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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Introduction to Valuation: The Time Value of Money

Quick Quiz 1

After taking this quiz, click 'Submit Answers' for graded results. You'll also have the option of emailing the results to your instructor and/or yourself.


1	You are choosing between investments offered by two different banks. One promises a return of 10% for three years using simple interest while the other offers a return of 10% for three years using compound interest. You should:
		A)	Choose the simple interest option because both have the same basic interest rate.
		B)	Choose the compound interest optiononly if the compounding is for monthly periods.
		C)	Choose the compound interest option because it provides a higher return.
		D)	Choose the simple interest option only if compounding occurs more than once a year.
		E)	Choose the compound interest option only if you are investing less than $5,000.


2	Fresh out of college, you are negotiating with your prospective new employer. They offer you a signing bonus of $2,000,000 today or a lump sum payment of $2,500,000 three years from now. If you can earn 8% on your invested funds, which of the following is true?
		A)	Take the lump sum because it has the higher present value.
		B)	Take the signing bonus because it has the higher future value.
		C)	Take the signing bonus because it has the lower present value.
		D)	Take the lump sum because it has the lower future value.
		E)	Based on these numbers, you are indifferent between the two.


3	Your grandfather placed $2,000 in a trust fund for you. In 10 years the fund will be worth $5,000. What is the rate of return on the trust fund?
		A)	9.98%
		B)	9.60%
		C)	8.76%
		D)	5.98%
		E)	10.14%


4	You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded annually, how long will you have to wait to buy the stereo?
		A)	8.42 years
		B)	6.58 years
		C)	14.58 years
		D)	18.78 years
		E)	15.75 years


5	The future value interest factor is calculated as:
		A)	1 + r - t
		B)	(1 + r^t)
		C)	(1 + r)(t)
		D)	(1 + r)^t
		E)	None of the above are correct.


6	Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $6,000 to invest today and can earn 10% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?
		A)	$7,260
		B)	$11,948
		C)	$12,000
		D)	$13,250
		E)	$14,520


7	In 1889, Vincent Van Gogh's painting, "Sunflowers" sold for $125. One hundred years later it sold for $36 million. Had the painting been purchased by your great-grandfather and passed on to you, what annual return on investment would your family have earned on the painting?
		A)	13.40%
		B)	10.09%
		C)	11.99%
		D)	11.88%
		E)	9.11%


8	An account was opened with $1,000 10 years ago. Today, the account balance is $1,500. If the account paid interest compounded annually, how much simple interest was earned?
		A)	$86.20
		B)	$92.47
		C)	$413.80
		D)	$436.29
		E)	$500.00


9	An account was opened with $1,000 10 years ago. Today, the account balance is $1,500. If the account paid interest compounded annually, how much interest on interest was earned?
		A)	$93.10
		B)	$86.20
		C)	$102.39
		D)	$500.00
		E)	$130.28


10	Given r and t greater than zero, I. present value interest factors are less than one. II. future value interest factors are less than one. III. present value interest factors are greater than future value interest factors. IV. present value interest factors grow as t grows, provided r is held constant.
		A)	I and III only
		B)	I only
		C)	I and IV only
		D)	II and III only
		E)	II and IV only

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