1、4-1Chapter Four Allocating Resources Over TimeThis chapter contains 46 multiple-choice questions, 18 short problems and 9 longer problems.Multiple Choice1. _ is the process of going from present value to future value, whereas _ is finding the present value of some future amount.(a) Discounting; comp
2、ounding(b) Compounding; annualizing(c) Compounding; discounting(d) Discounting; leasingAnswer: (c)2. _ refers to the interest rate at which money received before the end of the planning horizon can be reinvested.(a) Internal rate(b) Reinvestment rate(c) Cost of equity(d) Compound interestAnswer: (b)
3、3. The difference between an immediate annuity and an ordinary annuity is _.(a) the number of periods(b) the amount of the payments(c) the interest rate (d) the timing of the paymentsAnswer: (d)4-24. The preferred stock of Tavistock Realty offers a cash dividend of $2.28 per year and it is selling a
4、t a price of $110 per share. What is the yield of Tavistock Realty preferred stock?(a) 2.07%(b) 2.12%(c) 2.28%(d) 48.25%Answer: (a)5. Consider the situation where you have won a $10 million lottery to be received in 25 annual equal payments of $400,000. What will happen to the present value of these
5、 winnings if the interest rate increases during the next 25 years?(a) it will not change(b) it will be worth more(c) it will be worth less(d) it cannot be determinedAnswer: (c) 6. What is the effective annual rate on a bank account that has APR of 8 percent with interest compounded quarterly?(a) 6.1
6、2%(b) 8.24%(c) 8.48%(d) 17.17%Answer: (b)7. You take out a loan with an APR of 10% with monthly compounding. What is the effective annual rate on your loan?(a) 23.87%(b) 21.6%(c) 19.56%(d) 18%Answer: (a)4-38. The CFO of CyberHelp Inc. has $250,000 in cash today that he wants to invest. How much will
7、 this investment be worth in four years if the current interest rate is 8%?(a) $270,000(b) $330,000(c) $340,125(d) $342,150Answer: (c)9. If you purchase a $12,000 certificate of deposit today with an APR of 14%, with quarterly compounding, what will the CD be worth when it matures in 5 years?(a) $20
8、,846.99(b) $20,865.60(c) $23,104.97(d) $23,877.47Answer: (d)10. The CFO of CyberChain Inc. plans to unleash a media campaign that is expected to cost $15 million four years from today. How much cash should she set aside to pay for this if the current interest rate is 13%?(a) $9.2 million(b) $13.3 mi
9、llion(c) $14.4 million(d) $16.9 millionAnswer: (a)11. The NPV is a measure of how much your _ wealth changes as a result of your choice and if the NPV is _it does not pay to undertake that choice.(a) future; negative(b) current; negative(c) current; positive(d) future; positiveAnswer: (b)4-412. The
10、_ is the rate that one can earn somewhere else if one did not invest in the project under evaluation.(a) opportunity cost of capital(b) cost of debt(c) cost of equity(d) weighted average cost of capitalAnswer: (a)13. You are trying to decide whether or not to buy a bond for $990 that will make one p
11、ayment for $1,050 four years from today. What is the internal rate of return on the bonds cash flows?(a) 1.06%(b) 1.48%(c) 10.6%(d) 14.8%Answer: (b)14. Calculate the NPV of the following cash flows: you invest $3,000 today and receive $300 one year from now, $700 two years from now, and $1,100 start
12、ing four years from now. Assume that the interest rate is 7%.(a) $1,962.62(b) $1,269.04(c) $1,269.04(d) $1,962.62Answer: (b)15. After each payment of an amortized loan, the outstanding balance is reduced by the amount of principal repaid. Therefore, the portion of the payment that goes toward the pa
13、yment of interest is _ than the previous periods interest payment and the portion going toward repayment of principal is _ than the previous periods.(a) greater; lower(b) lower; lower(c) greater; greater(d) lower; greaterAnswer: (d)4-516. The present value of a future amount can be calculated with t
14、he equation _.(a) PV = FV(1 + i)n(b) PV = FV(1 + i)(n)(c) PV = FV/(1 + i)n NOTE: this should be formatted as a stacked fraction(d) PV = FV/(1 + i)(n) NOTE: this should be formatted as a stacked fractionAnswer: (c)17. To compute the future value of a present amount use the compound amount factor defi
15、ned as _.(a) FV = PV(1 + i)n(b) FV = PV(1 + i)(n)(c) FV = PV/(1 + i)n NOTE: this should be formatted as a stacked fraction(d) FV = PV/(1 + i)(n) NOTE: this should be formatted as a stacked fractionAnswer: (a)18. The earnings of BGB Computers have grown from $3.20 to $6.90 in 6 years. Determine the a
16、nnual compound rate.(a) 1.14%(b) 13.7%(c) 15.6%(d) 115.6%Answer: (b)19. In five years you intend to go to graduate school. For each of your four years in graduate school, you need to have a fund that will provide $25,000 per year at the beginning of each year. If the interest rate is 9% throughout,
17、how much must you put in the fund today?(a) $64,996(b) $57,379(c) $50,184(d) $16,249Answer: (b)4-620. As part of your new job at CyberInc. the company is providing you with a new Jeep. Your firm will lease this $34,000 Jeep for you. The terms of the lease are seven annual payments at an interest rat
18、e of 10%, which will fully amortize the cost of the car. What is the annual lease payment?(a) $6,984.39(b) $5,342.86(c) $4,857.14(d) $3,584.00Answer: (a)21. A rule of thumb with using the internal rate of return is to invest in a project if the IRR is _ the opportunity cost of capital.(a) greater th
