FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
Final Exam Review
Practice Solutions
1. A business created as a distinct legal entity and treated as a legal "person" is
called a ______________.
a)
b)
c)
d)
e)
corporation
sole proprietorship
general partnership
limited partnership
unlimited liability company
2. Which one of the following terms is defined as a conflict of interest between the
corporate shareholders and the corporate managers?
a)
b)
c)
d)
e)
Articles of incorporation
Corporate breakdown
Agency problem
Bylaws
Legal liability
3. Which of the following accounts are included in working capital management?
I. Accounts payable
II. Accounts receivable
Ill. Fixed assets
IV. Inventory
a)
b)
c)
d)
e)
I and II only
I and III only
II and IV only
I, II and IV only
II, III and IV only
1
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
4. A loan where the borrower receives money today and repays a single lump sum on a
future date is called a(n)_____ loan.
a)
b)
c)
d)
e)
amortized
continuous
balloon
pure discount
interest-only
5. You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments
for 5 years at 8.6 percent interest. What is the amount of each payment?
a)
b)
c)
d)
e)
$287.71
$291.40
$301.12
$342.76
$366.05
$17,800 = C ×
Enter
5×12
⎧ 1 − �1/ �1 + 0.086�
⎪
12
⎨
⎪
⎩
0.086
12
�⎫
⎪
⎬
⎪
⎭
; C = $366.05
5 x 12
8.6/12%
$17,800
N
I/Y
PV
Solve for
PMT
FV
−$366.05
6. You are paying an effective annual rate of 18.974 percent on your credit card. The
interest is compounded monthly. What is the annual percentage rate on this account?
a)
b)
c)
d)
e)
17.50 percent
18.00 percent
18.25 percent
18.64 percent
19.00 percent
𝐴𝐴𝐴𝐴𝐴𝐴 = �(1 + 0.18974)1/12 − 1�(12) = 17.50%
2
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
7. The Pawn Shop loans money at an annual rate of 23 percent and compounds interest
weekly. What is the actual rate being charged on these loans?
a)
b)
c)
d)
e)
25.16 percent
25.80 percent
26.49 percent
26.56 percent
26.64 percent
0.23 52
�� − 1 = 25.80 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝐸𝐸𝐸𝐸𝐸𝐸 = �1 + �
52
8. On June 1, you borrowed $220,000 to buy a house. The mortgage rate is 8.25 percent.
The loan is to be repaid in equal monthly payments over 15 years. The first payment is
due on July 1. How much of the second payment applies to the principal balance?
(Assume that each month is equal to 1/12 of a year.)
a)
b)
c)
d)
e)
$626.08
$721.14
$1,358.56
$1,453.38
$2,056.70
⎡
⎤⎫
⎧
1
⎢
⎥⎪
⎪1 −
⎢
0.0825 15×12 ⎥
⎣�1 + 12 �
⎦⎬
$220,000 = C × ⎨
⎪
⎪
0.0825
⎩
⎭
12
C = $2,134.31
Enter
15x12
N
8.25/12%
$220,000
I/Y
PV
Solve for
PMT
FV
−$2,134.31
Beginning balance
Payment amount
Interest
Principal
$220,000.00
$2,134.31
$1,512.50
$621.81
$219,378.19
$2,134.31
$1,508.23
$626.08
3
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
9. Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued
by Winston Industries. The 11.6 percent is referred to as which one of the following?
a)
b)
c)
d)
e)
Coupon rate
Face rate
Call rate
Yield to maturity
Interest rate
10. The Walthers Company has a semi-annual coupon bond outstanding. An increase in the
market rate of interest will have which one of the following effects on this bond?
a)
b)
c)
d)
e)
Increase the coupon rate
Decrease the coupon rate
Increase the market price
Decrease the market price
Increase the time period
11. A 6-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on
February 1 and August 1. Assume today is October 1. What will the difference, if any, be
between this bond's clean and dirty prices today?
a)
b)
c)
d)
e)
No difference
One month's interest
Two months' interest
Four months' interest
Five months' interest
4
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
12. The bonds issued by Stainless Tubs bear an 8 percent coupon, payable semiannually. The
bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for
$952. What is the yield to maturity?
a)
b)
c)
d)
e)
7.87 percent
7.92 percent
8.08 percent
8.69 percent
9.20 percent
$952 =
⎧
⎪1 − �
0.08 × $1,000
× ⎨
⎪
2
⎩
1
⎫
�
𝑟𝑟 11 ×2 ⎪
�1 + 2�
$1,000
⎬ +
𝑟𝑟
⎪
𝑟𝑟 11 ×2
�1 + 2�
⎭
2
This cannot be solved directly, so it is easier to just use the calculator method to get an
answer. You can use the calculator answer as the rate in the formula just to verify that
your answer is correct.
