Essentials Of Corporate Finance 8th Edition By Westerfield – Ross - Test Bank Instant Download - Complete Test Bank With Answers Sample Questions Are Posted Below Chapter 05 Discounted Cash Flow Valuation Multiple Choice Questions 1. Travis is buying a car and will finance it with a loan that requires monthly …
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Essentials Of Corporate Finance 8th Edition By Westerfield – Ross – Test Bank
Instant Download – Complete Test Bank With Answers
Sample Questions Are Posted Below
Chapter 05
Discounted Cash Flow Valuation
Multiple Choice Questions
| 1. | Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?
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| 2. | Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?
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| 3. | The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?
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| 4. | A perpetuity in Canada is frequently referred to as which one of the following?
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| 5. | The stated interest rate is the interest rate expressed:
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| 6. | Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:
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| 7. | Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
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| 8. | Which one of the following will decrease the present value of an annuity?
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| 9. | Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?
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| 10. | Which one of the following statements is true concerning annuities?
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| 11. | Which one of the following is the annuity present value formula?
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| 12. | Which one of the following is an example of a perpetuity?
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| 13. | Which one of the following can be classified as an annuity but not as a perpetuity?
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| 14. | Which one of the following statements concerning annuities is correct?
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| 15. | Which one of the following qualifies as an annuity?
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| 16. | Which of the following characteristics apply to a perpetuity?
I. Constant cash flow dollar amount
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| 17. | Which of the following will increase the present value of an annuity, all else held constant?
I. Increase in the number of payments
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| 18. | 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?
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| 19. | Which one of the following features distinguishes an ordinary annuity from an annuity due?
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| 20. | Which one of the following is an ordinary annuity, but not a perpetuity?
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| 21. | Which one of the following cannot be computed?
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| 22. | 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?
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| 23. | Which one of the following has the highest effective annual rate?
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| 24. | When comparing savings accounts, you should select the account that has the:
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| 25. | A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
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| 26. | Which one of the following statements is correct?
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| 27. | A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:
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| 28. | 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):
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| 29. | Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?
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| 30. | Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?
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| 31. | Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?
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| 32. | Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?
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| 33. | 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 three years. What type of loan did you obtain?
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| 34. | Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3?
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| 35. | McClary Tires just decided to save money each year for the next four years to help fund a new building. If it earns 6.5 percent on its savings, how much will the firm have saved at the end of year 4?
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| 36. | Slaughter Industries just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 6 percent on its savings?
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| 37. | Doris’s Fashions has just signed a $2.2 million contract. The contract calls for a payment of $0.6 million today, $0.8 million one year from today, and $0.8 million two years from today. What is this contract worth today if the firm can earn 8.2 percent on its money?
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| 38. | Capstone Investments is considering a project that will produce cash inflows of $11,000 in year 1, $24,000 in year 2, and $36,000 in year 3. What is the present value of these cash inflows if the company assigns the project a discount rate of 12 percent?
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| 39. | 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 six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?
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| 40. | Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from today. How much should she pay for this investment if she wishes to earn a 13 percent rate of return?
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| 41. | How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent.
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| 42. | Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?
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| 43. | 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?
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| 44. | Webster Mining is considering the purchase of a new sorting machine. The quote consists of a quarterly payment of $29,600 for seven years at 8 percent interest. What is the purchase price of the equipment?
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| 45. | You want to purchase a new condominium that 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?
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| 46. | Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting 1 year from today. What is the amount of each payment?
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| 47. | Kurt wants to have $25,000 in an investment account four 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?
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| 48. | 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 five years. What is the amount of each monthly payment?
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| 49. | 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 three months?
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| 50. | 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?
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| 51. | Sticks and Stuff Furniture is offering a bedroom suite for $3,000. The credit terms are 60 months at $50 per month. What is the interest rate on this offer?
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| 52. | The Insolvent Insurance Co. will pay you $2,500 a year for 10 years in exchange for $30,000 today. What interest rate will you earn on this annuity?
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| 53. | Hughes Motors will sell you a $15,000 car for $380 a month for 48 months. What is the interest rate?
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| 54. | You have just won the lottery! You can either receive $5,000 a year for 15 years or $50,000 as a lump sum payment today. What is the interest rate on the annuity option?
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| 55. | 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 $58,000, to be paid in monthly payments of $1,500 each for 48 months. What interest rate did you charge for financing the sale?
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| 56. | Overnight Trucking recently purchased a new truck costing $150,800. The firm financed this purchase at 8.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?
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| 57. | Cromwell Enterprises is acquiring Athens, Inc. for $899,000. Athens has agreed to accept annual payments of $210,000 at an interest rate of 8.5 percent. How many years will it take Cromwell Enterprises to pay for this purchase?
