# Fundamentals of Corporate Finance Study Set 23

## Quiz 5 :Discounted Cash Flow Valuation

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Terry is calculating the present value of a bonus he will receive next year.The process he is using is called:
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B

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Sara invested $500 six years ago at 5 percent interest.She spends her earnings as soon as she earns any interest so she only receives interest on her initial$500 investment.Which type of interest is Sara earning?
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C

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Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually.Barb also deposited$3,000 this morning into an account that pays 5 percent interest, compounded annually.Andy will withdraw his interest earnings and spend it as soon as possible.Barb will reinvest her interest earnings into her account.Given this, which one of the following statements is true?
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C

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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? Multiple Choice Answer: Tags Choose question tag Tracy invested$1,000 five years ago and earns 4 percent interest on her investment.By leaving her interest earnings in her account, she increases the amount of interest she earns each year.The way she is handling her interest income is referred to as which one of the following?
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Your grandmother has promised to give you $5,000 when you graduate from college.She is expecting you to graduate two years from now.What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now? Multiple Choice Answer: Tags Choose question tag Steve just computed the present value of a$10,000 bonus he will receive in the future.The interest rate he used in this process is referred to as which one of the following?
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You are investing $100 today in a savings account at your local bank.Which one of the following terms refers to the value of this investment one year from now? Multiple Choice Answer: Tags Choose question tag 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?
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You want to have $1 million in your savings account when you retire.You plan on investing a single lump sum today to fund this goal.You are planning on investing in an account which will pay 7.5 percent annual interest.Which of the following will reduce the amount that you must deposit today if you are to have your desired$1 million on the day you retire? I.Invest in a different account paying a higher rate of interest. II.Invest in a different account paying a lower rate of interest. III.Retire later. IV.Retire sooner.
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Sue and Neal are twins.Sue invests $5,000 at 7 percent when she is 25 years old.Neal invests$5,000 at 7 percent when he is 30 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?
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Martin invested $1,000 six years ago and expected to have$1,500 today.He has not added or withdrawn any money from this account since his initial investment.All interest was reinvested in the account.As it turns out, Martin only has $1,420 in his account today.Which one of the following must be true? Multiple Choice Answer: Tags Choose question tag Samantha opened a savings account this morning.Her money will earn 5 percent interest, compounded annually.After five years, her savings account will be worth$5,600.Assume she will not make any withdrawals.Given this, which one of the following statements is true?
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Which one of the following variables is the exponent in the present value formula?
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The process of determining the present value of future cash flows in order to know their worth today is called which one of the following?
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What is the relationship between present value and future value interest factors?
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Interest earned on both the initial principal and the interest reinvested from prior periods is called:
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Luis is going to receive $20,000 six years from now.Soo Lee is going to receive$20,000 nine years from now.Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?
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Steve invested $100 two years ago at 10 percent interest.The first year, he earned$10 interest on his $100 investment.He reinvested the$10.The second year, he earned $11 interest on his$110 investment.The extra \$1 he earned in interest the second year is referred to as: