Fundamentals Of Corporate Finance 9th Canadian Edition By Ross Test Bank

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Fundamentals Of Corporate Finance 9th Canadian Edition By Ross Test Bank

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WITH ANSWERS
Fundamentals Of Corporate Finance 9th Canadian Edition By Ross Test Bank

CHAPTER 5

Exam

 

Name___________________________________

 

 

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.  
1) You collect model airplanes. One particular model is currently valued at $275. If this 1)

model increases in value by 5% annually, it will be worth ________ six years from now and ________ twelve years from now.

  1. A) $368.01; $461.34
  2. B) $368.53; $442.89
  3. C) $368.53; $493.86
  4. D) $368.01; $442.89
  5. E) $368.53; $467.08

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

2) The Smith Co. has $450,000 to invest at 5.5% interest. How much more money will they 2) have if they invest these funds for eight years instead of five years?

 

  1. $68,851.36

 

  1. $78,408.62

 

  1. $102,476.93

 

  1. $62,948.21

 

  1. $74,250.00

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

3) You deposit $500,000 in a higher risk investment. Three years later, you receive 3)
$711,900 and withdraw your funds. Given this information calculate the balance at the  
end of year two.        
A) $632,804 B) $636,549 C) $665,202 D) $687,702 E) $693,303  
Answer: A          
Explanation: A)        
  B)        
  C)        
  D)        
  E)        

 

 

 

 

 

 

 

1

 

  • Jennifer invested $2,000 in an account that pays 3% simple interest. How much more could she have earned over a six-year period if the interest had compounded annually?
  1. A) $28.10 B) $33.33 C) $29.18                    D) $34.67                    E) $31.50

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • What is the future value of $3,497 invested for 15 years at 7.5% compounded annually?

 

  1. $15,267.21

 

  1. $14,911.08

 

  1. $14,289.16

 

  1. $10,347.19

 

  1. $7,431.13

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You would like to give your daughter $40,000 towards her college education thirteen years from now. How much money must you set aside today for this purpose if you can earn 6.3% on your funds?

 

  1. $17,989.28

 

  1. $18,213.69

 

  1. $18,077.05

 

  1. $18,395.00

 

  1. $17,750.00

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

4)

 

 

 

 

 

 

 

 

 

 

 

 

5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2

 

7) All else being the same, which of the following statements is correct? 7)
  1. Present values increase the further away in time the future value.

 

  1. Present values increase as the discount rate increases I only.

 

  1. Present values are always smaller than future values when r is negative and t positive.

 

  1. Present values decrease as the discount rate decreases.

 

  1. Present values are always smaller than future values when both r and t are positive.

 

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Jessica invests $3,000 in an account that pays 5% simple interest. How much more could she have earned over a 7-year period if the interest had compounded annually?
  1. A) $221.30 B) $122.20 C) $171.30                 D) $129.20                 E) $147.80

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • The greater the number of years, the:

 

  1. Smaller the future value factor.

 

  1. Greater the compounding effect.

 

  1. Larger the present value factor.

 

  1. Larger the present value of a single sum.

 

  1. Smaller the future value of a single sum.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

 

 

 

 

 

 

 

8)

 

 

 

 

 

 

 

 

 

 

 

 

9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

  • Twelve years ago, Jake invested $2,000. Six years ago, Tami invested $4,000. Today, both Jakes and Tamis investments are each worth $9,700. Assume that both Jake and Tami continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments?

 

  1. Tami has earned an average annual interest rate of 15.91%.

 

  1. Jake has earned a higher rate of return than Tami.

 

  1. Three years from today, Jakes investment will be worth more than Tamis.

 

  1. One year ago, Tamis investment was worth more than Jakes.

 

  1. Jake has earned an average annual interest rate of 15.47%.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • Which one of the following interest rates will produce the largest value at the end of ten years given a lump sum investment of $5,000?
    1. 0%, compounded semi-annually

 

  1. 5%, compounded annually

 

  1. 0%, simple interest

 

  1. 0%, compounded annually

 

  1. 5%, simple interest

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • Frank invests $2,500 in an account that pays 6% simple interest. How much money will he have at the end of four years?
  1. A) $3,163 B) $2,650 C) $3,100                    D) $10,600                 E) $3,156

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4

 

  • All County Insurance, Inc. promises to pay Ted $1 million on his 65th birthday in return for a one-time payment of $75,000 today. (Ted just turned 25) At what rate of interest would Ted be indifferent between accepting the companys offer and investing the premium on his own?
  1. A) 1% B) 6.7% C) 7.2%                       D) 5.5%                        E) 2.4%

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • When you retire forty years from now, you want to have $1 million. You think you can earn an average of 8.5% on your money. To meet this goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today. How much more will you have to deposit as a lump sum if you wait for five years before making the deposit?

