Question 1

​Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?
A)The company should not construct the new facility because the future value of the construction cost is only $1,628,894.63.
B)​The company should not construct the new facility because the future value of the construction cost is $1,783,267.42.
C)​The company should construct the new facility because the present value of the future payoff is $1,092,734.95.
D)​The company should construct the new facility because the present value of the future payoff is $1,043,652.53.

Accepted Answer

The answer of ​Suppose a company is considering the construction...

Question 2

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today). Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?
A)2%
B)​5%
C)​7%
D)​10%

Accepted Answer

The answer of ​Suppose you have a choice between receiving...

Question 3

Which of the following statements best describes the economist's view of finance and the financial system?
A)The financial system is very important to the functioning of the economy, and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.
B)The financial system, while interesting, is not very important to the functioning of the economy; however, the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.
C)The financial system is very important to the functioning of the economy; however, the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful.
D)The field of finance is intimately concerned with the financial system and the tools of finance, and financial economists see great importance in them; however, the "mainstream" economist sees little value in studying financial markets or the tools of finance.

Accepted Answer

The statement that the financial system is very important to the functioning of the economy is consistent with the views of most economists. Additionally, economists recognize the usefulness of tools of finance in making certain decisions as individuals, such as deciding how much to save or invest. Therefore, option A best describes the economist's view on finance and the financial system.

Question 4

You are considering buying a share of stock in Company ABC. At the end of years 1, 2, and 3 the stock will pay you a dividend of $10. In addition, at the end of the third year you expect to sell the share of stock for $200. If the interest rate is 5%, how much is the share of ABC stock worth to you today?
A)$200
B)$210
C)$220
D)$230

Accepted Answer

The answer of You are considering buying a share of...

Question 5

​Suppose you own a savings bond that will pay you $100 in 7 years. If the annual interest rate is 2%, what is the present value of the savings bond?
A)​$27.91
B)​$87.06
C)​$93.64
D)-​$87.06

Accepted Answer

We can use the present value formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the annual interest rate, and n is the number of years. Plugging in the given values, we get PV = 100 / (1 + 0.02)^7 = $87.06, which is closest to choice B.

Question 6

Most financial decisions involve two related elements:
A)advice and consent.
B)investment and taxes.
C)time and risk.
D)saving and consumption.

Accepted Answer

Most financial decisions involve considering the time value of money and the associated risks, as these factors influence the potential returns and the uncertainty involved in financial planning.

Question 7

Suppose you put $10,000 into a bank account today that pays interest annually at an annual rate of 0.5%. What is the future value of the $10,000 after 10 years?​
A)​$10,050.00
B)​$10,511.40
C)​$10,573.26
D)​$16,288.95

Accepted Answer

The answer of Suppose you put $10,000 into a bank...

Question 8

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today). Of the following, which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?
A)2%
B)​5%
C)​7%
D)​10%

Accepted Answer

To compare the lump-sum payment and the four annual payments, we need to calculate the present value of the cash flows using a discount rate or the interest rate.

- For the lump-sum payment of $10,000 today, the present value is simply $10,000 since there is no discounting or compounding involved.
- For the four annual payments of $2,750, we can use the formula for the present value of an annuity:

PV = PMT x [1 - (1 + r)^(-n)] / r

where PV is the present value, PMT is the payment amount, r is the interest rate, and n is the number of periods (years).

Plugging in the given numbers, we get:

PV = $2,750 x [1 - (1 + r)^(-4)] / r

Solving for r using trial and error or a financial calculator, we find that the interest rate where the present value of the annuity equals $10,000 (the lump-sum payment) is approximately 7%.

Therefore, if the annual interest rate is less than 7%, you should choose the lump-sum payment, and if it is greater than 7%, you should choose the four annual payments.

