Description

Berk FIN 300 and 401test bank COMBINED

7) You decide to deposit $5000 in a bank account paying 3.5% interest. What is the value
of your savings in one year?
A) $5,175
B) $4,831
C) $5,000
D) $5,500
E) $5,350
Answer: A
Explanation: A) 5000 × 1.035 = $5,175
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
8) You decide to deposit your money in a bank account paying 6% interest. If the value of
your savings grows to $3,180 in one year’s time, how much money did you deposit?
A) $3,180
B) $3,371
C) $3,000
D) $3,100
E) $3,080
Answer: C
Explanation: C) 3,180/1.06 = $3,000
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
9) You decide to $10,000 in a bank account. If the value of your savings grows to $10,200
in one year’s time, what is the interest rate on your savings?
A) 5%
B) 4%
C) 3%
D) 2%
E) 1%
Answer: D
Explanation: D) 10,200/10,000 -1 = 2%
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
10) You have made an investment which will pay you $10,485 in one year’s time. If the
discount factor is 0.9728, what is the present value of your investment?
A) $10,200
B) $10,000
C) $10,485
D) $10,778
E) $10,400
Answer: A
Explanation: A) PV = 10,485 × 0.9728 = 10,200
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
11) Owen expects to receive $20,000 at the end of next year from a trust fund. If a bank
loans money at an interest rate of 7.5%, how much money can he borrow from the bank
on the basis of this information?
A) $11,428
B) $15,000
C) $18,605
D) $21,500
E) $20,000
Answer: C
Explanation: C) $20,000 / 1.075 = $18,605
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
12) Stella deposits $5000 in a savings account at a bank that offers interest of 5.5% on
such accounts. What is the value of the money in her savings account in one year’s time?
A) $4739
B) $5135
C) $5275
D) $7750
E) $5000
Answer: C
Explanation: C) $5,000 × 1.055 = $5,275
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
13) An investment will pay $205,000 at the end of next year for an investment of $183,000
at the start of the year. If the market interest rate is 8% over the same period, should this
investment be made?
A) No, because the investment will yield $6240 less than putting the money in a bank.
B) Yes, because the investment will yield $2360 more than putting the money in a bank.
C) Yes, because the investment will yield $4280 more than putting the money in a bank.
D) Yes, because the investment will yield $7360 more than putting the money in a bank.
E) Yes, because the investment will yield $14,640 more than putting the money in a bank.
Answer: D
Explanation: D) $183,000 × 1.08 = $197,640; $205,000 – $197,640 = $7360
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
14) If $476 invested today yields $500 in one year’s time, what is the discount factor?
A) 0.05
B) 0.95
C) 1.05
D) 1.50
E) 0.24
Answer: B
Explanation: B) $476 / $500 = 0.95
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
15) If $476 invested today yields $500 in one year’s time, what is the discount rate?
A) 0.05
B) 0.95
C) 1.05
D) 1.50
E) 0.24
Answer: A
Explanation: A) 1 / (476 / 500) -1 = 0.05
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
16) A vintner is deciding when to release a vintage of sauvignon blanc. If it is bottled and
released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it
will be worth 20% more, though there will be additional costs of $500,000, realized at the
end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner
will realize if he releases the wine after barrel aging it for one year or if he releases the
wine now?
A) He will earn $600,000 less if he releases the wine now.
B) He will earn $200,000 more if he releases the wine now.
C) He will earn $107,000 less if he releases the wine now.
D) He will earn $80,000 more if he releases the wine now.
E) He will earn $500,000 less if he releases the wine now.
Answer: B
Explanation: B) PV of releasing now = $2.2 million
PV of aging one year: $2.2 million × 1.2 = $2.64 million; $2.64 million – $500,000 = $2.14
million; 2.14/1.07 = $2 million.
Difference = $2.2 million – $2 million = $200,000.
Diff: 2 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
17) Samantha has holdings of 250 troy ounces of platinum, currently valued at $815
dollars per ounce. She estimates that the price of platinum will rise to $850 per ounce in
the next year. If the interest rate is 8%, should she sell the platinum today?
A) Yes, as the difference between selling now and selling in one year is $7550 dollars one
year from now.
B) Yes, as the difference between selling now and selling in one year is $6991 dollars one
year from now.
