Fundamentals of Corporate Finance Canadian 6th Edition By Brealey - Test Bank

Fundamentals of Corporate Finance Canadian 6th Edition By Brealey – Test Bank

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Sample Questions Are Posted Below

TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
1) A dollar tomorrow is worth more than a dollar today.
Answer: True False
2) The Excel function for future value is FV (rate, nper, pmt, PV).
Answer: True False
3) As long as the interest rate is positive, the future value will always be larger than the present value
given any period of time.
Answer: True False
4) For a given amount, the lower the discount rate, the less the present value.
Answer: True False
5) To calculate present value, we discount the future value by some interest rate r, the discount rate.
Answer: True False
6) The discount factor is used to calculate the present value of $1 received in year t.
Answer: True False
7) The Excel function for present value is PV (rate, nper, pmt, FV).
Answer: True False
8) Comparing the values of undiscounted cash flows is analogous to comparing apples to oranges.
Answer: True False
9) The present value of an annuity due equals the present value of an ordinary annuity times the
discount rate.
Answer: True False
10) A perpetuity is a special form of an annuity.
Answer: True False
11) An annuity factor represents the future value of $1 that is deposited today.
Answer: True False
12) Accrued interest declines with each payment on an amortizing loan.
Answer: True False
13) Converting an annuity to an annuity due decreases the present value.
Answer: True False
14) You should never compare cash flows occurring at different times without first discounting them to
a common date.
Answer: True False
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15) An annuity due must have a present value at least as large as an equivalent ordinary annuity.
Answer: True False
16) Any sequence of equally spaced, level cash flows is called an annuity. An annuity is also known as a
perpetuity.
Answer: True False
17) A mortgage loan is an example of an amortizing loan. “Amortizing” means that part of the monthly
payment is used to pay interest on the loan and part is used to reduce the amount of the loan.
Answer: True False
18) The more frequent the compounding, the higher the future value, other things equal.
Answer: True False
19) Compound interest pays interest for each time period on the original investment plus the
accumulated interest.
Answer: True False
20) When money is invested at compound interest, the growth rate is the interest rate.
Answer: True False
21) The term “constant dollars” refers to equal payments for amortizing a loan.
Answer: True False
22) Nominal dollars refer to the amount of purchasing power.
Answer: True False
23) The appropriate manner of adjusting for inflationary effects is to discount nominal cash flows with
real interest rates.
Answer: True False
24) An effective annual rate must be greater than an annual percentage rate.
Answer: True False
25) An annual percentage rate (APR) is determined by annualizing the rate using compound interest.
Answer: True False
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
26) What will be the monthly payment on a home mortgage of $75,000 at 12% interest compounded
monthly, to be amortized over 30 years?
A) $775.90 B) $1,034.53 C) $1,028.61 D) $771.46
Answer: D
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27) Three thousand dollars is deposited into an account paying 10% annually to provide three annual
withdrawals of $1,206.34 beginning in one year. How much remains in the account after the second
payment has been withdrawn?
A) $1,326.97 B) $1,096.69 C) $1,206.34 D) $587.32
Answer: B
28) Approximately how much must be saved for retirement in order to withdraw $100,000 per year for
the next 25 years if the balance earns 8% annually, and the first payment occurs one year from now?
A) $1,128,433.33 B) $1,067,477.62 C) $1,250,000.00 D) $1,487,320.09
Answer: B
29) You invested $1,200 three years ago. During the three years, you earned annual rates of return of
4.8%, 9.2%, and 11.6%. What is the value of this investment today?
A) $1,532.60 B) $1,498.08 C) $1,512.11 D) $1,549.19
Answer: A
30) How much more is a perpetuity of $1,000 worth than an annuity of the same amount for 20 years?
Assume an interest rate of 10% and cash flows at the end of each period.
