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An investment offers $7,700 per year for 14 years, with the first payment occurring one year from now.

Assume the required return is 8 percent.

 

You’ve just joined the investment banking firm of Dewey, Cheatum, and Howe.

They’ve offered you two different salary arrangements.

You can have $8,500 per month for the next three years, or you can have $7,200 per month for the next three years,

along with a $38,500 signing bonus today. Assume the interest rate is 8 percent compounded monthly.

 

 

You’re prepared to make monthly payments of $235, beginning at the end of this month,

into an account that pays 12 percent interest compounded monthly.
 
How many payments will you have made when your account balance reaches $62,000?

(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

4. 

Prepare an amortization schedule for a three-year loan of $111,000.

The interest rate is 10 percent per year, and the loan agreement calls for a principal reduction of $37,000 every year.

How much total interest is paid over the life of the loan?

(Leave no cells blank. Enter '0' where necessary.

Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

 

 

This question illustrates what is known as discount interest.

Imagine you are discussing a loan with a somewhat unscrupulous lender.

You want to borrow $32,000 for one year.

The interest rate is 20.25 percent. You and the lender agree that the interest on the loan

will be .2025 × $32,000 = $6,480.

So, the lender deducts this interest amount from the loan up front and gives you $25,520.

In this case, we say that the discount is $6,480.
 
What is the interest rate on this loan?

(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Interest rate             %

 

Which of the following questions are addressed by financial managers?

I. How should a product be marketed?
II. Should customers be given 30 or 45 days to pay for their credit purchases?
III. Should the firm borrow more money?
IV. Should the firm acquire new equipment?

 

 

Decisions made by financial managers should primarily focus on increasing which one of the following?

 

Market value per share of outstanding stock

 

 

Why should financial managers strive to maximize the current value per share of the existing stock?

 

Because they have been hired to represent the interests of the current shareholders.

 

 

Which one of the following statements is correct?

 

Corporations can raise large amounts of capital generally easier than partnerships can.

 

 

Corporate bylaws ___________.

 

Determine how a corporation regulates itself.

 

 

Which one of the following is a working capital management decision?

 

Determining whether to pay cash for a purchase or use the credit offered by the supplier.

 

 

The Sarbanes-Oxley Act of 2002 is a governmental response to:

 

Management greed and abuses.

 

 

A business owned by a solitary individual who has unlimited liability for its debt is called a:

 

Sole proprietorship.

 

 

Which one of the following actions by a financial manager is most apt to create an agency problem?

 

Increasing current profits when doing so lowers the value of the firm's equity.

 

 

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a:

 

General partnership

 

 

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner?

 

Maximum loss limited to the capital invested.

 

 

Which one of the following is a capital budgeting decision?

Deciding whether or not to purchase a new machine for the production line.

 

The growth of both sole proprietorships and partnerships is frequently limited by their:

Inability to raise cash

 

 

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

 

Agency problem

 

 

Which of the following should a financial manager consider when analyzing a capital budgeting project?

Project start-up costs.
Timing of all projected cash flows.
Dependability of future cash flows.
Dollar amount of each projected cash flow.

 

 

You expect to receive $36,000 at graduation in two years. You plan on investing it at 9.25 percent until you have $171,000.
How long will you wait from now? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

 

19.60 years

 

 

In 1895, the first Putting Green Championship was held. The winner's prize money was $200. In 2014, the winner's check was $1,400,000.

a. What was the percentage increase per year in the winner's check over this period

(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. If the winner's prize increases at the same rate, what will it be in 2035?

(Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)

 

a.      Increase per year: 7.72%

b.      Winner's prize in 2035: $6,678,435.70

 

 

Your coin collection contains 43 1952 silver dollars.

If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2053

 assuming they appreciate at an annual rate of 5.8 percent?

(Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

 

Future Value: $ 12,779.71

 

 

At 6.9 percent interest, how long does it take to double your money?

(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
At 6.9 percent interest, how long does it take to quadruple it?

(Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

Length of Time: 10.37 years
Length of Time: 20.76 years

 

 

A coin that was featured in a famous novel sold at auction in 2014 for $6,581,000.

The coin had a face value of $10 when it was issued in 1791 and had previously been sold for $235,000 in 1968.

a. At what annual rate did the coin appreciate from its first minting to the 1968 sale?

(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

b. What annual rate did the 1968 buyer earn on his purchase?

(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

c. At what annual rate did the coin appreciate from its first minting to the 2014 sale?

(Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

a.      Rate of Return: 5.85%

b.      7.51%

c.       6.19%

 

 

In January 2007, the average price of an asset was $28,658. 6 years earlier, the average price was $21,608.

What was the annual increase in selling price?

