Chapter 04 - Discounted Cash Flow Valuation 11. A perpetuity differs from an annuity because: A. perpetuity payments vary with the rate of inflation. B. perpetuity payments vary with the market rate of interest. C. perpetuity payments are variable while annuity payments are constant.
D. perpetuity payments never cease. E. annuity payments never cease.
Difficulty level: Easy Topic: PERPETUITY VERSUS ANNUITY Type: CONCEPTS
12. Which one of the following statements concerning the annual percentage rate is correct? A. The annual percentage rate considers interest on interest.
B. The rate of interest you actually pay on a loan is called the annual percentage rate. C. The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly.
D. When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.
E. The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.
Difficulty level: Medium Topic: ANNUAL PERCENTAGE RATE Type: CONCEPTS
13. Which one of the following statements concerning interest rates is correct? A. The stated rate is the same as the effective annual rate.
B. An effective annual rate is the rate that applies if interest were charged annually. C. The annual percentage rate increases as the number of compounding periods per year increases.
D. Banks prefer more frequent compounding on their savings accounts. E. For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.
Difficulty level: Medium Topic: INTEREST RATES Type: CONCEPTS 4-5
Chapter 04 - Discounted Cash Flow Valuation
14. Which of the following statements concerning the effective annual rate are correct? I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates.
II. The more frequently interest is compounded, the higher the effective annual rate. III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily.
IV. When borrowing and choosing which loan to accept, you should select the offer with the highest effective annual rate.
A. I and II only B. I and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV
Difficulty level: Medium Topic: EFFECTIVE ANNUAL RATE Type: CONCEPTS
15. The highest effective annual rate that can be derived from an annual percentage rate of 9% is computed as:
A. .09e - 1. B. e.09 ， q. C. e ， (1 + .09). D. e.09 - 1. E. (1 + .09)q.
Difficulty level: Medium Topic: CONTINUOUS COMPOUNDING Type: CONCEPTS
16. The time value of money concept can be defined as: A. the relationship between the supply and demand of money. B. the relationship between money spent versus money received. C. the relationship between a dollar to be received in the future and a dollar today. D. the relationship between interest rate stated and amount paid.
E. None of the above.
Difficulty level: Easy Topic: TIME VALUE Type: CONCEPTS 4-6
Chapter 04 - Discounted Cash Flow Valuation 17. Discounting cash flows involves:
A. discounting only those cash flows that occur at least 10 years in the future. B. estimating only the cash flows that occur in the first 4 years of a project. C. multiplying expected future cash flows by the cost of capital. D. discounting all expected future cash flows to
reflect the time value of money. E. taking the cash discount offered on trade merchandise.
Difficulty level: Easy Topic: CASH FLOWS Type: CONCEPTS 18. Compound interest:
A. allows for the reinvestment of interest payments.
B. does not allow for the reinvestment of interest payments. C. is the same as simple interest.
D. provides a value that is less than simple interest. E. Both A and D.
Difficulty level: Easy Topic: INTEREST Type: CONCEPTS 19. An annuity:
A. is a debt instrument that pays no interest.
B. is a stream of payments that varies with current market interest rates. C. is a level stream of equal payments through time.
D. has no value. E. None of the above.
Difficulty level: Easy Topic: ANNUITY Type: CONCEPTS 4-7
Chapter 04 - Discounted Cash Flow Valuation
20. The stated rate of interest is 10%. Which form of compounding will give the highest
effective rate of interest? A. annual compounding B. monthly compounding
C. daily compounding D. continuous compounding
E. It is impossible to tell without knowing the term of the loan. Difficulty level: Easy Topic: COMPOUNDING Type: CONCEPTS 21. The present value of future cash flows minus initial cost is called:
A. the future value of the project. B. the net present value of the project. C. the equivalent sum of the investment.
D. the initial investment risk equivalent value. E. None of the above.
Difficulty level: Easy Topic: PRESENT VALUE Type: CONCEPTS
22. Find the present value of $5,325 to be received in one period if the rate is 6.5%.
A. $5,000.00 B. $5,023.58 C. $5,644.50 D. $5,671.13
E. None of the above.
Difficulty level: Easy Topic: PRESENT VALUE - SINGLE SUM Type: PROBLEMS
4-8
Chapter 04 - Discounted Cash Flow Valuation
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