between i (the discount or interest rate) and g (the constant growth rate of the cash flow)

B) i (the discount or interest rate)

C) g (the constant growth rate of the cash flow)

D) The addition of i (the discount or interest rate) and g (the constant growth rate of the cash flow)

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

44) The present value of a future cash flow is computed by multiplying the future cash flow value with the:

A) discounting factor.

B) compounding factor.

C) interest rate.

D) number of periods.

Learning Objective: LO 1

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

45) 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?

A) $4,210

B) $4,200

C) $4,000

D) $4,620

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

46) Which of the following is true of the discounting factor?

A) The discounting factor is the reciprocal of compounding factor.

B) The discounting factor is the sum of 1 and the rate of interest.

C) The discounting factor is period n times the rate of interest.

D) The discounting factor is computed by dividing period n by the sum of 1 and the rate of interest.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

47) William deposited $25,000 today that would earn an annual interest of 3 percent each year for a period of 2 years. The amount of $25,000 represents the:

A) present value of an annuity.

B) future value of an annuity.

C) present value.

D) future value.

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

48) 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.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

49) Anna will receive $15,000 from a bank deposit in 2 years which earned an annual interest rate of 3.5 percent. The amount of $15,000 represents the:

A) present value of an annuity.

B) future value of an annuity.

C) present value.

D) future value.

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

50) 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) higher or lower than the cash flows depending on the interest rate.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

51) Assuming a 10 percent positive 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) higher or lower than the cash flows depending on the interest rate.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

52) 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) a growing perpetuity.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

53) 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) a growing perpetuity.

Learning Objective: LO 2

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

54) A preferred stock would be an example of:

A) a perpetuity.

B) an ordinary annuity.

C) an annuity due.

D) a growing annuity.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

55) Cash flows associated with annuities are considered to be:

A) an uneven cash flow stream.

B) a constant cash flow stream.

C) a mix of constant and uneven cash flow streams.

D) a cash flow stream with decreasing trend.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

56) Which of the following statements is true of amortization?

A) Amortization solely refers to the total value to be paid by the borrower at the end of maturity.

B) The amortization schedule represents only the interest portion of the loan.

C) The computation of loan amortization is wholly based on the computation of simple interest.

D) The amortization schedule provides principal, interest, and unpaid principal balance for each period.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

57) Which of the following statements is true of amortization?

A) With an amortized loan, a periodic payment of principal portion gradually decreases over a period.

B) Amortization schedule represents only the interest portion of the loan.

C) With an amortized loan, a larger proportion of each periodic payment goes toward interest in the early periods.

D) The computation of loan amortization is wholly based on the computation of simple interest.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

58) Which of the following statements is true of an amortized loan?

A) A larger proportion of each periodic payment goes toward interest in the early periods.

B) A larger proportion of each periodic payment goes toward interest in the later periods.

C) A smaller proportion of each periodic payment goes toward interest in the early periods.

D) The interest portion of each periodic payment remains unchanged.

Learning Objective: LO 1

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

59) 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.

Learning Objective: LO 2

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

60) 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.

Learning Objective: LO 4

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

61) 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.

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

62) Which of the following statements is true about the effective annual rate (EAR)?

A) The EAR is defined as the annual growth rates that do not take compounding into account.

B) The EAR is the annualized interest rate using simple interest. It ignores the interest earned on interest associated with compounding periods of less than one year.

C) The EAR is the simple interest charged per period multiplied by the number of periods per year.

D) The EAR is the interest rate actually paid or earned after accounting for compounding over one year.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

63) The true cost of borrowing is the:

A) annual percentage rate.

B) effective annual rate.

C) quoted interest rate.

D) periodic rate.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

64) The true cost of lending is the:

A) annual percentage rate.

B) effective annual rate.

C) quoted interest rate.

D) interest rate per period.

Learning Objective: LO 5

Bloomcode: Knowledge

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

65) Which of the following statements is true of annual percentage rate (APR)?

A) The APR is similar to the quoted interest rate, which is a simple annual rate.

B) The APR calculation adjusts for the effects of compounding and, hence, the time value of money.

C) The APR is the true cost of borrowing and lending.

D) The APR takes compounding effect into account.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

66) Which of the following statements is true of annual percentage rate (APR)?

