Chapter Four

Allocating Resources Over Time

This chapter contains 46 multiple-choice questions, 18 short problems and 9 longer problems.

Multiple Choice

1. ________ is the process of going from present value to future value, whereas ________ is

finding the present value of some future amount.

(a) Discounting; compounding (b) Compounding; annualizing (c) Compounding; discounting (d) Discounting; leasing

Answer: (c)

2. ________ refers to the interest rate at which money received before the end of the planning

horizon can be reinvested.

(a) Internal rate

(b) Reinvestment rate (c) Cost of equity (d) Compound interest

Answer: (b)

3. The difference between an immediate annuity and an ordinary annuity is ________.

(a) the number of periods

(b) the amount of the payments (c) the interest rate

(d) the timing of the payments

Answer: (d)

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4. The preferred stock of Tavistock Realty offers a cash dividend of $2.28 per year and it is

selling at a price of $110 per share. What is the yield of Tavistock Realty preferred stock?

(a) 2.07% (b) 2.12% (c) 2.28% (d) 48.25%

Answer: (a)

5. Consider the situation where you have won a $10 million lottery to be received in 25 annual

equal payments of $400,000. What will happen to the present value of these winnings if the interest rate increases during the next 25 years?

(a) it will not change (b) it will be worth more (c) it will be worth less (d) it cannot be determined

Answer: (c)

6. What is the effective annual rate on a bank account that has APR of 8 percent with interest

compounded quarterly?

(a) 6.12% (b) 8.24% (c) 8.48% (d) 17.17%

Answer: (b)

7. You take out a loan with an APR of 10% with monthly compounding. What is the effective

annual rate on your loan?

(a) 23.87% (b) 21.6% (c) 19.56% (d) 18%

Answer: (a)

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8. The CFO of CyberHelp Inc. has $250,000 in cash today that he wants to invest. How much

will this investment be worth in four years if the current interest rate is 8%?

(a) $270,000 (b) $330,000 (c) $340,125 (d) $342,150

Answer: (c)

9. If you purchase a $12,000 certificate of deposit today with an APR of 14%, with quarterly

compounding, what will the CD be worth when it matures in 5 years?

(a) $20,846.99 (b) $20,865.60 (c) $23,104.97 (d) $23,877.47

Answer: (d)

10. The CFO of CyberChain Inc. plans to unleash a media campaign that is expected to cost $15

million four years from today. How much cash should she set aside to pay for this if the current interest rate is 13%?

(a) $9.2 million (b) $13.3 million (c) $14.4 million (d) $16.9 million

Answer: (a)

11. The NPV is a measure of how much your ________ wealth changes as a result of your choice

and if the NPV is ________it does not pay to undertake that choice.

(a) future; negative (b) current; negative (c) current; positive (d) future; positive

Answer: (b)

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