Chapter 6 Discounted Cash Flow Valuation Valuation
1. You You hold a winning winning ticket from your your provincial lottery. It entitles the earer earer to receive payments of !"#$### at the end of each of the ne%t years. 'iven what you know aout the time value of money$ you should e ale to sell this ticket for no less than !1 million in the open market. (ns) False
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,u-ect) resent Values Values
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&. You You have -ust won a lottery pri0e. pri0e. You You can choose to receive receive !"#$### today or an annual annual payment of !"#$### at the end of each of the ne%t years. /he interest rate that makes you indifferent etween the two is &.213$ and at higher rates you should take the lump sum. (ns) /rue
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,u-ect) resent Value Value 4 Interest 5ates
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. (n annuity annuity stream stream of cash flow flow payments payments is) (7 ( set set of level level cash cash flows flows occu occurri rring ng each each time time period period for for a fi%ed fi%ed lengt length h of time. time. +7 ( set set of level level cash cash flows flows occurr occurring ing eac each h time time perio period d forev forever er.. C7 ( set set of incre increasi asing ng cash cash flows flows occur occurrin ring g each each time per period iod for for a fi%ed fi%ed lengt length h of time. time. D7 ( set set of increa increasin sing g cash cash flows flows occ occurr urring ing each each time per period iod fore forever ver.. 87 ( set set of ari aritra trary ry cash cash flows flows occu occurr rring ing each each time time period period for for no more more than than 1# 1# years. years. (ns) (
*evel) +asic
,u-ect) (nnuity
/ype) /ype) Definitions
9. /he present present value factor factor for annuities annuities is calculated calculated as) (7 :1 ; pres presen entt valu valuee fact factor or7< 7
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,u-ect) resent resent Value Value Factor For (nnuities
/ype) /ype) Definitions Definitions
". /he future future value factor for for annuities annuities is calculated calculated as) (7 Futur ture va value fa factor ; r +7 :1
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,u-ect) Future Future Value Value Factor For (nnuities
/ype) /ype) Definitions
6. (nnuities where the payments payments occur at the end of each each time period are are called >>>>>>>>$ whereas >>>>>>>>>>>>> refer to annuity streams with payments occurring at the eginning of each time period. (7 ordin ordinar ary y annu annuit itie ies? s? early early annu annuit itie iess +7 late late annu annuit itie ies? s? stra straig ight ht annu annuit itie iess C7 stra straig ight ht annu annuit itie ies? s? late late annu annuit itie iess D7 annu annuit itie iess due? due? ordi ordina nary ry annu annuit itie iess 87 ordi ordina nary ry annu annuit itie ies? s? annu annuit itie iess due due (ns) 8
*evel) +asic
,u-ect) (nnuities Due
/ype) /ype) Definitions
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Chapter 6 Discounted Cash Flow Valuation Valuation
. (n annuity stream where where the payments occur forever is called a:n7 >>>>>>>>>>>. (7 annuity due +7 indemnity C7 perpetuity D7 amo morrti0e ti0ed d cas cash h flo flow w str streeam 87 amorti0ation tale (ns) C
*evel) +asic
,u-ect) erpetuity
/ype) /ype) Definitions
. /he interest rate e%pressed in terms of the interest interest payment made each period is called the) (7 ,tate tated d in inter terest ra rate. +7 Comp Compou ound nd inte interrest est rate. ate. C7 8ffective ive an annual ra rate. te. D7 er eriodi iodicc inte interrest est rate rate.. 87 Daily ily inter terest rate. te. (ns) (
*evel) +asic
,u-ect) ,tated Interest 5ates
/ype) /ype) Definitions
2. /he interest rate e%pressed as if it were compounded compounded once per per year is called called the) (7 ,tate tated d in inter terest ra rate. +7 Comp Compou ound nd inte interrest est rate. ate. C7 8ffective ive an annual ra rate. te. D7 er eriodi iodicc inte interrest est rate rate.. 87 Daily ily inter terest rate. te. (ns) C
*evel) +asic
,u-ect) 8ffective (nnual 5ate
/ype) /ype) Definitions
1#. /he interest rate charged charged per period multiplied y the numer of periods per year is called the) (7 8ffe 8ffect ctiv ivee annu annual al rate rate :8(5 :8(57. 7. +7 (nnu (nnual al perc percen enta tage ge rate rate :(5 :(57. 7. C7 er eriodi iodicc inte interrest est rate rate.. D7 Comp Compou ound nd inte interrest est rat rate. e. 87 Daily ily inter terest rate. te. (ns) +
*evel) +asic
,u-ect) (nnual ercentage 5ate
/ype) /ype) Definitions
11. ( loan where where the orrower receives money today and repays a single lump sum at some time in the future future is called a:n7 >>>>>>>>>>> loan. (7 amorti0ed +7 continuous C7 alloon D7 pure discount 87 interest=only (ns) D
*evel) +asic
,u-ect) ure Discount *oan
/ype) /ype) Definitions
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Chapter 6 Discounted Cash Flow Valuation Valuation
