Finance 380 Exam 1

One of the underlying principles of finance is that cash is

King

Newly-created securities are issued to their initial investors in the

Primary market

Limited liability exists for

limited partners and shareholders

You purchase securities directly from an entity. That entity is a securities

dealer

Double taxation may exist in

Corporations

Ultimate control of a corporation is held by the

Stockholders

A market is which security prices quickly reflect new information is said to be

Efficient

In order for a particular security to be traded on a particular exchange, the security must be __________ on the exchange

listed

The day-to-day decisions in a firm are typically made by the

Management team

Which of the following files its own tax return (is a separate tax-paying entity)

Corporation

The present value and the discount rate are __________ related, everything else equal

inversely

What is the present value of $1,800 to be received ten years from now discounted at 5% APR compounded quarterly?

$1,095.14

What is the present value of $10,000 to be received seven years from now discounted at 5% APR compounded annually?

$7,106.81

According to the rule of 72, an investment that earns 10% annual interest will double in approximately 7.2 years.

True

What is the future value ten years from now of $2,500 invested at 6% APR compounded monthly?

$4,548.49

How many years does it take for $10,000 to grow into $48,010.21 if the investment earns 8% APR compounded semi-annually?

20

A $20,000 investment compounds monthly for 120 months and grows into $28,000. What is the APR earned by this investment?

3.37%

An investment of $20,000 grows into $35,000 over a period of 6 years. What is the APR? Remember, when the compounding period is not given, we assume annual compounding.

9.78%

"Earning interest on interest" pertains to

compound interest

What is the future value six years from now of $1,000 invested at 5% interest compounded annually:

$1,340.10

Financial markets exist to transfer savings from

households to businesses

Securities trading takes place at a physical location is the case of an

Organized securities exchange

Brokers charge a fee or commission for bringing buyers and sellers together

True

Dealers actually buy securities from or sell securities to investors and earn a spread by buying low and selling high

True

What should be the goal of the financial manager of a corporation?

maximize shareholder's wealth/stock price

In addition to corporation (both c and sub-S) and LLC, name one other organizational form of business enterprise that may provide at least some of its owners with limited liability

Limited partnerships

-general partners face UNLIMITED liability

For the financial manager's purposes, maximizing shareholders' wealth is synonymous with maximizing the firm's stock price

True

For the financial manager's purposes, maximizing shareholders' wealth is synonymous with maximizing the firm's profits

False

The primary purpose of a financial market is to maximize stockholders' wealth

False

A major advantage of a corporation is double taxation

False

An S-Corporation is taxed like a partnership (each pays taxes personally on their share of the corporation's profits)

True

-avoids double taxation

How many years does it take for $10,000 to grow into $21,911.23 if the investment earns 8% APR compounded semi-annually?

10 years

The future value of a single sum invested for several periods

-increase as the number of periods increases

-increases as the interest rate increases

-increases by a greater amount during each subsequent period due to compounding

-grows exponentially due to compounding

The future value of a single sum invest for one period doubles if the interest rate is doubled

False

The amount of interest earned on a single sum invested for one period doubles if the interest rate is doubled

True

Interest earned on a single sum invested for more than one period exactly doubles if the interest rate is double

False

-more than double

The formula for future value is: r=interest rate, t=number of periods, PV=present value

FVt = PV (1+r)t

What is the future value of $1,000 invested at 6% interest per year after one year?

$1,060

What is the future value of $1,000 invested at 12% interest per year after one year?

$1,120

What is the future value of $1,000 invested at 6% interest per year after six years?

$1,418.52

What is the future value of $1,000 invested at 12% interest per year after six years?

$1,973.82

What is the future value of $1,600 invested at 7% APR compounded monthly for four years?

$2,115.29

You just purchased a parcel of land for $10,000. If you expect a 13% annual rate of return on your investment, how much will you sell the land for in 5 years?

$18,424.35

The formula for present value is: r=discount rate, t=number of periods, FV=future value

PV = FVt/(1+r)t

The present value of a single future sum

decreases as the discount rate increases

What is the future value of $2500 invested at 12% interest after one year compounded quarterly?

$2,813.77

What is the future value of $2500 invested at 12% interest after one year compounded monthly?