C) Yes, as the difference between selling now and selling in one year is $5513 dollars one
year from now.
D) No, as the difference between selling now and selling in one year is -$6988 dollars one
year from now.
E) No, the difference between selling now and selling in one year is -$8750 dollars one
year from now.
Answer: A
Explanation: A) $815 × 250 = $203,750; $203,750 × 1.08 = $220,050;
$850 × 250 = $212,500; $220,050 – $212,500 = $7550
Diff: 3 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
18) You are scheduled to receive $10,000 in one year. An increase in the interest rate will
have what effect on the present value of this cash flow?
A) It will cause the present value to fall.
B) It will cause the present value to rise.
C) It will have no effect on the present value.
D) The effect cannot be determined with the information provided.
E) It will cause the present value to rise significantly.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
19) You are scheduled to receive $10,000 in one year. An decrease in the interest rate will
have what effect on the present value of this cash flow?
A) It will cause the present value to fall.
B) It will cause the present value to rise.
C) It will have no effect on the present value.
D) The effect cannot be determined with the information provided.
E) It will cause the present value to fall significantly.
Answer: B
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
20) You are scheduled to receive $10,000 in one year. An increase in the interest rate will
have what effect on the future value of this cash flow?
A) It will cause the future value to fall.
B) It will cause the future value to rise.
C) It will have no effect on the future value.
D) The effect cannot be determined with the information provided.
E) It will cause the future value to fall significantly.
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
21) If the interest rate is 5%, the one-year discount factor is equal to:
A) 0.050
B) 1.050
C) 0.952
D) 1.045
E) 0.950
Answer: C
Explanation: C) 1/(1.05) = 0.952
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
22) If the one-year discount factor is equal to 0.90909, the interest must be equal to:
A) 5.0%
B) 9.1%
C) 9.5%
D) 10.0%
E) 10.5%
Answer: D
Explanation: D) 1/(1 + r) = 0.90909
1 = (1 + r) × 0.90909
1 = 0.90909 + 0.90909r
1 – 0.90909 = 0.90909r
0.09091 = 0.90909r
r = 0.09091/0.90909 = .10 = 10%
Diff: 2 Type: MC
Skill: Analytical
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
23) Explain why a dollar today is worth more than a dollar tomorrow.
Answer: A dollar today can be invested to earn interest, which will make it worth more
than a dollar tomorrow.
Diff: 1 Type: SA
Skill: Conceptual
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
24) How can we take a financial decision with cash flows occurring at different points in
time?
Answer: We need to transform the cash flows to a single point in time either through
present value (PV) computations or through future value (FV) computations, thus bringing
all of them at the same point in time to perform simple algebraic computation.
Diff: 1 Type: SA
Skill: Conceptual
Objective: 3.3 Understand the Valuation Principle and how it can be used to identify decisions that
increase the value of the firm
3.4 Valuing Cash Flows at Different Points in Time
1) A dollar today and a dollar in one year may be considered to be equivalent.
Answer: FALSE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
2) The rule of 72 tells you approximately how long it takes for money invested at a given
rate of compound interest to double in value.
Answer: TRUE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
3) To calculate a cash flow’s present value (PV), you must compound it.
Answer: FALSE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
4) What is the present value (PV) of $85,000 received 15 years from now, assuming the
interest rate is 3% per year?
A) $54,558
B) $85,000
C) $82,524
D) $132,427
E) $5,502
Answer: A
Explanation: A) Calculate the PV with FV = $85,000, interest = 3%, and N =15, PV =
$54,558
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
5) What is the present value (PV) of $1 million received 100 years from now, assuming the
interest rate is 5% per year?
A) $10,000
B) $7,604
C) $9,524
D) $11,114
E) $112
Answer: B
Explanation: B) Calculate the PV with FV = $1,000,000, interest = 5%, and N =100, PV =
$7,604
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
6) What is the present value (PV) of $66,000 received 7 years from now, assuming the
interest rate is 9% per year?
A) $60,550
B) $60,000
C) $66,000
D) $36,104
E) $8,650
Answer: D
Explanation: D) Calculate the PV with FV = $66,000, interest = 9%, and N =7, PV =
$36,104
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
7) What is the future value (FV) of $10,000 in 50 years, assuming the interest rate is 4%
per year?