A) The Truth-in-Savings Act was passed by Congress to ensure that the true cost of credit was disclosed to consumers.

B) The Truth-in-Lending Act was passed to provide consumers an accurate estimate of the return they would earn on an investment.

C) The Truth-in-Savings Act and Truth-in-Lending Act require by law that the APR be disclosed on all consumer loans and savings plans.

D) The annual percentage rate (APR), and not the effective annual interest rate (EAR), represents the true economic interest rate.

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

A) The effective annual interest rate (EAR)

B) The annual percentage rate (APR)

C) The quoted interest rate

D) The simple interest

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

68) Krysel Inc. is expecting a new project to begin producing cash flows at the end of this year. They expect cash flows to be as follows:

If they can reinvest these cash flows to earn an annual 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.)

A) $4,368,692

B) $4,429,046

C) $4,468,692

D) $4,529,046

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

69) Phosfranc, Inc. is expecting the following cash flows starting at the end of the year–$133,245, $152,709, $161,554, and $200,760. If their opportunity cost of capital is 9.4 percent, what is the future value of these cash flows at the end of four years? (Round to the nearest dollar.)

A) $734,731

B) $756,525

C) $734,231

D) $776,252

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

70) Robert White will receive cash flows of $4,450, $4,775, and $5,125 from his investment at the end of in the next three years. If he can earn 7 percent on the investment, what is the future value of his investment cash flows at the end of three years? (Round to the nearest dollar.)

A) $15,329

B) $15,427

C) $16,427

D) $14,427

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

71) Scottie Barnes has an investment that will pay him $6,400, $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 after four years? (Round to the nearest dollar.)

A) $27,150

B) $32,020

C) $30,455

D) $31,770

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

72) Global Shippers Inc. has forecasted earnings of $1,233,600, $1,345,900, and $1,455,650 for the next three years. What is the future value of these earnings in three years if the firm's opportunity cost is 13 percent? (Round to the nearest dollar.)

A) $4,214,360

B) $4,551,701

C) $3,900,865

D) $4,362,428

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

73) Damien McCoy has loaned money to his brother at an annual 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.)

A) $3,785

B) $3,757

C) $3,657

D) $3,685

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

74) Newship Inc. has borrowed from its bank at an annual interest rate of 8 percent and will repay the loan with interest over the next five years. Its scheduled payments, starting at the end of the year are as follows: -$450,000, $560,000, $750,000, $875,000, and $1,000,000. What is the present value of these payments? (Round to the nearest dollar.)

A) $2,735,200

B) $2,989,351

C) $2,431,224

D) $2,815,885

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

75) David Stephens has made an investment that will pay him $11,455, $16,376, and $19,812 annually starting next year. His investment was to offer an annual return of 14 percent. What is the present value of these cash flows? (Round to the nearest dollar.)

A) $37,712

B) $36,022

C) $41,675

D) $39,208

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

76) Nutech Corp. is expecting the following annual cash flows–$79,000, $112,000, $164,000, $84,000, and $242,000–over the next five years. If the company's opportunity cost of capital is 15 percent, what is the present value of these cash flows? (Round to the nearest dollar.)

A) $429,560

B) $485,097

C) $480,906

D) $477,235

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

77) Helen Ashley is expecting annual cash flows of $50,000, $75,000, $125,000, and $250,000 from an inheritance over the next four years. If she can earn 11 percent on any investment that she makes, what is the present value of her inheritance? (Round to the nearest dollar.)

A) $361,998

B) $414,454

C) $412,372

D) $434,599

Learning Objective: LO 1

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

78) Ransport Company has made an investment in another company that will guarantee 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? (Round to the nearest dollar.)

A) $101,766

B) $124,868

C) $251,154

D) $186,250

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

79) Ryan Campbell has invested in a fund that will provide him an annual cash flow of $11,700 for the next 20 years. If his opportunity cost of capital is 8.5 percent, what is the present value of this cash flow stream? (Round to the nearest dollar.)

A) $234,000

B) $132,455

C) $110,721

D) $167,884

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

80) Moore's Inc. will be making annual lease payments of $3,895.50 for a 10-year period, starting at the end of this year. If the firm uses a 9 percent discount rate, what is the present value of this annuity? (Round to the nearest dollar.)

