# Multiple Choice Questions on Time Value of Money, Stocks

1) The present value of a dollar:

Increases as the interest rate increases.

Decreases as the interest rate increases.

Increases as the time period increases.

Decreases as the time period increases.

a. 1 and 3.

b. 1 and 4.

c. 2 and 3.

d. 2 and 4.

3. Discounting:

a. Expresses the present in the future.

b. Brings the future back to the present.

c. Is synonymous with compounding.

d. Depends on the rate of interest.

4. The future value of an annuity is:

Larger the higher the rate of interest.

Smaller the higher the rate of interest.

Larger the greater the number of years.

Smaller the greater the number of years.

a. 1 and 3.

b. 1 and 4.

c. 2 and 3.

d. 2 and 4.

5. Which is the largest if interest rates are 7 percent?

a. $100 compounded for three years.

b. The future value of a $100 annuity for three years.

c. The present value of $100 after three years.

d. The present value of a $100 annuity.

6) If the required rate of return is 10 percent and the stock pays a fixed $5 dividend, its value is:

a. $100.

b. $75.

c. $50.

d. $25.

7) The risk adjusted required rate of return includes:

The firm's earnings.

The firm's beta coefficient.

The treasury bill rate (i.e., the risk free rate).

a. 1 and 2.

b. 1 and 3.

c. 2 and 3.

d. All of the above.

8) A stock's price will tend to fall if:

The firm's beta declines.

The firm's beta increases.

The risk free rate declines.

The risk free rate increases.

a. 1 and 3.

b. 1 and 4.

c. 2 and 3.

d. 2 and 4.

9) A P/E ratio depends on:

The firm's dividends.

The price of the stock.

The firm's per share earnings.

a. 1 and 2.

b. 1 and 3.

c. 2 and 3.

d. all of the above.

10) The use of P/E ratios to select stocks suggests that:

a. High P/E stocks should be purchased.

b. Low P/E ratio stocks are overvalued.

c. A stock should be purchased if it is selling near its historic low P/E.

d. A stock should be purchased if it is selling near its historic high P/E.

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#### Solution Preview

The present value of a dollar:

1) Increases as the interest rate increases.

Decreases as the interest rate increases.

Increases as the time period increases.

Decreases as the time period increases.

a. 1 and 3.

b. 1 and 4.

c. 2 and 3.

d. 2 and 4.

Answer: d. 2 and 4.

Present value = Future value / (1+ interest rate)^t

(^ stands for raised to the power of)

Therefore higher the interest rate and time period, lower is the present value

3. Discounting:

a. Expresses the present in the future.

b. Brings the future back to the present.

c. Is synonymous with compounding.

d. Depends on the rate of interest.

Answer: d. Depends on the rate of interest.

4 The future value of an annuity is:

Larger the higher the rate of interest.

Smaller the higher the rate of interest.

Larger the greater the number of years. ...

#### Solution Summary

Answers multiple choice questions on time value of money, stocks.

Problems: Calculations for present value, future value, annuities, interest

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