19、an(b) less than(c) less than or equal to(d) one-half ofAnswer: (a)22. When considering the timeframe of an investment, a rule followed by some is to choose the investment with _ payback period.(a) the longest(b) the shortest(c) no(d) an infiniteAnswer: (b)23. A major problem with using the internal
20、rate of return rule is _.(a) there may be multiple cash outflows and multiple cash inflows(b) the internal rate of return may not exist(c) the internal rate of return may not be unique(d) all of the above Answer: (d)4-724. The NPV is the difference between the _ value of all _ cash inflows minus the
21、 _ value of all current and future cash outflows.(a) future; present; present(b) present; future; present(c) present; present; future(d) present; future; futureAnswer: (b)25. When considering effective interest rates, as the compounding frequency increases, the effective annual rate gets _ and _ but
22、 approaches _.(a) larger; larger; a limit(b) smaller; smaller; a limit(c) larger; larger; infinity(d) smaller; smaller; infinityAnswer: (a)26. In 10 years you wish to own your business. How much will you have in your bank account at the end of 10 years if you deposit $300 each quarter (assume end of
23、 the period deposits)? Assume the account is paying an interest rate of 12% compounded quarterly.(a) $20,220(b) $21,060(c) $21,626(d) $22,620Answer: (d)27. The director of marketing for CyberProducts Inc. plans to unleash a media blitz that is expected to cost $4.7 million three years from today. Ho
24、w much cash should she set aside today to pay for this if the current interest rate is 11%?(a) $6.43 million(b) $4.23 million(c) $3.62 million(d) $3.44 millionAnswer: (d)4-828. If you purchased a $10,000 certificate of deposit today with an APR of 12%, with monthly compounding, what would be the CD
25、worth when it matures in 6 years?(a) $56,340(b) $20,468(c) $19,738(d) $5,066Answer: (b)29. The manufacturing manager of CyberProducts Inc. estimates that she can save the company $16,000 cash per year over the next 8 years by implementing a recycling plan. What is the value of the savings today if t
26、he appropriate interest rate for the firm is 9%? Assume cash flows occur at the end of the year.(a) $64,240(b) $88,557(c) $96,527(d) $128,000Answer: (b)30. If the exchange rate between the U.S. dollar and the French Franc is $0.17 per French Franc, the dollar interest rate is 5.5% per year, and the
27、French Franc interest rate is 4.5% per year, what is the “break-even“ value of the future dollar/French Franc exchange rate one year from now?a) $0.172 per FFb) $0.179 per FFc) $5.827 per FFd) $5.882 per FFAnswer: (a)31. In any time value of money calculation, the cash flows and the interest rate mu
28、st be denominated _.a) in the same currencyb) in different currenciesc) in terms of a third currencyd) in terms of the ECUAnswer: (a)4-932. If the exchange rate between the U.S. dollar and the Japanese yen is $0.00745 per yen, the dollar interest rate is 6% per year, and the Japanese interest rate i
29、s 7% per year, what is the “break-even” value of the future dollar/yen exchange rate one year from now?a) $135.49 per yenb) $134.23 per yenc) $0.00752 per yend) $0.00738 per yenAnswer: (d)33. Consider the situation where you are trying to decide if you should invest in a Swiss project or an American
30、 project. Both projects require an initial outlay of $15,000. The Swiss project will pay you 17,100 Swiss Francs per year for 6 years, whereas the American one will pay you $11,000 per year for 6 years. The dollar interest rate is 5% per year, the Swiss Franc interest rate is 6% per year, and the cu
31、rrent dollar price of a Swiss Franc is $0.68 per Swiss Franc. Which project has the higher NPV? a) the U.S. project; its NPV is $55,832b) the U.S. project; its NPV is $40,833c) the Swiss project; its NPV is $42,179d) the Swiss project; its NPV is $57,178Answer: (c)34. The _ is the rate denominated i
32、n dollars or in some other currency, and the _ is denominated in units of consumer goods.a) nominal interest rate; inflation interest rateb) nominal interest rate; real interest ratec) real interest rate; inflation interest rated) real interest rate; nominal interest rateAnswer: (b)35. Consider the
33、situation where you are trying to decide if you should invest in a British project or U.S. project. Both projects require an initial outlay of $55,000. The British project will pay you 30,000 pounds per year for 6 years, whereas the American one will generate $40,000 per year for 6 years. The Britis
34、h interest rate is 5% per year, and the American interest rate is 6% per year; the current dollar price of a pound sterling is $1.6320 per pound sterling. Which project has the higher NPV?a) choose the U.S. one, it has a NPV of $196,693b) choose the U.S. one, it has a NPV of $141,693c) choose the Br
35、itish one, it has a NPV of $248,506d) choose the British one, it has a NPV of $193,506Answer: (d)4-1036. What is the real interest rate if the nominal interest rate is 9% per year and the rate of inflation is 6% per year?a) 1.5%b) 2.75%c) 2.83%d) 7.5%Answer: (c) 37. What is the nominal interest rate
36、 if the real rate of interest is 4.5% and the rate of inflation is 6% per year?a) 10.5%b) 10.77%c) 10.86%d) 14.5%Answer: (b)38. What is the real rate of interest if the inflation rate is 6% per year and the nominal interest rate per year is 12.5%?a) 1.32%b) 6.13%c) 5.78%d) 11.79%Answer: (b)39. Compute the real future value, to the nearest dollar, of $2,000 in 35 years time. The real interest rate is 3.2%, the nominal interest rate is 8.36%, and the rate of inflation is 5%.a) $6,023b) $6,853c) $33,223d) $11,032Answer: (a)