Enter
11x2
N
Solve for
I/Y
−$952
$80/2
PV
PMT
$1,000
FV
4.3431%
4.3431 per 6 months × 2 = 8.6863 per year
5
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
13. Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest
annually. The face value is $1,000 and the current market price is $1,062.50 per bond.
The bonds mature in 16 years. What is the yield to maturity?
a)
b)
c)
d)
e)
6.94 percent
7.22 percent
7.46 percent
7.71 percent
7.80 percent
$1,062.50 = (0.076 × $1,000) × �
1 − [1/(1 + 𝑟𝑟)16 ]
$1,000
� +
𝑟𝑟
(1 + 𝑟𝑟)16
This cannot be solved directly, so it is easier to just use the calculator method to get an
answer. You can use the calculator answer as the rate in the formula just to verify that
your answer is correct.
Enter
16
−$1,062.50
N
Solve for
I/Y
PV
$76
PMT
$1,000
FV
6.94%
14. Grand Adventure Properties offers a 9.5 percent coupon bond with annual payments.
The yield to maturity is 11.2 percent and the maturity date is 11 years from today. What
is the market price of this bond if the face value is $1,000?
a)
b)
c)
d)
e)
$895.43
$896.67
$941.20
$946.18
$953.30
Enter
𝑃𝑃 = (0.095 × $1,000) × �
Solve for
1 − [1/(1 + 0.112)11 ]
$1,000
= $895.43
� +
0.112
(1 + 0.112)11
11
11.2%
N
I/Y
PV
$95
$1,000
PMT
FV
−$895.43
6
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
15. Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market
price of $832. The yield to maturity is 16.28 percent and the face value is $1,000. Interest
is paid semiannually. How many years is it until these bonds mature?
a)
b)
c)
d)
e)
2.10 years
4.19 years
7.41 years
9.16 years
18.32 years
$832 =
⎧
⎪1 − �
0.065 × $1,000
× ⎨
⎪
2
⎩
⎫
1
�
⎪
0.1628 𝑡𝑡 ×2
�1 + 2 �
$1,000
⎬ +
0.1628
⎪
0.1628 𝑡𝑡 ×2
�1
+
⎭
2
2 �
It is easier to solve this problem using a financial calculator. You can then use the
calculator answer as the time period in the formula just to verify that your answer is
correct.
Enter
N
Solve for
16.28/2%
−$832
$65/2
$1,000
I/Y
PV
PMT
FV
4.19
The number of six-month periods is 4.19. The number of years is 2.10 years.
16. Which one of the following is an underlying assumption of the dividend growth model?
a) A stock has the same value to every investor.
b) A stock's value is equal to the discounted present value of the future cash flows
which it generates.
c) A stock's value changes in direct relation to the required return.
d) Stocks that pay the same annual dividend have equal market values.
e) The dividend growth rate is inversely related to a stock's market price.
7
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
17. How much are you willing to pay for one share of Jumbo Trout stock if the company just
paid a $0.70 annual dividend, the dividends increase by 2.5 percent annually and you
require a 10 percent rate of return?
a)
b)
c)
d)
e)
$9.29
$9.33
$9.53
$9.57
$9.59
𝑃𝑃0 =
$0.70 × (1 + 0.025)
= $9.57
0.10 − 0.025
18. The common stock of Textile Mills pays an annual dividend of $1.65 a share. The
company has promised to maintain a constant dividend even though economic times are
tough. How much are you willing to pay for one share of this stock if you want to earn a
12 percent annual return?
a)
b)
c)
d)
e)
$13.75
$14.01
$14.56
$14.79
$15.23
𝑃𝑃0 =
$1.65
= $13.75
0.12
19. The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to
pay $1.35 per share next year when the annual dividend is distributed. The firm has
established a pattern of increasing its dividends by 3 percent annually and expects to
continue doing so. What is the market rate of return on this stock?