 

  1. $18,677.78

 

  1. $21,036.83

 

  1. $19,272.81

 

  1. $18,001.06

 

  1. $18,998.03

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • The future value factor will decrease:

 

  1. The lower the present value factor.

 

  1. The higher the future value.

 

  1. The higher the present value.

 

  1. The longer the period of time.

 

  1. The lower the interest rate.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

13)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15)

 

 

 

 

 

 

 

 

 

 

 

5

 

  • One year ago, you invested $2,500. Today it is worth $2,789.50. What rate of interest did you earn?
  1. A) 89% B) 11.58% C) 10.67%                  D) 8.67%                     E) 11.42%

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • When you retire thirty years from now, you want to have $750,000. You think you can earn an average of 9% on your money. To meet this goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today. How much more will you have to deposit as a lump sum if you wait for five years before making the deposit?

 

  1. $30,447.52

 

  1. $29,414.14

 

  1. $28,788.03

 

  1. $38,278.27

 

  1. $36,118.09

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • Theresa wants to save $10,000 so that she can surprise her husband with a vacation six years from now. She can earn 7% on her savings. How much more will she have to deposit if she waits one more year before investing versus if she deposits one lump sum today?
  1. A) $466.44 B) $471.08 C) $471.54                 D) $470.23                 E) $469.15

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

16)

 

 

 

 

 

 

 

 

 

 

 

 

17)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

  • Sampson, Inc. invested $1.325 million in a project that earned an 8.25% rate of return. Sampson sold their investment for $3,713,459. How much sooner could Sampson have sold the company if they only wanted $3 million from the project?

 

  1. 33 years

 

  1. 69 years

 

  1. 17 years

 

  1. 67 years

 

  1. 31 years

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • The rate used to find the present value of a future payment is called the:

 

  1. Discount rate.

 

  1. Simple rate.

 

  1. Future value rate.

 

  1. Loan rate.

 

  1. Compound rate.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • At a 3% rate of interest, you will quadruple your money in approximately ________

 

years.

 

  1. A) 24 B) 47 C) 6                                D) 12                             E) 3

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

19)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7

 

  • You invest $1,000 in an account paying 5% simple interest. You do not add nor withdraw any funds from this account. Every year, your account balance will:
    1. Increase at an increasing rate.

 

  1. Remain constant.

 

  1. Increase at a decreasing rate.

 

  1. Increase at a constant rate.

 

  1. Increase by a constant amount.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • You wish to have $200,000 at the end of twenty years. In the last five years, you withdraw $1,000 annually at a rate of 3.8% compounded quarterly. During the middle ten years, you contribute $500 monthly at a rate of 2.8% compounded semi-annually. Given this information, determine the initial deposit that has to be made at the start of the first five years at a rate of 4% compounded monthly.

 

  1. $12,056.65

 

  1. $10,056.65

 

  1. $11,056.65

 

  1. $9,056.65

 

  1. $13,056.65

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Katie is going to receive $1,000 three years from now. Wilt is going to receive $1,000 five years from now. Which one of the following statements is correct if both Katie and Wilt apply a 5% discount rate to these amounts?

 

  1. The present value of Katie and Wilts money is equal.

 

  1. The value of Wilts money will be greater than the value of Katies money six years from now.

 

  1. In todays dollars, Wilts money is worth more than Katies.

 

  1. Katies money is worth more than Wilts money today.

 

  1. In five years, the value of Katies money will be less than the value of Wilts money.

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

22)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

24)

 

 

 

 

8

 

  • Betty invests $500 in an account that pays 3% simple interest. How much money will Betty have at the end of ten years?
  1. A) $633.33 B) $675.00 C) $671.96                 D) $650.00                 E) $630.00

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Sun Lee has $500 today. Which one of the following statements is correct if she invests this money at a positive rate of interest for five years?
    1. If Sun Lee can earn 7%, she will have to wait about six years to have $1,000 total.

