You purchased the stock of Sargent Motors at a price of $75.75 one year ago today

You purchased the stock of Sargent Motors at a price of $75.75 one year ago today. If you sell the stock today for $89.00, what is your rate of return?

A) 35.00%

B) 12.50%

C) 17.50%

D) 25.00%

You have invested in a project that has the following payoff schedule:

                                         Probability of

              Payoff                 Occurrence

                $40                             .15

                $50                             .20

                $60                             .30

                $70                             .30

                $80                             .05

What is the expected value of the investment's payoff? (Round to the nearest $1.)

A) $60

B) $65

C) $58

D) $70

If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return?

A) 12%

B) 13%

C) 14%

D) 15%

You are considering investing in a project with the following possible outcomes:

                                                   Probability of        Investment

        States                                  Occurrence             Returns

State 1: Economic boom              15%                        16%

State 2: Economic growth           45%                        12%

State 3: Economic decline           25%                         5%

State 4: Depression                       15%                        -5%

Calculate the expected rate of return for this investment.

A) 9.8%

B) 7.0%

C) 8.3%

D) 6.3%

An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%

An investment will pay $500 in three years, $700 in five years, and $1,000 in nine years. If the opportunity rate is 6%, what is the present value of this investment?

Answer: 

PV = $500(1/(1.06)3) + $700(1/1.06)5) + $1000(1/(1.06)9)

PV = $500(.840) + $700(.747) + $1000(.592)

       = $420.00 + $522.90 + $592.00

       = $1,534.90

What is the value (price) of a bond that pays $400 semiannually for 10 years and returns $10,000 at the end of 10 years? The market discount rate is 10% paid semiannually.

Answer:  Using a financial calculator N=20, i=5, PMT=400, FV=10000, solve for PV=-5361.77 or $5,361.77

The expected after-tax cash flow from an investment property that you are considering is

Year 1   $25,000

Year 2   $27,500

Year 3   $30,250

At the end of year 3 you expect to sell the property for $400,000.  If the appropriate discount rate is 12%, what is the most you should pay for this property?

Answer:  [25000/(1.12)1 + 27500/(1.12)2 + 302500/(1.12)3 + 400000/(1.12)3] = $350,487.71

In order to send your oldest child to law school when the time comes, you want to accumulate $40,000 at the end of 18 years. Assuming that your savings account will pay 6% compounded annually, how much would you have to deposit if:

a. you want to deposit an amount annually at the end of each year?

b. you want to deposit one large lump sum today?

Answer: 

a. PMT = $1,294.26

b. PMT = $14,013.75

You are considering purchasing common stock in AMZ Corporation. You anticipate that the company will pay dividends

You are considering purchasing common stock in AMZ Corporation. You anticipate that the company will pay dividends of $5.00 per share next year and $7.50 per share in the following year. You also believe that you can sell the common stock two years from now for $30.00 per share. If you require a 14% rate of return on this investment, what is the maximum price that you would be willing to pay for a share of AMZ common stock?

Answer: 

PV  = $5.00 /(1.14)1 + ($7.50 + $30.00)/(1.14)2

        = $33.24

To evaluate and compare investment proposals, we must adjust all cash flows to a common date.

Answer:  TRUE

Consider an investment that has cash flows of $500 the first year and $400 for the next four years. If your opportunity cost is 10%, you should be willing to pay $1,607.22 for this investment.

Answer:  TRUE

You believe WSU stock will pay dividends of $1.00, $1.25, and $1.50 at the end of each of the next 3 years.  Immediately after receiving the third dividend, you will sell the stock for $28.50.  If the appropriate discount rate is 12%, you should be willing to pay $20.75 for this stock.

Answer:  FALSE

The present value of a complex cash flow stream is equal to the sum of the present values of each of the cash flows.

Answer:  TRUE

You have decided to invest $500 in a mutual fund today and make $500 end-of-the-year investments in the fund each year until you retire for 40 years. Assuming an opportunity cost of 12%, what do you estimate that you will have in this account at retirement?