$2,817.06

What is the future value of $2500 invested at 12% interest after six and half years compounded quarterly?

$5,391.48

What is the future value of $2500 invested at 12% interest after six and half years compounded monthly?

$5,432.59

You invest $10,000 at a rate of 6% APR compounded monthly. What is the account balance after one year?

$10,616,78

What amount would you have to place in Junior's college fund today so that in 18 years it will be worth $150,000? Assumed that the account earns 6% compounded monthly. Round to the nearest $1.

$51,077

What is the present value of $4,000 to be received in four years discounted at 6% APR compounded semi-annually?

-$3,157.64

At what rate must $400 be compounded annually for it to grow to $1,000 in 10 years?

9.6%

How many years will it take $5,000 to grow into $10,000 if the investment earns 9% per year (nearest year)?

8 years

You invest $1,400 today in an investment that pays interest (and thus "compounds") quarterly. If your account contains $6,000 in 20 years, what annual rate of return have you earned?

7.34%

How many years will it take $10,000 to reach $50,000 if it earns 11% APR compounded semiannually (nearest year)?

15 years

What is the future value six years from now of $1,000 invested at 5% interest compounded annually

$1,340.10

An investment of $20,000 grows into $35,000 over a period of 8 years. What is the APR? Remember, when the compounding period is not given, we assume annual compounding.

7.25%

The present value and the discount rate are _________________ related, everything else equal.

inversely

A $20,000 investment compounds monthly for 120 months and grows into $27,000. What is the APR earned by this investment?

3.00%

What is the present value of $10,000 to be received seven years from now discounted at 4% APR compounded annually?

$7,599.18

How much will you accumulate if you deposit $100 each month for 10 years into an account earning 6.0% APR? Remember: assume that payments occur at the end of each period (ordinary annuity) unless told otherwise, and compounding occurs with the same frequency as payments.

$16,387.93

Calculate the present value of $400 to be received at the beginning of each year for four years if the discount rate is 13%. Remember, the payments will be received at the beginning of each year (annuity due)

$1,344.46

Find the APR on a loan of $82,870 for 15 years that has a payment of $830 every month

8.79%

What is the present value of an annuity of $456 to be received at the end of each year for three years discounted at 10.8% APR?

$1,118.22

An investment provides you with $1,000 after six years and $2,000 after nine years. What is the present value of these cash flows if you require a 6% rate of return (discount the cash flows at that rate)?

$1,888.76

Beatrix plans to retire with $722,530 in the bank. The appropriate rate of return is 11.82%. If Beatrix saves $13,200 every year, how soon can Beatrix retire?

18 years

A two-year investment requires monthly deposits of $90 at the beginning of each month. The deposits earn 6% per year. Calculate the investment's future value.

$2,300.32

A four-year investment requires annual deposits of $300 at the beginning of each year. The deposits earn 7% per year. What is the investment's future value? Remember, the deposits at the beginning of the year (annuity due)

$1,425. 22

If you want to have $3,000,000 at retirement in 42 years, how much money must you put in a retirement savings each month? Assume the account pays 8.4% APR compounded monthly.

$643.39

What is the rate of return on a perpetuity that provides an annual payment of $150 and sells for $2,500?

6%

What is the rate of return on a perpetuity that provides an annual payment of $140 and sells for $4,000?

3.5%

You wish to borrow $25,000 to be repaid in monthly installments of $400 at the end of each month (ordinary annuity) for the next 10 years. The APR is:

14.78%

Fred's Bank will loan you $28,000 for five years to buy a car. The loan must be repaid in equal monthly payments. The annual interest rate on the loan is 7.2 % APR. What is the monthly payment?

$557.08

If you invest $500 every six months at 8% APR, with the first deposit being made six months from now (ordinary annuity), how much would you accumulate at the end of 10 years?

$14,889.04

You just won the lottery, and you will receive $2,500,000 at the end of each year for the next 20 years. While the Lottery Commission will call this a $50,000,000 jackpot, $50,000,000 will NOT be used in solving this problem. What would your lump sum payoff be if you selected the "cash option"? Assume a discount rate of 8%. Round to the nearest $1.