a)
b)
c)
d)
e)
7.42 percent
7.79 percent
19.67 percent
20.14 percent
20.86 percent
$28.16 =
$1.35
; 𝑟𝑟 = 7.79 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
𝑟𝑟 − 0.03
8
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
20. Hightower Pharmacy just paid a $3.10 annual dividend. The company has a policy of
increasing the dividend by 4.2 percent annually. You would like to purchase 100 shares
of stock in this firm but realize that you will not have the funds to do so for another
four years. If you require a 16 percent rate of return, how much will you be willing to
pay per share for the 100 shares when you can afford to make this investment?
a) $31.50
b) $32.27
c) $33.12
d) $33.78
e) $34.47
$3.10 × (1 + 0.042)5
= $32.27
𝑃𝑃4 =
0.16 − 0.042
21. Combined Communications is a new firm in a rapidly growing industry. The company is
planning on increasing its annual dividend by 15 percent a year for the next 4 years and
then decreasing the growth rate to 3.5 percent per year. The company just paid its
annual dividend in the amount of $0.20 per share. What is the current value of one
share of this stock if the required rate of return is 15.5 percent?
a)
b)
c)
d)
e)
$1.82
$2.04
$2.49
$2.71
$3.05
$0.20 × (1 + 0.15)4 × (1 + 0.035)
= $3.017
0.155 − 0.035
$0.20 × (1 + 0.15)
(1 + 0.15) 4
$3.017
× �1 − �
� �+
= $2.49
𝑃𝑃0 =
0.155 − 0.15
(1 + 0.155)
(1 + 0.155)4
𝑃𝑃4 =
9
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
22. Langley Enterprises pays a constant dividend of $0.85 a share. The company announced
today that it will continue to pay the dividend for another 2 years after which time all
dividends will cease. What is one share of this stock worth today if the required rate of
return is 16.5 percent?
a)
b)
c)
d)
e)
$0.92
$1.36
$2.04
$2.09
$2.20
𝑃𝑃0 =
$0.85
$0.85
+
= $1.36
1
(1 + 0.165)
(1 + 0.165)2
23. You are viewing a graph that plots the NPVs of a project to various discount rates that
could be applied to the project’s cash flows. What is the name given to this graph?
a)
b)
c)
d)
e)
Project tract
Projected risk profile
NPV profile
NPV route
Present value sequence
24. Which of the following is a project acceptance indicator given an independent project?
a)
b)
c)
d)
e)
Profitability index less than 1.0
Project’s internal rate of return less than the required return
Discounted payback period greater than requirement
Average accounting return that is less than the internal rate of return
Internal rate of return that exceeds the required return
10
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
25. What is the net present value of a project with the following cash flows if the required
rate of return is 9 percent?
Year
0
1
2
3
a)
b)
c)
d)
e)
Cash Flow
−$42,398
$18,201
$21,219
$17,800
−$1,574.41
−$1,208.19
$5,904.65
$6,029.09
$6,311.16
𝑁𝑁𝑁𝑁𝑁𝑁 = $42,398 +
$18,201
$21,219
$17,800
+
+
= $5,904.64
1
2
(1 + 0.09)
(1 + 0.09)
(1 + 0.09)3
26. Based on the profitability index rule, should a project with the following cash flows be
accepted if the discount rate is 14 percent? Why or why not?
Year
0
1
2
3
a)
b)
c)
d)
e)
Cash Flow
−$32,100
$11,800
$0
$22,600
Yes; The PI is 1.08.
Yes; The PI is 0.96.
Yes; The PI is 0.80.
No; The PI is 0.96.
No; The PI is 0.80.
$11,800 $22,600
+
= $25,605.23
(1.14)
(1.14)3
$25,605.23
𝑃𝑃𝑃𝑃 =
= 0.80
$32,100
𝑃𝑃𝑃𝑃𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 =
11
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
27. It will cost $6,000 to acquire an ice cream cart. Cart sales are expected to be $3,600 a
year for three years. After the three years, the cart is expected to be worthless as the
expected life of the refrigeration unit is only three years. What is the payback period?
a)
b)
c)
d)
e)
1.48 years
1.67 years
1.82 years
1.95 years
2.00 years
Payback period=$6,000/$3,600=1.67 years
28. Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years.
