Financial Management, 12e (Titman/Keown/Martin)
Time Value of Money-The Basics
5.1 Using Timelines to Visualize Cash Flows
1) Financial managers use the time value of money to
Answer: D
2) The time value of money is created by
Answer: A
3) Which of the following statements is FALSE?
Answer: A
4) An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year. Her cash flow at time period 0 is
Answer: B
5) An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year. Her cash at time period 10 is
Answer: D
6) Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12 years?
Answer: C
7) Money has a greater time value time value
Answer: A
8) A diagram for visualizing future cash flows is known as
Answer: D
9) On timeline, the present is represented as
Answer: B
10) A timeline typically represents cash flows as an exponential growth curve.
Answer: FALSE
11) A timeline is a linear representation of the timing of cash flows.
Answer: TRUE
12) A timeline represents the value of a sum invested now at the end of a series of time periods.
Answer: FALSE
13) The end of one time period and the beginning of the next occupy the same place on a timeline.
Answer: TRUE
14) Timelines are always expressed in years.
Answer: FALSE
15) Timelines used to visualize cash flows normally represent present values on the left and future values on the right.
Answer: TRUE
16) The last amount shown on a timeline represents the future value of all amounts invested up to that point.
Answer: FALSE
17) The first amount on a timeline represent the present value of all the future amounts at a given interest rate.
Answer: TRUE
18) Sketch a timeline that represents an immediate investment of $20,000 with $25,000 to be received at the end of 4 years.
Answer:
_0__________1__________2_________3__________4
-$20,000 $25,000
5.2 Compounding and Future Value
1) Which of the following is the formula for compound value?
Answer: A
2) At 8% compounded annually, how long will it take $750 to double?
Answer: C
3) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
Answer: A
4) An increase in future value can be caused by an increase in the
Answer: D
5) A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1.
Answer: B
6) You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?
Answer: B
7) If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?
Answer: C
8) If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)?
Answer: B
9) If you put $600 in a savings account that yields an 8% rate of interest compounded weekly, what will the investment be worth in 37 weeks (round to the nearest dollar)?
Answer: B
10) Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?
Answer: D
11) What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?
Answer: A
12) Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?
Answer: C
13) If you want to have $10,000 in 10 years, which of the following formulas represents how much money you must put in a savings account today? Assume that the savings account pays 6% and it is compounded monthly.
Answer: B
14) Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $4,500. Today, the average cost is $29,000. What is the growth rate in tuition cost over this 20-year period? Round off to the nearest 0.1%.
Answer: C
15) If you want to have $1,700 in seven years, how much money must you put in a savings account today? Assume that the savings account pays 6% and it is compounded quarterly (round to the nearest $10).
Answer: A
16) If you want to have $90 in four years, how much money must you put in a savings account today? Assume that the savings account pays 8.5% and it is compounded monthly (round to the nearest $1).
Answer: A
17) How much money must be put into a bank account yielding 5.5% (compounded annually) in order to have $250 at the end of five years (round to nearest $1)?
Answer: B
18) If you want to have $1,200 in 27 months, how much money must you put in a savings account today? Assume that the savings account pays 14% and it is compounded monthly (round to the nearest $10).
Answer: C
Use the following information to answer the following question(s).
A Max, Inc. deposited $2,000 in a bank account that pays 12% interest annually.
19) What will the dollar amount be in four years, assuming that interest is paid annually?
Answer: D
20) What will the dollar amount be if the interest is compounded semiannually for those four years?
Answer: B
21) How many periods would it take for the deposit to grow to $6,798 if the interest is compounded semiannually?
Answer: C
22) You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?
Answer: C
23) You deposit $5,000 today in an account drawing 12% compounded quarterly. How much will you have in the account at the end of 2 1/2 years?
Answer: D
24) Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years. If this city's population continues to grow at 4% per year, what will the population be 10 years from now?
Answer: B
25) How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually?
Answer: D
26) When using a financial calculator, which of the following is the correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 3% ?
Answer: B
27) The future value of a single sum:
Answer: D
28) When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?
Answer: C
29) When using EXCEL to find the future value of $2,000 invested in an account that would earn interest of 7.5% for 18 years, the correct entry would be
Answer: D
30) When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?
Answer: C
31) If you purchased a share of Mico.com stock on March 1, 1993 for $45 and you sold the stock at $168 on February 28, 1998, what was your annual rate of return on the stock?
Answer: D
32) At 8%, compounded annually, how long will it take $750 to double?
Answer: A
33) The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest declines.
Answer: FALSE
34) If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, during which we receive 4% interest each period.
Answer: TRUE
35) Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation.
Answer: TRUE
36) When performing time value of money computations with a financial calculator or EXCEL, PV and FV must have opposite signs.
