FP Final Review with all Correct & 100% Verified
Answers |Latest Version |Already Graded A+
your best friend just won the florida lottery. she can choose between receiving: a sum of
$16,600,000 today or an annuity of $1,050,000 per year for 20 years with the first payment starting
one year from today. what is the rate of return built into the annuity? ✔Correct Answer-2.35%
your older sister turned 35 today, and she is planning to save 20,000 per year for retirement, with the
first deposit to be made one year from today. she will invest in a mutual fund that's expected to
provide a return of 7.5% per year and plans to retire 30 years from today when she turns 65. at that
time, she expects to live for 25 years after retirement to age 90. under these assumptions, how much
can she spend each year after she retires? her first withdrawal will be made at the end of her first
retirement year ✔Correct Answer-$185,520.60
Which of the following investment cash flow streams create/provide the lowest present value?
Assume that the annual rate for all investments is 10%
- Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).
- Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20
payments).
- Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of
20 payments).
- Investment D pays $2,500 at the end of 10 years (just one payment).
-Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
✔Correct Answer-investment D
You are considering investing in a bank account that pays 7%, compounded monthly. If you invest
$3,000 at the end of each month, how many months will it take for your account to grow to
$395,000? ✔Correct Answer-97.98
According to the text, as well as a quiz question, a source of value creation are returns to capital that
exceed costs of capital. Is this statement true or false? ✔Correct Answer-True
What is a beta?
- A measure of how much a stock moves with the broader market
- A return on equity.
- A measure of how much ROE is higher than the cost of capital.
- A measure of how much taxes affect a company's WACC. ✔Correct Answer-A measure of how
much a stock moves with the broader market
According to a quiz question in Chapter 4: Sources of Value Creation, the cost of debt is determined
by
- your lender will tell you what your current borrowing costs are.
- multiplying your current ratio by your credit rating.
- multiplying your cost of equity by 1 minus the tax rate.
- subtract the cost of equity from your WACC. ✔Correct Answer-your lender will tell you what your
current borrowing costs are
according to the text, companies that have higher betas have higher costs of equity ✔Correct
Answer-true
, you can always increase a firm's value by adding leverage. ✔Correct Answer-false
Which of the following bank accounts has the highest effective annual return?
- An account that pays 8% nominal interest with monthly compounding.
- An account that pays 8% nominal interest with annual compounding.
- An account that pays 7.5% nominal interest with daily (365-day) compounding
- An account that pays 8% nominal interest with daily (365-day) compounding. ✔Correct Answer-
8% nominal interest with daily compounding
Which of the following can be a source of value creation? ✔Correct Answer-returns to capital that
exceed costs of capital, reinvesting profits to grow
Imagine a conglomerate with three divisions. Division A's assets have a beta of 0.5; division B's
assets, a beta of 1.0; and division C's assets, a beta of 1.5. If the company uses the average, 1.0,
when valuing projects for all its divisions, which division will the company overinvest in? ✔Correct
Answer-division C
for a company with returns of capital of 5% and costs of capital of 10%, its market-to-book ratio will
be: ✔Correct Answer-less than 1
how do you determine the cost of equity? ✔Correct Answer-take the risk-free rate and add the
product of your equity beta and the market risk premoum
why should companies invest in positive NPV projects? ✔Correct Answer-because they create
value by having returns greater than the cost of capital
how can a company with sustainable returns to capital of 15% and a cost of capital of 12% maximize
its value? ✔Correct Answer-reinvest as many of its profits as possible
your best friend's firm, the firm that you have worked hard at for many years has been acquired by
another firm, and you have been given a handsome severance payment of $450,0000, which you
have invested at 8.5% annual rate. with that invested severance package, you now plan to
supplement your retirement income, and you want to withdraw $55,000 at the end of each year,
starting at the end of the year. how many years will it take to exhaust your funds, run the account
down to zero? ✔Correct Answer-14.57 years
The CU Endowment Corporation is considering a new investment opportunity that requires an initial
outlay of $78,000. This investment decision is critical to the company's growth strategy, as it seeks to
diversify its revenue streams and capitalize on emerging market trends. By allocating resources to
this project, Sharp Corporation aims to enhance its long- term financial position and create value for
shareholders. The project is then expected to generate the following after-tax cash of $12,000 the
first year, $14,000 the second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth
year, and $29,000 the sixth year. What is the IRR of the project? ✔Correct Answer-10.33%
imagine you're choosing between different investment vehicles for one of your retirement accounts,
each promising the greatest growth over time. The question is, which of the following accounts has
the highest effective annual return?
- An account that pays 8.25% nominal interest with annual compounding.
- An account that pays 8.85% nominal interest with daily (365-day) compounding
- An account that pays 9% nominal interest with monthly compounding.
