Follow Below Link to
Download File
View Sample Chapter Below:
Chapter 04
Discounted Cash Flow
Valuation
Multiple Choice Questions
|
1.
|
An annuity stream of
cash flow payments is a set of:
|
A.
|
level cash flows occurring each
time period for a fixed length of time.
|
|
B.
|
level cash flows occurring each
time period forever.
|
|
C.
|
increasing cash flows occurring
each time period for a fixed length of time.
|
|
D.
|
increasing cash flows occurring
each time period forever.
|
|
E.
|
arbitrary cash flows occurring
each time period for no more than 10 years.
|
|
|
2.
|
Annuities where the
payments occur at the end of each time period are called _____, whereas _____
refer to annuity streams with payments occurring at the beginning of each
time period.
|
A.
|
ordinary annuities; early
annuities
|
|
B.
|
late annuities; straight
annuities
|
|
C.
|
straight annuities; late
annuities
|
|
D.
|
annuities due; ordinary
annuities
|
|
E.
|
ordinary annuities; annuities
due
|
|
|
3.
|
An annuity stream
where the payments occur forever is called a(n):
|
D.
|
amortized cash flow stream.
|
|
|
4.
|
The interest rate
expressed in terms of the interest payment made each period is called the
_____ rate.
|
A.
|
stated annual interest
|
|
B.
|
compound annual interest
|
|
C.
|
effective annual interest
|
|
|
5.
|
The interest rate
expressed as if it were compounded once per year is called the _____ rate.
|
|
6.
|
The interest rate
charged per period multiplied by the number of periods per year is called the
_____ rate.
|
|
7.
|
Paying off long-term
debt by making installment payments is called:
|
A.
|
foreclosing on the debt.
|
|
|
8.
|
You are comparing
two annuities which offer monthly payments for ten years. Both annuities are
identical with the exception of the payment dates. Annuity A pays on the
first of each month while annuity B pays on the last day of each month. Which
one of the following statements is correct concerning these two annuities?
|
A.
|
Both annuities are of equal
value today.
|
|
B.
|
Annuity B is an annuity due.
|
|
C.
|
Annuity A has a higher future
value than annuity B.
|
|
D.
|
Annuity B has a higher present
value than annuity A.
|
|
E.
|
Both annuities have the same
future value as of ten years from today.
|
|
|
9.
|
You are comparing
two investment options. The cost to invest in either option is the same
today. Both options will provide you with $20,000 of income. Option A pays
five annual payments starting with $8,000 the first year followed by four
annual payments of $3,000 each. Option B pays five annual payments of $4,000
each. Which one of the following statements is correct given these two
investment options?
|
A.
|
Both options are of equal value
given that they both provide $20,000 of income.
|
|
B.
|
Option A is the better choice of
the two given any positive rate of return.
|
|
C.
|
Option B has a higher present
value than option A given a positive rate of return.
|
|
D.
|
Option B has a lower future
value at year 5 than option A given a zero rate of return.
|
|
E.
|
Option A is preferable because
it is an annuity due.
|
|
|
10.
|
You are considering
two projects with the following cash flows:
Which of the
following statements are true concerning these two projects?
I. Both projects
have the same future value at the end of year 4, given a positive rate of
return.
II. Both projects have the same future value given a zero rate of return.
III. Both projects have the same future value at any point in time, given a
positive rate of return.
IV. Project A has a higher future value than project B, given a positive rate
of return.
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
|
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.
|
|
15.
|
The highest
effective annual rate that can be derived from an annual percentage rate of
9% is computed as:
|
|
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.
|
|
|
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.
|
|
|
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 allows for the reinvestment
of interest payments and provides a value that is less than simple interest.
|
|
|
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.
|
|
|
20.
|
The stated rate of
interest is 10%. Which form of compounding will give the highest effective
rate of interest?
|
D.
|
continuous compounding
|
|
E.
|
It is impossible to tell without
knowing the term of the loan.
|
|
|
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.
|
|
Comments
Post a Comment