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1、Chapter 04 Discounted Cash Flow Valuation Answer Key Multiple Choice Questions 1.An annuity stream of cash flow payments is a set of:A.level cash flows occurring each time period for a fixed length of time.B.level cash flows occurring each time period forever.C.increasing cash flows occurring each t
2、ime period for a fixed length of time.D.increasing cash flows occurring each time period forever.E.arbitrary cash flows occurring each time period for no more than 10 years.Difficulty level:Easy Topic:ANNUITY Type:DEFINITIONS 2.Annuities where the payments occur at the end of each time period are ca
3、lled _,whereas _ refer to annuity streams with payments occurring at the beginning of each time period.A.ordinary annuities;early annuities B.late annuities;straight annuities C.straight annuities;late annuities D.annuities due;ordinary annuities E.ordinary annuities;annuities due Difficulty level:E
4、asy Topic:ANNUITIES DUE Type:DEFINITIONS 欢迎下载 2 3.An annuity stream where the payments occur forever is called a(n):A.annuity due.B.indemnity.C.perpetuity.D.amortized cash flow stream.E.amortization table.Difficulty level:Easy Topic:PERPETUITY Type:DEFINITIONS 4.The interest rate expressed in terms
5、of the interest payment made each period is called the _ rate.A.stated annual interest B.compound annual interest C.effective annual interest D.periodic interest E.daily interest Difficulty level:Easy Topic:STATED INTEREST RATES Type:DEFINITIONS 5.The interest rate expressed as if it were compounded
6、 once per year is called the _ rate.A.stated interest B.compound interest C.effective annual D.periodic interest E.daily interest Difficulty level:Easy Topic:EFFECTIVE ANNUAL RATE Type:DEFINITIONS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢
7、迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 3 6.The interest rate charged per period multiplied by the number of periods per year is called the _ rate.A.effective annual B.annual percentage C.periodic interest D.compound interest E.daily i
8、nterest Difficulty level:Easy Topic:ANNUAL PERCENTAGE RATE Type:DEFINITIONS 7.Paying off long-term debt by making installment payments is called:A.foreclosing on the debt.B.amortizing the debt.C.funding the debt.D.calling the debt.E.None of the above.Difficulty level:Easy Topic:AMORTIZATION Type:DEF
9、INITIONS 8.You are comparing two annuities which offer monthly payments for ten years.Both annuities are identical with the exception of the payment dates.Annuity A pays on the first of each month while annuity B pays on the last day of each month.Which one of the following statements is correct con
10、cerning these two annuities?A.Both annuities are of equal value today.B.Annuity B is an annuity due.C.Annuity A has a higher future value than annuity B.D.Annuity B has a higher present value than annuity A.E.Both annuities have the same future value as of ten years from today.Difficulty level:Mediu
11、m Topic:ORDINARY ANNUITY VERSUS ANNUITY DUE Type:CONCEPTS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 4 9.You are comparing two investme
12、nt options.The cost to invest in either option is the same today.Both options will provide you with$20,000 of income.Option A pays five annual payments starting with$8,000 the first year followed by four annual payments of$3,000 each.Option B pays five annual payments of$4,000 each.Which one of the
13、following statements is correct given these two investment options?A.Both options are of equal value given that they both provide$20,000 of income.B.Option A is the better choice of the two given any positive rate of return.C.Option B has a higher present value than option A given a positive rate of
14、 return.D.Option B has a lower future value at year 5 than option A given a zero rate of return.E.Option A is preferable because it is an annuity due.Difficulty level:Medium Topic:UNEVEN CASH FLOWS AND PRESENT VALUE Type:CONCEPTS 10.You are considering two projects with the following cash flows:Whic
15、h of the following statements are true concerning these two projects?I.Both projects have the same future value at the end of year 4,given a positive rate of return.II.Both projects have the same future value given a zero rate of return.III.Both projects have the same future value at any point in ti
16、me,given a positive rate of return.IV.Project A has a higher future value than project B,given a positive rate of return.A.II only B.IV only C.I and III only D.II and IV only E.I,II,and III only Difficulty level:Medium Topic:UNEVEN CASH FLOWS AND FUTURE VALUE Type:CONCEPTS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下
