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Exam 6: Discounted Cash Flow Valuation

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Question 161

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Price corporation is considering purchasing rental property that provides annual cash flows of $600,000. Rent is expected to increase by 2.5% annually for the foreseeable future. If Mason's return requirement is 12.5% and the rental property is listed at $6,500,000 determine if the property is over or under valued from Mason's perspective.

A) Listed property is over-valued by $500,000.
B) Listed property is under-valued by $500,000.
C) Listed property is over-valued by $292,727.
D) Listed property is under-valued by $292,727.
E) Listed property is priced correctly.

F) B) and E)
G) A) and E)

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Question 162

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What is the effective annual rate of 12% compounded continuously?

A) 11.27%
B) 12.00%
C) 12.68%
D) 12.75%
E) 12.89%

F) None of the above
G) A) and B)

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Question 163

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This morning you borrowed $3,900 at 7.75% interest. You are to repay the loan principle plus all of the loan interest in one lump sum two years from today. How much will you have to pay in two years?

You deposit $1,000 in an account today. You will deposit $600 at the end of each month for the next 12 months and $800 each month for the following 12 months. How much interest will you have earned in two years if the account pays 5.5% compounded monthly?

You just borrowed $12,750 from the bank to use in your business. The loan terms require you to pay the interest annually with the entire principle due in six years. The interest rate is 8.95%. How much will you pay to the bank in year five of the loan?

You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first day of each year. What is the value of this annuity today at a 7% discount rate?

A credit card company charges you an interest rate of 1.25% monthly. The annual percentage rate is ____ and the effective annual rate is _______.

You just won the lottery. You and your heirs will receive $25,000 per year forever, beginning one year from now. If the present value of the lottery is $416,667, what is the discount rate used to value this perpetuity?

An annuity stream of cash flow payments is a set of:

When interest is credited the instant it is earned it is referred to as:

What is the future value of the following cash flows at the end of year 3 if the interest rate is 7.25%? The cash flows occur at the end of each year.

You are paying an effective annual rate of 19.44% on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account?

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.

Calculate the present value of a growing annuity given the following information: annual cash flows = $200,000; cash flow growth rate = 10%; required rate of return = 3%; timeframe = 25years.

You have $2,500 that you want to use to open a savings account. You have found five different accounts that are acceptable to you. All you have to do now is determine which account you want to use such that you can earn the highest rate of interest possible. Which account should you use based upon the annual percentage rates quoted by each bank? Account A: 3.75%, compounded annually Account B: 3.70%, compounded monthly Account C: 3.70%, compounded semi-annually Account D: 3.65%, compounded continuously Account E: 3.66%, compounded quarterly

Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35%?

Today, you signed loan papers agreeing to borrow $7,500 at 9% compounded monthly. The loan payment is $196.99 a month. How many loan payments must you make before the loan is paid in full?

You have some property for sale and have received two offers. The first offer is for $189,000 today in cash. The second offer is the payment of $100,000 today and an additional $100,000 two years from today. If the applicable discount rate is 8.75%, which offer should you accept and why?

Determine the difference between the present value of a $10,000 twenty-year annuity earning 10% interest compounded annually versus a $10,000 twenty-year growing annuity earning 10% interest compounded annually and having a 3% annuity growth rate.

You work for a furniture store. You normally sell a living room set for $2,500 and finance the full purchase price for 30 monthly payments at 24% APR. You are planning to run a zero-interest financing sale during which you will finance the set over 30 months at 0% interest. How much do you need to charge for the bedroom set during the sale in order to earn your usual combined return on the sale and the financing?