## 03 Jan Which of the following investments would have the lowest present value

1. Which of the following investments would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero. A. Investment D pays $2,500 at the end of 10 years (just one payment). B. Investment C pays $125 at the beginning of every 6-month period for the next 10 years (a total of 20 payments). C. Investment E pays $250 at the beginning of every year for the next 10 years (a total of 10 payments). D. Investment A pays $250 at the end of every year for the next 10 years (a total of 10 payments). E. Investment B pays $125 at the end of every 6-month period for the next 10 years (a total of 20 payments).

2. Which of the following statements is CORRECT?

A. Limited liability is an advantage of the corporate form of organization to its owners (stockholders), but corporations have more trouble raising money in financial marketsbecause of the complexity of this form of organization.

B. A corporation is a legal entity created by a state, and it has a life and existence that is separate from the lives and existence of its owners and managers.

C. Although the stockholders of the corporation are insulated by limited legal liability, the legal status of the corporation does not protect the firm's managers in the same way, i.e.,bondholders can sue its managers if the firm defaults on its debt.

D. Unlimited liability and limited life are two key advantages of the corporate form over other forms of business organization. E. A hostile takeover is the main method of transferring ownership interest in a corporation.

3. Nature Jane has just won a lottery with a reported prize of $40 million. However, this reported prize is just the sum of the 20 beginning of the year payments of $2,000,000 per year, and this particular lottery doesn’t offer an upfront cash option. This presents a problem for Nature Jane because she wants to use her lottery winnings to fund her dream to build a Wildebeest Sanctuary right away and she would need more than the initial $2,000,000 lottery prize payment. Nature Jane decides to put her entire lottery prize annuity up for bid. Several insurance and finance companies respond, and Prairie Insurance Company has the highest bid of $27 million, which is accepted by Nature Jane . What annual rate of return would the company earn with their bid?

A. 4.59% B. 6.15% C. 5.62% D. 4.07%

4. Which of the following best describes what happens to the present value and future value of a cash flow as the interest rate increases?

A. Both the present value and future value decreases. B. Both present value and future value stay the same. C. Both the present value and future value increases. D. The present value decreases and the future value increases.

5. Suppose a U.S. treasury bond will pay $2,875 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

A. $2,918.55 B. $2,124.71 C. $2,381.54 D. $2,428.24 E. $2,334.84

6. You are negotiating to make a 7-year loan of $27,500 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. Breck is essentially riskless, so you are confident the payments will be made. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?

A. $5,683.99 B. $5,513.47 C. $5,172.43 D. $5,058.75 E. $5,740.83

7. An annuity pays $1000 at the end of each of the next 8 years. What is the future value of this annuity at 6.5% in 8 years?

A. $6,088.75 B. $10,076.86 C. $10,731.85 D. $6,484,52 E. $8,000.00

8. Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $3,800 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate's trustee) will make 40 more $3,800 payments until a 46th and final payment is made on Steve's 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a ""trust fund baby,"" but he also wants to ensure that Steve is provided for in his old age. Until now, the grandfather has been disappointed with Ed, hence has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed. He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Ed's trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?

A. $6,909 B. $5,663 C. $5,889 D. $5,833 E. $5,153

9. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant? A. A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage. B. A bank loan's nominal interest rate will always be equal to or less than its effective annual rate. C. If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%. D. Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit. E. The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity. 10. Which of the following statements is CORRECT?

A. Partnerships have more difficulty attracting large amounts of capital than corporations because of such factors as unlimited liability, the need to reorganize when a partner dies, and the illiquidity (difficulty buying and selling) of partnership interests.

B. In a typical partnership, liability for other partners' misdeeds is limited to the amount of a particular partner's investment in the business.

C. In a limited partnership, the limited partners have voting control, while the general partner has operating control over the business, and the limited partners are individually responsible, on a pro rata basis, for the firm's debts in the event of bankruptcy.

D. A slow-growth company, with little need for new capital, would be more likely to organize as a corporation than would a faster growing company.

E. A major disadvantage of a partnership relative to a corporation is the fact that federal income taxes must be paid by the partners rather than by the firm itself.

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