17、载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 5 11.A perpetuity differs from an annuity because:A.perpetuity payments vary with the rate of inflation.B.perpetuity p
18、ayments vary with the market rate of interest.C.perpetuity payments are variable while annuity payments are constant.D.perpetuity payments never cease.E.annuity payments never cease.Difficulty level:Easy Topic:PERPETUITY VERSUS ANNUITY Type:CONCEPTS 12.Which one of the following statements concernin
19、g the annual percentage rate is correct?A.The annual percentage rate considers interest on interest.B.The rate of interest you actually pay on a loan is called the annual percentage rate.C.The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterl
20、y.D.When firms advertise the annual percentage rate they are violating U.S.truth-in-lending laws.E.The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.Difficulty level:Medium Topic:ANNUAL PERCENTAGE RATE Type:CONCEPTS 13.Which one
21、of the following statements concerning interest rates is correct?A.The stated rate is the same as the effective annual rate.B.An effective annual rate is the rate that applies if interest were charged annually.C.The annual percentage rate increases as the number of compounding periods per year incre
22、ases.D.Banks prefer more frequent compounding on their savings accounts.E.For any positive rate of interest,the effective annual rate will always exceed the annual percentage rate.Difficulty level:Medium Topic:INTEREST RATES Type:CONCEPTS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎
23、下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 6 14.Which of the following statements concerning the effective annual rate are correct?I.When making financial decisions,you should compare effective an
24、nual rates rather than annual percentage rates.II.The more frequently interest is compounded,the higher the effective annual rate.III.A quoted rate of 6%compounded continuously has a higher effective annual rate than if the rate were compounded daily.IV.When borrowing and choosing which loan to acce
25、pt,you should select the offer with the highest effective annual rate.A.I and II only B.I and IV only C.I,II,and III only D.II,III,and IV only E.I,II,III,and IV Difficulty level:Medium Topic:EFFECTIVE ANNUAL RATE Type:CONCEPTS 15.The highest effective annual rate that can be derived from an annual p
26、ercentage rate of 9%is computed as:A.09e-1.B.e.09 q.C.e (1+.09).D.e.09-1.E.(1+.09)q.Difficulty level:Medium Topic:CONTINUOUS COMPOUNDING Type:CONCEPTS 16.The time value of money concept can be defined as:A.the relationship between the supply and demand of money.B.the relationship between money spent
27、 versus money received.C.the relationship between a dollar to be received in the future and a dollar today.D.the relationship between interest rate stated and amount paid.E.None of the above.Difficulty level:Easy Topic:TIME VALUE Type:CONCEPTS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢
28、迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 7 17.Discounting cash flows involves:A.discounting only those cash flows that occur at least 10 years in the future.B.estimating only the cash flows
29、 that occur in the first 4 years of a project.C.multiplying expected future cash flows by the cost of capital.D.discounting all expected future cash flows to reflect the time value of money.E.taking the cash discount offered on trade merchandise.Difficulty level:Easy Topic:CASH FLOWS Type:CONCEPTS 1
30、8.Compound interest:A.allows for the reinvestment of interest payments.B.does not allow for the reinvestment of interest payments.C.is the same as simple interest.D.provides a value that is less than simple interest.E.Both A and D.Difficulty level:Easy Topic:INTEREST Type:CONCEPTS 19.An annuity:A.is
31、 a debt instrument that pays no interest.B.is a stream of payments that varies with current market interest rates.C.is a level stream of equal payments through time.D.has no value.E.None of the above.Difficulty level:Easy Topic:ANNUITY Type:CONCEPTS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下
32、载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 8 20.The stated rate of interest is 10%.Which form of compounding will give the highest effective rate of interest?A.annual compounding B.mont