The project has a 12 percent required rate of return and an initial cost of $6,000. What
is the discounted payback period?
a)
b)
c)
d)
e)
3.72 years
3.91 years
4.26 years
4.38 years
Never
Year
1
2
3
4
Cash flow
$2,100
$2,100
$2,100
$2,100
Discounted cash flow @ 12%
$1,875.00
$1,674.11
$1,494.74
$1,334.59
𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷𝐷 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝 = 3 +
Cumulative cash flow
$1,875.00
$3,549.11
$5,043.85
$6,378.44
$6,000 − $5,043.85
= 3.72 𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦𝑦
$1,334.59
12
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
29. A project has an initial cost of $32,000 and a 3-year life. The company uses straight-line
depreciation to a book value of zero over the life of the project. The projected net
income from the project is $1,200, $2,300, and $1,800 a year for the next 3 years,
respectively. What is the average accounting return?
a)
b)
c)
d)
e)
8.72 percent
11.04 percent
11.26 percent
14.69 percent
15.14 percent
𝐴𝐴𝐴𝐴𝐴𝐴 =
($1,200 + $2,300 + $1,800)/3
= 11.04 𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝𝑝
($32,000 + 0)/2
30. Which one of the following provides the option of selling a stock anytime during the
option period at a specified price even if the market price of the stock declines to zero?
a)
b)
c)
d)
e)
American call
European call
American put
European put
Either an American or a European put
31. Assume the price of the underlying stock decreases. How will the values of the options
respond to this change?
I. Call value decreases
II. Call value increases
III. Put value decreases
IV. Put value increases
a)
b)
c)
d)
e)
I and III only
I and IV only
II and III only
II and IV only
I only
13
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
32. This morning, Krystal purchased puts on Global Markets stock at a cost of $1.50 per
share and a strike price of $40 per share. The put expires in one year. How much profit
will she earn per share on this transaction if the stock is worth $38 a share one year
from now?
a)
b)
c)
d)
e)
−$2.00
−$1.50
−$0.50
+$0.50
+$2.00
P1 = (E – S1) = ($40 – $38) = $2.00
Cost = $1.50
Profit = $2.00 – $1.50 = $0.50
33. Which term relates to the cash flow which results from a firm’s ongoing normal business
activities?
a)
b)
c)
d)
e)
Operating cash flow
Capital spending
Net working capital
Cash flow from assets
Cash flow to creditors
Refer to section 2.4
14
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
34. A firm has net working capital of $640, long-term debt of $4,180, total assets of $6,230,
and fixed assets of $3,910. What is the amount of total liabilities?
a)
b)
c)
d)
e)
$2,050
$2,690
$4,130
$5,590
$5,860
CA = TA – FA = $6,230 – $3,910 = $2,320
NWC = CA – CL => $640 = $2,320 – CL => CL = $1,680
TL = CL + LTD = $1,680 + $4,180 = $5,860
35. A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of
$6,500. The tax rate is 34 percent. What is the value of the cash coverage ratio?
a)
b)
c)
d)
e)
12.14
15.24
17.27
23.41
24.56
CCR = [(EBIT) + Dep’n] / Int = [($68,400 – $42,900 – $6,500) + $6,500] / $2,100 = 12.14
Where: EBIT = Sales – Costs – Dep’n
15
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
36. Lassiter Industries has annual sales of $220,000 with 10 ,000 shares of stock outstanding.
The firm has a profit margin of 6 percent and a price-sales ratio of 1.20. What is the
firm’s price-earnings ratio?
a)
b)
c)
d)
e)
14
16
18
20
22
Price to sales ratio = Price / Sales
Price for all shares = (P/S ratio) x (Sales) = 1.2 x $220,000 = $264,000
PPS = Price per share = (P for all shares) / # shares = $264,000 / 10,000 = $26.40
EPS = NI / # shares = (Sales x PM) / # shares = ($220,000 x 0.06) / 10,000 = $1.32
PE ratio = PPS / EPS = $26.40 / $1.32 = 20
37. An increase in which one of the following will increase a firm’s quick ratio without
affecting its cash ratio?
a)
b)
c)
d)
e)
Cash
Inventory
Accounts receivable
Accounts payable
Fixed assets
Refer to section 3.3
A = CaR increases; B = QR decreases; C = QR increases and CaR unchanged; D = CaR
decreases; E = QR unchanged
16
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
38. If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the
following?
a)
b)
c)
d)
e)
0.0
0.5
1.0
1.5
2.0
Debt to equity ratio = TD / TE = 1 / 1 => TD = TE
Total debt ratio = TD / TA
by definition
Total debt ratio = TD / (TD + TE)
substituting (TD + TE) = TA
Total debt ratio = TD / (TD + TD)
substituting TD = TE
Total debt ratio = TD / 2TD = ½ = 0.5
39. Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and earnings
per share of $0.87. How many shares of stock are outstanding?