1&. ( loan where where the orrower pays interest interest each period and repays repays the entire principal of the loan at at some point in the future is called a:n7 >>>>>>>>>>> loan. (7 amorti0ed +7 continuous C7 alloon D7 pure discount 87 interest=only (ns) 8
*evel) +asic
,u-ect) Interest=nly *oan
/ype) /ype) Definitions
1. ( loan where where the orrower pays interest interest each period$ and repays repays some or all of the principal of the loan over time is called a:n7 >>>>>>>>>> l oan. (7 amorti0ed +7 continuous C7 alloon D7 pure discount 87 interest=only (ns) (
*evel) +asic
,u-ect) (morti0ed *oan
/ype) /ype) Definitions
19. ( loan where where the orrower pays interest interest each period$ repays part part of the principal of the loan over time$ and repays the remainder of the principal at the end of the loan$ is called a:n7 >>>>>>>>>>>>> loan. (7 amorti0ed +7 continuous C7 alloon D7 pure discount 87 interest=only (ns) C
*evel) +asic
,u-ect) +alloon *oan
/ype) /ype) Definitions
1". Ehich of the following following fit fit the definition definition of an annuity annuity I. !1## a Guarter for 1# years II. !# a year forever III. !1# a week for 1$### weeks IV !1"# a month for & months (7 I and IV only +7 II only C7 III and IV only D7 I$ III$ and IV onl y 87 I$ II$ III$ an and IV (ns) D
*evel) +asic
,u-ect) (nnuity
/ype) /ype) Definitions
16. /he formula formula HCHJ1 HCHJ1 K :1 < :1 ; r7t 7L< r is the >>>>>>> formula. (7 Future va value +7 Futur uturee val value ue of an annui nnuity ty C7 resent value D7 res reseent valu valuee of of an an ann annui uity ty 87 erpetuity (ns) D
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,u-ect) resent Value Value Factor For (n (nnuity
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/ype) /ype) Definitions
age
Chapter 6 Discounted Cash Flow Valuation Valuation
1. (n annuity annuity due due is a series series of) (7 8Gual 8Gual payment paymentss that occur occur at at the eginn eginning ing of each each time time period period and and continu continuee foreve forever. r. +7 MneGua MneGuall payment paymentss that that occur occur at the the eginn eginning ing of each each time time perio period d for a set set perio period d of time. time. C7 8Gual 8Gual payment paymentss that that occur occur at the egi eginni nning ng of each each time time perio period d for a set set perio period d of time. time. D7 MneGua MneGuall payment paymentss that that occur occur at the the end of of each each time peri period od for for a set peri period od of time time.. 87 8Gual 8Gual paym payment entss that that occur occur at at the end end of each each time time period period and and cont continue inue foreve forever. r. (ns) C
*evel) +asic
,u-ect) (nnuity Due
/ype) /ype) Definitions
1. ( perpetuity perpetuity is a series series of payments payments that) (7 (re eGual eGual in amou amount nt and and occur occur over over a set set period period of time time.. +7 Vary in in amo amoun untt ut ut occu occurr for forev ever er.. C7 Vary in in amou amount nt and and occ occur ur ove overr a set set peri period od of of time time.. D7 (re uneGua uneGuall in amount amount and occur occur over over a set set perio period d of time. time. 87 (re (re eGu eGual al in amou amount nt and and con contin tinue ue fore foreve ver. r. (ns) 8
*evel) +asic
,u-ect) erpetuity
/ype) /ype) Definitions
12. /he effective effective annua annuall rate is eGual eGual to) t (7 J1 = Nuoted ra rate < mL < r. +7 J1 = Nuoted ra rate < m7Lm = 1. C7 J:17K:(57K:m7L m = 1. D7 J1 ; Nuoted ra rate < mLm = 1. 87 J1= Nuoted rate < mLm JrL. (ns) D
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,u-ect) 8ffective (nnual 5ate
/ype) /ype) Definitions
. Ehen interest is credited the instant it is earned it is referred to as) (7 ,imple interest. +7 (nnu (nnual ally ly comp compou ound nded ed inte intere rest st.. C7 Cont Contin inuo uous usly ly com compo poun unde ded d inte intere rest st.. D7 (mor (m orti ti0e 0ed d da daily ily int inteerest rest.. 87 (nnuiti0e i0ed int interest. (ns) C
*evel) +asic
,u-ect) Continuous Compounding
/ype) /ype) Definitions
&1. ( pure discount loan is one where the orrower receives money today and repays the loan with) (7 ( sing single le lump lump sum sum in in the the futu future re.. +7 8Gua 8Guall month monthly ly pay payme ments nts calle called d annu annuity ity paym paymen ents ts.. C7 artia artiall month monthly ly paymen payments ts followe followed d y y a allo alloon on payment payment.. D7 8ven 8ven monthly monthly paymen payments ts that that fully fully amorti0 amorti0ee the the princ principa ipall alan alance. ce. 87 Aonthly Aon thly interes interestt only only paym payments ents follow followed ed y a allo alloon on paymen payment. t. (ns) (
*evel) +asic
,u-ect) ure Discount *oan
/ype) /ype) Definitions
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Chapter 6 Discounted Cash Flow Valuation Valuation
&&. /he process of making regular payments payments that reduce the principal loan alance is called) (7 (nnuiti0in i0ing g th the lo loan. +7 (morti0ing ing the loa loan. C7 Depleting th the lo loan. D7 Disc iscountin ting th the lo loan. 87 Comp mpo ounding ing the loa loan. (ns) +
