Practice questions for online quiz 1 PDF

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Corporate Financial Management Practice questions for online quiz 1 (Answers at back for first 9 questions) Disclaimer: This practice question covers a selection of the types of questions that may be asked in the online quiz 1. However it should not be taken as being exhaustive as to the topics that could be included in the exam. Students should therefore not be surprised if other types of questions appear in the online quiz. 1.

2.

3.

$200 invested today and earning 8 per cent per annum compounded semi-annually will grow to what amount at the end of three years? (A)

$158.80

(B)

$251.94

(C)

$380.75

(D)

$253.06

Bill plans to fund his individual retirement account with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn an effective return of 12 per cent per annum on his contributions, how much will he have accumulated at the end of twenty years, rounded to the nearest dollar? (A)

$14,938

(B)

$19,292

(C)

$144,105

(D)

$40,000

The present value of $100 to be received 10 years from today, assuming an effective annual return of 9 per cent, is (A)

$75.64

(B)

$42.24

(C)

$699.13

(D)

$236.10

4.

5.

6.

7.

Given an effective annual interest rate of 14 per cent, the present value of a perpetuity consisting of yearly payments of $25,000 starting immediately is, rounded to the nearest dollar (A)

$232,071

(B)

$203,571

(C)

$178,571

(D)

$156,641

If the present value of a perpetual income stream is increasing, the discount rate must be (A)

increasing

(B)

decreasing

(C)

increasing proportionally

(D)

changing unpredictably

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. To the nearest dollar, how much must Janice deposit annually in an account paying interest of 10 per cent per annum compounded annually in order to have enough money to send her parents on the cruise, assuming the first deposit is to be made one year from now? (A)

$2,457

(B)

$3,000

(C)

$2,234

(D)

$1,862

Marla borrows $4,500 and repays the loan with four equal quarterly installments, with the first installment made 3 months after the loan is made. If interest is charged at a rate of 12 per cent per annum compounded quarterly, the quarterly installment is (A)

$1,107.89

(B)

$1,075.62

8.

Q9:

(C)

$1,210.62

(D)

$1,246.94

A ski chalet in Aspen now costs $25,000. Inflation is expected to cause this price to increase at 5 per cent per year over the next 10 years before Barbara and Phil retire from successful investment banking careers. If they are to accumulate the money to buy the ski chalet upon retirement by making 10 equal annual deposits into an account paying an effective annual interest rate of 13 per cent, with the first deposit to be made immediately, each deposit should be? (A)

$2,210.80

(B)

$6,641.33

(C)

$1,956.46

(D)

$1,357.24

You are valuing an investment that will pay you $27,000 per year for the first ten years, $35,000 per year for the next ten years, and $48,000 per year the following ten years (all payments are at the end of each year). If the appropriate annual discount rate is 9.00%, what is the value of the investment to you today (in whole number)?

(A)

$323153

(B)

$323123

(C)

$323136

(D)

$258947

ANSWERS for first 9 questions: 1.

Answer: (D) FV 200 (1.04) 6 $253.06

2.

Answer: (C) FVA 

3.

2,000[(1.12) 20  1]  $144,104.88 0.12

Answer: (B) PV 100 (1.09)  10 $42.24

4.

Answer: (B) PVA 

25,000 (1.14)  $203,571.42 0.14

5.

Answer: (B)

6.

Answer: (A) 15,000 (0.1)  $2,456.96 PMT  (1 .1)5  1

7.

Answer: (C) PMT 

8.

Answer: (C) Amount required in 10 years 25,000 (1.05) 10 $40,722.37 PMT 

9.

4,500 (0.03)  $1,210.62  1  (1.03) 4

40,722.37 (0 .13) $1,956.46 [(1.13)10  1] (1 .13)

Answer: (D)

17000[1  (1  0.09)  10] 35000[1  (1 0.09)  10] 48000[1  (1 0.09) PVA   (1  0.09) 10  (1  0.09) 20 0.09 0.09 0.09 17000 6.41766  (1  0.09)  10 35000 6.41766 (1 0.09)  20 48000 6.41766 $258946.55 258947

More Practice questions

 10

]

1. What principal will accumulate to $2550 in 9 months if the simple interest rate is 9% per annum? a) $2320.76 b) $2350.76 c) $2388.76 d) $2688.76 Ans: c) 2. What is the simple interest rate if $500 accumulates $550 in 6 months? a) 20% b) 0.20% c) 15% d) 0.15% Ans: a) 3. What is the present value of $800 at a simple interest of 8% per annum for 8 months? a) $859.50 b) $759.50 c) $769.50 d) $789.50 Ans: b) 4. The future value of $4500 at 7.5% p. a. in 5 years compounded i) monthly and ii) daily are respectively: a) $6539.82 and $6547.21 b) $6444.82 and $6547.21 c) $6539.82 and $6235.21 d) $6213.82 and $6125.21 Ans: a) 5. What is the future value of $4500 at 7.5% p. a. in 5 years compounded i) half yearly and ii) quarterly? a) $6250.70 (half yearly) & $6576.77 (quarterly) b) $6350.70 (half yearly) & $6976.77 (quarterly) c) $6524.77 (half yearly) & $6502.70 (quarterly) d) $6502.70 (half yearly) & $6524.77 (quarterly) Ans: d)

6. A person deposited $51000 into a savings account @ 9.67% p. a. compounded daily. Interest earned during the first 5 years is: a) $31603.47 b) $31703.47 c) $82703.47 d) $81504.47 Ans: b) 7. A person deposited $51000 into a savings account @ 9.67% p. a. compounded daily. Interest earned during the second year is:

a) $5702.89 b) $61880.19 c) $56177.30 d) $5757.89 Ans: a) 8. The future value of $200 at 12% per annum, compounded annually in 5 years is: a) $355.47 b) $340.47 c) $352.47 d) $330.47 Ans: c) 9. The future value of $200 at 12% per annum, compounded annually in 25 years is: a) $3450.01 b) $5420.01 c) $3420.01 d) $3400.01 Ans: d) 10. A person deposited $2500 into a savings account @ 0.68% compounded quarterly. Interest earned during the first 5 years is: a) $32586.39 b) $86.39 c) $2506.39 d) $80.39 Ans: b) 11. A person deposited $2500 into a savings account @ 0.68% compounded quarterly. Interest earned during the second year is: a) $2534.20 b) $2517.04 c) $17.16 d) $34.20 Ans: c) 12. Consider two investments over five years with the same initial investment (PV). The first earns a nominal annual rate of interest of 5% for the first two years and 6% for the following three years, with quarterly compounding. The effective annual rate of interest for the investment is: a) 0.05718% b) 5.72% c) 4.72% d) 5.67% Ans: b)

0.05  PV (1  EAR) PV  1   4   (1  EAR ) 5 1.320543

24

5

  0.06 1  4  

34

1

1  EAR (1.320543) 5 EAR  0.057184 or ,5.72

13.

A debt of $10,000 (i.e. value of debt now) is to be repaid by equal payments at the end of each month for the next two years (with the first payment to be made one month from now). If the interest rate is 12% per annum compounded monthly, the monthly payment will be (A)

$470.73

(B)

$466.07

(C)

$370.73

(D)

$367.06

Answer: (A) PMT [1  (1  0.01)  24 ] 10,000  0.01 10,000 (0.01)  470.73 PMT  1  (1  0.01)  24 14.

An individual purchases a perpetuity providing payments of $300 at the end of each month, but with the first payment deferred until 3 months after purchase. If the interest rate on the perpetuity is 12% per annum compounded monthly, the purchase price of the perpetuity is (A)

$30,000

(B)

$29,117.70

(C)

$29,408.88

(D)

$29,702.97

Answer: (C) Effective monthly rate is 0.01. If the perpetuity were purchased one month before the first payment, it would cost

300 30,000 0.01 This has a value now of 30,000 (1.01)  2 $29,408.88 PVA 

15.

When the net present value is negative, the internal rate of return is __________ the cost of capital. (A)

equal to

(B)

greater than or equal to

(C)

less than

(D) Answer c)

16.

greater than

The monthly repayment on a loan is $593.89 with the first payment to be made one month from now. If the loan term is 30 years and interest is charged at a rate of 7.8% per annum compounded monthly, how much was borrowed (to the nearest dollar)? (A)

$75,000

(B)

$82,500

(C)

$85,000

(D)

$87,500

Answer: (B) i  0.078 12 0.0065 PVA 

17.

593.89[1  (1.0065) 360 ]  $82,500 0.0065

If the interest rate is 6 per cent per annum compounded monthly, the effective annual rate of interest is (correct to two decimal places) (A)

6.09%

(B)

6.20%

(C)

6.17%

(D)

6.14%

Answer: (C) i EAR  1   m  

18.

m

0.06    1  1   12  

12

 1  0 .06167 (6 .17%)

A loan is being repaid by equal monthly payments of $608.62 over the next 50 months. The effective monthly rate of interest charged is 0.8%. What is the principal outstanding at the beginning of the 11th month (immediately after the 10 payment is made)? (A)

$19,874.95

(B)

$20,763.51

(C)

$21,202.51

(D)

$20,321.00

Answer: (B) Principal outstanding at the beginning of the 11th month 

608.62[1 (1.008) 0.008

40

]

 20,763.51...