Answer: 

Calculator steps:

-500               PV

-500               PMT

    40               N

    12               I/yr or I

FV = $430,071

You are planning to deposit $10,000 today into a bank account. Five years from today you expect to withdraw $7,500. If the account pays 5% interest per year, how much will remain in the account eight years from today? Round to the nearest dollar.

Answer: 

FV  = $10,000(1.05)5 

         = $12,760

             Amount to invest in remaining three years = $12,760 - $7,500 = $5,260

FV  = $5,260 (1.05)3 

         = $6,089

Suppose you are 40 years old and plan to retire in exactly 20 years. 21 years from now you will need to withdraw $5,000 per year from a retirement fund to supplement your social security payments. You expect to live to the age of 85. How much money should you place in the retirement fund each year for the next 20 years to reach your retirement goal if you can earn 12% interest per year from the fund?

Answer:  Using a financial calculator N=25, i=12, PMT=5000, PV=39,215.70=s the amount in fund at age 60.

To find the annual contribution, n=20, i=12,PV=0, FV=39215.70, solve for PMT=-544.27, so 

Annual contribution = $544.27

Your parents are planning to retire in Phoenix, AZ in 20 years. Currently, the typical house that pleases your parents costs $200,000

Your parents are planning to retire in Phoenix, AZ in 20 years. Currently, the typical house that pleases your parents costs $200,000, but they expect inflation to increase the price of the house at a rate of 4% over the next 20 years. To buy a house upon retirement, what must they save each year in equal annual end-of-year deposits if they can earn 10% annually?

A) $21,910.00

B) $7,650.94

C) $10,000.00

D) $14,715.52

You intend to purchase a new car upon graduation in two years. It will have a cost of $29,371, including all extra features and sales tax. You just received a $3,000 pre-graduation gift from your rich uncle that you intend to deposit in a money market account that pays 6% interest, compounded monthly.  If you use the amount in the money market account for a down payment, and take out an auto loan for the remainder, how much will you need to borrow? (Round to the nearest dollar.)

A) $29,371

B) $25,880

C) $26,371

D) $26,000

 Assume that two investments have a three-year life and generate the cash flows shown below. Which of the two would you prefer?

       Year                  Investment A         Investment B

           1                            $5,000                       $8,000

           2                            $5,000                       $5,000

           3                            $5,000                       $2,000

A) Investment A, since it has the most even cash flows

B) Investment B, since it gives you the largest cash flows in earlier years

C) Neither, since they both have equal lives

D) Both investments are equally attractive

You have just purchased an investment that generates the cash flows that are shown below. You are able to invest your money at 5.75%, compounded annually. How much is this investment worth today?

       Year                       Amount

           0                                $0

           1                            $1,250

           2                            $1,585

           3                            $1,750

           4                            $2,225

           5                            $3,450

A) $7,758

B) $4,521

C) $10,260

D) $8,467

You want to travel to Europe to visit relatives when you graduate from college three years from now. The trip is expected to cost a total of $10,000

You want to travel to Europe to visit relatives when you graduate from college three years from now. The trip is expected to cost a total of $10,000. Your parents have deposited $5,000 for you in a CD paying 6% interest annually, maturing three years from now. Aunt Hilda has agreed to finance the balance. If you are going to put Aunt Hilda's gift in an investment earning 10% annually over the next three years, how much must she deposit now so you can visit your relatives in three years?

A) $3,757

B) $3,039

C) $3,801

D) $3,345

What is the present value of the following uneven stream of cash flows? Assume a 6% discount rate and end-of-period payments. Round to the nearest whole dollar.