A) $23,250

B) $29,000

C) $25,000

D) $20,000

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

81) Graciela Treadwell 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 today. If she can earn an annual return of 10 percent on any investment she makes, what is the least she should be willing to accept today as a lump-sum payment? (Round to the nearest hundred dollars.)

A) $750,000

B) $334,600

C) $212,400

D) $235,700

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

82) Insulor Inc. is expecting cash flows of $67,000 at the end of each year for the next five years. If the firm's discount rate is 17 percent, what is the present value of this annuity? (Round to the nearest dollar.)

A) $214,356

B) $241,653

C) $278,900

D) $197,776

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

83) Lloyd Harris is planning to invest $3,500 every year for the next six years in an investment paying 13 percent annually. What will be the total amount he will have at the end of the six years? (Round to the nearest dollar.)

A) $21,000

B) $29,129

C) $24,670

D) $26,124

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

84) 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 an annual return of 10 percent. How much will Shaun have at the end of 45 years? (Round to the nearest dollar.)

A) $2,667,904

B) $3,594,524

C) $1,745,600

D) $5,233,442

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

85) John Mason decided to save $2,250 at the end of each of the next three years to pay for a vacation. If he invests it at 8 percent annually, how much will he have at the end of three years? (Round to the nearest dollar.)

A) $7,304

B) $7,403

C) $6,297

D) $7,010

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

86) Barbara Lakey is saving to buy a new car in four years. She will save $5,500 at the end of each of the next four years. If she invests her savings at 7.75 percent annually, how much will she have after four years? (Round to the nearest dollar.)

A) $22,000

B) $23,345

C) $27,556

D) $24,692

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

87) Rosalia White will invest $3,000 annually in an IRA for the next 30 years starting at the end of this year. The investment will earn 13 percent annually. How much will she have at the end of 30 years? (Round to the nearest dollar.)

A) $879,598

B) $912,334

C) $748,212

D) $1,233,450

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

88) Viviana Carroll needs to have $25,000 in five years. If she can earn 8 percent annually on any investment, what is the amount that she will have to invest every year at the end of each year for the next five years? (Round to the nearest dollar.)

A) $5,000

B) $4,261

C) $4,640

D) $4,445

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

89) Cassandra Dawson wants to save for a trip to Australia. She will need $12,000 at the end of four years. Starting today, 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 each year to reach her target? (Round to the nearest dollar.)

A) $3,000

B) $2,980

C) $2,538

D) $2,711

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

90) 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.)

A) $4,708

B) $5,134

C) $4,939

D) $4,748

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

91) 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 annual payments. What will be his annual payment if he begins his payments now? (Round to the nearest dollar.)

A) $2,229

B) $2,304

C) $2,850

D) $2,448

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

92) 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 annually on any investment he makes. (Round to the nearest dollar.)

A) $13,464

B) $14,273

C) $10,900

D) $16,110

Learning Objective: LO 2

Bloomcode: Evaluation

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

93) Stuart Weddle's father is 55 years old and wants to set up a cash flow stream that would be forever. He would like to receive $15,000 every year, beginning at the end of this year. These payments would then continue to future generations indefinitely. If he could invest in account earning 9 percent annually, how much would he have to invest today to receive his perpetual cash flow? (Round to the nearest dollar.)

A) $166,667

B) $200,000

C) $222,222

D) $135,200

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

94) A lottery winner was given a perpetual payment of $25,362 starting next year. She could invest the cash flows at 7.5 percent annually. What is the present value of this perpetuity? (Round to the nearest dollar.)

A) $338,160

B) $390,215

C) $238,160

D) $201,356

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

A) $50,000

B) $32,600

C) $35,200

D) $40,300

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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

A) $12,150

B) $15,250

C) $16,875

D) $14,900

Learning Objective: LO 3

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

97) Ralf Wilson wants to receive $25,000 annually 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 starting next year? (Round to the nearest dollar.)

A) $640,225

B) $252,325

C) $144,350

D) $178,571

Learning Objective: LO 3

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

98) Starting today, you plan to make four annual contributions of $1,400 to save for a vacation. If you can invest it at 6 percent annually, how much will you have at the end of four years? (Round to the nearest dollar.)