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| 58. | Today is your 21st birthday and you just decided to start saving money so you can retire early. Thus, you are going to save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn an average of 8 percent on your savings, how old will you be when you retire?
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| 59. | You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?
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| 60. | Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?
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| 61. | Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of 7.75 percent and monthly payments of $310. Your financial situation recently changed such that you can no longer afford these payments. After talking with your banker and explaining the situation, he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 percent. How much longer will it take you to repay this loan than you had originally planned?
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| 62. | The Food Store is planning a major expansion for four years from today. In preparation for this, the company is setting aside $35,000 each quarter, starting today, for the next four years. How much money will the firm have when it is ready to expand if it can earn an average of 6.25 percent on its savings?
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| 63. | Janice plans to save $75 a month, starting today, for 20 years. Kate plans to save $80 a month for 20 years, starting one month from today. Both Janice and Kate expect to earn an average return of 5.5 percent on their savings. At the end of the 20 years, Kate will have approximately _____ more than Janice.
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| 64. | What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the end of this week.
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| 65. | At the end of this month, Les will start saving $150 a month for retirement through his company’s retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?
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| 66. | Steve is considering investing $3,600 a year for 40 years. How much will this investment be worth at the end of the 40 years if he earns an average annual rate of return of 11.6 percent? Assume Steve invests his first payment of the end of this year.
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| 67. | Kristina started setting aside funds three years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved for her down payment?
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| 68. | Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?
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| 69. | You just won a contest! You will receive $100,000 a year for 20 years, starting today. If you can earn 12 percent on your investments, what are your winnings worth today?
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| 70. | You want to save $200 a month for the next 24 years and hope to earn an average rate of return of 11 percent. How much more will you have at the end of the 24 years if you invest your money at the beginning of each month rather than the end of each month?
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| 71. | A local magazine is offering a $2,500 grand prize to one lucky winner. The prize will be paid in four annual payments of $625 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 9 percent on your money?
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| 72. | A preferred stock pays an annual dividend of $6. What is one share of this stock worth to you today if you require a 12 percent rate of return?
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| 73. | Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest?
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| 74. | Standards Life Insurance offers a perpetuity that pays annual payments of $100,000. This contract sells for $2,750,000 today. What is the interest rate?
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| 75. | West Coast Builders is offering preferred stock for sale with a 6.75 percent rate of return. What is the amount of the annual dividend on this stock if the current market price per share is $83.87?
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| 76. | A recent alumnus of your university gifted money to the school to fund annual scholarships for students in need. The school expects to earn an average rate of return of 5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the gift?
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| 77. | Kris will receive $800 a month for the next five years from an insurance settlement. The interest rate is 4 percent, compounded monthly, for the first two years and 5 percent, compounded monthly, for the final three years. What is this settlement worth to him today?
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| 78. | Anne plans to save $40 a week for the next five years. She expects to earn 3 percent for the first two years and 5 percent for the last three years. How much will her savings be worth at the end of the five years?
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| 79. | What is the value today of $3,600 received at the end of each year for seven years if the first payment is paid at the end of year 3 and the discount rate is 12 percent?
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| 80. | You will receive annual payments of $2,400 at the end of each year for 15 years. The first payment will be received in year 6. What is the present value of these payments if the discount rate is 7 percent?
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| 81. | What is the effective annual rate of 6.5 percent compounded quarterly?
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| 82. | What is the effective annual rate of 10 percent compounded semiannually?
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| 83. | The Townhouse Galleries offers credit to its customers at a rate of 1.6 percent per month. What is the effective annual rate of this credit offer?
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| 84. | First Trust offers personal loans at 7.7 percent compounded monthly. Second Bank offers similar loans at 7.75 percent compounded semiannually. Which one of the following statements is correct concerning these loans?
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| 85. | What is the effective annual rate of 14.9 percent compounded quarterly?
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| 86. | A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?
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| 87. | A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?
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| 88. | Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?
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| 89. | Belk Department Store charges a daily rate of 0.01 percent on its store credit cards. What interest rate is the company required by law to report to potential customers?
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| 90. | Radio Shack offers credit to its customers and charges interest of 1.2 percent per month. What is the annual percentage rate?
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| 91. | The Men’s Warehouse charges 1.6 percent interest per month. What rate of interest are its credit customers actually paying?
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| 92. | Today, you are borrowing $13,800 to purchase a car. What will be your monthly payment amount if the loan is for four years at 7.5 percent interest?
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| 93. | You have an outstanding loan with an EAR of 14.6 percent. What is the APR if interest is compounded monthly?