       Year                     Cash Flow

           1                             $3,000

           2                             $4,000

           3                             $5,000

A) $10,588

B) $11,461

C) $12,688

D) $13,591

As a part of your savings plan at work, you have been depositing $250 per quarter in a savings account earning 8% interest compounded quarterly for the last 10 years. You will retire in 15 years and want to increase your contribution each year from $1,000 to $2,000 per year, by increasing your contribution every four months from $250 to $500. Additionally, you have just inherited $10,000, which you plan to invest now to earn interest at 12% compounded annually for the next 15 years. How much money will you have in savings when you retire 15 years from now?

A) $126,862

B) $73,012

C) $161,307

D) $194,415

Ronald Slump purchased a real estate investment with the following end-of-year cash flows:

       Year                EOY Cash Flow

           1                              $200

           2                              $-350

           3                              $-430

           4                              $950

What is the present value of these cash flows if the appropriate discount rate is 20%?

A) $178

B) $160

C) $133

D) $767

You have just won a magazine sweepstakes and have a choice of three alternatives. You can get $100,000 now, or $10,000 per year in perpetuity, or $50,000 now and $150,000 at the end of 10 years. If the appropriate discount rate is 12%, which option should you choose?

A) $100,000 now

B) $10,000 perpetuity

C) $50,000 now and $150,000 in 10 years

Jay Coleman just graduated. He plans to work for five years and then leave for the Australian "Outback" country

Jay Coleman just graduated. He plans to work for five years and then leave for the Australian "Outback" country. He figures that he can save $3,500 a year for the first three years and $5,000 a year for the next two years. These savings will start one year from now. In addition, his family gave him a $2,500 graduation gift. If he puts the gift, and the future savings when they start, into an account that pays 7.75% compounded annually, what will his financial "stake" be when he leaves for Australia five years from now? Round off to the nearest $1.

A) $36,082

B) $24,725

C) $30,003

D) $27,178

An investment is expected to yield $300 in three years, $500 in five years, and $300 in seven years. What is the present value of this investment if our opportunity rate is 5%?

A) $735

B) $865

C) $885

D) $900

You are thinking of buying a miniature golf course. It is expected to generate cash flows of $40,000 per year in years one through four and $50,000 per year in years five through eight. If the appropriate discount rate is 10%, what is the present value of these cash flows?

A) $285,288

B) $167,943

C) $235,048

D) $828,230

You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts?

       Year            End of Year Deposit

           1                              $350

           2                              $500

           3                              $725

           4                              $400

A) $1,622

B) $2,207

C) $2,384

D) $2,687

If your opportunity cost is 12%, how much will you pay for a bond that pays $100 per year forever?

If your opportunity cost is 12%, how much will you pay for a bond that pays $100 per year forever?

Answer:  PV = $100/.12 = $833.33

What is the present value of the following perpetuities?

a.    $600 discounted at 7%

b.    $450 discounted at 12%

c.     $1,000 discounted at 6%

d.    $880 discounted at 9%

Answer: 

a.     PV = $600/.07

        PV = $8,571.43

b.    PV = $450/.12

        PV = $3,750

c.     PV = $1,000/.06

        PV = $16,666.67

d.    PV = $880/.09

        PV = $9,777.78

What is the value on 1/1/14 of the following cash flows? Use a 10% discount rate, and round your answer to the nearest $1.00.

Date Cash Received         Amount of Cash

          1/1/16                                     $100

          1/1/17                                     $200

          1/1/18                                     $300

          1/1/19                                     $400

          1/1/20                                     $500

A) $1,500

B) $880

C) $968

D) $1,065

Consider the following cash flows:

Date Cash Received         Amount of Cash

          1/1/15                                     $100

          1/1/16                                     $100

          1/1/17                                     $500

          1/1/18                                     $100

What is the value on 1/1/14 of the above cash flows? Use an 8% discount rate, and round your answer to the nearest $1.00.

A) $649

B) $601

C) $740

D) $800

If you put $200 in a savings account at the beginning of each year for 10 years and then allow the account to compound for an additional 10 years, how much will be in the account at the end of the 20th year? Assume that the account earns 10%, and round to the nearest $10.

A) $8,300

B) $9,100

C) $8,900

D) $9,700