*evel) +asic
,u-ect) (morti0ed *oan
/ype) /ype) Definitions
&. /he effective annual rate with continuous continuous compounding is e%pressed as 8(5O) m (7 J:17 :(57 :m7L = 1. +7 J1 ; :Nuoted ted rate7 te7 < mLm = 1. C7 J1= Nuoted rate < mLm JrL. D7 eG = 1. 87 :e7 :G7 =1. (ns) D
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,u-ect) Continuous Compounding
/ype) /ype) Definitions
&9. Ehich of the following following fit fit the definition definition of a perpetuity perpetuity I. referred stock dividend II. Common stock dividend III. 8ndowment fund providing eGual annual payments from accrued earnings IV. Aonthly payments payments eGual eGual to 1##3 of the income earned y a restaurant (7 I only +7 III and IV only C7 I and III only D7 I$ II$ an and IV only 87 I$ III$ and IV only (ns) C
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,u-ect) erpetuity
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&". You You are going to invest !"## at the end of each year year for 1# years. 'iven an interest rate$ you can can find the future value of this investment y) I. (dding the cash flows together and finding the future value of the sum using the appropriate future future value factor. II. (pplying the proper future value factor to each cash flow$ flow$ then adding up these future values. III. Finding the present value of each cash flow$ adding adding all of the present values together$ then finding the future value at the end of year 1# of this lump sum. IV. Finding the present value of the entire payment stream. (7 II only +7 III only C7 II and III only D7 I$ II$ an and IV only 87 II$ III$ and IV onl y (ns) C
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,u-ect) resent Value Value (nnuity
/ype) /ype) Concepts
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Chapter 6 Discounted Cash Flow Valuation Valuation
&6. ,uppose you are evaluating two annuities. /hey are identical identical in every way$ way$ e%cept that that one is an ordinary annuity and one is an annuity due. (ssuming an interest rate of 1#3$ which of the following is true (7 /he ordi ordinar nary y annuity annuity must must have have a higher higher pres present ent value value than than the the annuity annuity due. due. +7 /he annu annuity ity due due must must have have the the same same prese present nt value value as as the ordi ordinar nary y annui annuity ty.. C7 /he regu regular lar annu annuity ity must must have have a lower lower futu future re value value than than the the annui annuity ty due. due. D7 /he two two annuities annuities will will differ differ in prese present nt value value y the the amount amount of e%actly e%actly one of the annuity annuity payments. payments. 87 /he annuity annuity due will will e larger larger than than the the regular regular annuity y an an amount amount eGual eGual to the prese present nt value value of the last annuity payment. (ns) C
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&. Ehich of the following following C(PP/ C(PP/ e calculated calculated (7 /he /he pre prese sent nt val value ue of a per perpe petu tuit ity y. +7 /he inte interes restt rate on on a perpetu perpetuity ity give given n the prese present nt value value and and paymen paymentt amount. amount. C7 /he /he pre prese sent nt valu valuee of of an an ann annui uity ty due. due. D7 /he /he fut futur uree val value ue of an annu annuity ity due. due. 87 /he /he fut futur uree val value ue of a per perpe petu tuit ity y. (ns) 8
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,u-ect) erpetuity
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&. You You are considering two perpetuities perpetuities which are identical in every way$ way$ e%cept that perpetuity ( will egin making annual payments of ! to you two years from today while the first ! payment for perpetuity + will occur one year from today. today. It must e true that the present value of perpetuity) (7 ( is grea greate terr tha than n tha thatt of of + y !. !. +7 + is is gre great ater er than than that that of ( y !. !. C7 + is is eGu eGual al to that that of perp perpet etui uity ty (. D7 ( e%c e%cee eeds ds tha thatt of + y the the V of ! ! for for one one yea year. r. 87 + e%c e%cee eeds ds tha thatt of ( y the the V V of of ! ! for for one one yea yearr. (ns) 8
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,u-ect) resent Value Value erpetuity
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&2. In order to compare different different investment opportunities :each :each with the same risk7 with interest rates rates reported in different manners you should) (7 Conver Convertt each each interes interestt rate rate to an an annu annual al nom nomina inall rate rate.. +7 Conv Conver ertt each each inte intere rest st rate rate to a mon monthl thly y nomin nominal al rat rate. e. C7 Conver Convertt each each interes interestt rate rate to an an eff effect ective ive annual annual rate. rate. D7 Compa Compare re the them m y usin using g the the pul pulis ishe hed d annu annual al rat rates es.. 87 Conv Conver ertt eac each h inte intere rest st rat ratee to to an an (5 (5.. (ns) C