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| 94. | Today, you are borrowing money from your local bank. The loan is to be repaid in one lump sum payment of $15,000 one year from now. How much money are you borrowing today if the APR is 10.6 percent?
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| 95. | PayDay Loans is offering a special on one-year loans. The company will loan you $5,000 today in exchange for one payment of $5,900 one year from now. What is the APR on this loan?
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| 96. | Amish Bakery needs $210,000 today to fund a new project. The project will not produce any cash flows for two years and thus the firm agreed to a two-year, pure discount loan at 7.5 percent interest. How much will the firm owe on this loan at the time it must be repaid?
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| 97. | A new financial services company just opened in your town. To attract customers, it is offering a “9-11” loan special. The company will lend $9 today in exchange for a payment of $11 one year from today. What is the APR on this loan?
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| 98. | Hometown Builders is borrowing $150,000 today for five years. The loan is an interest-only loan with an APR of 8.5 percent. Payments are to be made annually. What is the amount of the first annual payment?
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| 99. | Popeye’s Fried Chicken just took out an 8 percent interest-only loan of $50,000 for three years. Payments are to be made at the end of each year. What is the amount of the payment that will be due at the end of year 3?
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| 100. | The Rent-to-Own Store has a six-year, interest-only loan at 12 percent interest. The firm originally borrowed $125,000. How much will the firm pay in total interest over the life of the loan?
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| 101. | Billingsley, Inc. is borrowing $60,000 for five years at an APR of 8 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for year 3 of this loan?
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| 102. | Julie is borrowing $12,800 to purchase a car. The loan terms are 36 months at 7.5 percent interest. How much interest will she pay on this loan if she pays the loan as agreed? Round your answer to the nearest whole dollar.
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| 103. | The Egg House just borrowed $260,000 to build a new restaurant. The loan terms call for equal annual payments at the end of each year. The loan is for 15 years at an APR of 8 percent. How much of the first annual payment will be used to reduce the principal balance?
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| 104. | Wesson Metals has an outstanding loan that calls for equal annual payments of $9,768.46 over the life of the loan. The original loan amount was $50,000 at an APR of 8.5 percent. How much of the second loan payment is interest?
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| 105. | Taylor Farms is borrowing $75,000 for three years at an APR of 9 percent. The loan calls for the principal balance to be reduced by equal amounts over the life of the loan. Interest is to be paid in full each year. The payments are to be made annually at the end of each year. How much will Taylor Farms pay in interest over the life of this loan?
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| 106. | If you put up $46,000 today in exchange for a 6.75 percent 15-year annuity, what will the annual cash flow be?
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| 107. | Appalachian Bank offers you a $135,000, nine-year term loan at 7.5 percent annual interest. What will your annual loan payment be?
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| 108. | Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the required return on this investment is 4.75 percent, how much will you pay for the policy?
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| 109. | PayDay Loans wants to earn an effective annual return on its consumer loans of 18 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?
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| 110. | Compass Bank is offering 0.8 percent compounded daily on its savings accounts. If you deposit $2,500 today, how much will you have in the account in 15 years?
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| 111. | You want to buy a new sports coupe for $84,600, and the finance office at the dealership has quoted you a 7.1 percent APR loan for 48 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?
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| 112. | If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows?
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| 113. | 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 a 9.2 percent APR. What will your monthly payment be?
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| 114. | You want to borrow $40,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $775, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?
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| 115. | You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 25-year mortgage for 80 percent of the $1,800,000 purchase price. The monthly payment on this loan will be $10,800. What is the APR? The EAR?
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| 116. | A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent compounded semiannually, what is the value of this annuity 4 years from now?
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| 117. | Given an interest rate of 5.85 percent per year, what is the value at year t = 8 of a perpetual stream of $2,500 payments that begin at year t = 25?
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| 118. | If today is year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 7.8 percent per year.
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Essay Questions
| 119. | Explain the similarities and differences among an ordinary annuity, an annuity due, and a perpetuity.
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| 120. | What does it mean when a loan is amortized? Explain how amortization methods can vary from one loan to another.
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| 121. | Consider an ordinary annuity and the variables that are related to that annuity. For each of the following sets of variables, identify whether the relationship between the two variables is direct (D) or inverse (I). Assume all other variables are held constant.
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| 122. | Jesse just won the state lottery. He has been given the option of receiving either $62.9 million today or $5 million a year for the next 35 years, with the first payment paid today. Describe the process that Jesse should use to determine which payment option he prefers. Ignore all taxes and assume that Jesse will live for at least 40 more years.
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| 123. | Identify four ways that you can use annuity computations in your everyday life.
