Solution Key for Exam 2 - Financial Management | FIN 3123, Exams of Finance

Download Solution Key for Exam 2 - Financial Management | FIN 3123 and more Exams Finance in PDF only on Docsity! Financial Management FIN 3123 01 TEST TWO Name: "As a Mississippi State University student I will conduct myself with honor and integrity at all times. I will not lie, cheat, or steal, nor will I accept the actions of those who do." Signature: Conceptual Questions 1. Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following? A. single amount B. compounded value C. present value D. simple amount E. future value C 2. An ordinary annuity is best defined by which one of the following? A. increasing payments paid for a definitive period of time B. increasing payments paid forever C. equal payments paid at regular intervals over fixed time periods D. unending equal payments paid at regular intervals E. unequal payments that occur at set intervals for a limited period of time C 3. Tracy invested $1,000 five years ago and earns 4% interest on her investment. By leaving her interest earnings in her account, she received $1,216.65 after five years. The way she was handling her interest income is referred to as which one of the following? A. aggregation B. compounding C. discounting D. accumulation E. simplifying B 4. Which one of the following accurately defines a perpetuity? A. a limited number of equal payments paid in even time increments B. unending equal payments paid at either equal or unequal time intervals C. varying amounts that are paid at even intervals forever D. payments of equal amounts that are paid irregularly but indefinitely E. unending equal payments paid at equal time intervals E 5. Sue and Neal are twins. Sue invests $1,000 at 5 percent when she is 30 years old. Neal invests $1,000 at 5 percent when he is 20 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts? A. Sue will have less money when she retires than Neal. B. Neal will earn less interest on interest than Sue. C. Sue will earn more compound interest than Neal. D. If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings. E. Sue will have more money than Neal as long as they retire at the same time. E. discounting. E Calculation Questions 16. Young expects to receive $20,000 at graduation in 3 years. He plans on investing it at 9% until he has $33,000. How long will Young wait from now? A. 3.22 years B. 5.82 years C. 7.98 years D. 8.81 years E. none of the above FV=$30,000 PV=$20,000 r=9%, using the calculator gets t = 5.81 years So he will wait: 3 years + 5.81 years = 8.81 years D 17. Your coin collection contains 50 1985 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2033, assuming they appreciate at a 7% annual rate? A. $1286.45 B. $2289.05 C. $3937.22 D. $5292.97 E. none of the above PV=$50 r = 7%, t = 2033-1985 = 48 years, using the calculator gets FV = $1286.45 Or FV = PV(1+r)t = 50(1+0.07)48 = $1286.45 A 18. Andy plans to make monthly deposits of $250 into a retirement account that pays 10% interest compounded monthly. If his deposits will be made at the end of each month, how large will his retirement account be in 35 years? A. $874,064.35 B. $861,723.06 C. $948,180.23 D. $956,078.57 E. none of the above C = $250; r = 10%/12 = 0.833%; t = 35*12 = 420 months FVA = C[(1+r)t-1]/r = 250*[(1+0.00833) 420-1]/0.00833 = $948,180.23 C 19. Given an interest rate of 5% per year, what is the value at date t = 4 of a perpetual stream of $1,000 payments that begins at date t = 10? A. $14,924.31 B. $15,670.52 C. $17,367.22 D. $18,128.97 E. none of the above A perpetuity: PV = $1,000/0.05 = $20,000 PV = $20,000/(1+0.05)5 = $15,670.52 B Question 20, 21, 22, 23 are based on the following two projects: Year Cash Flow (A) Cash Flow (B) 0 -275,563 -14,837 1 28,500 4,024 2 54,000 8,848 3 52,000 13,218 4 382,000 8,142 20. What are the payback periods for Project A and Project B? A. Project A: 2.41 years; Project B: 3.89 years B. Project A: 2.20 years; Project B: 3.04 years C. Project A: 3.52 years; Project B: 2.29 years D. Project A: 3.37 years; Project B: 2.15 years E. none of the above The payback period for project A: 3 + ($141,063/$382,000) = 3.37 years The payback period of project B: 2 + ($1,965/$13,218) = 2.15 years D 21. If the discount rate is 6% for Project A and Project B, what are the NPV for Project A and Project B? A. Project A: $145,623.58; Project B: $14,381.23 B. Project A: $152,904.76; Project B: $14,812.67 C. Project A: $141,254.87; Project B: $15,100.29 D. Project A: $138,324.40; Project B: $13,662.17 E. none of the above The NPV for project A: NPV = –$275,563 + $28,500/1.06 + $54,000/1.062 + $52,000/1.063 + $382,000/1.064 NPV = $145,623.58 The NPV for project B: NPV = –$14,837 + $4,024/1.06 + $8,848/1.062 + $13,218/1.063 + $8,142/1.064 NPV = $14,381.23 A 22. What are the IRR for Project A and Project B? A. Project A: 20%; Project B: 38% B. Project A: 19.4%; Project B: 36.1% C. Project A: 21.6%; Project B: 39.9% D. Project A: 22%; Project B: 35.8% E. none of the above The IRR for project A: $275,563 = $28,500/(1+IRR) + $54,000/(1+IRR)2 + $52,000/(1+IRR)3 + $382,000/(1+IRR)4 IRR = 20% The IRR for project B: $14,837 = $4,024/(1+IRR) + $8,848/(1+IRR)2 + $13,218/(1+IRR)3 + $8,142/(1+IRR)4 IRR = 38% A 23. If two projects are independent, which project(s) should you accept? A. Accept Project A only; B. Accept Project B only; C. Accept Project A and Project B; D. Accept neither Project A nor Project B; E. none of the above Since Project A and Project B are independent, Accept both of them since the NPV of two projects are positive. C Question 24, 25, 26 are based on the information: Live Forever Insurance Co. is selling a perpetuity contract that pays $1,520 monthly. The contract currently sells for $102,000. 24. What is the monthly return on this investment vehicle? A. 2.31% B. 1.78% C. 2.22% D. 1.49% E. none of the above A perpetuity: PV = C/r then r = C/PV = 1,520/102,000 = 0.0149 or 1.49% D 25. What interest rate is the company required by law to report to potential customers? A. 21.36% B. 26.64% C. 17.88% D. 27.72% E. none of the above APR = 1.49% * 12 = 17.88% C 26. What is the real interest rate the company charges the potential customers? A. 19.42% B. 31.53% C. 23.58% D. 30.15% E. none of the above m = 12, then EAR =[1+APR/m]m-1=[1+17.88%/12]12-1= 0.1942 or 19.42% A 27. Holiday Tours 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 here first 3 years of service. Holiday Tours 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% on the funds. How much must Holiday Tours set aside each year for this purpose?