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,u-ect) 8ffective (nnual 5ate
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#. Ehich of the the following following is a true true statement statement (7 Ehen Ehen compar comparing ing inve investme stments nts it it is est est not not to rely rely solely solely on Guote Guoted d rates. rates. +7 Compounding Compounding will typically typically not not lead lead to differen differences ces etween etween Guoted Guoted and effective effective rates. rates. C7 /he (5 on a loan reGuiring reGuiring monthly payments payments is the annual annual interest interest rate rate you you actually actually pay. pay. D7 (n (5 (5 is the the interes interestt rate per per perio period d divided divided y the num numer er of peri periods ods per per year year.. 87 Eith Eith monthl monthly y compou compoundi nding$ ng$ the the (5 (5 will will e larger larger than than the the effe effectiv ctivee annual annual rate. rate. (ns) (
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,u-ect) (nnual ercentage 5ate
/ype) /ype) Concepts
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Chapter 6 Discounted Cash Flow Valuation Valuation
1. You You have !"## that you would like to invest. You You have two choices) ,avings account account ( which earns earns 3 compounded annually$ or savings savings account + which earns ."3 compounded semiannually. semiannually. Ehich would you choose and why (7 ( ec ecau ause se it it has has a high higher er eff effec ectiv tivee annu annual al rat rate. e. +7 ( ec ecau ause se the the futur futuree val value ue in in one one yea yearr is lowe lower. r. C7 + eca ecaus usee it has has a high higher er eff effec ectiv tivee annu annual al rat rate. e. D7 + eca ecaus usee the the futu future re val value ue in in one one year year is low lower er.. 87 + ec ecau ause se it has has the the high higher er Guot Guoted ed rate rate.. (ns) (
*evel) Intermediate
,u-ect) Comparing ,avings (ccounts
/ype) /ype) Concepts
&. You You have !"## that you would like to invest. You You have two choices),avings account account ( which earns 3 compounded annually$ or savings savings account + which earns ."3 compounded monthly. Ehich would you choose and why (7 ( ec ecau ause se it it has has a high higher er eff effec ectiv tivee annu annual al rat rate. e. +7 ( ec ecau ause se the the futur futuree val value ue in in one one yea yearr is lowe lower. r. C7 + eca ecaus usee it has has a high higher er eff effec ectiv tivee annu annual al rat rate. e. D7 + eca ecaus usee the the futu future re val value ue in in one one year year is low lower er.. 87 ( eca ecaus usee it it has has the the hig highe herr Guo Guote ted d rat rate. e. (ns) C
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,u-ect) Comparing ,avings (ccounts
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. You You are planning to save your your Christmas onuses from work work and are comparing savings savings accounts)(ccount ( compounds semiannually semiannually while account + compounds monthly. If oth accounts have the same effective annual rate of interest and you place pl ace only the onuses in the account$ you should choose >>>>>>>>>>>. (7 acco accoun untt ( eca ecaus usee it it has has a hig highe herr (5 (5 +7 acco accoun untt + ec ecau ause se it has has a hig highe herr (5 (5 C7 acco accoun untt + ec ecau ause se it is is comp compou ound nded ed more more ofte often n D7 acco accoun untt ( eca ecaus usee you you will will pay less less in in ta%e ta%ess 87 eith either er sinc sincee you you would would e ind indif iffe fere rent nt et etwe ween en the the two two (ns) 8
*evel) Intermediate
,u-ect) Comparing ,avings (ccounts
/ype) /ype) Concepts
9. Ehich of the the following following is P/ a true true statement statement (7 resent resent values values and discount discount rates rates move move in the the opposite opposite directions directions from one another. another. +7 n mon monthly thly compou compounde nded d loans loans$$ the the 8(5 8(5 will e%ceed e%ceed the (5. (5. C7 Compou Compoundin nding g essen essentia tially lly mean meanss earni earning ng inte interes restt on intere interest. st. D7 Future Future values values increa increase se with with increa increases ses in inte interes restt rates rates.. 87 (ll else else the the same$ same$ the the longer longer the the term term of a loan loan the lower lower will will e the the total total inter interest est you you pay on on it. (ns) 8
*evel) +asic
,u-ect) Various Various ,tatements
/ype) /ype) Concepts
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Chapter 6 Discounted Cash Flow Valuation Valuation