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Chapter 05 Discounted Cash Flow Valuation Answer Key
Multiple Choice Questions
| 1. | Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuities |
| 2. | Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity due |
| 3. | The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Perpetuity |
| 4. | A perpetuity in Canada is frequently referred to as which one of the following?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Consul |
| 5. | The stated interest rate is the interest rate expressed:
Refer to Section 5.3. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: Stated interest rate |
| 6. | Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:
Refer to Section 5.3. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: Effective annual rate |
| 7. | Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:
Refer to Section 5.3. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: Annual percentage rate |
| 8. | Which one of the following will decrease the present value of an annuity?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 9. | Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Ordinary annuity loan |
| 10. | Which one of the following statements is true concerning annuities?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity values |
| 11. | Which one of the following is the annuity present value formula?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value formula |
| 12. | Which one of the following is an example of a perpetuity?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Perpetuity |
| 13. | Which one of the following can be classified as an annuity but not as a perpetuity?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity versus perpetuity |
| 14. | Which one of the following statements concerning annuities is correct?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuities |
| 15. | Which one of the following qualifies as an annuity?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity payment |
| 16. | Which of the following characteristics apply to a perpetuity?
I. Constant cash flow dollar amount
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Perpetuity |
| 17. | Which of the following will increase the present value of an annuity, all else held constant?
I. Increase in the number of payments
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 18. | 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?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present and future values |
| 19. | Which one of the following features distinguishes an ordinary annuity from an annuity due?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Ordinary annuity versus annuity due |
| 20. | Which one of the following is an ordinary annuity, but not a perpetuity?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Ordinary annuity |
| 21. | Which one of the following cannot be computed?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Perpetuity future value |
| 22. | 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?
Refer to Section 5.2. |
| AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuities and perpetuities |
| 23. | Which one of the following has the highest effective annual rate?
Refer to Section 5.3. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: Effective annual rate |
| 24. | When comparing savings accounts, you should select the account that has the:
Refer to Section 5.3. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: Effective annual rate |
| 25. | A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account:
Refer to Section 5.3. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: Effective annual rate |
| 26. | Which one of the following statements is correct?
Refer to Section 5.3. |
| AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: APR and EAR |
| 27. | A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:
Refer to Section 5.3. |
| AACSB: Analytic Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: APR and EAR |
| 28. | 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):
Refer to Section 5.4. |
| AACSB: Analytic Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Pure discount loan |
| 29. | Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?
Refer to Section 5.4. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Pure discount loan |
| 30. | Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?
Refer to Section 5.4. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Interest-only loan |
| 31. | Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?
Refer to Section 5.4. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Amortized loan |
| 32. | Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have?
Refer to Section 5.4. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Amortized loan |
| 33. | 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 three years. What type of loan did you obtain?
Refer to Section 5.4. |
| AACSB: Analytic Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Interest-only loan |
| 34. | Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3?
FV = ($500 × 1.062) + ($800 × 1.061) + $900 = $2,309.80 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.1 Topic: Multiple cash flow future value |
| 35. | McClary Tires just decided to save money each year for the next four years to help fund a new building. If it earns 6.5 percent on its savings, how much will the firm have saved at the end of year 4?
FV = ($20,000 × 1.0653) + ($24,000 × 1.0652) + ($28,000 × 1.0651) + $32,000 = $113,200.39 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.1 Topic: Multiple cash flow future value |
| 36. | Slaughter Industries just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 6 percent on its savings?
FV = ($84,000 × 1.063) + ($113,000 × 1.062) + ($125,000 × 1.061) + $130,000 = $489,512.14 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.1 Topic: Multiple cash flow future value |
| 37. | Doris’s Fashions has just signed a $2.2 million contract. The contract calls for a payment of $0.6 million today, $0.8 million one year from today, and $0.8 million two years from today. What is this contract worth today if the firm can earn 8.2 percent on its money?
PV = $0.6m + ($0.8m/1.082) + ($0.8m/1.0822) = $2,022,709.37 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.1 Topic: Multiple cash flow present value |
| 38. | Capstone Investments is considering a project that will produce cash inflows of $11,000 in year 1, $24,000 in year 2, and $36,000 in year 3. What is the present value of these cash inflows if the company assigns the project a discount rate of 12 percent?
PV = ($11,000/1.12) + ($24,000/1.122) + ($36,000/1.123) = $54,578.17 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.1 Topic: Multiple cash flow present value |
| 39. | 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 six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 40. | Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from today. How much should she pay for this investment if she wishes to earn a 13 percent rate of return?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 41. | How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent.
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 42. | Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 43. | 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?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 44. | Webster Mining is considering the purchase of a new sorting machine. The quote consists of a quarterly payment of $29,600 for seven years at 8 percent interest. What is the purchase price of the equipment?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 45. | You want to purchase a new condominium that 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?
