Principles
of
/
Financial
/
Management
/
Exam 2 Questions With Correct Answers
/ / / / / /
Chapter /Eight: /- /correct /answer(s) /✔✔ /The /Time /Value /of /Money
The
/Time
/Value /of /Money /- /correct /answer(s) /✔✔ /Money's /potential /to /grow /in /value /over /time. /
The /relationship /between /time, /money, /a /rate /of /return, /and /earnings /growth.
Money
/that
/is /to /be /received /in /the /future /is /worth /less /than /the /same /dollar /amount /received /today.
Debt /paid /in /the /future /is /less /burdensome /than /a /debt /paid /now.
The /Future /Value /of /a /Single /Amount /- /correct /answer(s) /✔✔ /Example:
$100 /today, /earns /8% /a /year /in /the /bank, /after /one /year:
$100+(.08x$100)=$100+$8= /$108
or
$100x(1.08)^1=$100
,The
/Present
/Value
/of /
a
/Single
/Amount /- /correct /answer(s) /✔✔ /The /value /today /of /an /amount /to /be /received /in /the /future. /
Example:
PV= /100/(1+10)^1=90.90
PV= /100/(1+10)^8=46.65
Annuities /-
/correct /answer(s) /✔✔ /An /annuity /is /a /series /of /equal /cash /flows /spaced /evenly /over /time.
For /example, /rent.
Ordinary
/Annuity /- /correct /answer(s) /✔✔ /The /cash /payments /occur /at /the /end /of /each /time /period.
Annuity
/Due /- /correct /answer(s) /✔✔ /The /cash /payments /occur /at /the /beginning /of /each /time /period.
Future
/Value
/of /an /Ordinary /Annuity /- /correct /answer(s) /✔✔ /Example /of /$100 /at /8% /interest /for /3 /years:
FVOA= /100(((1+.08)^3)-1/.08)
FVOA= /100(3.2464)= /324.64
,Present
/Value
/of /an /Ordinary /Annuity /- /correct /answer(s) /✔✔ /Example /of /$100 /at /8% /interest /for /3 /years:
PVOA= /100((1-(1/(1.08)^3)/.08)
PVOA= /100(2.5771)=257.71
Future
/Value /of /an /Annuity /Due /- /correct /answer(s) /✔✔ /Example /of /$100 /at /8% /interest /for /3 /years:
FVAD= /100(((1+.08)^3)-1/.08)(1.08)
FVAD= /100(3.2464)(1.08)= /350.61
Present
/Value /of /an /Annuity /Due /- /correct /answer(s) /✔✔ /Example /of /$100 /at /8% /interest /for /3 /years:
PVAD= /100((1-(1/(1.08)^3))/.08)(1.08)
PVAD= /100(2.5771)(1.08)= /278.33
Amortized
/Loans /-
/correct
/answer(s)
/✔✔ /A /loan /that /is /paid /off /in /equal /amounts /that /include /principal /as /well /as /interest.
You
/borrow
/$20,000
/from
/the
, /bank
/to
/purchase /
a
/used
/car.
/You
/agree
/to
/make /payments /at /the /end /of /each /month /for /the /next /4 /years. /If /the /annual /interest /rate /on
/this
/loan /is /9%, /how /much /is /your /monthly /payment? /- /correct /answer(s) /✔✔ /$20,000=PMT(1-
(1/(1.0075)^48)))/.0075
$20,000=PMT(40.184782)
PMT= /497.70
Perpetuities /- /correct /answer(s) /✔✔ /A /perpetuity /is /a /series /of /equal /payments /at /equal /time
/intervals /that /will /be /received /into /infinity.
