兹维博迪金融学第二版试题库4TB

Chapter Four

Allocating Resources Over Time

This chapter contains 46 multiple-choice questions, 18 short problems and 9 longer problems. Multiple Choice1.________ is the process of going from present value to future value, whereas ________ isfinding the present value of some future amount.(a)Discounting; compounding(b)Compounding; annualizing(c)Compounding; discounting(d)Discounting; leasingAnswer: (c)

2.________ refers to the interest rate at which money received before the end of the planninghorizon can be reinvested.(a)Internal rate(b)Reinvestment rate(c)Cost of equity(d)Compound interestAnswer: (b)

3.The difference between an immediate annuity and an ordinary annuity is ________.(a)the number of periods(b)the amount of the payments(c)the interest rate

(d)the timing of the paymentsAnswer: (d)

4.The preferred stock of Tavistock Realty offers a cash dividend of $2.28 per year and it isselling at a price of $110 per share. What is the yield of Tavistock Realty preferred stock?(a)2.07%(b)2.12%(c)2.28%(d)48.25%Answer: (a)

5.Consider the situation where you have won a $10 million lottery to be received in 25 annual

equal payments of $400,000. What will happen to the present value of these winnings if the interest rate increases during thenext 25 years?(a)it will not change

(b)it will be worth more(c)it will be worth less(d)it cannot be determinedAnswer: (c)

6.What is the effective annual rate on a bank account that has APR of 8 percent with interestcompounded quarterly?(a)6.12%(b)8.24%(c)8.48%(d)17.17%Answer: (b)

7.You take out a loan with an APR of 10% with monthly compounding. What is the effectiveannual rate on your loan?(a)23.87%(b)21.6%(c)19.56%(d)18%Answer: (a)

8.The CFO of CyberHelp Inc. has $250,000 in cash today that he wants to invest. How muchwill this investment be worth in four years if the current interest rate is 8%?(a)$270,000(b)$330,000(c)$340,125(d)$342,150Answer: (c)

9.If you purchase a $12,000 certificate of deposit today with an APR of 14%, with quarterlycompounding, what will the CD be worth when it matures in 5 years?(a)$20,846.99(b)$20,865.60(c)$23,104.97(d)$23,877.47Answer: (d)

10.The CFO of CyberChain Inc. plans to unleash a media campaign that is expected to cost $15

million four years from today. How much cash should she set aside to pay for this if the current interest rate is 13%?(a)$9.2 million

(b)$13.3 million(c)$14.4 million(d)$16.9 millionAnswer: (a)

11.The NPV is a measure of how much your ________ wealth changes as a result of your choiceand if the NPV is ________it does not pay to undertake that choice.(a)future; negative(b)current; negative(c)current; positive(d)future; positiveAnswer: (b)

12.The ________ is the rate that one can earn somewhere else if one did not invest in the projectunder evaluation.

(a)opportunity cost of capital(b)cost of debt(c)cost of equity

(d)weighted average cost of capitalAnswer: (a)

13.You are trying to decide whether or not to buy a bond for $990 that will make one paymentfor $1,050 four years from today. What is the internal rate of return on the bond’s cash flows?(a)1.06%(b)1.48%(c)10.6%(d)14.8%Answer: (b)

14.Calculate the NPV of the following cash flows: you invest $3,000 today and receive $300 one

year from now, $700 two years from now, and $1,100 starting four years from now. Assume that the interest rate is 7%.(a)–$1,962.62(b)–$1,269.04(c)$1,269.04(d)$1,962.62Answer: (b)

15.After each payment of an amortized loan, the outstanding balance is reduced by the amount

of principal repaid. Therefore, the portion of the payment that goes toward the payment of interest is ________ than theprevious period’s interest payment and the portion going toward repayment of principal is ________ than the previousperiod’s.