Amount financed = 0.80 × $329,000 = $263,200 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity payment |
| 46. | Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting 1 year from today. What is the amount of each payment?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity payment |
| 47. | Kurt wants to have $25,000 in an investment account four 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?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity payment |
| 48. | 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 five years. What is the amount of each monthly payment?
Amount borrowed = 0.80 × $84,000 = $67,200 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity payment |
| 49. | 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 three months?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity payment |
| 50. | 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?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity payment |
| 51. | Sticks and Stuff Furniture is offering a bedroom suite for $3,000. The credit terms are 60 months at $50 per month. What is the interest rate on this offer?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity interest rate |
| 52. | The Insolvent Insurance Co. will pay you $2,500 a year for 10 years in exchange for $30,000 today. What interest rate will you earn on this annuity?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity interest rate |
| 53. | Hughes Motors will sell you a $15,000 car for $380 a month for 48 months. What is the interest rate?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity interest rate |
| 54. | You have just won the lottery! You can either receive $5,000 a year for 15 years or $50,000 as a lump sum payment today. What is the interest rate on the annuity option?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity interest rate |
| 55. | 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 $58,000, to be paid in monthly payments of $1,500 each for 48 months. What interest rate did you charge for financing the sale?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity interest rate |
| 56. | Overnight Trucking recently purchased a new truck costing $150,800. The firm financed this purchase at 8.6 percent interest with monthly payments of $2,100. How many years will it take the firm to pay off this debt?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity time period |
| 57. | Cromwell Enterprises is acquiring Athens, Inc. for $899,000. Athens has agreed to accept annual payments of $210,000 at an interest rate of 8.5 percent. How many years will it take Cromwell Enterprises to pay for this purchase?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity interest rate |
| 58. | Today is your 21st birthday and you just decided to start saving money so you can retire early. Thus, you are going to save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn an average of 8 percent on your savings, how old will you be when you retire?
Retirement age = 21 + 33.39 = 54.39 years |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity time period |
| 59. | You just received a loan offer from Friendly Loans. The company is offering you $5,000 at 14.3 percent interest. The monthly payment is only $100. If you accept this offer, how long will it take you to pay off the loan?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity time period |
| 60. | Jake owes $3,400 on his credit card. He is not charging any additional purchases because he wants to get this debt paid in full. The card has an APR of 13.9 percent. How much longer will it take him to pay off this balance if he makes monthly payments of $50 rather than $60?
Difference = 134.55 – 92.76 = 41.79 months |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity time period |
| 61. | Currently, you owe the bank $9,800 for a car loan. The loan has an interest rate of 7.75 percent and monthly payments of $310. Your financial situation recently changed such that you can no longer afford these payments. After talking with your banker and explaining the situation, he has agreed to lower the monthly payments to $225 while keeping the interest rate at 7.75 percent. How much longer will it take you to repay this loan than you had originally planned?
Difference = 51.31 – 35.47 = 15.84 months |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity time period |
| 62. | The Food Store is planning a major expansion for four years from today. In preparation for this, the company is setting aside $35,000 each quarter, starting today, for the next four years. How much money will the firm have when it is ready to expand if it can earn an average of 6.25 percent on its savings?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Future value annuity due |
| 63. | Janice plans to save $75 a month, starting today, for 20 years. Kate plans to save $80 a month for 20 years, starting one month from today. Both Janice and Kate expect to earn an average return of 5.5 percent on their savings. At the end of the 20 years, Kate will have approximately _____ more than Janice.
Difference $34,850.19 – $32,821.80 = $2,028.39 |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Ordinary annuity and annuity due future value |
| 64. | What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the end of this week.
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity future value |
| 65. | At the end of this month, Les will start saving $150 a month for retirement through his company’s retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?
Total contribution = $150 + (0.5 × $150) = $225 |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity future value |
| 66. | Steve is considering investing $3,600 a year for 40 years. How much will this investment be worth at the end of the 40 years if he earns an average annual rate of return of 11.6 percent? Assume Steve invests his first payment of the end of this year.
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity future value |
| 67. | Kristina started setting aside funds three years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved for her down payment?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity future value |
| 68. | Uptown Insurance offers an annuity due with semiannual payments for 25 years at 6 percent interest. The annuity costs $200,000 today. What is the amount of each annuity payment?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity due payment |
| 69. | You just won a contest! You will receive $100,000 a year for 20 years, starting today. If you can earn 12 percent on your investments, what are your winnings worth today?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity due present value |
| 70. | You want to save $200 a month for the next 24 years and hope to earn an average rate of return of 11 percent. How much more will you have at the end of the 24 years if you invest your money at the beginning of each month rather than the end of each month?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Ordinary annuity and annuity due future value |
| 71. | A local magazine is offering a $2,500 grand prize to one lucky winner. The prize will be paid in four annual payments of $625 each, starting one year after the drawing. How much would this prize be worth to you if you can earn 9 percent on your money?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Present value of multiple cash flows |
| 72. | A preferred stock pays an annual dividend of $6. What is one share of this stock worth to you today if you require a 12 percent rate of return?
