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Multiple choice questions on Time Value of Money

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1. What is the future value (approx.), where present value=1000, r=6% and n=1?
a. 1060.00
b. 1600.00
c. 943.40
d. 900.00

2. What is the future value (approx.), where present value=1000, r=6% and n=10?
a. 1600.00
b. 400.00
c. 1790.85
d. 1645.32

3. What is the present value (approx.), where future value = 1000, r=6% and n=1?
a. 1060.00
b. 1600.00
c. 943.40
d. 900.00

4. What is the present value (approx.), where future value = 1000, r=6% and n=5?
a. 1300.00
b. 747.26
c. 545.38
d. 700.00

5. What is the present value (approx.), where future value = 1000, r=6% and n=10?
a. 558.39
b. 1600.00
c. 400.00
d. 428.32

6. Calculate the interest rate implied (approx.), where PV=1000, n=5, FV=1436.
a. 5.6%
b. 6.2%
c. 7.5%
d. 9.2%

7. Calculate the interest rate implied (approx.), where PV=1000, n=11, FV=1750.
a. 5.2%
b. 3.7%
c. 7.5%
d. 9.2%

8. How long (approx.) will it take for \$500 to grow to \$1,000 at 8% per year?
a. 6 yrs
b. 7
c. 8
d. 9

9. How long (approx.) will it take for \$500 to grow to \$700 at 5% per year?
a. 6.9 yrs
b. 10.9
c. 11.7
d. 13.2

10.A famous quarterback just signed a \$10 million contract providing \$1 million a year for 10 years. The first payment is after one year. The interest rate is 10%. The quarterback's contract present value is approximately?
a. 5.2 million
b. 6.1
c. 6.8
d. 8.9

11.A less famous receiver just signed an \$8 million contract providing \$3 million now and \$1 million for the next 5 years. The interest rate is 10%. The receiver's contract present value is approximately?
a. 5.2
b. 6.1
c. 6.8
d. 8.9

12.What is the present value (approx.) of a 5-year annuity of \$100 if the discount rate is 6%?
a. 326.25
b. 421.24
c. 532.83
d. 601.23

13.Consider a 4-year amortizing loan. You borrow \$1,000 initially, and repay it in four equal annual year-end payments. If the interest rate is 7%, what is the annual payment approximately?
a. 189.65
b. 220.21
c. 295.23
d. 401.89
14.The \$40 million lottery payment that you just won actually pays \$2 million per year for 20 years. If the discount rate is 5%, and the first payment comes in 1 year, what is the present value of the winnings approximately?
a. 40.00 million
b. 38.26
c. 24.92
d. 19.64

15.You believe you will need to have saved \$500,000 by the time you retire in 35 years. If the interest rate is 9% per year, how much must you save each year (approx.) until retirement to meet your retirement goal?
a. 3230.77
b. 2317.92
c. 1875.01
d. 1306.00

Chapter 10 (Block and Hirt)

16. Market-determined required rate of return is the same thing as discount rate, according to the text.
a. True
b. False

17.When the market interest rate exceeds the coupon rate, bonds sell for less than face value.
a. True
b. False

18.The yield to maturity is defined as the discount rate that makes the present value of the bond's payments equal its price.
a. True
b. False

19.Common stock usually represents a perpetuity.
a. True
b. False

20.Required rate of return = real rate of return + inflation premium + risk premium
a. True
b. False

21.Price-earnings ratio represents a multiplier applied to current earnings to determine the value of a share of stock.
a. True
b. False

22.Supernormal growth pattern is often experienced by firms in mature industries.
a. True
b. False

23.If the annual dividend of a preferred stock is \$10 and the required rate of return is 10%, then the price of the preferred stock would be:
a. \$10
b. \$90
c. \$100
d. \$110

24.According to the constant growth dividend valuation model, if dividends were \$2.00, required rate of return is 12%, and the dividends grow at a constant rate of 7% per year, the price of the stock would be:
a. \$24
b. \$40
c. \$48
d. \$60

25.What is the approximate price of a bond if par value is \$1000, interest rate of (coupon) 9%, matures in 20 years and the present yield to maturity is 6%?
a. \$910
b. \$1245
c. \$1344
d. \$1485

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Solution Preview

Please see attached file

Note: the abbreviations have the following meanings

PVIF= Present Value Interest Factor
FVIF= Future Value Interest Factor
Ordinary Annuity
PVIFA= Present Value Interest Factor for an Annuity
FVIFA= Future Value Interest Factor for an Annuity

They can be read from tables or calculated using the following equations
PVIF( n, r%)= =1/(1+r%)^n
FVIF( n, r%)= =(1+r%)^n

PVIFA( n, r%)= =[1-1/(1+r%)^n]/r%
FVIFA( n, r%)= =[(1+r%)^n -1]/r%

1.     What is the future value (approx.), where present value=1000, r=6% and n=1?
a.     1060.00
b.     1600.00
c.     943.40
d.     900.00

1060 =1000*(1+6%)

2.     What is the future value (approx.), where present value=1000, r=6% and n=10?
a.     1600.00
b.     400.00
c.     1790.85
d.     1645.32

1790.85 =1000*(1+6%)^10

3.     What is the present value (approx.), where future value = 1000, r=6% and n=1?
a.     1060.00
b.     1600.00
c.     943.40
d.     900.00

943.40 =1000/(1+6%)

4.     What is the present value (approx.), where future value = 1000, r=6% and n=5?
a.     1300.00
b.     747.26
c.     545.38
d.     700.00

747.26 =1000/(1+6%)^5

5.     What is the present value (approx.), where future value = 1000, r=6% and n=10?
a.     558.39
b.     1600.00
c.     400.00
d.     428.32

558.39 =1000/(1+6%)^10

6.     Calculate the interest rate implied (approx.), where PV=1000, n=5, FV=1436.
a.     5.6%
b.     6.2%
c.     7.5%
d.     9.2%

7.5% =(1436/1000)^(1/5)-1

7.     Calculate the interest rate implied (approx.), where PV=1000, n=11, FV=1750.
a.     5.2%
b.     3.7%
c.     7.5%
d.     ...

Solution Summary

Answers to multiple choice questions on Time Value of Money (Calculations for present value, future value, annuities, implied interest rate, number of years, present value of the winnings), Market-determined required rate of return, yield to maturity, Common stock, perpetuity, Price-earnings ratio, price of the preferred stock, constant growth dividend valuation model, price of a bond ,amortizing loan

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Multiple Choice Questions on Time Value of Money. Future value, Annuity, Present Value

1. Toni adds \$3,000 to her savings on the first day of each year. Tim adds \$3,000 to his savings on the last day of each year. They both earn a 9% rate of return. What is the difference in their savings account balances at the end of thirty years?
\$35,822.73
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\$40,115.31

2. The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of \$25 million be paid to the president upon the completion of her first ten years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 6.5% on these funds. How much must the company set aside each year for this purpose?
\$1,775,042.93
\$1,798,346.17
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3. The great, great grandparents of one of your classmates sold their factory to the government 104 years ago for \$150,000. If these proceeds had been invested at 6%, how much would this legacy be worth today? Assume annual compounding.
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