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Exam 5: Discounted Cash Flow Valuation

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Question 61

Multiple Choice

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Which one of the following is an example of a perpetuity?

A) Trust income of $1,200 a year forever
B) Retirement pay of $2,200 a month for 20 years
C) Lottery winnings of $1,000 a month for life
D) Car payment of $260 a month for 60 months
E) Apartment rent payment of $800 a month for one year

F) None of the above
G) A) and B)

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Question 62

Multiple Choice

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Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

A) annual percentage rate.
B) compounded rate.
C) effective annual rate.
D) perpetual rate.
E) simple rate.

F) None of the above
G) B) and E)

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Question 63

Multiple Choice

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At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?

Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:

Karl can afford car payments of $235 a month for 48 months. The bank will lend him money to buy a car at 7.75 percent interest. How much money can he afford to borrow?

Today, you are purchasing a 20-year, 6 percent annuity at a cost of $120,000. The annuity will pay annual payments starting one year from today. What is the amount of each payment?

Curtis Builders is borrowing $140,000 today for 5 years. The loan is an interest-only loan with an APR of 9.5 percent. Payments are to be made annually. What is the amount of the first annual payment?

Which one of the following is the annuity present value formula?

A perpetuity in Canada is frequently referred to as which one of the following?

First Bank offers personal loans at 7.6 percent compounded monthly. Second Bank offers similar loans at 7.75 percent compounded semi-annually. Which one of the following statements is correct concerning these loans?

Explain the similarities and differences among an ordinary annuity, an annuity due, and a perpetuity.

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

Turntable Industrial, Inc. owes your firm $138,600. This amount is seriously delinquent so your firm has offered to arrange a payment plan in the hopes that it might at least collect a portion of this receivable. Your firm's offer consists of weekly payments for one year at an interest rate of 3 percent. What is the amount of each payment?

A credit card has a stated interest rate of 13.9 percent. What is the APR if interest is compounded monthly?

Jesse just won the state lottery. He has been given the option of receiving either $66.4 million today or $5 million a year for the next 30 years, with the first payment paid today. Describe the process that Jesse should use to determine which payment option he prefers. Ignore all taxes and assume that Jesse will live for at least 45 more years.

Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment which she will be required to pay 2 years from today. Which type of loan is this?

You have just won a contest! You can either receive $10,000 a year for 15 years or $100,000 as a lump sum payment today. What is the interest rate on the annuity option?

Consider an ordinary annuity and the variables that are related to that annuity. For each of the following sets of variables, identify whether the relationship between the two variables is direct (D) or inverse (I). Assume all other variables are held constant.

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?

You want to borrow $36,000 from your local bank to buy a new sailboat. You can afford to make monthly payments of $750, but no more. Assuming monthly compounding, what is the highest rate you can afford on a 60-month APR loan?