A) $2,000.00 B) $297.29 C) $1,486.44 D) $1,635.08
Answer: C
31) Assume the total expense for your current year in college equals $20,000. How much would your
parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover
this amount?
A) $1,600.00 B) $952.46 C) $3,973.11 D) $1,728.08
Answer: C
32) The present value of an annuity stream of $100 per year is $614 when valued at a 10% rate. By
approximately how much would the value change if these were annuities due?
A) $6.14 × Number of years in annuity stream B) $10 × Number of years in annuity stream
C) $61.40 D) $10
Answer: C
33) You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of year 3,
and $6,000 at end of year 5. What is the present value of these cash flows at an interest rate of 7%?
A) $10,524.08 B) $9,731.13 C) $10,412.27 D) $11,524.91
Answer: C
34) You’re ready to make the last of four equal, annual payments on a $1,000 loan with a 10% interest
rate. If the amount of the payment is $315.47, how much of that payment is accrued interest?
A) $100.00 B) $31.55 C) $315.47 D) $28.68
Answer: D
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35) How much interest is earned in just the third year on a $1,000 deposit that earns 7% interest
compounded annually?
A) $70.00 B) $105.62 C) $80.14 D) $140.00
Answer: C
36) How much interest can be accumulated during one year on a $1,000 deposit paying continuously
compounded interest at an APR of 10%?
A) $100.00 B) $115.70 C) $110.50 D) $105.17
Answer: D
37) How much interest will be earned in the next year on an investment paying 12% compounded
annually if $100 was just credited to the account for interest?
A) $100 B) $88 C) $112 D) $200
Answer: C
38) A loan officer states, “Thousands of dollars can be saved by switching to a 15-year mortgage from a
30-year mortgage.” Calculate the difference in payments on a 30-year mortgage at 9% interest
versus a 15-year mortgage with 8.5% interest. Both mortgages are for $100,000 and have monthly
payments. What is the difference in total dollars that will be paid to the lender under each loan?
(Round the monthly payment amounts to 2 decimal places. Both interest rates are compounded
monthly.)
A) $89,211 B) $112,410 C) $98,406 D) $124,300
Answer: B
39) What is the present value of $100 to be deposited today into an account paying 8%, compounded
semiannually for 2 years?
A) $85.48 B) $116.00 C) $116.99 D) $100.00
Answer: D
40) What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and
the first payment is made today?
A) $9,655.65 B) $13,200.00 C) $10,814.33 D) $12,112.05
Answer: D
41) With $1.5 million in an account expected to earn 8% annually over the retiree’s 30 years of life
expectancy, what annual annuity can be withdrawn, beginning today?
A) $112,148.50 B) $120,000.00 C) $133,241.15 D) $123,371.44
Answer: D
42) What is the future value of $10,000 on deposit for 5 years at 6% simple interest?
A) $13,000.00 B) $13,382.26 C) $7,472.58 D) $10,303.62
Answer: A
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43) How much will accumulate in an account with an initial deposit of $100, and which earns 10%
interest compounded quarterly for 3 years?
A) $133.10 B) $107.69 C) $134.49 D) $313.84
Answer: C
44) Eighteen years from now, 4 years of college are expected to cost $150,000. How much more must
be deposited into an account today to fund this expense if you could only earn 8% rather than the
11% you had hoped to earn on your savings?
A) $14,614.03 B) $12,211.18 C) $13,609.21 D) $14,006.41
Answer: A
45) Your real estate agent mentions that homes in your price range require a payment of $1,200 per
month for 30 years at 9% interest compounded monthly. What is the size of the mortgage with these
terms?
A) $147,940.29 B) $128,035.05 C) $149,138.24 D) $393,120.03
Answer: C
46) $50,000 is borrowed, to be repaid in three equal, annual payments with 10% interest. Approximately
how much principal is amortized with the first payment?