 

  1. At 10% interest Sun Lee should expect to have $1,000 in her account at the end of the five years.

 

  1. The higher the interest rate she earns, the less money she will have in the future.

 

  1. The higher the interest rate, the longer she has to wait for her money to grow to $1,000 in value.

 

  1. At the end of the five years Sun Lee will have less money if she invests at 5% rather than at 7%.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • You have $500 in an account which pays 5% compound interest. How much additional interest would you earn over four years if you moved the money to an account earning 6%?
  1. A) $21.89 B) $29.94 C) $24.93                    D) $23.49                    E) $25.88

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

25)

 

 

 

 

 

 

 

 

 

 

 

 

26)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

  • When you retire 36 years from now, you want to have $2 million. You think you can earn an average of 11.5% on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 3 years from today. How much more will you have to deposit as a lump sum if you wait for 3 years before making the deposit?

 

  1. $17,021.12

 

  1. $19,407.78

 

  1. $16,208.11

 

  1. $15,677.78

 

  1. $15,344.14

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Interest earned on the reinvestment of previous interest payments is called ________.

 

  1. Interest on interest.

 

  1. Free interest.

 

  1. Compound interest.

 

  1. Annual interest.

 

  1. Simple interest.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • The discounted value of money is called the:

 

  1. Simple value.

 

  1. Complex value.

 

  1. Future value.

 

  1. Present value.

 

  1. Compound value.

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

28)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

29)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30)

 

 

 

 

 

 

 

 

 

 

10

 

  • Andy promises Opie that he will give him $5,000 upon his graduation from college at Mayberry U. How much must Andy invest today to make good on his promise, if Opie is expected to graduate in 12 years and Andy can earn 5% on his money?

 

  1. $3,012.88

 

  1. $2,784.19

 

  1. $2,135.32

 

  1. $8,979.28

 

  1. $2,881.11

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Koji invested $3,300 at 7.75% interest. After a period of time he withdrew $9,383.31. How long did Koji have his money invested?
  1. A) 13 years B) 14 years C) 15 years                 D) 16 years                 E) 17 years

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Jeff invests $3,000 in an account that pays 7% simple interest. How much more could he have earned over a 20-year period if the interest had compounded annually?
    1. $4,087.18

 

  1. $4,409.05

 

  1. $3,778.54

 

  1. $3,212.12

 

  1. $2,840.00

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

31)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32)

 

 

 

 

 

 

 

 

 

 

 

 

33)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

11

 

  • You want to have $10,000 saved ten years from now. How much less do you have to deposit today to reach this goal if you can earn 6% rather than 5% on your savings?
    1. $615.48

 

  1. $1,046.22

 

  1. $928.73

 

  1. $555.18

 

  1. $609.81

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You collect old model trains. One particular model increases in value at a rate of 6.5% per year. Today, the model is worth $1,670. How much additional money can you make if you wait 4 years to sell the model rather than selling it 2 years from now?
  1. A) $280.15 B) $208.04 C) $254.24                 D) $241.79                 E) $196.67

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • Lisa deposited $500 in a savings account this morning. The account pays 2.5% simple interest. If Lisa leaves this money in the account for five years, how much total interest will she earn?
  1. A) $12.50 B) $62.50 C) $67.25                    D) $10.75                    E) $53.75

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • At a 6% rate of interest you will double your money in approximately ________ years.

 

  1. A) 24 B) 12 C) 6                                D) 48                             E) 3

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

34)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35)

 

 

 

 

 

 

 

 

 

 

 

 

 

36)

 

 

 

 

 

 

 

 

 

 

 

 

 

37)

 

 

 

 

 

 

 

 

12

 

  • You deposit $1,000 in a retirement account today at 8.5% interest. How much more money will you have if you leave the money invested for 40 years rather than 35 years?
    1. $7,714.91

 

  1. $7,846.52

 

  1. $7,839.73

 

  1. $8,753.37

 

  1. $7,799.08

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • New Metals, Inc. is planning on expanding their operations when the economy strengthens in a few years. At that time they will need to purchase additional equipment. Four years ago, they set aside $300,000 in a special account for this purpose. Today, that account is worth $383,048.98. What rate of interest is New Metals earning on this money?
  1. A) 35% B) 5.92% C) 6.30%                     D) 6.26%                     E) 5.87%

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • Neal wants to borrow $2,500 and has received the offers from his local banks. Which offer should Neal accept if he wants to repay the loan in one single payment two years from now?

