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Commerce and BusinessbackBusinessbackCorporate Finance/Financial ManagementbackFundamentals of Corporate FinancebackPractice Set 2491back

Discounted Cash Flow Valuation

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Question 1
Free
Multiple Choice

An ordinary annuity is best defined by which one of the following?

Choose correct answer/s
A

increasing payments paid for a definitive period of time

B

increasing payments paid forever

C

equal payments paid at regular intervals over a stated time period

D

equal payments paid at regular intervals of time on an ongoing basis

E

unequal payments that occur at set intervals for a limited period of time

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Question 2
Free
Multiple Choice

Which one of the following accurately defines a perpetuity?

Choose correct answer/s
A

a limited number of equal payments paid in even time increments

B

payments of equal amounts that are paid irregularly but indefinitely

C

varying amounts that are paid at even intervals forever

D

unending equal payments paid at equal time intervals

E

unending equal payments paid at either equal or unequal time intervals

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Question 3
Free
Multiple Choice

Which one of the following terms is used to identify a British perpetuity?

Choose correct answer/s
A

ordinary annuity

B

amortized cash flow

C

annuity due

D

discounted loan

E

consol

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Question 4
Free
Multiple Choice

The interest rate that is quoted by a lender is referred to as which one of the following?

Choose correct answer/s
A

stated interest rate

B

compound rate

C

effective annual rate

D

simple rate

E

common rate

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Question 5
Free
Multiple Choice

A monthly interest rate expressed as an annual rate would be an example of which one of the following rates?

Choose correct answer/s
A

stated rate

B

discounted annual rate

C

effective annual rate

D

periodic monthly rate

E

consolidated monthly rate

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Question 6
Multiple Choice

What is the interest rate charged per period multiplied by the number of periods per year called?

Choose correct answer/s
A
effective annual rate
B
annual percentage rate
C
periodic interest rate
D
compound interest rate
E
daily interest rate
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Question 7
Multiple Choice

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

Choose correct answer/s
A
amortized
B
continuous
C
balloon
D
pure discount
E
interest-only
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Question 8
Multiple Choice

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?

Choose correct answer/s
A
amortized loan
B
modified loan
C
balloon loan
D
pure discount loan
E
interest-only loan
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Question 9
Multiple Choice

Which one of the following terms is used to describe a loan wherein each payment is equal in amount and includes both interest and principal?

Choose correct answer/s
A
amortized loan
B
modified loan
C
balloon loan
D
pure discount loan
E
interest-only loan
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Question 10
Multiple Choice

Which one of the following terms is defined as a loan wherein the regular payments,including both interest and principal amounts,are insufficient to retire the entire loan amount,which then must be repaid in one lump sum?

Choose correct answer/s
A
amortized loan
B
continuing loan
C
balloon loan
D
remainder loan
E
interest-only loan
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Question 11
Multiple Choice

You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75 percent interest per month.Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month.Which one of the following statements is correct concerning these two annuities?

Choose correct answer/s
A
These two annuities have equal present values but unequal futures values at the end of year five.
B
These two annuities have equal present values as of today and equal future values at the end of year five.
C
Annuity B is an annuity due.
D
Annuity A has a smaller future value than annuity B.
E
Annuity B has a smaller present value than annuity A.
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Question 12
Multiple Choice

You are comparing two investment options that each pay 5 percent interest,compounded annually.Both options will provide you with $12,000 of income.Option A pays three annual payments starting with $2,000 the first year followed by two annual payments of $5,000 each.Option B pays three annual payments of $4,000 each.Which one of the following statements is correct given these two investment options?

Choose correct answer/s
A
Both options are of equal value given that they both provide $12,000 of income.
B
Option A has the higher future value at the end of year three.
C
Option B has a higher present value at time zero than does option A.
D
Option B is a perpetuity.
E
Option A is an annuity.
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Question 13
Multiple Choice

You are considering two projects with the following cash flows: image Which 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)Project X has a higher present value than Project Y,given a positive discount rate.
IV)Project Y has a higher present value than Project X,given a positive discount rate.

Choose correct answer/s
A
II only
B
I and III only
C
II and III only
D
II and IV only
E
I, II, and IV only
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Question 14
Multiple Choice

Which one of the following statements is correct given the following two sets of project cash flows? image A. The cash flows for Project B are an annuity,but those of Project A are not.

Choose correct answer/s
B
Both sets of cash flows have equal present values as of time zero given a positive discount rate.
C
The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three.
D
The present value of Project A cannot be computed because the second cash flow is equal to zero.
E
As long as the discount rate is positive,Project B will always be worth less today than will Project A.
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Question 15
Multiple Choice

Which one of the following statements related to annuities and perpetuities is correct?

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A
An ordinary annuity is worth more than an annuity due given equal annual cash flows for ten years at 7 percent interest, compounded annually.
B
A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.
C
Most loans are a form of a perpetuity.
D
The present value of a perpetuity cannot be computed, but the future value can.
E
Perpetuities are finite but annuities are not.
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Question 16
Multiple Choice

Which of the following statements related to interest rates are correct?
I)Annual interest rates consider the effect of interest earned on reinvested interest payments.
II)When comparing loans,you should compare the effective annual rates.
III)Lenders are required by law to disclose the effective annual rate of a loan to prospective borrowers.
IV)Annual and effective interest rates are equal when interest is compounded annually.

Choose correct answer/s
A
I and II only
B
II and III only
C
II and IV only
D
I, II, and III only
E
II, III, and IV only
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Question 17
Multiple Choice

Which one of the following statements concerning interest rates is correct?

Choose correct answer/s
A
Savers would prefer annual compounding over monthly compounding.
B
The effective annual rate decreases as the number of compounding periods per year increases.
C
The effective annual rate equals the annual percentage rate when interest is compounded annually.
D
Borrowers would prefer monthly compounding over annual compounding.
E
For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.
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Question 18
Multiple Choice

Which one of these statements related to growing annuities and perpetuities is correct?

Choose correct answer/s
A
The cash flow used in the growing annuity formula is the initial cash flow at time zero.
B
Growth rates cannot be applied to perpetuities if you wish to compute the present value.
C
The future value of an annuity will decrease if the growth rate is increased.
D
An increase in the rate of growth will decrease the present value of an annuity.
E
The present value of a growing perpetuity will decrease if the discount rate is increased.
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Question 19
Multiple Choice

Which one of the following statements correctly states a relationship?

Choose correct answer/s
A
Time and future values are inversely related, all else held constant.
B
Interest rates and time are positively related, all else held constant.
C
An increase in the discount rate increases the present value, given positive rates.
D
An increase in time increases the future value given a zero rate of interest.
E
Time and present value are inversely related, all else held constant.
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Question 20
Multiple Choice

Which one of the following compounding periods will yield the smallest present value given a stated future value and annual percentage rate?

Choose correct answer/s
A
annual
B
semi-annual
C
monthly
D
daily
E
continuous
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