Chapter Four Allocating Resources Over Time Multiple Choice 1 is the process of going from present value to future value,whereas is finding the present value of some future amount. (a)Discounting;compounding (b)Compounding;annualizing (c)Compounding;discounting (d)Discounting;leasing Answer:(c) 2.The difference between an immediate annuity and an ordinary annuity is (a)the number of periods (b)the amount of the payments (c)the interest rate (d)the timing of the payments Answer:(d) 3.The preferred stock of Tavistock Realty offers a cash dividend of $2.28 per year and it is selling at a price of $110 per share.What is the yield of Tavistock Realty preferred stock? (a)2.07% (b)2.12% (c)2.28% (d)48.25% Answer:(a) 4.Consider the situation where you have won a $10 million lottery to be received in 25 annual equal payments of $400,000.What will happen to the present value of these winnings if the interest rate increases during the next 25 years? (a)it will not change (b)it will be worth more (c)it will be worth less (d)it cannot be determined Answer:(c) 4-1
4-1 Chapter Four Allocating Resources Over Time Multiple Choice 1. ________ is the process of going from present value to future value, whereas ________ is finding the present value of some future amount. (a) Discounting; compounding (b) Compounding; annualizing (c) Compounding; discounting (d) Discounting; leasing Answer: (c) 2. The difference between an immediate annuity and an ordinary annuity is ________. (a) the number of periods (b) the amount of the payments (c) the interest rate (d) the timing of the payments Answer: (d) 3. The preferred stock of Tavistock Realty offers a cash dividend of $2.28 per year and it is selling at a price of $110 per share. What is the yield of Tavistock Realty preferred stock? (a) 2.07% (b) 2.12% (c) 2.28% (d) 48.25% Answer: (a) 4. Consider the situation where you have won a $10 million lottery to be received in 25 annual equal payments of $400,000. What will happen to the present value of these winnings if the interest rate increases during the next 25 years? (a) it will not change (b) it will be worth more (c) it will be worth less (d) it cannot be determined Answer: (c)
5.What is the effective annual rate on a bank account that has APR of 8 percent with interest compounded quarterly? (a)6.12% (b)8.24% (c)8.48% (d)17.17% Answer:(b) 6.If you purchase a $12,000 certificate of deposit today with an APR of 14%,with quarterly compounding,what will the CD be worth when it matures in 5 years? (a)$20,846.99 (b)$20,865.60 (c)$23,104.97 (d)$23,877.47 Answer:(d) 7.The CFO of CyberChain Inc.plans to unleash a media campaign that is expected to cost $15 million four years from today.How much cash should she set aside to pay for this if the current interest rate is 13%? (a）$9.2 million (b)$13.3 million (c)$14.4 million (d)$16.9 million Answer:(a) 8.The NPV is a measure of how much your wealth changes as a result of your choice and if the NPV is it does not pay to undertake that choice. (a)future;negative (b)current:negative (c)current;positive (d)future;positive Answer:(b) 4-2
4-2 5. What is the effective annual rate on a bank account that has APR of 8 percent with interest compounded quarterly? (a) 6.12% (b) 8.24% (c) 8.48% (d) 17.17% Answer: (b) 6. If you purchase a $12,000 certificate of deposit today with an APR of 14%, with quarterly compounding, what will the CD be worth when it matures in 5 years? (a) $20,846.99 (b) $20,865.60 (c) $23,104.97 (d) $23,877.47 Answer: (d) 7. The CFO of CyberChain Inc. plans to unleash a media campaign that is expected to cost $15 million four years from today. How much cash should she set aside to pay for this if the current interest rate is 13%? (a) $9.2 million (b) $13.3 million (c) $14.4 million (d) $16.9 million Answer: (a) 8. The NPV is a measure of how much your ________ wealth changes as a result of your choice and if the NPV is ________it does not pay to undertake that choice. (a) future; negative (b) current; negative (c) current; positive (d) future; positive Answer: (b)
9.The is the rate that one can earn somewhere else if one did not invest in the project under evaluation. (a)opportunity cost of capital (b)cost of debt (c)cost of equity (d)weighted average cost of capital Answer:(a) 10.You are trying to decide whether or not to buy a bond for $990 that will make one payment for $1,050 four years from today.What is the internal rate of return on the bond's cash flows? (a)1.06% (b)1.48% (c)10.6% (d)14.8% Answer:(b) 11.After each payment of an amortized loan,the outstanding balance is reduced by the amount of principal repaid.Therefore,the portion of the payment that goes toward the payment of interest is than the previous period's interest payment and the portion going toward repayment of principal is than the previous period's. (a)greater;lower (b)lower:lower (c)greater;greater (d)lower;greater Answer:(d) 12.The earnings of BGB Computers have grown from $3.20 to $6.90 in 6 years.Determine the annual compound rate (a)1.14% (b)13.7% (c)15.6% (d)115.6% Answer:(b) 13.In five years you intend to go to graduate school.For each of your four years in graduate school,you need to have a fund that will provide $25,000 per year at the beginning of each year.If the interest rate is 9%throughout,how much must you put in the fund today? 4-3
4-3 9. The ________ is the rate that one can earn somewhere else if one did not invest in the project under evaluation. (a) opportunity cost of capital (b) cost of debt (c) cost of equity (d) weighted average cost of capital Answer: (a) 10. You are trying to decide whether or not to buy a bond for $990 that will make one payment for $1,050 four years from today. What is the internal rate of return on the bond’s cash flows? (a) 1.06% (b) 1.48% (c) 10.6% (d) 14.8% Answer: (b) 11. After each payment of an amortized loan, the outstanding balance is reduced by the amount of principal repaid. Therefore, the portion of the payment that goes toward the payment of interest is ________ than the previous period’s interest payment and the portion going toward repayment of principal is ________ than the previous period’s. (a) greater; lower (b) lower; lower (c) greater; greater (d) lower; greater Answer: (d) 12. The earnings of BGB Computers have grown from $3.20 to $6.90 in 6 years. Determine the annual compound rate. (a) 1.14% (b) 13.7% (c) 15.6% (d) 115.6% Answer: (b) 13. In five years you intend to go to graduate school. For each of your four years in graduate school, you need to have a fund that will provide $25,000 per year at the beginning of each year. If the interest rate is 9% throughout, how much must you put in the fund today?