A) $100,804
B) $52,000
C) $520,000
D) $20,000
E) $71,067
Answer: E
Explanation: E) Calculate the FV with PV = $10,000, interest = 4%, and N = 50, FV =
$71,067
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
8) What is the future value (FV) of $100 in 30 years, assuming the interest rate is 8% per
year?
A) $102
B) $3,240
C) $1,800
D) $1,006
E) $1,080
Answer: D
Explanation: D) Calculate the FV with PV = $100, interest = 8%, and N = 30, FV =
$1,006
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
9) What is the future value (FV) of $72,000 in 25 years, assuming the interest rate is 5.5%
per year?
A) $1.9 million
B) $274,564
C) $171,000
D) $1.8 million
E) $144,000
Answer: B
Explanation: B) Calculate the FV with PV = $72,000, interest = 5.5%, and N = 25, FV =
$274,564
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
10) If $1 million is invested at 6% per year, in approximately how many years will the
investment double?
A) 10.1
B) 11.9
C) 12.9
D) 15
E) 8.7
Answer: B
Explanation: B) Calculate the N with FV = $2 million, PV = $1 million, and interest = 6%,
N = 11.9
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
11) If money is invested at 8% per year, after approximately how many years will the
interest earned be equal to the original investment?
A) 5 years
B) 6 years
C) 9 years
D) 12 years
E) 8 years
Answer: C
Explanation: C) Calculate the N using the rule of 72.
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
12) If the future value (FV) in two years of $100,000 invested in a certain fund that
compounds it at a fixed rate annually is $116,640, at what rate has it been compounded?
A) 8.00%
B) 11.66%
C) 16.00%
D) 24.20%
E) 10.00%
Answer: A
Explanation: A) Calculate the interest with FV = $116,640, PV = $100,000, and N = 2,
which = 8%.
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
13) Jeff has the opportunity to receive lump-sum payments either now or in the future.
Which of the following opportunities is the best, given that the interest rate is 7% per
year?
A) one that pays $1,000 now
B) one that pays $1,200 in two years
C) one that pays $1,500 in five years
D) one that pays $1,800 in ten years
E) one that pays $5,000 in 25 years
Answer: C
Explanation: C) It has the highest Present Value. Calculate with FV = $1500, and
interest = 7%, and number of years = 5, which gives PV = $1,069.479.
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
14) Michelle is saving for a new car. She wants to have $25,000 in her account in 3 years.
If her account pays 11% interest, how much money will she need to put in her account
now, to ensure that she has $25,000 in 3 years?
A) $18,280
B) $25,000
C) $20,000
D) $18,060
E) $18,000
Answer: A
Explanation: A) Calculate the PV with FV = $25000, N =3, and interest = 11%, PV =
18,280
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
15) On the day Justine was born, her grandparents put $10,000 into a savings account
that pays interest of 6% per year. How much money will Justine have in her account when
she turns 18?
A) $20,800
B) $190,800
C) $28,543
D) $20,000
E) $18,000
Answer: C
Explanation: C) Calculate the FV with PV = $10000, interest = 6%, and N = 18, FV =
$28,543
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
16) Helen is saving to start a business. If she invests $10,000 in a savings account now,
which of the following is the minimum interest rate required to ensure that she has
$25,000 in her account in ten years time?
A) 2.5%
B) 6.4%
C) 9.6%
D) 10.2%
E) 8.7%
Answer: C
Explanation: C) Calculate the interest rate FV = $25,000 with PV = $10,000 and N = 10,
which = 9.6%.
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
17) Which of the following statements is correct?
A) The process of moving a value or cash flow forward in time is known as discounting.
B) The effect of earning interest on interest is known as compound interest.
C) It is possible to compare or combine values at different points in time.
D) A dollar in the future is worth more than a dollar today.
E) Calculating the value of a future cash flow at an earlier point in time is known as
compounding.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
18) Consider the following timeline:
If the current market rate of interest is 9%, then the present value (PV) of this timeline as
of year 0 is closest to:
A) $492
B) $637
C) $600
D) $400
E) $463
Answer: A
Explanation: A) PV = FV(1 + r)n
100 / (1.09)1 = 91.74
200 / (1.09)2 = 168.34
300 / (1.09)3 = 231.66
Sum = 491.74, which is approximately $492.