A) $5,000.00 B) $15,105.74 C) $20,105.74 D) $2,010.60
Answer: B
47) Miller’s Hardware plans on saving $42,000, $54,000, and $58,000 at the end of each year for the
next three years, respectively. How much will the firm have saved at the end of the three years if it
can earn 4.5% by reinvesting its saving?
A) $160,295.05 B) $165,212.57 C) $167,508.33 D) $158,098.15
Answer: A
48) How much interest will be earned in an account into which $1,000 is deposited for one year with
continuous compounding at a 13% rate?
A) $138.83 B) $130.00 C) $353.34 D) $169.00
Answer: A
49) If $120,000 is borrowed for a home mortgage, to be repaid at 9% interest over 30 years with
monthly payments of $965.55, how much interest is paid over the life of the loan?
A) $181,458 B) $227,598 C) $162,000 D) $120,000
Answer: B
50) Prizes are often not “worth” as much as claimed. Place a value on a prize of $5,000,000 that is to be
received in equal payments over 20 years, with the first payment beginning today. Assume an
interest rate of 7%.
A) $2,609,144.14 B) $2,833,898.81 C) $2,738,304.13 D) $2,911,015.68
Answer: B
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51) What is the present value of your trust fund if you have projected that it will provide you with
$50,000 on your 30 th birthday (7 years from today) and it earns 10% compounded annually?
A) $25,000.00 B) $25,657.91 C) $29,411.76 D) $28,223.70
Answer: B
52) How much must be deposited today in an account earning 6% annually to accumulate a 20% down
payment to use in purchasing a car one year from now, assuming that the car’s current price is
$20,000, and inflation will be 4%?
A) $3,774.61 B) $4,080.08 C) $3,924.53 D) $3,782.20
Answer: C
53) What is the present value of a four-year annuity of $100 per year that begins 2 years from today (end
of year 1) if the discount rate is 9%?
A) $272.68 B) $323.97 C) $297.22 D) $356.85
Answer: C
54) A perpetuity of $5,000 per year beginning today is said to offer a 15% interest rate. What is its
present value?
A) $38,333.33 B) $37,681.16 C) $33,333.33 D) $65,217.39
Answer: A
55) How much must be invested today in order to generate a 5-year annuity of $1,000 per year, with the
first payment 1 year from today, at an interest rate of 12%?
A) $4,037.35 B) $3,604.78 C) $4,604.78 D) $3,746.25
Answer: B
56) How much must be saved at the end of each year for the next 10 years in order to accumulate
$50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings
every year.
A) $3,587.87 B) $4,500.33 C) $4,587.79 D) $3,291.00
Answer: D
57) Approximately how much should be accumulated by the beginning of retirement to provide a
$2,500 monthly check that will last for 25 years, during which time the fund will earn 6% interest
with monthly compounding?
A) $388,017.16 B) $414,008.24 C) $402,766.67 D) $361,526.14
Answer: A
58) The salesperson offers, “Buy this new car for $25,000 cash or, with an appropriate down payment,
pay $500 per month for 48 months at 8% interest, compounded monthly.” Calculate the
“appropriate” down payment.
A) $4,519.04 B) $8,000.00 C) $5,127.24 D) $1,000.00
Answer: A
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59) What is the present value of the following payment stream, discounted at 8% annually: $1,000 at the
end of year 1, $2,000 at the end of year 2, and $3,000 at the end of year 3?
A) $5,423.87 B) $5,520.00 C) $5,144.03 D) $5,022.10
Answer: D
60) Your car loan requires payments of $200 per month for the first year and payments of $400 per
month during the second year. The annual interest rate is 12% and payments begin in one month.
What is the present value of this 2-year loan?
A) $6,246.34 B) $6,753.05 C) $6,389.78 D) $6,428.57
Answer: A
61) A corporation has promised to pay $1,000 20 years from today for each bond sold now. No interest
will be paid on the bonds during the 20 years, and the bonds are discounted at an interest rate of 7%,
compounded semiannually. Approximately how much should an investor pay for each bond?
