corporate finance 1

1. Simple Interest versus Compound Interest:

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually. If you made a $5,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years?

• $954.24

• $8,000

• $0

• $8,954

Compute the future value to complete the table above

• $ 8,338.7; $25,987; $140,090; $300,128

• $7,879; $22,167; $139,000; $443,165

• $10,338.69; $23,802.15; $143,080.66; $413,943.81

• None of the above

Complete the table above

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• 
• 
• 

Assume the total cost of a college education will be $280,000 when your child enters college in 18 years. You presently have $50,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college education?

• 9.04%

• 10.04%

• 12%

• 8.04%

You’re trying to save to buy a new $170,000 Ferrari. You have $40,000 today that can be invested at your bank. The bank pays 6.2 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

• 22.05

• 18.05

• 16.05

• 24.05

Imprudential, Inc., has an unfunded pension liability of $700 million that must be paid in 20 years. To assess the value of the firm’s stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 8.5 percent, what is the present value of this liability?

• $200,144,230.15

• $136,931,471.85

• $100,931,471.85

• $500,000,540.56

Wainright Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? At 24 percent?

• 
• 
• 
• none of the above

Investment X offers to pay you $5,200 per year for eight years, whereas Investment Y offers to pay you $7,300 per year for five years. Which of these cash flow streams has the higher present value if the discount rate is 5 percent? If the discount rate is 15 percent?

• X has higher PV when discount rate is 5%

• X has smaller PV when discount rate is 5%

• X has higher value when discount rate is 15%

• Y has smaller value when discount rate is 15%

Toadies, Inc., has identified an investment project with the following cash flows. If the discount rate is 8 percent, what is the future value of these cash flows in Year 4? What is the future value at a discount rate of 11 percent? At 24 percent?

• 
• 
• 
• none of the above

An investment offers $6,100 per year for 15 years, with the first payment occurring one year from now. If the required return is 6 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever?

• $ 50,358.01; $ 78,015.05; $ 85,323.57; $86,416.67

• $ 65,169.19; $100,960.65; $110,418.74; $111,833.33

• $ 71,093.66; $110,138.89; $ 120,456.81; $ 122,000.00

• $59,244.72; $91,782.41; $100,380.67; $101,666.67