(a)greater; lower(b)lower; lower(c)greater; greater(d)lower; greaterAnswer: (d)

16.The present value of a future amount can be calculated with the equation ________.(a) PV = FV(1 + i)n(b) PV = FV(1 + i)(n)

(c) PV = FV/(1 + i)n[NOTE: this should be formatted as a stacked fraction](d) PV = FV/(1 + i)(n) [NOTE: this should be formatted as a stacked fraction]Answer: (c)

17.To compute the future value of a present amount use the compound amount factor defined as________.(a) FV = PV(1 + i)n(b) FV = PV(1 + i)(n)

(c) FV = PV/(1 + i)n [NOTE: this should be formatted as a stacked fraction](d) FV = PV/(1 + i)(n) [NOTE: this should be formatted as a stacked fraction]Answer: (a)

18.The earnings of BGB Computers have grown from $3.20 to $6.90 in 6 years. Determine theannual compound rate.(a)1.14%(b)13.7%(c)15.6%(d)115.6%Answer: (b)

19.In five years you intend to go to graduate school. For each of your four years in graduate

school, you need to have a fund that will provide $25,000 per year at the beginning of each year. If the interest rate is 9%throughout, how much must you put in the fund today?(a)$,996(b)$57,379(c)$50,184(d)$16,249Answer: (b)

20.As part of your new job at CyberInc. the company is providing you with a new Jeep. Your

firm will lease this $34,000 Jeep for you. The terms of the lease are seven annual payments at an interest rate of 10%, whichwill fully amortize the cost of the car. What is the annual lease payment?

(a)$6,984.39(b)$5,342.86(c)$4,857.14(d)$3,584.00Answer: (a)

21.A rule of thumb with using the internal rate of return is to invest in a project if the IRR is________ the opportunity cost of capital.(a)greater than(b)less than

(c)less than or equal to(d)one-half ofAnswer: (a)

22.When considering the timeframe of an investment, a rule followed by some is to choose theinvestment with ______ payback period.(a)the longest(b)the shortest(c)no(d)an infiniteAnswer: (b)

23.A major problem with using the internal rate of return rule is ________.(a)there may be multiple cash outflows and multiple cash inflows(b)the internal rate of return may not exist(c)the internal rate of return may not be unique(d)all of the aboveAnswer: (d)

24.The NPV is the difference between the ________ value of all ________ cash inflowsminus the ________ value of all current and future cash outflows.(a)future; present; present(b)present; future; present(c)present; present; future(d)present; future; futureAnswer: (b)

25.When considering effective interest rates, as the compounding frequency increases, theeffective annual rate gets ________ and ________ but approaches ________.(a)larger; larger; a limit

(b)smaller; smaller; a limit(c)larger; larger; infinity(d)smaller; smaller; infinityAnswer: (a)

26.In 10 years you wish to own your business. How much will you have in your bank

account at the end of 10 years if you deposit $300 each quarter (assume end of the period deposits)? Assume the account ispaying an interest rate of 12% compounded quarterly.(a)$20,220(b)$21,060(c)$21,626(d)$22,620Answer: (d)

27.The director of marketing for CyberProducts Inc. plans to unleash a media blitz that is

expected to cost $4.7 million three years from today. How much cash should she set aside today to pay for this if the currentinterest rate is 11%?(a) $6.43 million(b) $4.23 million(c) $3.62 million(d) $3.44 millionAnswer: (d)

28.If you purchased a $10,000 certificate of deposit today with an APR of 12%, with monthlycompounding, what would be the CD worth when it matures in 6 years?(a) $56,340(b) $20,468(c) $19,738(d) $5,066Answer: (b)

29.The manufacturing manager of CyberProducts Inc. estimates that she can save the company

$16,000 cash per year over the next 8 years by implementing a recycling plan. What is the value of the savings today if theappropriate interest rate for the firm is 9%? Assume cash flows occur at the end of the year.(a) $,240(b) $88,557(c) $96,527(d) $128,000Answer: (b)

30.If the exchange rate between the U.S. dollar and the French Franc is $0.17 per French Franc,

the dollar interest rate is 5.5% per year, and the French Franc interest rate is 4.5% per year, what is the \"break-even\" value of

the future dollar/French Franc exchange rate one year from now?a)$0.172 per FFb)$0.179 per FFc)$5.827 per FFd)$5.882 per FFAnswer: (a)

31.In any time value of money calculation, the cash flows and the interest rate must bedenominated ________.a)in the same currencyb)in different currenciesc)in terms of a third currencyd)in terms of the ECUAnswer: (a)

32.If the exchange rate between the U.S. dollar and the Japanese yen is $0.00745 per yen, the

dollar interest rate is 6% per year, and the Japanese interest rate is 7% per year, what is the “break-even” value of the futuredollar/yen exchange rate one year from now?a)$135.49 per yenb)$134.23 per yenc)$0.00752 per yend)$0.00738 per yenAnswer: (d)

33.Consider the situation where you are trying to decide if you should invest in a Swiss project

or an American project. Both projects require an initial outlay of $15,000. The Swiss project will pay you 17,100 SwissFrancs per year for 6 years, whereas the American one will pay you $11,000 per year for 6 years. The dollar interest rate is5% per year, the Swiss Franc interest rate is 6% per year, and the current dollar price of a Swiss Franc is $0.68 per SwissFranc. Which project has the higher NPV?a)the U.S. project; its NPV is $55,832b)the U.S. project; its NPV is $40,833c)the Swiss project; its NPV is $42,179d)the Swiss project; its NPV is $57,178Answer: (c)

34.The ________ is the rate denominated in dollars or in some other currency, and the ________is denominated in units of consumer goods.a)nominal interest rate; inflation interest rateb)nominal interest rate; real interest ratec)real interest rate; inflation interest rated)real interest rate; nominal interest rate

Answer: (b)

35.Consider the situation where you are trying to decide if you should invest in a British project

or U.S. project. Both projects require an initial outlay of $55,000. The British project will pay you 30,000 pounds per year for 6years, whereas the American one will generate $40,000 per year for 6 years. The British interest rate is 5% per year, and theAmerican interest rate is 6% per year; the current dollar price of a pound sterling is $1.6320 per pound sterling. Which projecthas the higher NPV?

a)choose the U.S. one, it has a NPV of $196,693b)choose the U.S. one, it has a NPV of $141,693c)choose the British one, it has a NPV of $248,506d)choose the British one, it has a NPV of $193,506Answer: (d)

36.What is the real interest rate if the nominal interest rate is 9% per year and the rate ofinflation is 6% per year?a) 1.5%b) 2.75%c) 2.83%d)7.5%Answer: (c)

37.What is the nominal interest rate if the real rate of interest is 4.5% and the rate of inflation is6% per year?a)10.5%b)10.77%c)10.86%d)14.5%Answer: (b)

38.What is the real rate of interest if the inflation rate is 6% per year and the nominal interestrate per year is 12.5%?a) 1.32%b) 6.13%c) 5.78%d)11.79%Answer: (b)

http://www.doczj.com/doc/8c67d3066c85ec3a87c2c567.html pute the real future value, to the nearest dollar, of $2,000 in 35years time. The real

interest rate is 3.2%, the nominal interest rate is 8.36%, and the rate of inflation is 5%.a)$6,023b)$6,853

c)$33,223d)$11,032Answer: (a)

40.The real interest rate is 3.2%, the nominal interest rate is 8.36% and the rate of inflation is 5%.We are interested in determining the future value of $200 in 35 years time. What is the future price level?a) 2.91b) 3.012c) 5.516d)16.61Answer: (c)

41.Suppose your child is 9 years old and you are planning to open a fund to provide for the

child’s college education. Currently, tuition for one year of college is $22,000. How much must you invest now in order to payenough for the first year of college nine years from now, if you think you can earn a rate of interest that is 4% more than theinflation rate?a)$21,154b)$16,988c)$15,585d)$15,457Answer: (d)

42.Suppose you have a child who is 10 years old and you are planning to open a fund to provide

for the child’s college education. Currently, tuition for one year is $22,000. Your child is planning to travel for two years beforestarting college. How much must you invest now in order to pay enough for the first year of college ten years from now, if youthink you can earn

a rate of interest that is 5% more than the inflation rate?a)$10,190b)$13,506c)$13,660d)$20,952Answer: (b)

43.When considering a plan for long run savings, if one does not have an explicit forecast ofinflation, then one can make plans in terms of:a)constant real payments and a real rate of interestb)constant nominal payments and a nominal rate of interestc)constant real payments and a nominal rate of interestd)constant nominal payments and a real rate of interestAnswer: (a)

44.If the real rate is 4% and the rate of inflation is 6%, what is the nominal rate?

a)8.16%b)10.16%c)10.24%d)10.36%Answer: (c)

45.You have an investment opportunity with a nominal rate of 6% compounded daily. If you

want to have $100,000 in your investment account in 15 years, how much should you deposit today, to the nearest dollar?a.$43,233b.$41,727c.$40,930d.$40,660Answer: (d)

46.You have determined the present value of an expected cash inflow stream. Which of thefollowing would cause the stream to have a higher present value?a)The discount rate increases.

b)The cash flows are paid over a shorter period of time.c)The discount rate decreases.

d)Statements (b) and (c) are both correct.Answer: (d)Short Problems

1.CyberNow is opening an office in the U.S. CyberNow expects cash flows to be $500,000 for

the first year, $530,000 for the second year, $560,000 in the third year. If CyberNow uses 12 percent as its discount rate, whatis the present value of the cash flows? Assume cash flows are made at the end of the year.Answer: PV = FV/(1 + i)n

= 500,000/(1.12)1 + 530,000/(1.12)2 + 560,000/(1.12)3= 446,429 + 422,513 + 398,597= $1,267,539

2. GeorgiaSun Inc. has preferred stock that pays an annual dividend of $10.50. If the securityhas no maturity (an “infinite” life), what is its value to an investor who wishes to obtain an8.5 percent rate of return?

Answer: PV of a level Perpetuity = $10.50/0.085= $123.53

3.Let us suppose you have a choice between investing in a bank savings account that pays 9%compounded annually (Bank Yearly) and one that pays 8.5% compounded daily (Bank Daily).(Assume this is based on 365 days). Using only effective annual rates, which bank would you prefer?Answer: Effective annual rate: Bank Yearly = 9%

Effective annual rate: Bank Daily = [1 + 0.085/365]365– 1= 8.87%

You would prefer Bank Yearly because you will earn more money.

4.Steptoe’s bank account has a floating interest rate on certain deposits. That is, every year the

interest rate is adjusted. Four years ago Steptoe deposited $35,000 into the bank account, when interest rates were 6%. Thefollowing year the rate was 6.5%, last year the rate was 8% and this year the rate fell to 7.5%. How much will be in hisaccount at the end of the year?Assume annual compounding.

Answer: Amount = $35,000 x 1.06 x 1.065 x 1.08 x 1.075= $45,872.85

5.Calculate the net present value of the following cash flows: you invest $4,000 today andreceive $400 one year from now, $900 two years from now and $2000 three years from now.Assume the interest rate is 9%.

Answer: NPV = $400/(1.09) +$900/(1.09)2 + $2,000(1.09)3–$4,000= $366.97 + $757.51 + $1,544.37 – $4,000= $ -1,331.15

6.The manufacturing manager of CyberNow Inc. estimates that she can save the company

$20,000 cash per year over the next 5 years by implementing a recycling plan. What is the value of the savings today if theappropriate interest rate for the firm is 8%. Assume that cash flows occur at the end of the year.Answer:

n i PV FV PMT Result

5 8 ? 0 $20,000 PV = $79,854.20

7.Stroll Inc. has been offered a $2,000,000 jet under a 10 year loan agreement. The loan

requires Stroll Inc. to make equal, annual, end-of-year payments that include both principal and interest on the outstandingbalance. The interest rate on the loan is 11%. Calculate the amount of these annual payments.Answer:

n i PV FV PMT Result

10 11 –$2,000,000 0 ? PMT = $339,602.85 8.Herb Flint decides to put $2,000 a year into an IRA fund over his 35 yearworking life and

then retire. Assume the deposits are made at the end of the year. If the account earns 11% compounded annually, what willHerb have in the account when he retires?Answer:

n i PV FV PMT Result

35 11 0 ? $2,000 FV = $683,179.11

9.Regarding retirement funds, there is some debate as to whether investors should invest at the

beginning of the year rather than at the end of the year. If an investor invests $2,000 per year at 12% over a 35 year period,what is the difference between the two funds?Answer: End of Year Fund:

n i PV FV PMT Result

35 12 0 ? $2,000 PV = $863,326.99

Under an immediate annuity the entire amount earns interest for an additional year. So the FV for the immediate annuity is$863,326.99 X 1.12 = $996,926.23.

