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Fundamentals Of Corporate Finance Study Set 21

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Quiz 6 : Discounted Cash Flow Valuation

Annuities where the payments occur at the end of each time period are called annuities due, whereas ordinary annuities refer to annuity streams with payments occurring at the beginning of each time period.
Free
True False

False

Endowment fund providing equal annual payments from accrued earnings fit the definition of a perpetuity.
Free
True False

True

You are going to invest $500 at the end of each year for 10 years. Given an interest rate, you can find the future value of this investment by finding the present value of each cash flow, adding all of the present values together, then finding the future value at the end of year 10 of this lump sum. Free True False Answer: Answer: True$100 a quarter for 10 years fits the definition of an annuity.
True False
Preferred stock dividends fit the definition of a perpetuity.
True False
You are going to invest $500 at the end of each year for 10 years. Given an interest rate, you can find the future value of this investment by adding the cash flows together and finding the future value of the sum using the appropriate future value factor. True False Answer: The future value factor for annuities is calculated as (Future value factor-1)/r: True False Answer: Monthly payments equal to 100% of the income earned by a restaurant fits the definition of a perpetuity. True False Answer: The interest rate charged per period multiplied by the number of periods per year is called the annual percentage rate (APR). True False Answer: An annuity stream where the payments occur forever is called an annuity due True False Answer: You are going to invest$500 at the end of each year for 10 years. Given an interest rate, you can find the future value of this investment by applying the proper future value factor to each cash flow, then adding up these future values.
True False
You hold a winning ticket from your provincial lottery. It entitles the bearer to receive payments of $50,000 at the end of each of the next 20 years. Given what you know about the time value of money, you should be able to sell this ticket for no less than$1 million in the open market.
True False
The interest rate expressed in terms of the interest payment made each period is called the compound interest rate:
True False
An annuity stream of cash flow payments is a set of level cash flows occurring each time period for a fixed length of time.
True False
The interest rate expressed as if it were compounded once per year is called the effective annual rate:
True False
$150 a month for 72 months fits the definition of an annuity. True False Answer: You have just won a lottery prize. You can choose to receive$750,000 today or an annual payment of \$50,000 at the end of each of the next 20 years. The interest rate that makes you indifferent between the two is 2.91%, and at higher rates you should take the lump sum.