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Exam 4: Discounted Cash Flow Valuation

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Question 41

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Your great-aunt left you an inheritance in the form of a trust.The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years.What is the value of this inheritance today if the applicable discount rate is 6.35%?

A) $36,811.30
B) $37,557.52
C) $39,204.04
D) $39,942.42
E) $40,006.09

F) A) and B)
G) C) and D)

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Question 42

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You hope to buy your dream house six years from now.Today your dream house costs $189,900.You expect housing prices to rise by an average of 4.5% per year over the next six years.How much will your dream house cost by the time you are ready to buy it?

A) $240,284.08
B) $246,019.67
C) $246,396.67
D) $246,831.94
E) $247,299.20

F) A) and C)
G) B) and C)

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Question 43

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What is the future value of $2,400 a year for three years at an 8% rate of interest?

You have deposited $1,500 in an account that promises to pay 8% compounded quarterly for the next five years.How much will you have in the account at the end?

The Bad Guys Co.is notoriously known as a slow-payer.It currently needs to borrow $25,000 and only one company will even deal with Bad Guys.The terms of the loan call for daily payments of $30.76.The first payment is due today.The interest rate is 21% compounded daily.What is the time period of this loan?

You are considering a job offer.The job offers an annual salary of $52,000, $55,000, and $60,000 a year for the next three years, respectively.The offer also includes a starting bonus of $2,000 payable immediately.What is this offer worth to you today at a discount rate of 6%?

The Great Giant Corp.has a management contract with its newly hired president.The contract requires a lump sum payment of $25 million be paid to the president upon the completion of her first ten years of service.The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow.The company can earn 6.5% on these funds.How much must the company set aside each year for this purpose?

There are three factors that affect the future value of an annuity.Explain what these three factors are and discuss how an increase in each will impact the future value of the annuity.

Mr.Miser, who is 35 years old, has just inherited $11,000 and decides to use the windfall towards his retirement.He places the money in a bank which promises a return of 6% per year until his planned retirement in 30 years.If his funds earn 6% interest compounded annually, how much will he have at retirement? Repeat the analysis for both semi-annual and continuous compounding.

What is the present value of a payment of $21,000 three years from now if the effective annual interest rate is 4%?

What is the annual percentage rate on a loan with a stated rate of 2% per quarter?

You estimate that you will have $24,500 in student loans by the time you graduate.The interest rate is 6.5%.If you want to have this debt paid in full within five years, how much must you pay each month?

An annuity:

What is the present value of 10 annual payments of $500 at a discount rate of 12%?

Todd is able to pay $160 a month for five years for a car.If the interest rate is 4.9%, how much can Todd afford to borrow to buy a car?

A mortgage instrument pays $1.5 million at the end of each of the next two years.An investor has an alternative investment with the same amount of risk that will pay interest at 8% compounded semiannually.Which of the following amounts is closest to what the investor should pay for the mortgage instrument?

Thornton will receive an inheritance of $500,000 three years from now.Thorton's discount rate is 10% compounded semiannually.Which of the following values is closest to the amount that Thornton should accept today for the right to his inheritance?

One year ago, you invested $3,000.Today it is worth $3,142.50.What rate of interest did you earn?

You are considering an annuity which costs $100,000 today.The annuity pays $6,000 a year.The rate of return is 4.5%.What is the length of the annuity time period?

You have been investing $120 a month for the last 15 years.Today, your investment account is worth $47,341.19.What is your average rate of return on your investments?