Answers |Latest Version |Already Graded A+
your best friend just won the florida lottery. she can choose between receiving: a sum of
$16,600,000 today or an annuity of $1,050,000 per year for 20 years with the first payment starting
one year from today. what is the rate of return built into the annuity? ✔Correct Answer-2.35%
your older sister turned 35 today, and she is planning to save 20,000 per year for retirement, with the
first deposit to be made one year from today. she will invest in a mutual fund that's expected to
provide a return of 7.5% per year and plans to retire 30 years from today when she turns 65. at that
time, she expects to live for 25 years after retirement to age 90. under these assumptions, how much
can she spend each year after she retires? her first withdrawal will be made at the end of her first
retirement year ✔Correct Answer-$185,520.60
Which of the following investment cash flow streams create/provide the lowest present value?
Assume that the annual rate for all investments is 10%
- Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments).
- Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20
payments).
- Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of
20 payments).
- Investment D pays $2,500 at the end of 10 years (just one payment).
-Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments).
✔Correct Answer-investment D
You are considering investing in a bank account that pays 7%, compounded monthly. If you invest
$3,000 at the end of each month, how many months will it take for your account to grow to
$395,000? ✔Correct Answer-97.98
According to the text, as well as a quiz question, a source of value creation are returns to capital that
exceed costs of capital. Is this statement true or false? ✔Correct Answer-True
What is a beta?
- A measure of how much a stock moves with the broader market
- A return on equity.
- A measure of how much ROE is higher than the cost of capital.
- A measure of how much taxes affect a company's WACC. ✔Correct Answer-A measure of how
much a stock moves with the broader market
According to a quiz question in Chapter 4: Sources of Value Creation, the cost of debt is determined
by
- your lender will tell you what your current borrowing costs are.
- multiplying your current ratio by your credit rating.
- multiplying your cost of equity by 1 minus the tax rate.
- subtract the cost of equity from your WACC. ✔Correct Answer-your lender will tell you what your
current borrowing costs are
according to the text, companies that have higher betas have higher costs of equity ✔Correct
Answer-true
, you can always increase a firm's value by adding leverage. ✔Correct Answer-false
Which of the following bank accounts has the highest effective annual return?
- An account that pays 8% nominal interest with monthly compounding.
- An account that pays 8% nominal interest with annual compounding.
- An account that pays 7.5% nominal interest with daily (365-day) compounding
- An account that pays 8% nominal interest with daily (365-day) compounding. ✔Correct Answer-
8% nominal interest with daily compounding
Which of the following can be a source of value creation? ✔Correct Answer-returns to capital that
exceed costs of capital, reinvesting profits to grow
Imagine a conglomerate with three divisions. Division A's assets have a beta of 0.5; division B's
assets, a beta of 1.0; and division C's assets, a beta of 1.5. If the company uses the average, 1.0,
when valuing projects for all its divisions, which division will the company overinvest in? ✔Correct
Answer-division C
for a company with returns of capital of 5% and costs of capital of 10%, its market-to-book ratio will
be: ✔Correct Answer-less than 1
how do you determine the cost of equity? ✔Correct Answer-take the risk-free rate and add the
product of your equity beta and the market risk premoum
why should companies invest in positive NPV projects? ✔Correct Answer-because they create
value by having returns greater than the cost of capital
how can a company with sustainable returns to capital of 15% and a cost of capital of 12% maximize
its value? ✔Correct Answer-reinvest as many of its profits as possible
your best friend's firm, the firm that you have worked hard at for many years has been acquired by
another firm, and you have been given a handsome severance payment of $450,0000, which you
have invested at 8.5% annual rate. with that invested severance package, you now plan to
supplement your retirement income, and you want to withdraw $55,000 at the end of each year,
starting at the end of the year. how many years will it take to exhaust your funds, run the account
down to zero? ✔Correct Answer-14.57 years
The CU Endowment Corporation is considering a new investment opportunity that requires an initial
outlay of $78,000. This investment decision is critical to the company's growth strategy, as it seeks to
diversify its revenue streams and capitalize on emerging market trends. By allocating resources to
this project, Sharp Corporation aims to enhance its long- term financial position and create value for
shareholders. The project is then expected to generate the following after-tax cash of $12,000 the
first year, $14,000 the second year, $17,000 the third year, $19,000 the fourth year, $23,000 the fifth
year, and $29,000 the sixth year. What is the IRR of the project? ✔Correct Answer-10.33%
imagine you're choosing between different investment vehicles for one of your retirement accounts,
each promising the greatest growth over time. The question is, which of the following accounts has
the highest effective annual return?
- An account that pays 8.25% nominal interest with annual compounding.
- An account that pays 8.85% nominal interest with daily (365-day) compounding
- An account that pays 9% nominal interest with monthly compounding.
