# Multiple Choice Questions on Time Value of Money

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

$36,803.03

$38,911.21

$39,803.04

$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

$1,801,033.67

$1,852,617.25

$1,938,018.22

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.

$ 936,000.00

$ 1,086,000.00

$60,467,131.54

$60,617,131.54

$64,254,159.44

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#### Solution Preview

Note: the abbreviations have the following meanings

FVIF= Future Value Interest Factor

Ordinary Annuity

FVIFA= Future Value Interest Factor for an Annuity

Annuity due

FVIFA (Annuity due)= Future Value Interest Factor for an Annuity due

They can be read from tables or calculated using the following equations

FVIF( n, r%)= =(1+r%)^n

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

FVIFA- Annuity due( n, r%)= =(1+r%) x[(1+r%)^n -1]/r%

Future Value= Lump sum x FVIF

Future Value= Annuity x FVIFA

Annuity = Future Value/FVIFA

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 ...

#### Solution Summary

Answers Multiple Choice Questions on Time Value of Money.

Multiple Choice Questions on Time Value of Money, Stocks: present value, required rate of return, interest rates, risk adjusted required rate of return, P/E ratio,

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.