# Financial Management Chapter 5 Quiz

Question
1) What is the highest effective rate attainable with a 12 percent nominal rate?

A) 12.00%

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B) 12.55%

C) 12.75%

D) 12.95%

2) The future value of a \$2,000 annuity due deposited at 8 percent compounded annually for each of the next 10 years is __________.

A) \$28,974

B) \$31,292

C) \$14,494

D) \$13,420

3) The present value of a \$25,000 perpetuity at a 14 percent discount rate is __________.

A) \$178,571

B) \$285,000

C) \$350,000

D) \$219,298

4) A generous philanthropist plans to make a onetime endowment to a renowned heart research center which would provide the facility with \$250,000 per year into perpetuity. The rate of interest is expected to be 8 percent for all future time periods. How large must the endowment be?

A) \$2,314,814

B) \$2,000,000

C) \$3,125,000

D) \$3,000,000

5) A local bank is offering a zero coupon certificate of deposit for \$25,000. At maturity, three years from now, the investor will receive \$32,000. What is the rate of return on this investment?

A) 3 percent

B) 6 percent

C) 9 percent

D) 12 percent

6) Entertainer’s Aid plans five annual colossal concerts, each in a different nation’s capital. The concerts will raise funds for an endowment which would provide the World Wide Hunger Fund with \$3,000,000 per year into perpetuity. The endowment will be given at the end of the fifth year. The rate of interest is expected to be 9 percent in all future periods. How much must Entertainer’s Aid deposit each year to accumulate to the required amount?

A) \$5,569,479

B) \$3,333,333

C) \$1,830,275

D) \$8,568,980

7) The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the __________ interest rate.

A) effective

B) nominal

C) discounted

D) continuous

8) If a United States Savings bond can be purchased for \$29.50 and has a maturity value at the end of 25 years of \$100, what is the annual rate of return on the bond?

A) 5 percent

B) 6 percent

C) 7 percent

D) 8 percent

9) If a United States Savings bond can be purchased for \$14.60 and has a maturity value at the end of 25 years of \$100, what is the annual rate of return on the bond?

A) 6 percent

B) 7 percent

C) 8 percent

D) 9 percent

10) The future value of \$200 received today and deposited at 8 percent compounded semiannually for three years is __________.

A) \$380

B) \$158

C) \$253

D) \$252

11) The future value of \$200 received today and deposited at 8 percent for three years is __________.

A) \$248

B) \$252

C) \$158

D) \$200

12) Chris is planning for her son’s college education to begin five years from today. She estimates the yearly tuition, books, and living expenses to be \$5,000 per year for a four year degree. How much must Chris deposit today, at an interest rate of 8 percent, for her son to be able to withdraw \$5,000 per year for four years of college?

A) \$20,000

B) \$13,620

C) \$39,520

D) \$11,277

13) Susan is planning to accumulate \$40,000 by the end of 5 years by making 5 equal annual deposits. If she plans to make her first deposit today and can earn an annual compound rate of 9 percent on her investment, how much must each deposit be in order to accumulate the \$40,000?

A) \$6,132

B) \$6,683

C) \$23,844

D) \$9,434

14) What is the rate of return on an investment of \$124,090 if the company expects to receive \$10,000 per year for the next 30 years?

A) 7 percent

B) 4 percent

C) 1 percent

D) 0 percent

15) \$1,200 is received at the beginning of year 1, \$2,200 is received at the beginning of year 2, and \$3,300 is received at the beginning of year 3. If these cash flows are deposited at 12 percent, their combined future value at the end of year 3 is __________.

A) \$ 6,700

B) \$17,000

C) \$12,510

D) \$ 8,141

16) Pam borrows \$19,500 from the bank at 8 percent annually compounded interest to be repaid in 10 equal annual installments. The interest paid in the third year is __________.

A) \$1,336.00

B) \$1,560.14

C) \$2,906.11

D) \$1,947.10

17) A wealthy art collector has decided to endow her favorite art museum by establishing funds for an endowment which would provide the museum with \$1,000,000 per year for acquisitions into perpetuity. The art collector will give the endowment upon her fiftieth birthday 10 years from today. She plans to accumulate the endowment by making annual end-of-year deposits into an account. The rate of interest is expected to be 6 percent in all future periods. How much must the art collector deposit each year to accumulate to the required amount?

A) \$1,575,333

B) \$736,000

C) \$1,264,446

D) \$943,396

18) Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at \$15,000 and she has 5 years to accumulate this money. How much must Janice deposit annually in an account paying 10 percent interest in order to have enough money to send her parents on the cruise?

A) \$1,862

B) \$2,457

C) \$3,000

D) \$2,234

19) In future value or present value problems, unless stated otherwise, cash flows are assumed to be

A) at the end of a time period.

B) at the beginning of a time period.

C) in the middle of a time period.

D) spread out evenly over a time period.

20) Donna makes annual end-of-year payments of \$5,043.71 on a four year loan with an interest rate of 13 percent. The original principal amount was __________.

A) \$24,462

B) \$15,000

C) \$ 3,092

D) \$20,175

21) Young Sook owns stock in a company which has consistently paid a growing dividend over the last 10 years. The first year Young Sook owned the stock, she received \$4.50 per share and in the 10th year, she received \$4.92 per share. What is the growth rate of the dividends over the last 10 years?

A) 5 percent

B) 4 percent

C) 2 percent

D) 1 percent

22) The future value interest factor is

A) always greater than 1.0.

B) sometimes negative.

C) always less than 0.

D) never greater than 25.

23) Teffan borrows \$4,500 from the bank at 9 percent annually compounded interest to be repaid in three equal annual installments. The interest paid in the third year is __________.

A) \$277.95

B) \$405.00

C) \$352.00

D) \$147.00

24) Find the present value of the following stream of cash flows, assuming that the firm’s opportunity cost is 9 percent.

Year Amount

1-5 \$10,000/yr.

6-10 16,000/yr.

A) \$13,252

B) \$141,588

C) \$10,972

D) \$79,348

25) A ski chalet in Aspen now costs \$250,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 10 years before Barbara and Phil retire from successful investment banking careers. How large an equal annual end-o-fyear deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon retirement?

A) \$8,333

B) \$13,572

C) \$25,005

D) \$22,109

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