P = $6/0.12 = $50 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Perpetuity present value |
| 73. | Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest?
P = $100,000/0.06 = $1,666,666.67. |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Perpetuity present value |
| 74. | Standards Life Insurance offers a perpetuity that pays annual payments of $100,000. This contract sells for $2,750,000 today. What is the interest rate?
r = $100,000/$2,750,000 = 3.64 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Perpetuity interest rate |
| 75. | West Coast Builders is offering preferred stock for sale with a 6.75 percent rate of return. What is the amount of the annual dividend on this stock if the current market price per share is $83.87?
C = 0.0675 × $83.87 = $5.66 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Perpetuity payment |
| 76. | A recent alumnus of your university gifted money to the school to fund annual scholarships for students in need. The school expects to earn an average rate of return of 5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the gift?
P = $50,000/0.055 = $909,090.91 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Perpetuity present value |
| 77. | Kris will receive $800 a month for the next five years from an insurance settlement. The interest rate is 4 percent, compounded monthly, for the first two years and 5 percent, compounded monthly, for the final three years. What is this settlement worth to him today?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Present value with multiple rates |
| 78. | Anne plans to save $40 a week for the next five years. She expects to earn 3 percent for the first two years and 5 percent for the last three years. How much will her savings be worth at the end of the five years?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Future value with multiple interest rates |
| 79. | What is the value today of $3,600 received at the end of each year for seven years if the first payment is paid at the end of year 3 and the discount rate is 12 percent?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value with delayed payment |
| 80. | You will receive annual payments of $2,400 at the end of each year for 15 years. The first payment will be received in year 6. What is the present value of these payments if the discount rate is 7 percent?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value with delayed payment |
| 81. | What is the effective annual rate of 6.5 percent compounded quarterly?
EAR = [1 + (0.065/4)] 4 – 1 = 6.66 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: EAR |
| 82. | What is the effective annual rate of 10 percent compounded semiannually?
EAR = [1 + (0.10/2)]2 – 1 = 10.25 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: EAR |
| 83. | The Townhouse Galleries offers credit to its customers at a rate of 1.6 percent per month. What is the effective annual rate of this credit offer?
EAR = (1 + 0.016)12 – 1 = 20.98 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: EAR |
| 84. | First Trust offers personal loans at 7.7 percent compounded monthly. Second Bank offers similar loans at 7.75 percent compounded semiannually. Which one of the following statements is correct concerning these loans?
EAR First Trust = [1 + (0.077/12)]12 – 1 = 7.98 percent; EAR Second Bank = [1 + (0.075/2)]2 – 1 = 7.90 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: EAR |
| 85. | What is the effective annual rate of 14.9 percent compounded quarterly?
EAR = [1 + (0.149/4)]4 – 1 = 15.75 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: EAR |
| 86. | A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?
EAR = 0.1440 = [1 + (APR/12)]12 – 1; APR = 13.53 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: APR |
| 87. | A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?
The stated rate is the APR. |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: APR |
| 88. | Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?
APR = 1.00 × 12 = 12 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: APR |
| 89. | Belk Department Store charges a daily rate of 0.01 percent on its store credit cards. What interest rate is the company required by law to report to potential customers?
APR = 0.01 percent × 365 = 36.50 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: APR |
| 90. | Radio Shack offers credit to its customers and charges interest of 1.2 percent per month. What is the annual percentage rate?
APR = 1.2 percent × 12 = 14.40 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: APR |
| 91. | The Men’s Warehouse charges 1.6 percent interest per month. What rate of interest are its credit customers actually paying?
EAR = (1 + 0.016)12 – 1 = 20.98 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: EAR |
| 92. | Today, you are borrowing $13,800 to purchase a car. What will be your monthly payment amount if the loan is for four years at 7.5 percent interest?
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| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.4 Topic: Annuity payment |
| 93. | You have an outstanding loan with an EAR of 14.6 percent. What is the APR if interest is compounded monthly?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: APR |
| 94. | Today, you are borrowing money from your local bank. The loan is to be repaid in one lump sum payment of $15,000 one year from now. How much money are you borrowing today if the APR is 10.6 percent?