Question 9

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment one year from today). Of the following, which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?
A)2%
B)​5%
C)​7%
D)​10%

Accepted Answer

We can calculate the present value of the four annual payments using the formula for the present value of an annuity: PV = PMT x [(1 - (1 + r)^-n) / r], where PMT is the payment amount, r is the annual interest rate, and n is the number of periods. Plugging in the values, we get:
PV = $2,750 x [(1 - (1 + 0.05)^-4) / 0.05] = $9,864.09
Since the lump-sum payment is $10,000, we would prefer it if the annual interest rate were less than the rate that causes the present value of the four payments to be greater than $10,000. The only interest rate that meets this criteria is 5%, so the best choice is B.

Question 10

The financial system
A)involves bank accounts, mortgages, stock prices, and many other items.
B)involves decisions and actions undertaken by people at a point in time that affect their lives in the future.
C)coordinates the economy's saving and investment.
D)All of the above are correct.

Accepted Answer

The financial system involves many items such as bank accounts, mortgages, stock prices, etc. It also involves decisions and actions that affect future outcomes, such as saving and investment. Therefore, all of the given choices are correct.

Question 11

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment one year from today). Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?
A)2%
B)​5%
C)​7%
D)​10%

Accepted Answer

The answer of ​Suppose you have a choice between receiving...

Question 12

The field of finance primarily studies
A)how society manages its scarce resources.
B)the implications of time and risk for allocating resources over time.
C)firms' decisions concerning how much to produce and what price to charge.
D)how society can reduce market risk.

Accepted Answer

Finance focuses on how individuals and organizations allocate resources over time, considering the implications of time and risk.

Question 13

Suppose your grandfather put $10,000 in the bank in 1965 at an annual interest rate of 7%. Using the Rule of 70, approximately how large should the bank balance be in 2015?
A)$50,000
B)$60,000
C)$80,000
D)$320,000

Accepted Answer

The Rule of 70 estimates that the investment will double approximately every 10 years (70/7 = 10). From 1965 to 2015 is 50 years, so the investment doubles 5 times: $10,000 → $20,000 → $40,000 → $80,000 → $160,000 → $320,000.

Question 14

You are considering buying a share of stock in XYZ Corporation. At the end of years 1, 2, and 3 the stock will pay you a dividend of $15. In addition, at the end of the third year you expect to sell the share of stock for $100. If the interest rate is 3%, how much is the share of XYZ stock worth to you today?
A)$123.14
B)$133.94
C)$137.96
D)$145.00

Accepted Answer

To calculate the present value of the stock, we need to discount the future cash flows at the given interest rate of 3%.

PV = (15/1.03) + (15/1.03^2) + (115/1.03^3)
PV = $12.62 + $13.05 + $108.27
PV = $133.94

Therefore, the share of XYZ stock is worth $133.94 today. Option B is the correct answer.

Quiz 27: Tools of Finance

Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

Which of the following statements best describes the economist's view of finance and the financial system?

Suppose you own a savings bond that will pay you $100 in 7 years. If the annual interest rate is 2%, what is the present value of the savings bond?

Most financial decisions involve two related elements:

Suppose you put $10,000 into a bank account today that pays interest annually at an annual rate of 0.5%. What is the future value of the $10,000 after 10 years?

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment one year from today) . Of the following, which is the lowest annual interest rate at which you would prefer the lump-sum payment over the four annual payments?

The financial system

Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment one year from today) . Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?

The field of finance primarily studies

Suppose your grandfather put $10,000 in the bank in 1965 at an annual interest rate of 7%. Using the Rule of 70, approximately how large should the bank balance be in 2015?

Quiz 27: Tools of Finance

​Suppose a company is considering the construction of a new facility. The construction will cost $1 million today and will yield a payoff of $1.7 million in 10 years. Assuming a 5% annual interest rate, which of the following statements is correct?

​Suppose you have a choice between receiving a lump-sum payment of $10,000 today or four annual payments of $2,750 (with the first payment today) . Of the following, which is the highest annual interest rate at which you would prefer the four annual payments over the lump-sum payment?