 

4.82%

 

 

Imprudential, Inc., has an unfunded pension liability of $550 million that must be paid in 23 years.

To assess the value of the firm's stock, financial analysts want to discount this liability back to the present.

If the relevant discount rate is 6.0 percent, what is the present value of this liability?

 

$143,988,494

 

You have just received notification that you have won the $4.5 million first prize in the Centennial Lottery.

However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 79 years from now.

What is the present value of your windfall if the appropriate discount rate is 10 percent?

 

$2,416.52

 

You're trying to save to buy a new $170,000 Ferrari. You have $34,000 today that can be invested at your bank.

The bank pays 4.5 percent annual interest on its accounts. How long will it be before

 

you have enough to buy the car?

 

36.56 years

 

You have just made your first $1,500 contribution to your retirement account.

Assuming you earn an 8 percent rate of return and make no additional contributions.
(a)What will your account be worth when you retire in 30 years?
(b)What will your account be worth if you wait 7 years before contributing?

 

a.      15,093.99

b.      8,807.20

 

 

You are offered an investment that will pay you $200 in one year, $400 the next year, $600 the next year and $800 at the end of the next year.

You can earn 12 percent on very similar investments.
What is the most you should pay for this one?

Find the PV of each cash flows and add them

Year 1 CF: 200 / (1.12)1 = 178.57
Year 2 CF: 400 / (1.12)2 = 318.88
Year 3 CF: 600 / (1.12)3 = 427.07
Year 4 CF: 800 / (1.12)4 = 508.41
Total PV = 178.57 + 318.88 + 427.07 + 508.41 = 1,432.93

 

 

You think you will be able to deposit $4,000 at the end of each of the next three years in a bank account paying 8 percent interest.

You currently have $7,000 in the account.
How much will you have in three years?
In four years?

Find the value at year 3 of each cash flow and add them together:

Today (year 0): FV = 7000(1.08)3 = 8,817.98

Year 1: FV = 4,000(1.08)2 =    4,665.60
Year 2: FV = 4,000(1.08) =                  4,320
Year 3: value =                                    4,000

Total value in 3 years = 8817.98 + 4665.60 + 4320 + 4000 = 21,803.58

Value at year 4 = 21,803.58(1.08) = 23,547.87

 

 

Suppose you invest $500 in a mutual fund today and $600 in one year. If the fund pays 9% annually, how much will you have in two years?

 

1248.05

 

FV = 500(1.09)² + 600(1.09)¹ = 1248.05

 

 

Suppose you plan to deposit $100 into an account in one year and $300 into the account in three years.

How much will be in the account in five years if the interest rate is 8%?

 

485.97

 

FV = 100(1.08)⁴ + 300(1.08)² = 136.05 + 349.92 = 485.97

 

 

After carefully going over your budget, you have determined you can afford to pay $350 per month towards a new sports car.

You call up your local bank and find out that the going rate is 6.99% for 5 years. How much can you borrow?

 

17,679.91

.0699 / 12 = .005825
5 x 12 = 60
350 x [1 - 1/(1.005825)⁶⁰] / .005825 = 17,679.91

 

 

Thomas invests $116 in an account that pays 5 percent simple interest.

How much money will Thomas have at the end of 5 years?

 

$145.00

 

 

What is the future value of $3,128 invested for 9 years at 6.5 percent compounded annually?

 

$5,513.32

 

 

When you retire 35 years from now, you want to have $1.2 million.

You think you can earn an average of 9 percent on your investments.

To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 5 years from today.

How much more will you have to deposit as a lump sum if you wait for 5 years before making the deposit?

 

$31,662.08

 

 

You invested $6,500 in an account that pays 6 percent simple interest.

How much more could you have earned over a 10-year period if the interest had compounded annually?

 

$1,240.51

 

 

One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?

 

6.92 percent

 

 

Walker's charges a daily rate of .049 percent on its store credit cards.

What interest rate is the company required by law to report to potential customers?

Assume each quarter has exactly 91.25 days.

 

0.1789, or 17.89 percent

 

APR = .049 percent ×365 = 0.1789

 

 

The Corner Bakery needs $86,000 today for remodeling.

They have obtained a 2-year, pure-discount loan at an interest rate of 6.8 percent, compounded annually.

How much must they repay in two years?

 

$98,093.66

 

FV = $86,000 × (1 +.068)2 = $98,093.66

 

 

Jake owes $3,990 on a credit card with an APR of 13.9 percent.

How much more will it cost him to pay off this balance if he makes monthly payments of $50 rather than $60?

Assume he does not charge any further purchases.