Therefore the difference between the funds is: $996,926.23 – $863,326.99 = $103,599.24 10.You have the chance to buy abond for $900 that will make one payment of $1,100 six yearsfrom today. What is the internal rate of return in the bond’s cash flows?Answer: 900(1 + i)6 = 1,100(1 + i)6 = 1.222i = (1.222)1/6 - 1i= 3.40%

11.Consider the situation where you are trying to decide if you should invest in an Australianproject or an American project. Both projects require an initial outlay of $20,000. The

Australian project will pay you Aust $40,000 per year for 6 years, whereas the American one will generate $25,000 per yearfor 6 years. The Australian dollar interest rate is 6% per year and the American interest rate is 5% per year; the current dollarprice of an Australian dollar is $0.65 per Australian dollar. Which project has the higher NPV?Answer:

American Project:n i PV FV PMT PV Result6 5 ? 0 $25,000 $126,2Australian Project:n i PV FV PMT PV Result6 6 ? 0 $40,000 $196,693 (Aust)

NPV US project = $126,2 - $20,000 = $106,2

Today the Australian project is worth A$196,693 x $0.65 per Aust= $127,850.45 (in U.S. dollars)

NPV Aust project = $127,850.45 - $20,000 = $107,850.45Choose the Australian project since it has a higher NPV.

12.If the exchange rate between the U.S. dollar and the Dutch Guilder is $0.49903 per Guilder,

the dollar interest rate is 7% per year and the Dutch interest rate is 8% per year, what is the “break-even” value of the futuredollar/Guilder exchange rate one year from now?Answer:

Today One Year From Now$1 @7% $1.07

2.003 Guilders @8% 2.120 Guilders“Break-even” point = $1.07/2.120 Guilders= $0.49441 per Guilder

13.What is the real rate of interest if the nominal rate is 11.5% per year and the rate of inflationis 7% per year?Answer:

Real interest rate = Nominal interest rate – rate of inflation1 + rate of inflation= 0.115 – 0.071.07= 0.04206

Real interest rate = 4.21%

14.I have $200 today and am interested in finding out what its equivalent real future value willbe in 40 years. What are the two ways I have available to me in computing the real future value?Answer:

http://www.doczj.com/doc/8c67d3066c85ec3a87c2c567.html pute the future value using the real rate of interest.

http://www.doczj.com/doc/8c67d3066c85ec3a87c2c567.html pute the nominal future value using the nominal rate, and thendeflate it to

find the real future value.

15.The real rate of interest is 3.756%, the nominal rate of interest is 10.5% and the rate ofinflation is 6.5%. What is the real future value of $2,000 in 40 years time? Show bothmethods.Answer:Method One:

Real future value = $,2000 x 1.03750= $8,741Method Two:

Nominal future value = $2,000 x 1.10540= $108,522.83

Future price level = 1.06540= 12.16

Real FV = nominal future valuefuture price level= $108,522.8312.416= $8,741

16.As part of your new job at CyberInc. the company is providing you with a new Jeep. Your

firm will lease this $34,000 Jeep for you. The terms of the lease are seven annual payments at an interest rate of 10%, whichwill fully amortize the cost of the car. Assuming that all

payments are made on time and no additional money is paid towards the lease in any year, what percent of the 5th paymentwill go towards repayment of principal?Answer:

n i PV FV PMT Result

7 10 –$34,000 0 ? PMT = $6,984.39The monthly payment = $6,984.39Of the monthly payment, principal = $5,247

% principal repayment in 5th payment =$5,247/$6,984.39= 75.12%

17.You have decided to buy a car that costs $35,000. The dealer offers you a 5 year loan withmonthly payments of $814 per month. What is the annual interest rate on the loan?Answer:

n i PV FV PMT Result60 ? –$35,000 0 $814 i = 1.165

The annual nominal interest rate = 1.165 * 12= 13.98% per year

18.A subscription to the magazine “National Tattler” states that you can purchase a one year

subscription for $45 today, which can be renewed after a year at this rate. Alternately, you can purchase a two year

subscription for $80 today. If you wish to subscribe to the magazine for two years and your required rate of return is 9% peryear, which subscription offer should you choose?Answer:

PV of the two year subscription = $80

PV of one year subscription and renewal = $45 + 45/1.09= $86.28

The two year subscription is the cheaper alternative.Longer Problems

1.Heathcliff is currently 25 years old and expects to retire at age 65. Suppose that Heathcliff

takes a job immediately and can earn $35,000 for the remainder of his working life. What is the present value of his futureearnings?Answer:

n i PV FV PMT Result

40 5 ? 0 $35,000 PV = $600,568

2.In order to finance your dream home, you are considering borrowing $120,000. The annual

percentage rate is 9% and payments are made annually over 5 years. Construct the loan-amortization schedule for theannual paymentsAnswer:

n i PV FV PMT Result

5 9 –$120,000 0 ? PMT = $30,856Loan Amortization Schedule is as follows: