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 accou