FIN Exam 2 Test Bank

Collection of Canvas Questions

An investor expects to save $550 per year and earn an average annual return of 6.1 percent. How much will her savings be worth 44 years from now?

$113,026

Assume a stated rate of interest of 8 percent per year. Which form of compounding will produce the highest effective rate of interest?

Continuous compounding

The net present value of an investment is best defined as the

present value of the investment's future cash flows, minus the investment's cost.

A project is expected to provide a cash flow of $18,600 next year with annual increases of 3.5 percent for 15 years. After that, the project will be worthless. What is the present value of this project at a discount rate of 17 percent, compounded annually?

~$115,871.11

The future value of an annuity due is computed as

C {[(1 + r)^t − 1] / r} (1 + r)

An investor invested $60,000 in exchange for payments of $2,500 per year forever. What rate of return is she earning?

4.17%

Investor X will receive $200 on the first of each month. Investor Y will receive $200 on the last day of each month. Both X and Y will receive payments for 30 years. The discount rate is 9 percent, compounded monthly. What is the difference in the present value of these two sets of payments?

~$186.43

A firm purchased a piece of property for $437,500. It paid a down payment of 20 percent in cash and financed the balance. The loan terms require monthly payments for 20 years at an annual percentage rate of 7 percent, compounded monthly. What is the amount of each mortgage payment?

$2,713.55

A firm invested $14,500 in a project. At the end of 23 years, the company sold the project for $52,925. What annual rate of return did the firm earn on this project?

5.79%

You are retiring today. You have a total of $387,419 in your retirement savings and have the funds invested at a guaranteed 3.68 percent, compounded monthly. You want to withdraw $1,500 at the beginning of every month, starting today. You also want the withdrawals to stop when your account balance declines to $100,000. For how many years can you make withdrawals?

36.22 years (HARD)

A preferred stock pays an annual dividend of $4.95 per share. How much should you pay to purchase one share if you require a rate of return of 12 percent?

$41.25

Your credit card company quotes you a rate of 17.9 percent, compounded daily. What is the actual rate of interest you are paying? Assume a 365-day year.

19.60%

A project is expected to produce cash flows of $40,000, $46,000, and $68,000 over the next three years, respectively. After three years, the project will be discontinued. What is this project worth today at a discount rate of 8.5 percent?

$129,179

A firm borrowed $98,000 for five years at an interest rate of 6.7 percent, compounded annually. The loan requires the payment of the annual interest plus $19,600 of principal each year. What is the amount of the total loan payment in Year 3?

$23,539.60

Which one of the following cash flow streams would have the greatest present value assuming each has a Year 0 cash flow of zero and a Year 1 cash flow of $100? Assume all experience the same interest rate, compounded annually. Also assume any growth rate is positive.

Growing perpetuity