33、hly compounding C.daily compounding D.continuous compounding E.It is impossible to tell without knowing the term of the loan.Difficulty level:Easy Topic:COMPOUNDING Type:CONCEPTS 21.The present value of future cash flows minus initial cost is called:A.the future value of the project.B.the net presen
34、t value of the project.C.the equivalent sum of the investment.D.the initial investment risk equivalent value.E.None of the above.Difficulty level:Easy Topic:PRESENT VALUE Type:CONCEPTS 22.Find the present value of$5,325 to be received in one period if the rate is 6.5%.A.$5,000.00 B.$5,023.58 C.$5,64
35、4.50 D.$5,671.13 E.None of the above.Difficulty level:Easy Topic:PRESENT VALUE-SINGLE SUM Type:PROBLEMS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎
36、下载欢迎下载 欢迎下载 9 23.If you have a choice to earn simple interest on$10,000 for three years at 8%or annually compounded interest at 7.5%for three years which one will pay more and by how much?A.Simple interest by$50.00 B.Compound interest by$22.97 C.Compound interest by$150.75 D.Compound interest by$150
37、.00 E.None of the above.Simple Interest=$10,000(.08)(3)=$2,400;Compound Interest=$10,000(1.075)3-1)=$2,422.97;Difference=$2,422.97-$2,400=$22.97 Difficulty level:Easy Topic:SIMPLE&COMPOUND INTEREST Type:PROBLEMS 24.Bradley Snapp has deposited$7,000 in a guaranteed investment account with a promised
38、rate of 6%compounded annually.He plans to leave it there for 4 full years when he will make a down payment on a car after graduation.How much of a down payment will he be able to make?A.$1,960.00 B.$2,175.57 C.$8,960.00 D.$8,837.34 E.$9,175.57$7,000(1.06)4=$8,837.34 Difficulty level:Easy Topic:FUTUR
39、E VALUE-SINGLE SUM Type:PROBLEMS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 10 25.Your parents are giving you$100 a month for four year
40、s while you are in college.At a 6%discount rate,what are these payments worth to you when you first start college?A.$3,797.40 B.$4,167.09 C.$4,198.79 D.$4,258.03 E.$4,279.32 Difficulty level:Easy Topic:ORDINARY ANNUITY AND PRESENT VALUE Type:PROBLEMS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎
41、下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 11 26.You just won the lottery!As your prize you will receive$1,200 a month for 100 months.If you can earn 8%on your money,what is this prize
42、 worth to you today?A.$87,003.69 B.$87,380.23 C.$87,962.77 D.$88,104.26 E.$90,723.76 Difficulty level:Easy Topic:ORDINARY ANNUITY AND PRESENT VALUE Type:PROBLEMS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载
43、欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 12 27.Todd is able to pay$160 a month for five years for a car.If the interest rate is 4.9%,how much can Todd afford to borrow to buy a car?A.$6,961.36 B.$8,499.13 C.$8,533.84 D.$8,686.82 E.$9,588.05 Difficulty level:Easy Topic:OR
44、DINARY ANNUITY AND PRESENT VALUE Type:PROBLEMS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 13 28.You are the beneficiary of a life insur
45、ance policy.The insurance company informs you that you have two options for receiving the insurance proceeds.You can receive a lump sum of$50,000 today or receive payments of$641 a month for ten years.You can earn 6.5%on your money.Which option should you take and why?A.You should accept the payment
46、s because they are worth$56,451.91 today.B.You should accept the payments because they are worth$56,523.74 today.C.You should accept the payments because they are worth$56,737.08 today.D.You should accept the$50,000 because the payments are only worth$47,757.69 today.E.You should accept the$50,000 b
47、ecause the payments are only worth$47,808.17 today.Difficulty level:Medium Topic:ORDINARY ANNUITY AND PRESENT VALUE Type:PROBLEMS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载
48、欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 14 29.Your employer contributes$25 a week to your retirement plan.Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%.Given these assumptions,what is this employee benefit worth to you today?A.$13,144.43 B.
49、$15,920.55 C.$16,430.54 D.$16,446.34 E.$16,519.02 Difficulty level:Medium Topic:ORDINARY ANNUITY AND PRESENT VALUE Type:PROBLEMS 迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢
50、迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载欢迎下载 欢迎下载 15 30.You have a sub-contracting job with a local manufacturing firm.Your agreement calls for annual payments of$50,000 for the next five years.At a discount rate of 12%,what is this job worth to you today?A.$180,238.81 B.$201,867.47 C.$210,618.19 D.$223,162.58 E