Ordinary = $24,545,369

Annuity Due = $26,508,998

Which of the following accurately relate the present value (PV) and future value (FV), respectively, of ordinary annuities with annuities due?

-PV Ordinary < PV due

-PV Ordinary < FV Due

You have just purchased a share of preferred stock for $40.00. The preferred stock pays an annual dividend of $5.60 per share forever. What is the annual rate of return on your investment?

14%

A perpetuity provides an annual payment of $40 per year forever. If the discount rate (your required rate of return) is 4% per year, then what are you willing to pay for the perpetuity?

$1,000

How much additional interest would a $100,000 investment earn over a five-year period if it earned 7% APR compounded monthly as opposed to earning 7% APR compounded annually?

$1,507

What would you be willing to pay for the following investments if you require a 6% annual rate of return?

"Hare Enterprises" stock, which provides a $10,000 payoff after five years and then a $5,000 payoff after ten years.

$10,264.55

What would you be willing to pay for the following investments if you require a 6% annual rate of return?

"Tortoise Technologies" stock, which provides a $5,000 payoff after five years and then a $10,000 payoff after ten years.

$9,320.24

What would you be willing to pay for the following investments if you require a 6% annual rate of return?

If you paid the respective amount that you calculated for each investment above, what would your expected rate of return have been for each investment? Explain!

6%

You pay more for Hare Enterprises

What is the balance after the first annual payment on a $200,000 loan for 20 years with a 6% interest rate and a payment of $17,436.91?

$194,563.09

Beginning balance + interest - payment = ending balance

$200,000 + (.06 x $200,000) - $17,436.91 = $194.563.09

Consider a 20-year loan for $200,000 with annual payments of interest plus equal principal reduction. What is the first year's payment amount if the interest rate is 4%?

$18,000

Interest for the first year = interest rate x loan amount = .04 x $200,000 - $8,000

The equal principal reduction = loan amount/number of periods = $200,000/20 = $10,000 per year

First year's payment = $8,000 + $10,000 = $18,000

You borrow $100,000 for 10 years. The loan has an APR of 9% with monthly payments. You will make a $20,000 balloon payment at the end of the 10-year term. What is the monthly payment?

$1,163.41

N = 10 years x 12 months = 120 months

I/Y - 9%/12 =.75%

PV = 100,000

PMT = (CPT) -$1,163.41

FV = -$20,000

Prepayment penalties are more common on:

Commercial loans

You borrow $200,000 for 19 years at 6% APR with monthly payments. What is the total interest paid over the life of the loan?

$135,654.76

N = 19 years x 12 months = 228

I/Y = 6%/12 =.5

PV = 200,000

PMT = (CPT) -$1,472.17

FV = 0

Total of payments - beginning balance = (payment among x number of payments - beginning balance) = ($1,472.17 x 228) - $200,000 = $135,654.76

What is the monthly payment on a 30-year fully amortized loan of $400,000 with an interest rate (APR) of 4.50%?

$2,026.74

N = 30 years x 12 months = 360

I/Y = 4.5%/12 = .375%

PV = 400,000

PMT = (CPT) -$2,026.74

FV = 0

Consider an interest-only loan with an interest rate of 6% and monthly payments. What is the monthly payment if the loan amount is $500,000?

$2,500

Payment for an interest only loan = interest rate per period x loan amount

Interest rate per period =6%/12 months =.5%

Monthly payment = .005 x $500,000 = $2,500

Consider a loan for $300,000 with 20 annual payments and an interest rate of 5%. What is the payment amount with a balloon payment of $60,000?

$22,258.22

N = 20 years

I/Y = 5%

PV = $300,000

PMT = (CPT) -$22,258.22

FV = -$60,000

What is the annual payment on a 20-year fully amortized loan of $500,000 with an interest rate of 7%?

$47,196.46

N = 20

I/Y = 7%

PV = $500,000

PMT = (CPT) -$47,196.46

FV = 0

What is the effective annual rate for a 9% APR compounded daily (use a 365-day year)?

9.42%

(1 + .09/365) the the 365th - 1 = (1.000246575) to the 365th -1 = .094162145 = 9.42%

NOM = 9

C/Y = 365

EFF = (CPT) 9.42