". Your Your anker Guotes you you two different loan payments payments on a !1&$### car loan$ one calling calling for 6 monthly payments and the other calling for &9 monthly payments. +oth loans have the same (5 and 8(5. ,he then tells you that the shorter loan is a etter deal ecause the total payments you would make over the life of the loan would e lower. lower. Ehat is she ignoring ignoring (7 /he /he pay payme ment nt wou would ld e e lowe lowerr on the the &9 month month loan loan.. +7 /he &9 &9 month month contr contract act will will actua actually lly cost cost you you more more in tota totall paymen payments$ ts$ not not less. less. C7 /he inte interes restt you could could earn earn y saving saving the the diffe differen rence ce etwee etween n the two two loan loan paymen payments. ts. D7 /he fact fact that that you you must must make make 1& more more paymen payments ts on the longer longer term term loan. loan. 87 /he /he (5 (5 and and 8(5 8(5 for for the the two two loa loans ns are are irr irrel elev evan ant. t. (ns) C
*evel) Intermediate
,u-ect) Comparing *oans
/ype) /ype) Concepts
6. /o compare interest rates offered offered y various financial financial institutions$ you should compare the) (7 Nuoted rates. +7 (nnu (nnuaal pe perce rcentag ntagee rate ratess. C7 ,tate tated d annual rates tes. D7 Pominal rates. 87 8ffe 8ffect ctiv ivee annu annual al rate rates. s. (ns) 8
*evel) +asic
,u-ect) 8ffective (nnual 5ate
/ype) /ype) Concepts
. Ehich one of the following will increase the present value of an annuity (7 *owe owering ing the the dis discoun countt rat ratee +7 5edu 5educi cing ng the the ca cash flow low amo amoun untt C7 Decr Decrea easi sing ng the the num nume err of of pay payme ment ntss D7 5edu 5educi cing ng the futu future re value value of the the cas cash h flo flow w 87 *owe owering ing the the pay payment ment amo moun untt (ns) (
*evel) Intermediate
,u-ect) resent Value Value f (n (nnuity
/ype) /ype) Concepts Concepts
. Ehich one of the following would have the greatest present value value (7 !1$# !1$### ## toda today y plu pluss !1# !1## # a month month for for & year yearss +7 !1$# !1$### ## toda today y plu pluss ! ! # # a month month for for a year year C7 !1$# !1$### ## toda today y plu pluss ! !9# 9## # a month month for for si% si% mon month thss D7 !&$& !&$# ## toda today y plu pluss ! ! # # a month month for for si% si% mon month thss 87 !&$& !&$# ## toda today y plu pluss !1# !1## # a mon month th for for a yea year r (ns) D
*evel) Intermediate
,u-ect) resent resent Value Value f MneGual ayments
/ype) /ype) Concepts Concepts
2. Ehich one of the following will increase the future value of a stream stream of uneGual payments for a ten year pro-ect /he rate of return is positive. (7 Delayi Delaying ng some some cash cash inflo inflows ws from from years years 1 and & until until year year 2 +7 *owe *oweri ring ng the the disc discou ount nt rat ratee appl applica ical lee to all all ten year yearss C7 Increa Increasing sing the initial initial cash cash outf outflow low to start start the pro-ec pro-ectt D7 Aoving Aov ing more more of the the cash cash inflows inflows to the the earlie earlierr years years of the the propro-ect ect 87 *ower *owering ing the the eff effect ective ive annual annual rate rate appli applica cale le to to the the pro-ec pro-ectt (ns) D
*evel) Intermediate
,u-ect) Future Future Value Value f MneGual ayments
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/ype) /ype) Concepts Concepts
Chapter 6 Discounted Cash Flow Valuation Valuation
9#. Ehich of the following following comparison comparison statements statements is :are7 :are7 true I. (n annuity has eGual payments$ a perpetuity does not. II. +oth an annuity and a perpetuity have eGual payments. III. (n annuity covers a longer period of time than a perpetuity. IV. (n annuity has has a constant rate rate of return$ a perpetuity does does not. (7 I only +7 II only C7 I and III only D7 II and IV only 87 I and IV only (ns) +
*evel) Intermediate
,u-ect) (nnuity Versus Versus erpetuity
/ype) /ype) Concepts
91. 'iven a fi%ed fi%ed stream stream of monthly monthly income income the) (7 resen resentt value value will will increa increase se as as the the time time peri period od incr increa eases ses.. +7 Future Future value value will decre decrease ase as the time time peri period od increa increases ses.. C7 resen resentt value value will will decre decrease ase as as the annu annual al perce percenta ntage ge rate rate decr decrea eases ses.. D7 Future Future valu valuee will will increa increase se as the annu annual al perce percenta ntage ge rate rate decre decrease ases. s. 87 Future Future value value will will increase increase if payments payments are made at the end of of the period period rather rather than than the the eginnin eginning. g. (ns) (
*evel) Intermediate
,u-ect) Pumer f /ime eriods
/ype) /ype) Concepts
9&. Ehich of the following is :are7 correct correct concerning perpetuities I. erpetuities consist of a stream of eGual payments. II. erpetuities have a life of etween twenty and and one hundred years. III. erpetuities have a variale rate of return. IV. /he present value perpetuity formula for a stream of annual payments is) (7 I only +7 I and IV only C7 II and IV only D7 I$ II$ and III onl y 87 I$ II$ and IV only (ns) (
*evel) Intermediate
,u-ect) erpetuity
C < :1 ; r<1&71&.