A) $6,124

B) $5,618

C) $4,019

D) $6,492

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

99) Jeff Lovett has a five-year loan on which he will make annual payments of $2,235, beginning now. If the interest rate on the loan is 8.3 percent annually, what is the present value of this annuity? (Round to the nearest dollar.)

A) $9,588

B) $8,854

C) $8,612

D) $9,122

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

100) Starting today, Ann Chang is making seven annual contributions of $2,500 into her savings account. If her investment can earn 12 percent annually, how much will she have at the end of seven years? (Round to the nearest dollar.)

A) $25,223

B) $28,249

C) $31,127

D) $29,460

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

101) Your inheritance will pay five annual payments of $100,000 starting today. You can invest it in a CD that will pay 7.75 percent annually. What is the present value of your inheritance? (Round to the nearest dollar.)

A) $399,356

B) $401,916

C) $433,064

D) $467,812

Learning Objective: LO 2

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

102) 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 an annual rate of 5.5 percent. What is the present value of this investment cash flow stream? (Round to the nearest dollar.)

A) $326,908

B) $312,766

C) $416,667

D) $446,667

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

103) Bryant Investments is putting out a new product. The product will pay out $32,000 in the first year, and after that the payouts will grow by an annual rate of 2.75 percent forever. If you can invest the cash flows at 7.25 percent, how much will you be willing to pay for this perpetuity? (Round to the nearest dollar.)

A) $721,111

B) $633,111

C) $531,111

D) $711,111

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

104) 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 cash flows 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.)

A) $6,448,519

B) $6,750,000

C) $7,115,449

D) $5,478,320

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

105) Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings which is invested to earn a guaranteed annual 5 percent rate of return. If inflation averages 2 percent per year, how much can she withdraw (to the nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate as inflation and thus enabling her to maintain a constant standard of living?

A) $65,632

B) $72,925

C) $81,027

D) $89,130

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

106) You are evaluating a growing perpetuity investment from a large financial services firm. The investment promises an initial payment of $20,000 at the end of this year and subsequent annual payments that will grow at a rate of 3.4 percent. If you use a 9 percent annual discount rate for investments like this, what is the present value of this growing perpetuity?

A) $365,632

B) $372,925

C) $357,143

D) $378,130

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

107) Foodelicious Corp. is evaluating whether it should take over the lease of an ethnic restaurant in Manhattan. The current owner had originally signed a 25-year lease, of which 16 years still remain. The restaurant has been growing steadily at the rate of 7 percent for the last several years. Foodelicious Corp. expects the restaurant to continue to grow at the same rate for the remaining lease term. Last year, the restaurant brought in net cash flows of $310,000. If the firm evaluates similar investments using a 15 percent discount rate, what is the present value of this investment? (Round to the nearest dollar.)

A) $2,966,350

B) $2,838,182

C) $3,109,460

D) $2,709,124

Learning Objective: LO 4

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

108) Beautinator Cosmetics borrowed $152,300 from a bank for three years. If the quoted rate (APR) is 11.75 percent, compounded daily, what is the effective annual rate (EAR)? (Round to one decimal place.)

A) 11.7%

B) 14.3%

C) 12.5%

D) 11.6%

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

109) Surreal Corp. has borrowed to invest in a project. The loan calls for a payment of $17,500 every month for three years. The lender quoted Surreal an APR of 8.40 percent with monthly compounding. What is the effective annual rate (EAR) for this loan? (Round to two decimal places.)

A) 8.40%

B) 8.73%

C) 8.95%

D) 8.44%

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

110) How is an annuity due different from the ordinary annuity?

Learning Objective: LO 2

Bloomcode: Analysis

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

111) The annual percentage rate (APR) is not the appropriate rate to perform present or future value calculations. Explain this statement.

Learning Objective: LO 5

Bloomcode: Application

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

112) What was the purpose behind the passage of the two consumer protection acts discussed in this chapter?

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Legal/Regulatory Perspective

113) What are the three types of interest rate quoted in the market place?

Learning Objective: LO 5

Bloomcode: Comprehension

AACSB: Analytic

IMA: Corporate Finance

AICPA: Measurement

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