Answer: TRUE
37) Assuming equal annual rates, the more frequent the compounding periods in a year, the higher the future value.
Answer: TRUE
38) Briefly discuss how non-annual compounding (more than one compounding period per year) is preferable to annual compounding if you are an investor.
Answer: Non-annual compounding is preferable to annual compounding because with non-annual compounding, interest is compounded more frequently within a year period. This means that more interest on interest would be generated on a given investment.
39) If you deposit $1,000 each year in a savings account earning 4%, compounded annually, how much will you have in 10 years?
Answer: FV[10] = $1,000(12.006) = $12,006
40) Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years. What annual rate of interest will you be paying?
Answer: FVIF[? %, 5 yr] $3,000 = $5,775
FVIF[? %, 5 yr] = $1.925
i = 14%
41) Earnings per share for XYZ, Inc. grew constantly from $7.99 in 1974 to $12.68 in 1980. What was the compound annual growth rate in earnings-per-share over the period?
Answer: $12.68 = $7.99 FVIF[? %, 6 yr]
1.587 = FVIF[? %, 6 yr]
g = 8%
42) If you invest $450 today and it increases to $6,185 at the end of 20 years, what rate of return have you earned?
Answer: $6,185 = $450 FVIF[? %, 20 yr]
13.743 = FVIF[? %, 20 yr]
i = 14%
5.3 Discounting and Present Value
1) The present value of a single future sum
Answer: C
2) Assuming two investments have equal lives, a high discount rate tends to favor
Answer: A
3) High discount rates favor
Answer: D
4) An increase in ________ will decrease present value.
Answer: D
5) What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
Answer: C
6) What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.
Answer: A
7) Three years from now, Barbara Waters will purchase a laptop computer that will cost $2,250. Assume that Barbara can earn 6.25% (compounded monthly) on her money. How much should she set aside today for the purchase? Round off to the nearest $1.
Answer: C
8) If you want to have $875 in 32 months, how much money must you put in a savings account today? Assume that the savings account pays 16% and it is compounded monthly (round to the nearest $10).
Answer: B
9) Which of the following is the formula for present value?
Answer: C
10) All else constant, the present value of an investment will increase if
Answer: D
11) To find the present value of $1000 discounted for 20 years at 8%, when using a financial calculator, the correct entry is
Answer: D
12) California Investors recently advertised the following claim: Invest your money with us at 21%, compounded annually, and we guarantee to double your money sooner than you imagine. Ignoring taxes, how long would it take to double your money at a nominal rate of 21%, compounded annually? Round off to the nearest year.
Answer: B
13) Using a financial calculator, which of the following would be a correct way to find how long it would take for a sum to triple at a rate of 3%?
Answer: A
14) Stephen's grandmother deposited $100 in an investment account for him when he was born, 25 years ago. The account is now worth $1,500. What was the average rate of return on the account?
Answer: D
15) Stephen's grandmother deposited $100 in an investment account for him when he was born, 25 years ago. The account is now worth $1,500. What was the average rate of return on the account? Which of the following is a correct way to solve this problem using EXCEL?
Answer: C
16) The present value of $400 to be received at the end of 10 years, if the discount rate is 5%, is
Answer: D
17) The present value of $1,000 to be received at the end of five years, if the discount rate is 10%, is
Answer: A
18) What is the present value of an investment that pays $400 at the end of three years and $700 at the end of 10 years if the discount rate is 5%?
Answer: C
19) The present value of a single sum
Answer: A
20) As the discount rate increases, the present value of future cash flows increases.
Answer: FALSE
21) As the compound interest rate increases, the present value of future cash flows decreases.
Answer: TRUE
22) The present value of a future sum of money increases as the number of years before the payment is received increases.
Answer: FALSE
23) When calculating either discount rates or the number of periods using a financial calculator, the PV and FV must have opposite signs.
Answer: TRUE
5.4 Making Interest Rates Comparable
1) Which of the following provides the greatest annual interest?
Answer: A
2) The effective annual rate increases when the ________ increases.
Answer: D
3) What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)?
Answer: D
4) You are considering two investments. Investment A yields 10% compounded quarterly. Investment B yields r% compounded semiannually. Both investments have equal annual yields. Find r.
Answer: D
5) The annual percentage rate (APR) is calculated as which of the following?
Answer: A
6) For any number of compounding periods per year greater than 1, EAR will always be greater than the APR.
Answer: TRUE
7) As the number of compounding periods per year increase, the annual percentage rate of interest increases.
Answer: FALSE
8) A monthly credit card interest rate of 1.5% is equal to and effective annual rate of 19.56%
Answer: TRUE
9) The annual percentage rate on two different investments will equal the effective annual rate on the two investments only if interest on both investments is compounded annually.
Answer: TRUE
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