 

$3,545

 

PV = $3,990 = $50 × (1 - {1 / [1 + (.139 / 12)]t}) / (.139 / 12) t = 224.16 months PV = $3,990 =

$60 × (1 - {1 / [1 + (.139 / 12)]t}) / (.139 / 12) t = 127.72 months

Additional cost = (224.16 ×$50) - (127.72 ×$60) = $3,545

 

 

Assume a project will produce cash flows of $22,400, $28,700, $30,300, $10,900 at the end of Years 1 to 4, respectively.

If the discount rate is 14.7 percent, what is the current value of these cash flows?

 

$67,721.24

 

PV = $22,400 / 1.147 + $28,700 / 1.1472 + $30,300 / 1.1473 + $10,900 / 1.1474 = $67,721.24

 

 

You want to buy a new sports car from Roy's Cars for $51,800.

The contract is in the form of a 48-month annuity due at an APR of7.8 percent, compounded monthly.

What would be your monthly payment?

 

$1,251.60

 

PV = $51,800 = C × [(1 - {1 / [1 + (.078 / 12)]⁴⁸}) / (.078 /.12)] × [1 + (.078 / 12)]

C = $1,251.60

 

 

Art invested $100 two years ago at 8 percent interest.

The first year, he earned $8 interest on his $100 investment. He reinvested the $8.

The second year, he earned $8.64 interest on his $108 investment.

The extra $.64 he earned in interest the second year is referred to as:

 

Interest on interest

 

 

According to the Rule of 72, you can do which one of the following?

 

Double your money in 5 years at 14.4 percent interest.

 

 

What is the relationship between present value and future value interest factors?

 

The factors are reciprocals of each other.

 

 

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

 

Compound interest.

 

 

Which of these will increase the present value of an amount to be received sometime in the future?

 

Decrease in the interest rate.

 

 

Which one of the following will decrease the present value of an annuity?

A. Increase in the annuity's future value

B. Increase in the payment amount

C. Increase in the time period

D. Decrease in the discount rate

E. Decrease in the annuity payment

 

 

 

Which one of the following statements is true concerning annuities?

 

A. All else equal, an ordinary annuity is more valuable than an annuity due.

B. All else equal, a decrease in the number of payments increases the future value of an annuity due.

C. An annuity with payments at the beginning of each period is called an ordinary annuity.

D. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.

E. All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.

 

 

Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent.

The loan term is 6 years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank.

Which type of loan does he have?

 

A. Interest-only

B. Pure discount

C. Compound

D. Amortized

E. Complex

 

 

Letitia borrowed $6,000 from her bank 2 years ago. The loan term is 4 years.

Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?

 

A. Amortized

B. Blended discount

C. Interest-only

D. Pure discount

E. Complex

 

 

Bill just financed a used car through his credit union. His loan requires payments of $275 a month for 5 years.

Assuming that all payments are paid timely, his last payment will pay off the loan in full.

What type of loan does Bill have?

 

A. Amortized

B. Complex

C. Pure discount

D. Lump sum

E. Interest-only

 

 

You just borrowed $3,000 from your bank and agreed to repay the interest

on an annual basis and the

principal at the end of 3 years. What type of loan did you obtain?

 

A. Interest-only

B. Amortized

C. Perpetual

D. Pure discount

E. Lump sum

 

 

You are comparing two annuities. Annuity A pays $100 at the end of each month for 10 years.

Annuity B pays $100 at the beginning of each month for 10 years. The rate of return on both annuities is 8 percent.

Which one of the following statements is correct given this information?

 

A. The present value of Annuity A is equal to the present value of Annuity B.

B. Annuity B will pay one more payment than Annuity A will.

C. The future value of Annuity A is greater than the future value of Annuity B.

D. Annuity B has both a higher present value and a higher future value than Annuity A.

E. Annuity A has a higher future value but a lower present value than Annuity B.

 

 

Which one of the following is an ordinary annuity, but not a perpetuity?

A. $75 paid at the beginning of each month period for 50 years

B. $15 paid at the end of each monthly period for an infinite period of time

C. $40 paid quarterly for five years, starting today

D. $50 paid every year for ten years, starting today

E. $25 paid weekly for one year, starting one week from today

 

 

Which one of the following can NOT be computed?

A. Future value of an ordinary annuity

B. Future value of a perpetuity

C. Present value of a perpetuity

D. Present value of an annuity due

E. Present value of an ordinary annuity

B

 

 

You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate.

One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity.

Which one of the following statements is correct given these three investment options?

 

A. To be the perpetuity, the payments must occur on the first day of each monthly period.

B. The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years.

C. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.

D. The future value of all three investments must be equal.

E. The present value of all three investments must be equal.

 

 

Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment

one year from now. This type of loan is referred to as a(n):

A. interest-only loan.

B. pure discount loan.

C. quoted rate loan.

D. compound interest loan.

E. amortized loan.

 

 

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs Project 1

will produce annual cash flows of $52,000 a year for 6 years. Project 2 will produce cash flows of $48,000 a year for 8 years.