/ype) /ype) Concepts
9. Ehich of the following will increase the effective annual annual rate I. Increasing the freGuency of the compounding II. Decreasing the freGuency of the compounding III. Increasing the stated rate IV. Decreasing the annual percentage rate (7 I only +7 II only C7 I and III only D7 I and IV only 87 II and IV only (ns) C
*evel) Intermediate
,u-ect) 8ffective (nnual 5ate
/ype) /ype) Concepts
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Chapter 6 Discounted Cash Flow Valuation Valuation
99. Ehich one of the following is correct correct concerning the annual percentage percentage rate :(57 (7 /he /he (5 (5 is gre greate aterr than than the the effe effect ctiv ivee annu annual al rat rate. e. +7 /he /he (5 (5 for formu mula la for for rat ratee disc disclos losur uree is J1 J1 ; :r :r < m7L m7Lm = 1. C7 /he (5 (5 is the rate rate which which lender lenderss are are reGui reGuired red to disc disclos lose. e. D7 /he (5 (5 is est est used used to comp compare are offers offers from from vario various us lend lenders ers.. 87 /he /he (5 (5 con consid sider erss all all the the effe effect ctss of compo compoun undin ding. g. (ns) C
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,u-ect) (nnual ercentage 5ate
/ype) /ype) Concepts
9". Ehich one of the following is true concerning amorti0ed loans (7 ( loan where annual annual payments payments include the interes interestt due plus some set amount amount of principa principall is an an amorti0ed loan. +7 (morti (morti0ed 0ed loans loans all all have have a alloo alloon n payme payment nt at at the end of of the loan loan term. term. C7 (mor (m orti ti0e 0ed d loan loan pay payme ments nts con consi sist st of inter interes estt only only. D7 (n amort amorti0e i0ed d loan loan reGuir reGuires es only only one lump lump sum sum paymen paymentt at the end end of the the loan loan term. term. 87 (n amo amort rti0 i0ed ed loa loan n is a type type of of a pur puree disc discou ount nt loa loan. n. (ns) (
*evel) Intermediate
,u-ect) (morti0ed *oans
/ype) /ype) Concepts
96. Ehich of the following is :are7 correct correct concerning interest=only loans I. Aost corporate onds are e%amples of interest=only loans. II. /he amount of principal due at the end of the loan term is eGual to the amount orrowed. orrowed. III. 8ach payment amorti0es a portion of the loan principal. IV. /he amount orrowed is the present value of the amount due due at maturity given a stated stated discount rate. rate. (7 I only +7 II only C7 I and II only D7 I and III only 87 II and IV only (ns) C
*evel) Intermediate
,u-ect) Interest nly *oan
/ype) /ype) Concepts
9. /omas wants to save !1$# a year year in a manner that ma%imi0es his savings. savings. /o do this$ he should) (7 Deposi Depositt !1$# !1$# into into his his saving savingss accou account nt on the the last last day of each each year year.. +7 /reat /reat his !1# !1## # month monthly ly savi savings ngs deposi deposits ts as as an annuity annuity due. due. C7 /reat /reat his !1# !1## # month monthly ly savi savings ngs deposi deposits ts as as an ordi ordinar nary y annui annuity ty.. D7 Deposi Depositt !## !## into into his accoun accountt at the end of each each Guarte Guarter. r. 87 Deposi Depositt !6## !6## into into his accoun accountt at the end of ever every y si% si% month month period period.. (ns) +
*evel) Intermediate
,u-ect) (nnuity Due
/ype) /ype) Concepts
9. +eatrice has a credit card that applies interest every month to her her account alance. In this case$ case$ +eatrice is paying an interest rate that) (7 8Guals 8Guals the rate rate state stated d on her illing illing statem statement ent as the the (5. (5. +7 Is eGua eGuall to the the (5 (5 comp compou ound nded ed con contin tinuo uous usly ly.. C7 Is greate greaterr than than the (5 (5 show shown n on on her her illing illing statem statement ent.. D7 Is eGua eGuall to the the annual annual perc percent entage age rate rate as reGu reGuire ired d y the the govern government ment.. 87 Eill Eill decl decline ine automa automatica tically lly as as her her accoun accountt alan alance ce decline declines. s. (ns) C
*evel) Intermediate
,u-ect) 8ffective (nnual 5ate
/ype) /ype) Concepts
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age 1#
Chapter 6 Discounted Cash Flow Valuation Valuation
92. If you are orrowing money$ money$ which one of the following rates would you prefer (7 23 paid annually +7 23 com compo poun unde ded d semi semi==annua nnuall lly y C7 23 comp compou oun nded ded Guar uarter terly D7 23 co compounded mo monthly thly 87 23 comp compou oun nded ded con conti tinu nuo ously usly (ns) (