A) $70.00 B) $629.56 C) $857.43 D) $252.57
Answer: D
62) How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from
today, and the account earns 9% interest compounded annually for 40 years?
A) $736,583.73 B) $675,764.89 C) $802,876.27 D) $87,200.00
Answer: B
63) How much more would you be willing to pay today for an investment offering $10,000 in 4 years
rather than in 5 years? Your discount rate is 8%.
A) $740.74 B) $800.00 C) $681.48 D) $544.47
Answer: D
64) On the day you retire you have $1,000,000 saved. You expect to live another 25 years during which
time you expect to earn 6.19% on your savings while inflation averages 2.5% annually. Assume you
want to spend the same amount each year in real terms and die on the day you spend your last dime.
What real amount will you be able to spend each year?
A) $61,334.36 B) $79,211.09 C) $79,644.58 D) $61,931.78
Answer: A
65) Lester’s just signed a contract that will provide the firm with annual cash inflows of $28,000,
$35,000, and $42,000 over the next three years with the first payment of $28,000 occurring one year
from today. What is this contract worth today at a discount rate of 7.25%?
A) $89,423.91 B) $88,311.08 C) $90,580.55 D) $91,341.41
Answer: C
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66) You are considering the purchase of a home that would require a mortgage of $150,000. How much
more in total interest will you pay if you select a 30-year mortgage at 5.65% rather than a 15-year
mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places. Both interest rates are
compounded monthly.)
A) $78,487.92 B) $102,486.68 C) $86,311.18 D) $99,595.80
Answer: D
67) What is the discount factor for $1 to be received in 5 years at a discount rate of 8%?
A) .5500 B) .6000 C) .6806 D) .4693
Answer: C
68) What is the annually compounded rate of interest on an account with an APR of 10% and monthly
compounding?
A) 11.05% B) 10.52% C) 10.47% D) 10.00%
Answer: C
69) A car dealer offers payments of $522.59 per month for 48 months on a $25,000 car after making a
$4,000 down payment. What is the loan’s APR?
A) 12% B) 11% C) 9% D) 6%
Answer: C
70) A credit card account that charges interest at the rate of 1.25% per month would have an annually
compounded rate of ________ and an APR of ________.
A) 14.55%; 16.08% B) 16.08%; 15.00% C) 12.68%; 15.00% D) 15.00%; 14.55%
Answer: B
71) What is the APR on a loan with an effective annual rate of 15.26% and weekly compounding of
interest?
A) 13.97% B) 14.49% C) 14.22% D) 14.35%
Answer: C
72) If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments,
what is the annual percentage rate?
A) 15.19% B) 14.50% C) 4.02% D) 10.02%
Answer: A
73) “Give me $5,000 today and I’ll return $10,000 to you in 5 years,” offers the investment broker. To
the nearest percent, what annual interest rate is being offered?
A) 12.29% B) 13.67% C) 12.84% D) 14.87%
Answer: D
74) What is the APR on a loan that charges interest at the rate of 1.4% per month?
A) 10.20% B) 18.16% C) 16.80% D) 14.00%
Answer: C
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75) After reading the fine print in your credit card agreement, you find that the “low” interest rate is
actually an 18% APR, or 1.5% per month. What is the effective annual rate?
A) 19.41% B) 18.47% C) 19.56% D) 18.82%
Answer: C
76) How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if
the investment earns 8% compounded annually?
A) 9.81 years B) 22.01 years C) 25.00 years D) 14.27 years
Answer: D
77) If inflation in Wonderland averaged about 3% per month in 2013, what was the annual rate of
inflation?
A) 36.00% B) 40.09% C) 41.27% D) 42.58%
Answer: D
78) If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary
annuity that is otherwise similar to the annuity due, what is the implied discount rate?
A) 1.04% B) 5.00% C) 4.17% D) 8.19%
Answer: C
79) What is the expected real rate of interest for an account that offers a 12% nominal rate of return
when the rate of inflation is 6% annually?
A) 5.66% B) 5.00% C) 6.00% D) 9.46%
Answer: A
80) What APR is being earned on a deposit of $5,000 made 10 years ago today if the deposit is worth
$9,848.21 today? The deposit pays interest semiannually.
A) 3.56% B) 7.12% C) 6.89% D) 6.76%
Answer: C
81) What will be the approximate population of the Canada, if its current population of 35 million
grows at a compound rate of 2% annually for 25 years?
A) 61 million B) 53 million C) 51 million D) 57 million
Answer: D
82) Would you prefer a savings account that paid 7% interest compounded quarterly, 6.8% compounded
monthly, 7.2% compounded weekly, or an account that paid 7.5% with annual compounding?
A) 7.5% compounded annually B) 7.2% compounded weekly
C) 7% compounded quarterly D) 6.8% compounded monthly
Answer: A
83) What is the minimum nominal rate of return that you should accept if you require a 4% real rate of
return and the rate of inflation is expected to average 3.5% during the investment period?
A) 8.01% B) 7.50% C) 7.36% D) 7.64%
Answer: D
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84) In calculating the present value of $1,000 to be received 5 years from today, the discount factor has
been calculated to be .7008. What is the apparent interest rate?
A) 7.37% B) 8.00% C) 9.50% D) 5.43%
Answer: A
85) If a borrower promises to pay you $1,900 nine years from now in return for a loan of $1,000 today,
what effective annual interest rate is being offered if interest is compounded annually?
A) 5.26% B) 10.00% C) 7.39% D) 9.00%
Answer: C
86) A furniture store is offering free credit on purchases over $1,000. You observe that a big-screen
television can be purchased for nothing down and $4,000 due in one year. The store next door offers
an identical television for $3,650 but does not offer credit terms. Which statement below best
describes the cost of the “free” credit?
A) 9.13% B) 9.59% C) 8.75% D) 0%
Answer: B
87) Your retirement account has a current balance of $50,000. What interest rate would need to be
earned in order to accumulate a total of $1,000,000 in 30 years, by adding $6,000 annually?
A) 5.02% B) 9.80% C) 7.24% D) 10.07%
Answer: C
88) What is the effective annual interest rate on a 9% APR automobile loan that has monthly payments?
A) 10.94% B) 9.00% C) 9.38% D) 9.81%
Answer: C
89) A stream of equal cash payments lasting forever is termed as:
A) a perpetuity. B) an installment plan.
C) an annuity. D) an annuity due.
Answer: A
90) How many monthly payments remain to be paid on an 8% compounded monthly mortgage with a
30-year amortization and monthly payments of $733.76, when the balance reaches one-half of the
$100,000 mortgage?
A) approximately 268 payments B) approximately 180 payments
C) approximately 68 payments D) approximately 91 payments
Answer: D
91) Real interest rates:
A) traditionally exceed nominal rates. B) can be negative, zero, or positive.
C) can decline to zero but no lower. D) always exceed inflation rates.
Answer: B
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92) Which one of the following will increase the present value of an annuity, other things equal?
A) increasing the interest rate B) decreasing the number of payments
C) decreasing the interest rate D) decreasing the amount of the payment
Answer: C
93) An interest rate that has been annualized using compound interest is termed the:
A) effective annual interest rate. B) discounted interest rate.
C) simple interest rate. D) annual percentage rate.
Answer: A
94) If interest is paid m times per year, then the per-period interest rate equals the:
A) effective annual rate divided by m. B) effective annual rate.
C) compound interest rate times m. D) annual percentage rate divided by m.
Answer: D
95) Cash flows occurring in different periods should not be compared unless:
A) the flows have been discounted to a common date.
B) the flows occur no more than one year from each other.
C) interest rates are expected to be stable.