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| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.4 Topic: Discount loan |
| 95. | PayDay Loans is offering a special on one-year loans. The company will loan you $5,000 today in exchange for one payment of $5,900 one year from now. What is the APR on this loan?
FV = $5,900 = $5,000 × (1 + APR)1; APR = 18 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.4 Topic: Loan interest rate |
| 96. | Amish Bakery needs $210,000 today to fund a new project. The project will not produce any cash flows for two years and thus the firm agreed to a two-year, pure discount loan at 7.5 percent interest. How much will the firm owe on this loan at the time it must be repaid?
FV = $210,000 × (1 + 0.075)2 = $242,681.25 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.4 Topic: Pure discount loan |
| 97. | A new financial services company just opened in your town. To attract customers, it is offering a “9-11” loan special. The company will lend $9 today in exchange for a payment of $11 one year from today. What is the APR on this loan?
FV = $9 × (1 + r)1 = $11; r = 22.22 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.4 Topic: Loan APR |
| 98. | Hometown Builders is borrowing $150,000 today for five years. The loan is an interest-only loan with an APR of 8.5 percent. Payments are to be made annually. What is the amount of the first annual payment?
Payment Year 1 = $150,000 × 0.085 = $12,750 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Interest-only loan |
| 99. | Popeye’s Fried Chicken just took out an 8 percent interest-only loan of $50,000 for three years. Payments are to be made at the end of each year. What is the amount of the payment that will be due at the end of year 3?
Payment Year 3 = $50,000 + ($50,000 × 0.08) = $54,000 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Interest-only loan |
| 100. | The Rent-to-Own Store has a six-year, interest-only loan at 12 percent interest. The firm originally borrowed $125,000. How much will the firm pay in total interest over the life of the loan?
Total interest = $125,000 × 0.12 × 6 = $90,000 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Interest-only loan |
| 101. | Billingsley, Inc. is borrowing $60,000 for five years at an APR of 8 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for year 3 of this loan?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Amortized loan |
| 102. | Julie is borrowing $12,800 to purchase a car. The loan terms are 36 months at 7.5 percent interest. How much interest will she pay on this loan if she pays the loan as agreed? Round your answer to the nearest whole dollar.
Total interest paid = ($398.16 × 36) – $12,800 = $1,534 (rounded) |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Loan interest |
| 103. | The Egg House just borrowed $260,000 to build a new restaurant. The loan terms call for equal annual payments at the end of each year. The loan is for 15 years at an APR of 8 percent. How much of the first annual payment will be used to reduce the principal balance?
Principal payment = $30,375.68 – ($260,000 × 0.08) = $9,575.68 |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Amortized loan |
| 104. | Wesson Metals has an outstanding loan that calls for equal annual payments of $9,768.46 over the life of the loan. The original loan amount was $50,000 at an APR of 8.5 percent. How much of the second loan payment is interest?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Amortized loan |
| 105. | Taylor Farms is borrowing $75,000 for three years at an APR of 9 percent. The loan calls for the principal balance to be reduced by equal amounts over the life of the loan. Interest is to be paid in full each year. The payments are to be made annually at the end of each year. How much will Taylor Farms pay in interest over the life of this loan?
Total interest = $13,500 |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Amortized loan |
| 106. | If you put up $46,000 today in exchange for a 6.75 percent 15-year annuity, what will the annual cash flow be?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity cash flow |
| 107. | Appalachian Bank offers you a $135,000, nine-year term loan at 7.5 percent annual interest. What will your annual loan payment be?
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| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity cash flow |
| 108. | Alfa Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $10,000 per year forever. If the required return on this investment is 4.75 percent, how much will you pay for the policy?
PV = $10,000/0.0475 = $210,526.32 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Perpetuity present value |
| 109. | PayDay Loans wants to earn an effective annual return on its consumer loans of 18 percent per year. The bank uses daily compounding on its loans. What interest rate is the bank required by law to report to potential borrowers?
0.18 = [1 + (APR/365)365 – 1; APR = 16.56 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: Annual percentage rate |
| 110. | Compass Bank is offering 0.8 percent compounded daily on its savings accounts. If you deposit $2,500 today, how much will you have in the account in 15 years?
FV = $2,500 × [1 + (0.008/365)]15 × 365 = $2,818.74 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: Future value |
| 111. | You want to buy a new sports coupe for $84,600, and the finance office at the dealership has quoted you a 7.1 percent APR loan for 48 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?
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| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.2 Section: 5.3 Topic: Loan payment and EAR |
| 112. | If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows?