 

  1. Bank A, which offers a simple rate of 4%.

 

  1. Bank B, which offers a simple rate of 5%.

 

  1. Bank C, which offers a rate of 4% compounded annually.

 

  1. Bank D, which offers a rate of 5% compounded annually.

 

  1. Bank E, which offers a rate of 5% compounded monthly.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

38)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

39)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40)

 

 

 

 

 

 

 

 

 

 

 

13

 

  • Compound interest means that you earn:

 

  1. The same amount of interest each year.

 

  1. Interest only on the initial amount invested.

 

  1. Interest on the initial principal only.

 

  1. A decreasing amount of interest each year.

 

  1. Interest on both the principal and prior reinvested interest.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • An investor deposited $10,500 in an account. At the end of year four, the account had accumulated $5,728.88. Over the first four years, the account earned ________

 

compounded annually.

 

  1. A) 1% B) 11.5% C) 15.6%                     D) 12.8%                     E) 14.6%

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • The formula for a present value calculation using Excel is:

 

  1. PV (rate, nper, pmt, fv).

 

  1. PV (nper, pmt, fv).

 

  1. PV (rate, nper, pmt).

 

  1. PV (rate, pmt, pv, fv).

 

  1. PV (rate, nper, pmt, pv).

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

41)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

42)

 

 

 

 

 

 

 

 

 

 

 

 

 

43)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14

 

  • An account was opened with $1,000 three years ago. Today, the account balance is

 

$1,157.63. If the account earns simple interest, how long will it take until the account has earned a total of $225 in interest?

 

  1. Less than one more year.

 

  1. Between one and two more years.

 

  1. Between two and three more years.

 

  1. Between three and four more years.

 

  1. Between four and five more years.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Robin invested $10,000 in an account that pays 5% simple interest. How much more could she have earned over a 40-year period if the interest had compounded annually?
    1. $50,399.89

 

  1. $48,414.14

 

  1. $38,207.16

 

  1. $38,414.14

 

  1. $40,399.89

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • You wish to have $400,000 at the end of twenty-five years. In the last ten years, you contribute $1,000 semi-annually at a rate of 5.8% compounded monthly. During the middle ten years, you withdraw $750 quarterly at a rate of 4.5% compounded annually. Given this information, determine the initial deposit that has to be made at the start of the first five years at a rate of 4% compounded monthly.

 

  1. $135,150.00

 

  1. $125,150.00

 

  1. $130,150.00

 

  1. $115,150.00

 

  1. $120,150.00

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

44)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46)

 

 

 

 

 

15

 

  • Alpha, Inc. is saving money to build a new factory. Six years ago they set aside $250,000 for this purpose. Today, that account is worth $306,958. What rate of interest is Alpha earning on this money?
  1. A) 55% B) 3.43% C) 3.48%                     D) 3.52%                     E) 3.45%

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • Last year, you deposited $25,000 into a retirement savings account at a fixed rate of

 

7.5%. Today, you could earn a fixed rate of 8% on a similar type account. However, your rate is fixed and cannot be adjusted. How much less could you have deposited last year if you could have earned a fixed rate of 8% and still have the same amount as you currently will when you retire 40 years from today?

 

  1. $1,666.67 less

 

  1. $3,628.09 less

 

  1. $2,408.28 less

 

  1. $1,218.46 less

 

  1. $4,331.30 less

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • You would like to invest some money today such that your investment will be worth $100,000 fifteen years from now. Your broker gives you two options. First, you can invest at a guaranteed annual rate of 4%. Or, you can invest in stocks and hopefully earn an average of 7% per year. How much more will you have to invest today if you opt for the fixed rate rather than the stocks?