*evel) +asic
,u-ect) 8ffective (nnual 5ate
/ype) /ype) Concepts
"#. /he effective effective annual rate on your savings account assumes assumes that) (7 You withdr withdraw aw the intere interest st as soon soon as it is is earn earned. ed. +7 (ll inte interes restt is with withdra drawn wn from from the the acco account unt at at the end of of each each year year.. C7 /he annual annual percen percentag tagee rate rate vari varies es as as the the prime prime rate rate vari varies. es. D7 (ll interes interestt is compounded compounded continuously continuously and immediately immediately added to the the account account alance. alance. 87 (ll interes interestt payments payments are reinvested reinvested at the same rate as the the original original deposit deposit into the accoun account. t. (ns) 8
*evel) Intermediate
,u-ect) 8ffective (nnual 5ate
/ype) /ype) Concepts
"1. Ehich one of the following statements concerning concerning an ordinary ordinary annuity is true true (7 (n ordinary ordinary annuity consists consists of eGual payments payments that that occur at the egin eginning ning of each period period over a set period of time. +7 If two annuities annuities are are eGual eGual in every every way e%cept e%cept that one is an ordinary ordinary annuity annuity and one one is an an annuity annuity due$ then the ordinary annuity wil l have a larger future value than the annuity due. C7 /he future future value of an an ordinary ordinary annuity can e compute computed d y dividing dividing the future future value value of an annuity annuity due y :1;r7. D7 If two annuities annuities are are eGual eGual in every every way e%cept e%cept that one is an ordinary ordinary annuity annuity and one one is an an annuity annuity due$ then the ordinary annuity wil l have a larger present value than the annuity due. 87 Aost financial financial calcula calculators tors can compute compute ordinary ordinary annuity annuity prolems prolems ut not annuity due prolems. prolems. (ns) C
*evel) Intermediate Intermediate
,u-ect) Future Value Value f (n rdinary (nnuity
/ype) /ype) Concepts
"&. Ehich of the following statements is :are7 :are7 true concerning concerning a time line I. ( timeline is a visual drawing depicting cash flows. II. (s you move leftward on a timeline$ you move further into the future. III. /ime # generally represents today. IV. ( timeline with no future future ending point is a perpetuity. perpetuity. (7 I and II only +7 I and III only C7 II and IV only D7 I$ II$ and III onl y 87 I$ III$ and IV only (ns) 8
*evel) Intermediate
,u-ect) /ime *ine
/ype) /ype) Concepts
". In the annuity present present value formula$ formula$ the variale QrQ must e e%pressed e%pressed as a:n7) a:n7) (7 (nnu (nnuaal perc perceentag ntagee rate rate.. +7 8ffective ive an annual ra rate. te. C7 ,tated an annual ra rate. D7 ,tat ,tated ed rate rate per per per perio iod d of of tim timee t. t. 87 Cont Contin inuo uous usly ly comp compou ound nded ed rate rate.. (ns) D
*evel) Intermediate
,u-ect) (nnuity resent Value Value Formula
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/ype) /ype) Concepts
age 11
Chapter 6 Discounted Cash Flow Valuation Valuation
"9. You You are trying to use your your financial calculator to solve a present present value prolem that has uneGual uneGual cash flows. You You input monies you receive as positive values. Ehich one of the following statements is true (7 Cash outflows outflows should should e input input as positiv positivee values values for each year in which which they they occur. occur. +7 (ny cash cash flow flow occurr occurring ing toda today y should should e input input as as a Ye Year 1 cash cash flow flow.. C7 You You have annual annual cash flows starting starting with Year ear 1 of !1##$ !#$ !#$ !#$ and !##. /he !## !## cash cash flow flow should e input as occurring in year . D7 +ecause +ecause you you are solving solving for the present present value$ value$ any cash flow that that occurs occurs today can e ignored. ignored. 87 ( negative negative prese present nt value value indicate indicatess that that this series series of cash flows causes causes you to lose lose money money today today given a certain discount rate. (ns) 8 *evel) Intermediate /ype) Concepts
,u-ect) Financial Calculator (nd MneGual Cash Flows