(a)$64,996 (b)$57,379 (c)$50,184 (d)$16,249 Answer:(b) 14.A rule of thumb with using the internal rate of return is to invest in a project if the IRR is the opportunity cost of capital. (a)greater than (b)less than (c)less than or equal to (d)one-half of Answer:(a) 15.The NPV is the difference between the value of all cash inflows minus the value of all current and future cash outflows (a)future;present;present (b)present;future;present (c)present;present;future (d)present;future;future Answer:(b) 16.If you purchased a $10,000 certificate of deposit today with an APR of 12%,with monthly compounding,what would be the CD worth when it matures in 6 years? (a)$56,340 (b)$20,468 (c)$19,738 (d)$5,066 Answer:(b) 17.The real interest rate is 3.2%,the nominal interest rate is 8.36%and the rate of inflation is 5%. We are interested in determining the future value of $200 in 35 years time.What is the future price level? a)2.91 b)3.012 c)5.516 d)16.61 Answer:(c) 4-4
4-4 (a) $64,996 (b) $57,379 (c) $50,184 (d) $16,249 Answer: (b) 14. A rule of thumb with using the internal rate of return is to invest in a project if the IRR is ________ the opportunity cost of capital. (a) greater than (b) less than (c) less than or equal to (d) one-half of Answer: (a) 15. The NPV is the difference between the ________ value of all ________ cash inflows minus the ________ value of all current and future cash outflows. (a) future; present; present (b) present; future; present (c) present; present; future (d) present; future; future Answer: (b) 16. If you purchased a $10,000 certificate of deposit today with an APR of 12%, with monthly compounding, what would be the CD worth when it matures in 6 years? (a) $56,340 (b) $20,468 (c) $19,738 (d) $5,066 Answer: (b) 17. The real interest rate is 3.2%, the nominal interest rate is 8.36% and the rate of inflation is 5%. We are interested in determining the future value of $200 in 35 years time. What is the future price level? a) 2.91 b) 3.012 c) 5.516 d) 16.61 Answer: (c)
18.If the real rate is 4%and the rate of inflation is 6%,what is the nominal rate? a)8.16% b)10.16% c)10.24% d)10.36% Answer:(c) 19.You have an investment opportunity with a nominal rate of 6%compounded daily.If you want to have $100.000 in your investment account in 15 years,how much should you deposit today,to the nearest dollar? a.$43,233 b.$41,727 C. $40,930 d.$40,660 Answer:(d) 20.You have determined the present value of an expected cash inflow stream.Which of the following would cause the stream to have a higher present value? a)The discount rate increases. b)The cash flows are paid over a shorter period of time. c)The discount rate decreases. d)Statements(b)and(c)are both correct. Answer:(d) 4-5
4-5 18. If the real rate is 4% and the rate of inflation is 6%, what is the nominal rate? a) 8.16% b) 10.16% c) 10.24% d) 10.36% Answer: (c) 19. You have an investment opportunity with a nominal rate of 6% compounded daily. If you want to have $100,000 in your investment account in 15 years, how much should you deposit today, to the nearest dollar? a. $43,233 b. $41,727 c. $40,930 d. $40,660 Answer: (d) 20. You have determined the present value of an expected cash inflow stream. Which of the following would cause the stream to have a higher present value? a) The discount rate increases. b) The cash flows are paid over a shorter period of time. c) The discount rate decreases. d) Statements (b) and (c) are both correct. Answer: (d)