Quiz 2 - Managerial Finance questions and answers PDF

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Quiz 4 Questions and answers...

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1. Interest earned on the reinvestment of previous interest payments is known as:interest Answers: simple interest accumulated interest interest on interest compound interest both compound interest and interest on interest 2. What is the future value at the time of the final payment of an annuity of 10 annual payments of $1,000 if the first cash flow occurs in one year’s time? The rate is 9% p.a. Calculate your answer to the nearest dollar. Do not use the $ sign when you submit your answer. 15,193 ± 2 This a future value of annuity question use FV = 1000((1+i)n-1)/i.

3. A new finance graduate has just commenced employment. The graduate plans to take the job for five years before seeking another position, and has been offered a choice of the following salary packages. The appropriate discount rate is 10%. Which is the preferred salary package in present value terms?

$100,000 today plus an annual salary of $25,000. The first annual payment is today. (A total of six equal salary payments). $25000 salary each year (five end of year payments) plus a sum of $125000 at end of year five. A commission of 30% of sales. Yearly commissions are expected to be, Year 1 $45,000; Year 2 $52,500; Year 3 $54,000; Year 4 $ 60,000; Year 5 $63,000 $210,000 today and no further income 4. When finding the future value (FV7) of a deferred annuity of five annual payments of $1000, with the first payment at the beginning of year four, which of the following is correct? The relevant rate 10% pa. Both (a) and (c) are correct. a. FV7 = 1000 x FVIFA(5,.1) c. FV7 = 1000 + 1000 x (1.1) + 1000 x (1.1)2 + 1000 x (1.1)3 + 1000 x (1.1)4

5. The expression (1+r)t is also called the:

future value interest factor present value interest factor Present value formula interest rate formula 6. What is the present value of an infinite series of cash flows of $4,000 pa, if the relevant rate is 8%p.a.? The first cash flow is at the end of the first year. Calculate to the nearest dollar. 50,000 ± 10 This is a perpetuity. PV = CF/i 7. What is the present value of an annuity of 6 annual payments of $1,000 if the first cash flow occurs in one year’s time? The rate is 12% p.a. Calculate your answer to the nearest dollar. Do not use the $ sign when you submit your answer. 4,111 ± 2 This is the present value of an ordinary annuity. Use PV = 1000 x (1-(1+i)-n)/i 8. You are evaluating two annuities. They are identical in every way except that one is an ordinary annuity and one is annuity due. Which of the following is false? The annuity due and the ordinary annuity will make the same number of total payments over time. The ordinary annuity must have a lower future value than the annuity due. The annuity due must have the same present value as the ordinary annuity. The two annuities will differ in present value by a factor of (1+r). 9. What is the Present Value of an amount of $2,000 to be received in 4 years if the rate is 10% p.a.? Your answer should be calculated to the nearest dollar. Do not include the dollar sign when entering your answer. 1,366 ± 2 This is a present value calculation. Use the formula PV = FV/(1+i)t 10. The difference between a nominal interest rate and an effective interest rate is expected inflation. False 11. When finding the present value of a deferred annuity of five annual payments of $1000, with the first payment at the beginning of year four, which of the following is correct? The relevant rate 10% pa. PV0 = 1000 x PVIFA(.1,5) PV0 = 1000 x PVIFA(.1,5) ÷ (1.1)4 PV0 = 1000 x PVIFA(.1,7) – 1000 x PVIFA(.1,2) Dr awacashflowmapt ohel psol vet hepr obl em.Remembert het i mi ngconvent i onusedi nt hi suni t .

12. A nominal annual rate of j12 = 12%pa converts to an annual effective rate of 12.68%. The monthly rate must be 12.68%/12 = 1.06% . False 13. What is the present value of a series of growing cash flows, where the first cash flow (at the end of the first period) is $400 the required rate is 10% and the growth rate is 5%? 8,000 ± 5 Use the constant growth formula. P = D 1/(r-g)

14. Mooncorp Insurance has quoted you an annual premium to insure your car of $2400. You are offered a 15% discount if you pay the lump sum immediately. You can also pay the account by making 12 equal end of month payments of $200. The effective annual opportunity cost of paying monthly as a percentage to two decimal places is? (Accurate to one basis point.) 35.97% 31.12% 2.59% 16. The annual nominal rate is jm = 0.15pa. What is the effective annual rate as a percentage to two decimal places? The number of compounding periods is 10. Enter your answer as a decimal eg 17.42% = .1742 to four decimal places. Accuracy of one basis point. Tip: use excel to get the required accuracy. Correct 0.1605 ± 0 EAR = (1+j/m)m-1 17. What is the Future Value in 2 years of an amount of $6,000, if the rate is 12% p.a.? Your answer should be calculated to the nearest dollar. Do not use the $ sign when entering your answer. Correct 7,526 ± 2...