D) high rates of interest can be earned on the flows.
Answer: A
96) Other things being equal, the more frequent the compounding period, the:
A) higher the effective annual interest rate. B) lower the effective annual interest rate.
C) higher the annual percentage rate. D) lower the annual percentage rate.
Answer: A
97) Assume your uncle recorded his salary history during a 40-year career and found that it had
increased 10-fold. If inflation averaged 4% annually during the period, then over his career his
purchasing power:
A) increased by nearly 1% annually. B) remained on par with inflation.
C) decreased. D) increased by nearly 2% annually.
Answer: D
98) What factor is fixed if you establish a scholarship fund in perpetuity?
A) discount rate B) interest rate C) payment amount D) present value
Answer: D
99) The concept of compound interest refers to:
A) earning interest on the original investment.
B) determining the APR of the investment.
C) payment of interest on previously earned interest.
D) investing for a multiyear period of time.
Answer: C
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100) Assume you are making $989 monthly payments on your amortized mortgage. The amount of each
payment that is applied to the principal balance:
A) fluctuates monthly with changes in market interest rates.
B) increases with each succeeding payment.
C) decreases with each succeeding payment.
D) is constant throughout the loan term.
Answer: B
101) Given a set future value, which of the following will contribute to a lower present value?
A) less frequent discounting B) higher discount rate
C) lower discount factor D) fewer time periods
Answer: B
102) The present value of a perpetuity can be determined by:
A) multiplying the payment by the number of payments to be made.
B) multiplying the payment by the interest rate.
C) dividing the payment by the interest rate.
D) dividing the interest rate by the payment.
Answer: C
103) A cash-strapped young professional offers to buy your car with four, equal end of year annual
payments of $3,000, beginning 2 years from today (the first payment will be made on the last day of
year 2). Assuming you’re indifferent to cash versus credit, that you can invest at 10%, and that you
want to receive $9,000 for the car, should you accept?
A) No; present value is $8,645.09 B) No; present value is $7,461.17
C) Yes; present value is $11,372.67 D) Yes; present value is $9,510.08
Answer: A
104) What is the relationship between an annually compounded rate and the annual percentage rate
(APR) which is calculated for truth-in-lending laws for a loan requiring monthly payments?
A) the APR equals the annually compounded rate.
B) the APR is lower than the annually compounded rate.
C) the answer depends on the interest rate.
D) the APR is higher than the annually compounded rate.
Answer: B
105) Under which of the following conditions will a future value calculated with simple interest exceed a
future value calculated with compound interest at the same rate?
A) the investment period is very long.
B) the compounding is annually.
C) the interest rate is very high.
D) this is not possible with positive interest rates.
Answer: D
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106) Would a depositor prefer an APR of 8% with monthly compounding or an APR of 8.5% with
semiannual compounding?
A) The time period must be known to select the preferred account.
B) The depositor would be indifferent.
C) 8.0% with monthly compounding
D) 8.5% with semiannual compounding
Answer: D
107) When an investment pays only simple interest, this means:
A) the interest rate is lower than on comparable investments.
B) the earned interest is nontaxable to the investor.
C) the future value of the investment will be low.
D) interest is earned only on the original investment.
Answer: D
108) The APR on a loan must be equal to the effective annual rate when:
A) compounding occurs annually. B) the loan is for less than one year.
C) compounding occurs monthly. D) the loan is for more than one year.
Answer: A
109) An amortizing loan is one in which:
A) the principal remains unchanged with each payment.
B) the maturity of the loan is variable.
C) accrued interest is paid regularly.
D) the principal balance is reduced with each payment.
Answer: D
110) What happens over time to the real cost of purchasing a home if the mortgage payments are fixed in
nominal terms and inflation is in existence?
A) the price index must be known to answer this question.
B) the real cost is decreasing.
C) the real cost is increasing.
D) the real cost is constant.
Answer: B
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