= $78,270.77 |
| AACSB: Analytic Blooms: Analyze Difficulty: 1 Easy EOC: #5.28 Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.1 Topic: Present value of multiple cash flows |
| 113. | 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 a 9.2 percent APR. What will your monthly payment be?
|
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity due |
| 114. | You want to borrow $40,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $775, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?
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| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity interest rate |
| 115. | You have just purchased a new warehouse. To finance the purchase, you’ve arranged for a 25-year mortgage for 80 percent of the $1,800,000 purchase price. The monthly payment on this loan will be $10,800. What is the APR? The EAR?
Loan amount = 0.80 × $1,800,000 = $1,440,000 EAR = [1 + (0.076687/12)]12 – 1 = 7.94 percent |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-04 Explain how interest rates are quoted (and misquoted). Section: 5.3 Topic: EAR versus APR |
| 116. | A 4-year annuity of eight $6,200 semiannual payments will begin 6 years from now, with the first payment coming 6.5 years from now. If the discount rate is 7 percent compounded semiannually, what is the value of this annuity 4 years from now?
PV Year 4 = $42,618.52/[1 + (0.07/2)]4 = $37,139.58 |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity present value |
| 117. | Given an interest rate of 5.85 percent per year, what is the value at year t = 8 of a perpetual stream of $2,500 payments that begin at year t = 25?
PV t = 24 = $2,500/0.0585 = $42,735.04; PV t = 8 = $42,735.04/(1 + 0.0585)16 = $17,208.00 |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Perpetuity present value |
| 118. | If today is year 0, what is the future value of the following cash flows 10 years from now? Assume an interest rate of 7.8 percent per year.
FV Year 10 = [$8,500 × (1 + 0.078)8] + [$9,300 × (1 + 0.078)7] + [$7,100 × (1 + 0.078)4] = $40,822.55 |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.1 Topic: Future value of multiple cash flows |
Essay Questions
| 119. | Explain the similarities and differences among an ordinary annuity, an annuity due, and a perpetuity.
Similarities: Both annuities and perpetuities have equal payments occurring in equal time intervals. Feedback: Similarities: Both annuities and perpetuities have equal payments occurring in equal time intervals. Differences: The ordinary annuity has payments that occur at the end of each time period for a stated number of time periods. An annuity due has payments that occur at the beginning of each time period for a stated number of time periods. A perpetuity has unending payments. Refer to Section 5.2. |
| AACSB: Reflective Thinking Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuities and perpetuities |
| 120. | What does it mean when a loan is amortized? Explain how amortization methods can vary from one loan to another.
Amortization means that a portion of the loan principal is repaid with each loan payment. The amortization method can be based on equal principal payments or varying principal payments. Feedback: Amortization means that a portion of the loan principal is repaid with each loan payment. The amortization method can be based on equal principal payments or varying principal payments. Refer to Section 5.4. |
| AACSB: Reflective Thinking Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-03 Describe how loans are amortized or paid off. Section: 5.4 Topic: Loan amortization |
| 121. | Consider an ordinary annuity and the variables that are related to that annuity. For each of the following sets of variables, identify whether the relationship between the two variables is direct (D) or inverse (I). Assume all other variables are held constant.
Feedback: Refer to Section 5.2. |
| AACSB: Reflective Thinking Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuity variables |
| 122. | Jesse just won the state lottery. He has been given the option of receiving either $62.9 million today or $5 million a year for the next 35 years, with the first payment paid today. Describe the process that Jesse should use to determine which payment option he prefers. Ignore all taxes and assume that Jesse will live for at least 40 more years.
Jesse should recognize that this is an annuity due problem and determine the annuity’s interest rate, which is 8 percent. Jesse should then determine whether or not he can earn more than 8 percent guaranteed on his investments. If he can earn more than a guaranteed 8 percent, he should accept the $62.9 million today. If not, then he should accept the $5 million payments for 30 years. Feedback: Jesse should recognize that this is an annuity due problem and determine the annuity’s interest rate, which is 8 percent. Jesse should then determine whether or not he can earn more than 8 percent guaranteed on his investments. If he can earn more than a guaranteed 8 percent, he should accept the $62.9 million today. If not, then he should accept the $5 million payments for 30 years. Refer to Section 5.2. |
| AACSB: Analytic Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Section: 5.2 Topic: Annuity interest rate |
| 123. | Identify four ways that you can use annuity computations in your everyday life.
Student answers will vary but could include the following: A. Compute a loan payment Feedback: Refer to Section 5.2. |
| AACSB: Reflective Thinking Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-01 Determine the future and present value of investments with multiple cash flows. Learning Objective: 05-02 Calculate loan payments and find the interest rate on a loan. Section: 5.2 Topic: Annuities |
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
Original price was: $30.00.$20.00Current price is: $20.00.