Diff: 3 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
19) Consider the following timeline:
If the current market rate of interest is 12%, then the value of the cash flows in year 0
and year 2 as of year 1 is closest to:
A) $257.29
B) -$96.57
C) $78.71
D) $1.29
E) -$38.71
Answer: B
Explanation: B) This is a two-part problem involving both present and future values.
FV of year 0 c/f = FV = PV(1 + r)n = -150(1.12)1 = -$168
PV of year 2 c/f = PV = FV/(1 + r)n = 80/(1.12)1 = $71.43
So, the answer is -$168 + $71.43 = -96.57
Diff: 2 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
20) Consider the following timeline:
If the current market rate of interest is 8%, then the value as of year 1 is closest to:
A) $0
B) $1003
C) $540
D) $77
E) $40
Answer: D
Explanation: D) Two-part problem:
FV = PV(1 + r)n = 500(1.08)1 = $540
PV = FV/(1 + r)n = -500 / (1.08)1 = -$463
So, the answer is $540 + -$463 = $77.
Diff: 2 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
21) To compute the future value of a cash flow, you must
A) discount it.
B) compound it.
C) double it.
D) arbitrage it.
E) first find the present value.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
22) An investment will pay you $100 in one year and $200 in two years. If the interest rate
is 5%, what is the present value of these cash flows?
A) $305.00
B) $285.71
C) $276.65
D) 258.32
E) $272.11
Answer: C
Explanation: C) 100/(1.05) + 200/(1.052) = 95.24 + 181.41 = 276.65
Diff: 1 Type: MC
Skill: Analytical
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
23) When computing a present value, which of the following is TRUE?
A) You should adjust the discount rate to match the time period of the cash flows.
B) You should adjust the future value to match the present value.
C) You should adjust the time period to match the present value.
D) You should adjust the cash flows to match the time period of the discount rate.
E) You should adjust the time period to match the future value.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
24) If an analyst mistakenly adds cash flows occurring at different points in time, what is
the implied assumption in the process?
Answer: Cash flows occurring at different points in time cannot be added because a
dollar today is worth more than a dollar tomorrow. In other words, these cash flows are
not in the same units. The compounding and discounting effect causes these cash flows to
be different across time. However, this is only valid for nonzero interest rates. Hence, the
implied assumption in adding cash flows across time is that interest rate is zero.
Diff: 2 Type: SA
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
25) Why should interest rates be generally positive?
Answer: An investor should be compensated for forgoing current consumption and,
everything else remaining the same, a positive interest rate serves to compensate the
investor.
Diff: 2 Type: SA
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
26) What are the the three rules of valuing cash flows at different points in time?
Answer: 1. It is only possible to compare or combine values at the same point in time.
2. To calculate a cash flow’s future value, you must compound it.
3. To calculate the value of a future cash flow at an earlier point in time, we must discount
it.
Diff: 2 Type: SA
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
27) In order to distinguish between inflows and outflows, different colours are assigned to
each of these cash flows when constructing a timeline.
Answer: FALSE
Diff: 1 Type: TF
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
28) A lender lends $10,000, which is to be repaid in annual payments of $2,000 for 6
years. Which of the following shows the timeline of the loan from the lender’s
perspective?
A)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
–
$10,00
0 $2000 $2000 $2000 $2000 $2000
B)
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
0 $2000 $2000 $2000 $2000 $2000
C)
Year 0
Year
1 Year 2 Year 3 Year 4 Year 5 Year 6
–
$10,000$2000 $2000 $2000 $2000 $2000 $2000
D)
Year 0
Year
1 Year 2 Year 3 Year 4 Year 5 Year 6
–
$10,000$2000 $4000 $6000 $8000 $10,000 $12,000
E)
Year 0
Year
1 Year 2 Year 3 Year 4 Year 5 Year 6
$10,000-$2000 -$2000 -$2000 -$2000 -$2000 -$2000
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Objective: 3.4 Assess the effect of interest rates on today’s value of future cash flows
29) A tenant wants to lease a building for $48,000 per year. She signs a five-year rental
agreement that states that she will pay $24,000 every six months for the next five years.
Which of the following is the timeline for her rental payments, assuming she makes the