Corporate Finance Exam Test Guide Questions with Complete Solutions

Suppose you invest $1,000 for one year at 5% per year. What is the future value in one year? - ANSWER-- Looking for FV FV = PV (1+r)^t - for excel function make sure PV is negative Future value interest factor - ANSWER-(1+r)^t Let us assume that you need $10,000 in one (1) year for a down payment on a used car. If you can invest at a rate of 7% how much money do you need to invest today? - ANSWER-- looking for present value - PV= FV/(1+r)^t - using PV excel function make sure FV is negative Let us assume that you would like to fund a trip to Nepal to hike Mount Everest. You expect to take this trip in 10 years. You estimate that trip will cost $75,000 in ten (10) years. If you can invest at a rate of 12.00%, how much money do you need to invest today? - ANSWER-- looking for present value 20 years ago your grandfather opened an investment account for you. Let us assume that the current value on the investment account is $6,000 and the average annual return earned by the account has been 8.00%. How much money was originally invested in the account? - ANSWER-Looking for present value You are considering an investment of $1,000 that will pay you $1,200 in five (5) years. What is the implied discount rate? - ANSWER-- looking for the discount rate (r) - (FV/t)^(1/t)-1 - when using rate excel function make sure PV or FV is negative You are considering a one time investment of $4000. An Insurance Company offers you an annuity contract that will pay you an annual return of 7.50%. How many years to you have to wait until the investment balance reaches $40,000? - ANSWER-- t= log (FV/PV)/log(1+r) - looking for the t or n term - excel function is nper and make sure your PV or FV is negative Suppose you have just celebrated your 19th birthday. A rich uncle has set up a trust for you that will pay you $150,000 when you turn 30. If the relevant discount rate is 9 percent, how much is this fund worth today? - ANSWER-- looking for PV