The company requires a 15 percent rate of return. Which project should the company select and why?

 

A. Project 1; because the annual cash flows are greater than those of Project 2

B. Project 1; because the present value of its cash inflows exceeds those of Project 2 by $14,211.62

C. Project 2; because the total cash inflows are $70,000 greater than those of Project 1

D. Project 2; because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

E. It does not matter as both projects have almost identical present values.

 

 

The manager of Gloria's Boutique has approved Carla's application for credit.

The maximum payment that has been approved is $65 a month for 24 months. The APR is 15.7 percent.

What is the maximum initial purchase that Carla can make given this credit approval?

 

A. $1,288.90

B. $1,300.00

C. $1,331.42

D. $1,350.00

E. $1,428.46

 

 

Webster Mining is considering the purchase of a new sorting machine.

The quote consists of a quarterly payment of $29,600 for 7 years at 8 percent interest.

What is the purchase price of the equipment?

 

A. $621,380.92

B. $629,925.66

C. $687,418.22

D. $774,311.28

E. $836,267.35

 

 

You want to purchase a new condominium which costs $329,000.

Your plan is to pay 20 percent down in cash and finance the balance over 25 years at 6.25 percent.

What will be your monthly mortgage payment?

 

A. $1,736.25

B. $1,833.33

C. $1,908.16

D. $2,221.43

E. $2,406.11

 

 

Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000.

The annuity will pay annual payments starting one year from today. What is the amount of each payment?

 

A. $9,511.08

B. $10,462.15

C. $10,754.40

D. $11,013.20

E. $12,208.19

 

 

Kurt wants to have $25,000 in an investment account 4 years from now.

The account will pay 0.2 percent interest per month.

If he saves money every month, starting one month from now, how much will he have to save each month to reach his goal?

 

A. $496.75

B. $497.03

C. $497.75

D. $501.03

E. $502.14

 

 

Katie's Dinor spent $84,000 to refurbish its current facility.

The firm borrowed 80 percent of the refurbishment cost at 9.2 percent interest for 5 years.

What is the amount of each monthly payment?

 

A. $1,108.91

B. $1,282.16

C. $1,333.33

D. $1,401.49

E. $1,487.06

 

 

Your grandfather started his own business 52 years ago. He opened a savings account at the end of his

third month of business and contributed $x. Every three months since then, he faithfully saved another $x.

His savings account has earned an average rate of 4.5 percent annually.

Today, his account is valued at $364,209.11. How much did your grandfather save every 3 months?

 

A. $425.15

B. $428.67

C. $431.09

D. $443.13

E. $462.25

 

 

Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously delinquent, so your firm has

offered to arrange a payment plan in the hopes that it might at least collect a portion of this receivable.

Your firm's offer consists of weekly payments for one year at an interest rate of 3 percent.

What is the amount of each payment?

 

A. $2,229.90

B. $2,318.11

C. $2,409.18

D. $2,599.04

E. $2,706.33

 

 

The Furniture Hut is offering a bedroom suite for $1,999. The credit

terms are 60 months at $50 per

month. What is the interest rate on this offer?

A. 16.33 percent

B. 16.50 percent

C. 16.65 percent

D. 17.15 percent

E. 17.30 percent

 

 

The Solvent Insurance Co. will pay you $2,500 a year for 20 years in exchange for $30,000 today.

What interest rate will you earn on this annuity?

 

A. 5.40 percent

B. 5.45 percent

C. 5.50 percent

D. 5.55 percent

E. 5.60 percent

 

 

Used Motors will sell you a $13,000 car for $380 a month for 48 months.

What is the interest rate?

 

A. 16.55 percent

B. 16.67 percent

C. 16.99 percent

D. 17.58 percent

E. 17.72 percent

 

 

You have just won a contest! You can either receive $10,000 a year for 15 years or $100,000 as a lump sum payment today.

What is the interest rate on the annuity option?

 

A. 5.56 percent

B. 5.68 percent

C. 6.20 percent

D. 6.39 percent

E. 6.50 percent

 

 

You recently sold an antique car you owned and valued greatly. However, you needed money and agreed

to sell the car at a price of $48,000, to be paid in monthly payments of $1,200 each for 48 months.

What interest rate did you charge for financing the sale?

 

A. 8.65 percent

B. 8.75 percent

C. 8.88 percent

D. 9.24 percent

E. 9.49 percent

 

 

Berkley Trucking recently purchased a new truck costing $147,800. The firm financed this purchase at

7.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?

 

A. 6.50 years

B. 6.67 years

C. 7.48 years

D. 7.60 years

E. 7.79 years