 

  1. $18,623.18

 

  1. $19,281.85

 

  1. $18,419.02

 

  1. $18,145.45

 

  1. $18,904.21

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

47)

 

 

 

 

 

 

 

 

 

 

 

 

 

48)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49)

 

 

 

 

 

 

 

16

 

  • A deposit of $10,000 increased to $12,500 in 5 years. Determine the annual rate of interest used and calculate the balance at the end of year four.
  1. A) $15,954 B) $11,954 C) $12,254                 D) $14,254                 E) $13,954

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $6,000 to invest today and can earn 10% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?
  1. A) $12,000 B) $11,948 C) $13,250                 D) $14,520                 E) $7,260

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • The amount an investment is worth after one or more periods of time is the ________.

 

  1. Principal value.

 

  1. Compound interest rate.

 

  1. Present value.

 

  1. Simple interest rate.

 

  1. Future value.

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Your older sister deposited $5,000 today at 8% interest for five years. You would like to have just as much money at the end of the next five years as your sister. However, you can only earn 6% interest. How much more money must you deposit today than your sister if you are to have the same amount at the end of five years?
  1. A) $201.80 B) $489.84 C) $399.05                 D) $367.32                 E) $423.81

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

50)

 

 

 

 

 

 

 

 

 

 

 

 

51)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53)

 

 

 

 

 

17

 

  • The present value factor will decrease:

 

  1. The slower the rate of growth.

 

  1. The longer the period of time.

 

  1. The lower the interest rate.

 

  1. The higher the present value.

 

  1. The higher the future value.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • Many economists view a 3% annual inflation rate as acceptable. Assuming a 3% annual increase in the price of automobiles, how much will a new Suburban cost you five years from now, if todays price is $48,000?
  1. A) $55,200 B) $54,024 C) $48,000                 D) $55,645                 E) $41,405

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Omar has an investment valued at $12,345 today. He made a one-time investment at

 

6.5% four years ago. Leon has an investment that is also valued at $12,345 today. Leon invested four years ago at 7.5%. Omar originally invested ________ and Leon invested

 

________.

 

  1. $9,633.33; $9,304.06

 

  1. $9,652.18; $9,389.00

 

  1. $9,568.24; $9,199.16

 

  1. $9,596.05; $9,243.94

 

  1. $9,608.14; $9,267.67

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

54)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

55)

 

 

 

 

 

 

 

 

 

 

 

 

 

56)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18

 

  • As the discount rate increases, the present value of $500 to be received six years from now:
    1. Remains constant.

 

  1. Becomes negative.

 

 

  1. Also increases.

 

  1. Will vary but the direction of the change is unknown.

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • Which one of the following statements is correct if you invest $100 in an account at a simple interest rate of 4% for five years?
    1. The amount of interest you earn in year five will equal the interest you earn in year one, whether or not you reinvest your earnings.
    2. For every $1 you earn in interest in the first year, you will earn ($1.04) interest in the second year.
    3. You will earn more interest than if you invested in an account which compounded the interest.
    4. The total interest you will earn over five years will be equal to $100 x (1 + .04)
    5. You will earn interest on interest for four of the five years.

 

Answer: A

Explanation:      A)

B)

C)

D)

E)

 

  • An account paying annual compound interest was opened with $1,000 ten years ago. Today, the account balance is $1,500. If the same interest rate is offered on an account paying simple interest, how much income would be earned each year over the same time period?
  1. A) $50.00 B) $36.97 C) $40.75                    D) $40.41                    E) $41.38

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

57)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

59)

 

 

 

 

 

 

 

 

 

 

19

 

  • Thirty years ago, your father invested $6,000. Today that investment is worth

 

$67,270.98. What is the average rate of return your father earned on this investment?

 

  1. A) 44% B) 10.23% C) 11.67%                  D) 10.34%                  E) 8.39%

 

Answer: E

Explanation:      A)

B)

C)

D)

E)

 

  • Calculating the present value of a future cash flow to determine its value today is called:

 

  1. Present value compounding.

 

  1. Discounted cash flow valuation.

 

  1. The discount rate.

 

  1. Future value compounding.

 

  1. Timing the cash flow.

 

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • The future value interest factor is calculated as:
  1. A) (1 + rt) B) (1 + r)t C) (1 + r)(2)               D) 1 + r t                   E) (1 + r)(t)

Answer: B

Explanation:      A)

B)

C)

D)

E)

 

  • You own a stamp collection that is currently valued at $24,500. If the value increases by 5.5% annually, how much will the collection be worth when you retire 40 years from now?