a)
b)
c)
d)
e)
13,558
14,407
165,523
171,000
173,540
EPS = NI / # shares => $0.87 = $150,980 / # shares => # shares = 173,540
17
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
40. Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover
of 3.2, and a current ratio of 2.9. What is the cost of goods sold?
a)
b)
c)
d)
e)
$1,560,000
$1,400,000
$1,200,000
$1,060,000
$980,000
CR = CA / CL => 2.9 = CA / $350,000 => CA = $1,015,000
QR = (CA – Invent) / CL => 1.65 = ($1,015,000 – Invent) / $350,000 => Invent = $437,500
IT = COGS / Invent => 3.2 = COGS / $437,500 => COGS = $1.400,000
41. This afternoon, you deposited $1,000 into a retirement savings account. The account
will compound interest at 6 percent annually. You will not withdraw any principal or
interest until you retire in forty years. Which one of the following statements is correct?
a)
from
b)
c)
d)
e)
The interest you earn six years from now will equal the interest you earn ten years
now.
The interest amount you earn will double in value every year.
The present value of this investment is equal to $1,000.
The total amount of interest you will earn will equal $1,000 x 0.06 x 40
The future value of this amount is equal to $1,000 / (1 + 0.06)40
Refer to section 5.1 and 5.2
18
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
42. You are depositing $1,500 in a retirement account today and expect to earn an average
return of 7.5 percent on this money. How much additional income will you earn if you
leave the money invested for 45 years instead of just 40 years?
a)
b)
c)
d)
e)
$10,723.08
$11,790.90
$12,441.56
$12,908.19
$27,066.36
FV = PV(1 + r)t
FV(45 years) = $1,500(1.075)45 = $38,857.26
FV(40 years) = $1,500(1.075)40 = $27,066.36
Difference = $38,857.26 − $27,066.36 = $11,790.90
Enter
45
7.5%
−$1,500
N
I/Y
PV
PMT
Solve for
Enter
Solve for
FV
$38,857.26
40
7.5%
−$1,500
N
I/Y
PV
PMT
FV
$27,066.36
19
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
43. Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land
is valued at $214,800. How long has she owned this land if the price of the land has
been increasing at 6 percent per year?
a)
b)
c)
d)
e)
28.33 years
29.98 years
30.23 years
31.29 years
32.08 years
FV = PV(1 + r)t
$214,800 = $36,900(1.06)t
t = [ln($214,800 / $36,900)] / [ln(1.06)] = 30.23 years
Enter
N
Solve for
6.0%
−$36,900
I/Y
PV
$214,800
PMT
FV
30.23
20
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
44. Theo needs $40,000 as a down payment for a house 6 years from now. He earns 2.5
percent interest on his savings. Theo can either deposit one lump sum today for this
purpose or he can wait a year and deposit a lump sum. How much additional money
must he deposit if he waits for one year rather than making the deposit today?
a)
b)
c)
d)
e)
$166.67
$778.98
$811.13
$862.30
$948.03
PV = FV / (1 + r)t
PV(now) = $40,000 / (1.025)6 = $34,491.87
PV(wait) = $40,000 / (1.025)5 = $35,354.17
Difference = $35,354.17 − $34,491.87 = $862.30
Enter
6
2.5%
N
I/Y
Solve for
Enter
Solve for
$40,000
PV
PMT
FV
−$34,491.87
5
2.5%
N
I/Y
$40,000
PV
PMT
FV
−$35,354.17
21
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
45. A monthly interest rate expressed as an annual rate would be an example of which of
the following rates?
a)
b)
c)
d)
e)
Stated rate
Discounted annual rate
Periodic monthly rate
Consolidated monthly rate
Effective annual rate
Refer to section 6.3
46. Your grandmother is gifting you $125 a month for four years while you attend college
to earn your bachelor’s degree. At a 6.5 percent discount rate, what are these payments
worth to you on the day you enter college?
a)
b)
c)
d)
e)
$5,201.16
$5,270.94
$5,509.19
$5,608.87
$5,800.00
1
�
(1+𝑟𝑟)𝑡𝑡
1− �
𝑃𝑃𝑃𝑃𝑃𝑃 = 𝐶𝐶 �
Enter
Solve for
𝑟𝑟
� = $125
1
⎧ 1− �
�⎫
⎪ �1+0.065�4𝑥𝑥12 ⎪
12
0.065
12
⎨
⎪
⎩
4x12
6.5/12 %
N
I/Y
⎬
⎪
⎭
= $5,270.94
$125
PV
PMT
FV
−$5,270.94
22
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
47. You are borrowing $17,800 to buy a car. The terms of the loan call for monthly
payments for 5 years at 8.6 percent interest. What is the amount of each payment?