PVP= /PMT/k
A
/share
/of
/preferred
/stock
/pays /
a
/constant
/dividend
/of
/$5
/per /year. /What /is /the /present /value /if /k /=8%? /- /correct /answer(s) /✔✔ /If /k /= /8%: /PVP /= /$5/.08
/= /$62.50
of
/
Financial
/
Management
/
Exam 2 Questions With Correct Answers
/ / / / / /
Chapter /Eight: /- /correct /answer(s) /✔✔ /The /Time /Value /of /Money
The
/Time
/Value /of /Money /- /correct /answer(s) /✔✔ /Money's /potential /to /grow /in /value /over /time. /
The /relationship /between /time, /money, /a /rate /of /return, /and /earnings /growth.
Money
/that
/is /to /be /received /in /the /future /is /worth /less /than /the /same /dollar /amount /received /today.
Debt /paid /in /the /future /is /less /burdensome /than /a /debt /paid /now.
The /Future /Value /of /a /Single /Amount /- /correct /answer(s) /✔✔ /Example:
$100 /today, /earns /8% /a /year /in /the /bank, /after /one /year:
$100+(.08x$100)=$100+$8= /$108
or
$100x(1.08)^1=$100
,The
/Present
/Value
/of /
a
/Single
/Amount /- /correct /answer(s) /✔✔ /The /value /today /of /an /amount /to /be /received /in /the /future. /
Example:
PV= /100/(1+10)^1=90.90
PV= /100/(1+10)^8=46.65
Annuities /-
/correct /answer(s) /✔✔ /An /annuity /is /a /series /of /equal /cash /flows /spaced /evenly /over /time.
For /example, /rent.
Ordinary
/Annuity /- /correct /answer(s) /✔✔ /The /cash /payments /occur /at /the /end /of /each /time /period.
Annuity
/Due /- /correct /answer(s) /✔✔ /The /cash /payments /occur /at /the /beginning /of /each /time /period.
Future
/Value
/of /an /Ordinary /Annuity /- /correct /answer(s) /✔✔ /Example /of /$100 /at /8% /interest /for /3 /years:
FVOA= /100(((1+.08)^3)-1/.08)
FVOA= /100(3.2464)= /324.64
,Present
/Value
/of /an /Ordinary /Annuity /- /correct /answer(s) /✔✔ /Example /of /$100 /at /8% /interest /for /3 /years:
PVOA= /100((1-(1/(1.08)^3)/.08)
PVOA= /100(2.5771)=257.71
Future
/Value /of /an /Annuity /Due /- /correct /answer(s) /✔✔ /Example /of /$100 /at /8% /interest /for /3 /years:
FVAD= /100(((1+.08)^3)-1/.08)(1.08)
FVAD= /100(3.2464)(1.08)= /350.61
Present
/Value /of /an /Annuity /Due /- /correct /answer(s) /✔✔ /Example /of /$100 /at /8% /interest /for /3 /years:
PVAD= /100((1-(1/(1.08)^3))/.08)(1.08)
PVAD= /100(2.5771)(1.08)= /278.33
Amortized
/Loans /-
/correct
/answer(s)
/✔✔ /A /loan /that /is /paid /off /in /equal /amounts /that /include /principal /as /well /as /interest.
You
/borrow
/$20,000
/from
/the
, /bank
/to
/purchase /
a
/used
/car.
/You
/agree
/to
/make /payments /at /the /end /of /each /month /for /the /next /4 /years. /If /the /annual /interest /rate /on
/this
/loan /is /9%, /how /much /is /your /monthly /payment? /- /correct /answer(s) /✔✔ /$20,000=PMT(1-
(1/(1.0075)^48)))/.0075
$20,000=PMT(40.184782)
PMT= /497.70
Perpetuities /- /correct /answer(s) /✔✔ /A /perpetuity /is /a /series /of /equal /payments /at /equal /time
/intervals /that /will /be /received /into /infinity.
PVP= /PMT/k
A
/share
/of
/preferred
/stock
/pays /
a
/constant
/dividend
/of
/$5
/per /year. /What /is /the /present /value /if /k /=8%? /- /correct /answer(s) /✔✔ /If /k /= /8%: /PVP /= /$5/.08
/= /$62.50
