MGT 181 ENTERPRISE FINANCE CH. 5 QUESTIONS
You are investing $100 today in a savings account at your local bank. Which one of the
following terms refers to the value of this investment one year from now? - Answer -
future value
Tracy invested $1,000 five years ago and earns 4 percent interest on her investment.
By leaving her interest earnings in her account, she increases the amount of interest
she earns each year. The way she is handling her interest income is referred to as
which one of the following? - Answer -compounding
Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10
interest on his $100 investment. He reinvested the $10. The second year, he earned
$11 interest on his $110 investment. The extra $1 he earned in interest the second year
is referred to as: - Answer -interest on interest
Interest earned on both the initial principle and the interest reinvested from prior periods
is called - Answer -compound interest
Sara invested $500 six years ago at 5 percent interest. She spends her earnings as
soon as she earns any interest so she only receives interest on her initial $500
investment. Which type of interest is Sara earning? - Answer -simple interest
Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of
her winnings today discounted at her discount rate is called which one of the following?
- Answer -present value
Terry is calculating the present value of a bonus he will receive next year. The process
he is using is called: - Answer -discounting
Steve just computed the present value of a $10,000 bonus he will receive in the future.
The interest rate he used in this process is referred to as which one of the following? -
Answer -discount rate
The process of determining the present value of future cash flows in order to know their
worth today is called which on of the following - Answer -discounted cash flow valuation
Andy deposited $3,000 this morning into an account that pays 5 percent interest,
compounded annually. Barb also deposited $3,000 this morning into an account that
pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings
and spend it as soon as possible. Barb will reinvest her interest earnings into her
account. Given this, which one of the following statements is true? - Answer -Barb will
earn interest on interest
, Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal
invests $5,000 at 7 percent when he is 30 years old. Both investments compound
interest annually. Both Sue and Neal retire at age 60. Which one of the following
statements is correct assuming that neither Sue nor Neal has withdrawn any money
from their accounts? - Answer -Sue will have more money than Neal as long as they
retire at the same time.
Samantha opened a savings account this morning. Her money will earn 5 percent
interest, compounded annually. After five years, her savings account will be worth
$5,600. Assume she will not make any withdrawals. Given this, which one of the
following statements is true? - Answer -Samantha could have deposited less money
and still had $5,600 in five years if she could have earned 5.5 percent interest.
This afternoon, you deposited $1,000 into a retirement savings account. The account
will compound interest at 6 percent annually. You will not withdraw any principal or
interest until you retire in 40 years. Which one of the following statements is correct? -
Answer -The present value of this investment is equal to $1,000.
Your grandmother has promised to give you 5k when you graduate from college. She is
expecting you to graduate 2 years from now. What happens to the present value of this
gift if you delay your graduation by one year and graduate three years from now? -
Answer -Decreases
Luis is going to receive $20,000 six years from now. Soo Lee is going to receive
$20,000 nine years from now. Which one of the following statements is correct if both
Luis and Soo Lee apply a 7 percent discount rate to these amounts? - Answer -In
today's dollars, Luis' money is worth more than Soo Lee's.
You want to have $1 million in your savings account when you retire. You plan on
investing a single lump sum today to fund this goal. You are planning on investing in an
account which will pay 7.5 percent annual interest. Which of the following will reduce the
amount that you must deposit today if you are to have your desired $1 million on the
day you retire?
I. Invest in a different account paying a higher rate of interest.
II. Invest in a different account paying a lower rate of interest.
III. Retire later.
IV. Retire sooner. - Answer -I and III only
Which of the following will produce the highest present value - Answer -6 percent
interest for five years
Martin invested $1,000 six years ago and expected to have $1,500 today. He has not
added or withdrawn any money from this account since his initial investment. All interest
was reinvested in the account. As it turns out, Martin only has $1,420 in his account
You are investing $100 today in a savings account at your local bank. Which one of the
following terms refers to the value of this investment one year from now? - Answer -
future value
Tracy invested $1,000 five years ago and earns 4 percent interest on her investment.
By leaving her interest earnings in her account, she increases the amount of interest
she earns each year. The way she is handling her interest income is referred to as
which one of the following? - Answer -compounding
Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10
interest on his $100 investment. He reinvested the $10. The second year, he earned
$11 interest on his $110 investment. The extra $1 he earned in interest the second year
is referred to as: - Answer -interest on interest
Interest earned on both the initial principle and the interest reinvested from prior periods
is called - Answer -compound interest
Sara invested $500 six years ago at 5 percent interest. She spends her earnings as
soon as she earns any interest so she only receives interest on her initial $500
investment. Which type of interest is Sara earning? - Answer -simple interest
Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of
her winnings today discounted at her discount rate is called which one of the following?
- Answer -present value
Terry is calculating the present value of a bonus he will receive next year. The process
he is using is called: - Answer -discounting
Steve just computed the present value of a $10,000 bonus he will receive in the future.
The interest rate he used in this process is referred to as which one of the following? -
Answer -discount rate
The process of determining the present value of future cash flows in order to know their
worth today is called which on of the following - Answer -discounted cash flow valuation
Andy deposited $3,000 this morning into an account that pays 5 percent interest,
compounded annually. Barb also deposited $3,000 this morning into an account that
pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings
and spend it as soon as possible. Barb will reinvest her interest earnings into her
account. Given this, which one of the following statements is true? - Answer -Barb will
earn interest on interest
, Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal
invests $5,000 at 7 percent when he is 30 years old. Both investments compound
interest annually. Both Sue and Neal retire at age 60. Which one of the following
statements is correct assuming that neither Sue nor Neal has withdrawn any money
from their accounts? - Answer -Sue will have more money than Neal as long as they
retire at the same time.
Samantha opened a savings account this morning. Her money will earn 5 percent
interest, compounded annually. After five years, her savings account will be worth
$5,600. Assume she will not make any withdrawals. Given this, which one of the
following statements is true? - Answer -Samantha could have deposited less money
and still had $5,600 in five years if she could have earned 5.5 percent interest.
This afternoon, you deposited $1,000 into a retirement savings account. The account
will compound interest at 6 percent annually. You will not withdraw any principal or
interest until you retire in 40 years. Which one of the following statements is correct? -
Answer -The present value of this investment is equal to $1,000.
Your grandmother has promised to give you 5k when you graduate from college. She is
expecting you to graduate 2 years from now. What happens to the present value of this
gift if you delay your graduation by one year and graduate three years from now? -
Answer -Decreases
Luis is going to receive $20,000 six years from now. Soo Lee is going to receive
$20,000 nine years from now. Which one of the following statements is correct if both
Luis and Soo Lee apply a 7 percent discount rate to these amounts? - Answer -In
today's dollars, Luis' money is worth more than Soo Lee's.
You want to have $1 million in your savings account when you retire. You plan on
investing a single lump sum today to fund this goal. You are planning on investing in an
account which will pay 7.5 percent annual interest. Which of the following will reduce the
amount that you must deposit today if you are to have your desired $1 million on the
day you retire?
I. Invest in a different account paying a higher rate of interest.
II. Invest in a different account paying a lower rate of interest.
III. Retire later.
IV. Retire sooner. - Answer -I and III only
Which of the following will produce the highest present value - Answer -6 percent
interest for five years
Martin invested $1,000 six years ago and expected to have $1,500 today. He has not
added or withdrawn any money from this account since his initial investment. All interest
was reinvested in the account. As it turns out, Martin only has $1,420 in his account