a)
b)
c)
d)
e)
$287.71
$291.40
$301.12
$342.76
$366.05
1
�
(1+𝑟𝑟)𝑡𝑡
1− �
𝑃𝑃𝑃𝑃𝑃𝑃 = 𝐶𝐶 �
Enter
Solve for
𝑟𝑟
� = 𝐶𝐶
1
⎧ 1− �
�⎫
⎪ �1+0.086�5𝑥𝑥12 ⎪
⎨
⎪
⎩
12
0.086
12
⎬
⎪
⎭
= $17,800 => C = $366.05
5x12
8.6/12 %
$17,800
N
I/Y
PV
PMT
FV
−$366.05
23
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
48. Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract
requires a lump sum payment of $10.4 million be paid to the CEO upon the successful
completion of her first three years of service. HT wants to set aside an equal amount of
money at the end of each year to cover this anticipated cash outflow and will earn 5.65
percent on the funds. How much must HT set aside each year for this purpose? Round
to the nearest dollar.
a)
b)
c)
d)
e)
$3,466,667
$3,318,190
$3,006,409
$3,277,973
$3,184,467
𝐹𝐹𝐹𝐹𝐹𝐹 = 𝐶𝐶 �
Enter
Solve for
(1 + 𝑟𝑟)𝑡𝑡 − 1
(1.0565)3 − 1
=>
$10,400,000
=
𝐶𝐶
�
�
� => 𝐶𝐶 = $3,277,973.15
𝑟𝑟
0.0565
3
5.65%
N
I/Y
$10,400,000
PV
PMT
FV
−$3,277,973.15
24
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
49. You just received an insurance settlement offer related to an accident you had six years
ago. The offer gives you a choice of one of the following three offers shown below.
You can earn 7.5 percent compounded monthly on your investments. You do not care if
you personally receive the funds or if they are paid to your heirs should you die within
the settlement period. Which one of the following statements is correct given this
information?
Option A: $1,565 a month for 72 months
Option B: $1,012 a month for 10 years
Option C: $100,000 as a lump sum payment today
a)
b)
c)
d)
e)
Option A is the best choice because it provides the largest monthly payment.
Option B is the best choice because it pays the largest total amount.
Option B is the best choice because you will receive the most payments.
Option C is the best choice because it has the largest present value.
You are indifferent to the three options because they are all equal in value.
PV(Option A) = $90,514.16
PV(Option B) = $85,255.68
PV(Option C) = $100,000.00
Option C is the best choice since it has the largest present value.
⎧
⎫
1
⎪1 − �
72 � ⎪
0.075
⎪
�1 + 12 � ⎪
1
1− �
�
(1 + 𝑟𝑟)𝑡𝑡
𝑃𝑃𝑃𝑃𝑃𝑃(𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐴𝐴) = 𝐶𝐶 �
� = $1,565
𝑟𝑟
⎨
⎪
⎪
⎩
0.075
12
⎬
⎪
⎪
⎭
= $90,514.16
⎧
⎫
1
�
⎪1 − �
⎪
0.075 10𝑥𝑥12 ⎪
⎪
�1 + 12 �
1
1− �
�
(1 + 𝑟𝑟)𝑡𝑡
𝑃𝑃𝑃𝑃𝑃𝑃(𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂𝑂 𝐵𝐵) = 𝐶𝐶 �
� = $1,012
𝑟𝑟
⎨
⎪
⎪
⎩
0.075
12
⎬
⎪
⎪
⎭
= $85,255.68
25
FINA 230
INTRODUCTION TO FINANCIAL MANAGEMENT
Option A:
Enter
72
7.5/12 %
N
I/Y
Solve for
$1,565
PV
PMT
FV
−$90,514.16
Option B:
Enter
10x12
7.5/12 %
N
I/Y
Solve for
$1,012
PV
PMT
FV
−$85,255.68
50. You would like to establish a trust fund that will provide $120,000 a year forever for your
heirs. The trust fund is going to be invested very conservatively so the expected rate of
return is only 5.75 percent. How much money must you deposit today to fund this gift
for your heirs? Round to the nearest dollar.
a)
b)
c)
d)
e)
$2,086,957
$2,121,212
$2,300,000
$2,458,122
$2,500,000
PV(Perpetuity) = C / r = $12,000 / 0.0575 = $2,086,957
26