"". Ehich one of the following is correct correct concerning ordinary annuities and annuities due (7 (n ordinary ordinary annuity will have have a larger larger present present value value than than an annuity annuity due given given that that the annuitie annuitiess are otherwise identical. +7 (n annuity annuity due will will have have a larger larger future future value than an ordinary ordinary annuity given that the annuitie annuitiess are are otherwise identical. C7 (n annui annuity ty due due applie appliess only to eGual eGual paym payment entss made made in annu annual al incre incremen ments. ts. D7 /he /he ma-or ma-ority ity of ann annui uitie tiess are are annu annuiti ities es due due.. 87 (n ordina ordinary ry annui annuity ty is one one where where the the payment payment occu occurs rs at the the egin eginning ning of of the peri period. od. (ns) +
*evel) Intermediate
,u-ect) rdinary (nnuity Versus Versus (nnuity Due
/ype) /ype) Concepts Concepts
"6. Ehat is the total future value si% years from now of !"# received in one year$ year$ !# received in two years$ years$ and !## received in si% years if the discount rate is 3 (7 !1$#"#.## +7 !1$#9.2 C7 !1$19"."6 D7 !1$&.&1 87 !1$&62.1" (ns) C
*evel) Intermediate
,u-ect) Future Value Value Mneven Cash Flows
/ype) /ype) rolems rolems
". Ehat is the future value at the end of year 9 of the following set of cash flows flows (ssume an interest rate of 3. Year 1 & 9 Cash !1### =!1### !1### =!1### Flow (7 +7 C7 D7 87
! #.## ! 1&. ! 1.1 ! 2.91 !$1&.1
(ns) C
*evel) Intermediate
,u-ect) Future Value Value Mneven Cash Flows
/ype) /ype) rolems rolems
". Ehat is the future value of the following set of cash flows four four years from now now (ssume an an interest rate of "."3. Year # 1 & 9 Cash =!## !1## !## !" # # !## Flow
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age 1&
Chapter 6 Discounted Cash Flow Valuation Valuation
(7 +7 C7 D7 87
!""".1 !"".& !69&.1& !6. !##.##
(ns) D
*evel) Intermediate
,u-ect) Future Future Value Value Mneven Cash Flows
/ype) /ype) rolems
"2. You You deposit !1$### in an account account today. You You will deposit !6## at the end of each each month for the ne%t 1& months and !## each month for for the following 1& months. Bow much interest will you have earned earned in two years if the account pays "."3 compounded monthl y (7 !2".9& +7 !&.6" C7 !92.9& D7 !26&." 87 !22.## (ns) D
*evel) Intermediate
,u-ect) Future Future Value Value Mneven Cash Flows
/ype) /ype) rolems
6#. Ehen you were orn$ your your dear old (unt (unt Ainnie promised to deposit !1$### into a savings account earing a "3 compounded annual rate on each irthday$ irthday$ eginning with your first. You You have -ust turned && and want the dough. Bowever$ it turns out that dear old :forgetful7 (unt Ainnie made no deposits on your fifth and eleventh irthdays. Bow much is in the account right now now (7 !1$26 +7 !9$"# C7 !9$ D7 !9$2 87 !"1$2 (ns) +
*evel) Intermediate Intermediate
,u-ect) Future Value Value f Mneven Cash Flows
/ype) /ype) rolems
61. Ehat is the total present value of !"# received in one year$ year$ !# received received in two years$ and !## received received in si% years if the discount rate is 3 (7 !9&.& +7 !661.6 C7 !62.&" D7 !&1.2# 87 !"&. (ns) D
*evel) Intermediate
,u-ect) resent resent Value Value Mneven Cash Flows
/ype) /ype) rolems rolems
6&. 'iven the following cash flows$ what is the present value if the discount rate is 3 Year 1 & 9 Cash !# !"# !## !11&" Flow
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age 1
Chapter 6 Discounted Cash Flow Valuation Valuation
(7 +7 C7 D7 87
!1$11".# !1$29.& !&$16".# !&$".26 !&$2&&.6&
(ns) +
*evel) Intermediate
,u-ect) resent Value Value Mneven Cash Flows
/ype) /ype) rolems rolems
6. Ehat is the present present value of the following set of cash flows at an 3 discount discount rate Year 1 & 9 Cash !1### =!1### ! 1# ## =!1### Flow (7 +7 C7 D7 87
! #.## ! 1&.2 ! 1.1 ! 2.91 !$1&.1
(ns) +
*evel) Intermediate
,u-ect) resent Value Value Mneven Cash Flows
/ype) /ype) rolems rolems
69. (nalysts e%pect Aarle Comics to pay shareholders shareholders !1.## per per share annually annually for the ne%t ne%t five years. (fter that$ the dividend will e !1."# annually forever. 'iven a discount rate of 1#3$ what is the value of the stock today (7 ! 6."" +7 ! 2. C7 !1&. D7 !1.1# 87 !&1. (ns) D
*evel) Intermediate Intermediate
,u-ect) resent Value Value f Mneven Cash Flows
/ype) /ype) rolems
6". /he monthly mortgage payment payment on your house is !"6.9. It is a # year mortgage at at a Guoted rate rate of .3. Bow much did you orrow (7 !"$### +7 !"$"## C7 !#$### D7 !&$"## 87 !"$### (ns) D
*evel) Intermediate
,u-ect) resent Value Value (nnuity
/ype) /ype) rolems
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age 19