 

  1. $204,981.16

 

  1. $205,155.45

 

  1. $208,576.07

 

  1. $206,666.67

 

  1. $204,113.07

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

60)

 

 

 

 

 

 

 

 

 

 

 

 

61)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

62)

 

 

 

 

 

 

 

 

 

 

 

63)

 

 

 

 

 

20

 

  • Alpo, Inc. invested $500,000 to help fund a company expansion project scheduled for eight years from now. How much additional money will they have eight years from now if they can earn 9% rather than 7% on this money?

 

  1. $86,991.91

 

  1. $58,829.69

 

  1. $118,009.42

 

  1. $137,188.23

 

  1. $126,745.19

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Today Richard is investing $1,000 at 5% interest for five years. One year ago, Richard invested $1,000 at 6.25% for six years. How much money will Richard have saved in total five years from now if both investments compound interest annually?

 

  1. $2,678.81

 

  1. $2,543.77

 

  1. $2,630.36

 

  1. $2,714.99

 

  1. $2,641.98

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • Lakeside Inc. invested $735,000 at an 11.25% rate of return. The company sold their investment for $1,067,425. How much longer would Lakeside have had to wait if they had wanted to sell their investment for $1.25 million?

 

  1. .98 year

 

  1. 31 years

 

  1. 98 years

 

  1. 48 years

 

  1. 50 years

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

64)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

65)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

66)

 

 

 

 

 

 

 

21

 

  • How much would you have to invest today at 8% compounded annually to have $25,000 available for the purchase of a car four years from now?
    1. $19,147.25

 

  1. $21,370.10

 

  1. $22,149.57

 

  1. $18,375.75

 

  1. $18,267.26

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • As long as the interest rate is greater than zero, the present value of a single sum will always:
    1. Increase as the number of periods increases.

 

  1. Decrease as the period of time decreases.

 

  1. Increase as the interest rate increases.

 

  1. Be less than the future value.

 

  1. Equal the future value if the time period is one year.

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • What is the present value of $2,800 to be received three years from now if the discount rate is 9.5%?
    1. $2,361.48

 

  1. $3,676.21

 

  1. $2,734.54

 

  1. $2,132.63

 

  1. $2,114.48

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

67)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

68)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69)

 

 

 

 

 

 

 

 

 

 

 

22

 

  • Chia Burgers began operations by opening 115 restaurants in Western Canada at the end of its first year of operations. By the end of year 2, an additional 5 restaurants were opened. By the end of year 3, there were 130 restaurants operational. At the end of year 5, there were 138 total restaurants.

 

Between the end of year 2 and the end of year 3, the number of eating establishments grew at a rate of ________ compounded annually.

  1. A) 2% B) 4.7% C) 9.3%                       D) 8.3%                        E) 5.6%

 

Answer: D

Explanation:      A)

B)

C)

D)

E)

 

  • You just received $278,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 38 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 9.5% rather than just 9.0%?

 

  1. $794,014

 

  1. $2,033,333

 

  1. $1,396,036

 

  1. $1,818,342

 

  1. $1,611,408

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

 

  • You just won the lottery and want to put some money away for your childs college education. College will cost $65,000 in 18 years. You can earn 8% compounded annually. How much do you need to invest today?

 

  1. $11,763.07

 

  1. $13,690.82

 

  1. $16,266.19

 

  1. $15,258.17

 

  1. $9,828.18

 

Answer: C

Explanation:      A)

B)

C)

D)

E)

70)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

71)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72)

 

 

 

 

 

23

 

  • Chia Burgers began operations by opening 115 restaurants in Western Canada at the end of its first year of operations. By the end of year 2, an additional 5 restaurants were opened. By the end of year 3, there were 130 restaurants operational. At the end of year 5, there were 138 total restaurants.

 

If the number of eating establishments is expected to grow in year 6 at the same rate as the percentage increase in year 5, how many new eating establishments will be added in year 6?

  1. A) 5 B) 6 C) 7                      &nbs

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