Econ 134A
Test 1, Form A
John Hartman
August 18, 2015
Instructions:
YOU WILL TURN IN YOUR SCANTRON AND THE PROBLEMS PAGE. MAKE SURE ALL
WORK AND ANSWERS ARE PROVIDED ON THESE.
You have 80 minutes to complete this test, unless you arrive late. Late arrival will lower the time
available to you, and you must finish at the same time as all other students.
Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant
authorities on this issue.
You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a
communication device. You are NOT allowed to have a calculator that stores formulas, buttons that
automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to
have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these
requirements, you will be assumed to be cheating.
Unless otherwise specified, you can assume the following:
 Negative internal rates of return are not possible.
 Equivalent annual cost problems are in real dollars.
You are allowed to turn in your test early if there are at least 10 minutes remaining. As a courtesy to your
classmates, you will not be allowed to leave during the final 10 minutes of the test.
Your test should have 12 multiple choice questions (24 points) and 2 problems (14 points). The maximum
possible point total is 39 points. If your test is incomplete, it is your responsibility to notify a proctor to
get a new test.
Grading:
For your reference, an example of a well-labeled graph is below:
Filling in scantron correctly, putting name, perm #, and
section day/time on problems page,
& having photo ID
___/1
(automatic unless something is incorrect)
Multiple choice portion
_____/24
Problems
_____/14
Total score
_____/39
MULTIPLE CHOICE: Answer the following questions on your scantron. Each correct answer is worth 2
points. All incorrect or blank answers are worth 0 points. If there is an answer that does not exactly
match the correct answer, choose the closest answer.
1. A stated annual interest rate of 20%, compounded continuously, is equivalent to a stated annual interest
rate of _____%, compounded every three months.
A. 22.1
B. 20.5
C. 20.0
D. 19.5
E. 18.2
2. As described in class, which of the following answers defines risk while studying corporate finance?
A. Something bad will definitely happen
B. There is only one possible outcome
C. Two or more outcomes are possible
D. A risky set of outcomes is always worse than an outcome with certainty
E. None of the above
For the next three questions, use the following information: Sterling is ready to buy a new house. In order
to do so, he will need to take out a loan of $360,000 today. He will pay back the loan over 180 months,
starting one month from today. The stated annual interest rate charged to Sterling is 8.4%, compounded
monthly.
3. If the loan is amortized such that all payments are constant, how much is each payment?
A. $2,010
B. $2,520
C. $3,250
D. $3,520
E. $4,520
4. If the loan is amortized such that the amount of principal reduced each month is constant, how
much is the first payment?
A. $2,010
B. $2,520
C. $3,250
D. $3,520
E. $4,520
5. If the loan is amortized such that the amount of principal reduced each month is constant, how
much is the last payment?
A. $2,010
B. $2,520
C. $3,250
D. $3,520
E. $4,520
6. Project XTYZ, if invested in by a corporation, will have a positive net present value (NPV). Will
money always be invested in this project? (Note that more than one answer may be correct. If so, pick E.)
A. Yes, because every project with positive NPV should be invested in
B. Yes, because investing in this project will maximize the value of the corporation
C. No, because there may be other constraints that prevent the company from investing in this
project
D. No, because the firm will never invest in a project with a positive NPV
E. More than one answer above is correct
7. Sam is about to invest $1,000 into an account later today that earns simple interest over the next 5
years. The annual interest rate is 7%. If Sam does not make any other deposits or withdrawals, how much
money will be in the account 5 years from today?
A. $1,350
B. $1,390
C. $1,400
D. $1,410
E. $1,420
8. Suzanne will receive $500 one year from today. She will receive $540, or 8% more, two years from
today. For each of the three years after that, she will receive $40 more than the previous year. After these
five payments have been made, she will receive nothing more. Find the present value of these five
payments if the effective annual discount rate is 15%.
A. $1,925
B. $1,919
C. $1,913
D. $1,907
E. $1,900
For the next two questions, assume that today is August 18, 2015. You invest $50,000 today. Find the
future values on the following dates, given the stated nominal annual interest rates and frequency of
compounding.
9. October 18, 2016, 24% interest rate, compounded every two months
A. $64,000
B. $65,600
C. $65,800
D. $66,000
E. $66,200
10. August 18, 2024, 10% interest rate, compounded every 18 months
A. $95,000
B. $116,000 C. $118,000 D. $120,000 E. $123,000
11. Patty is about to take out a partial amortization loan. The loan is for 1 year, but with 5-year
amortization. One year from today, a standard balloon payment will also apply. The loan amount today is
$50,000, and payments are made monthly starting one month from today. If the stated annual interest rate
is 6%, compounded monthly, how much will the balloon payment be? (Remember that the regular
payment one year from today is not included in the balloon payment.)
A. $37,000 B. $38,000
C. $39,000
D. $40,000
E. $41,000
12. An initial deposit of $100 turns into $178 ___ months from now if the stated annual interest rate is
12%, compounded monthly.
A. 78
B. 73
C. 68
D. 63
E. 58
Name____________________________ Perm #_________________________ Section time________
For the following problems, you will need to write out the solution. You must show all work to
receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least
four significant digits to each answer or you may not receive full credit for a correct solution. Show
all work in order to receive credit. You will receive partial credit for incorrect solutions in some
instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and
correct solution.
13. (6 points) If Jeanette invests $10,000 today in a project and receives $7,000 one year from today and
$9,000 two years from today in return, what is her annual internal rate of return? You can assume her
effective annual discount rate is 5%.
14. Assume that Shannon will receive a $1,200 payment 10 years from today.
(a) (4 points) If the stated annual interest rate is 8% and compounding occurs continuously, what is the
present value of the payment?
(b) (4 points) If the effective annual interest rate is 8% and compounding occurs continuously, what is the
present value of the payment?
NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE
NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS EXPLICITLY
SPECIFIED ON THE TEST.
Perpetuity
PV 
C
r
Annuity
C
1 
PV  1 
r  (1  r )T 
Growing perpetuity
C
PV 
rg
Growing annuity
T
 1
1
1  g  
PV  C 


 
 r  g r  g  1  r  
Quadratic formula
ax2 + bx + c = 0 
x
 b  b 2  4ac
2a
Logarithmic rule
ab = c  b = log c / log a