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CORPORATE FINANCE EXAM QUESTIONS AND ANSWERS #6
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CORPORATE FINANCE EXAM QUESTIONS AND ANSWERS #6What calculations always have to be done separately and then combined - correct
answer calculating the FV of multiple cash flows
The FV of a stream of uneven cash flows equals - correct answer the sum of future
values of each cash flow
The PV of a stream of uneven cash flows is equal to - correct answer the sum of
present values of each cash flow
PV and investments - correct answer -the PV is what you would be willing to pay for an
investment
-the PV of a stream of cash flows should be equal or less to the price of an investment
someone is offering you
Annuities - correct answer -the payment or receipt of equal cash flows per period for a
specified amount of time
-multiple cash flows that are worth the same amount and are paid for a specified period
Ordinary annuity - correct answer -payments or receipts occur at the END of each
period
-car payments
Annuity due - correct answer -payments or receipts occur at the BEGINNING of each
period
-lease payments
PV of annuities - correct answer the sum of present values of all the cash flows
FV of annuities - correct answer the sum of future values of the cash flows
Purpose of finding the annuity amount that must be invested each year to produce a
specific future value - correct answer buy some asset at some point in the future
Purpose of finding the annuity amount that must be paid each year to payback a loan
amount received today - correct answer today you're borrowing money and now you
want to see how much you have to pay for a period of time to pay it off
FV of an annuity due - correct answer since all cash flows are due at the beginning of
each year, each cash flow is compounded for one extra period
PV of an annuity due - correct answer since all cash flows are due at the beginning of
each year, each cash flow is discounted for one less period
, Compounding and discounting - correct answer compounding for one more period is the
same as discounting for one less period
Perpetuity - correct answer -a financial instrument that promises to pay an equal cash
flow per period forever
-an infinite series of payments/infinite annuity
Frequency of compounding affects how much _______ is earned - correct answer
interest
Nominal interest rate - correct answer -the annual interest rate that is quoted
-APR
-not necessarily the interest that is earned
Effective annual rate - correct answer -EAR
-the actual interest rate that is earned
-most relevant rate in financial analysis
When interest is compounded annually, EAR and APR... - correct answer are the same
When interest is compounded semiannually, EAR and APR... - correct answer -half of
the nominal rate is earned at the end of six month on the original principal
-half the nominal rate is earned at the end of the year on the original principal as well as
the previously earned interest
Pure discount loan - correct answer -borrower pays the principal and interest on the
principal in one lump sum in the future
-no periodic interest payments
-one full amount paid in a single cash flow
Interest-only loan - correct answer -borrower pays interest each period and pays the
entire principal back at the end/some point in the future
-every period you pay an interest payment but nothing from the principal
-at the end, when you want to pay off your loan, you pay both the interest for the last
period and the principal payment
-most corporate bonds
Amortized loan - correct answer -borrower pays a fixed payment for a certain number of
periods that includes some interest and principal repayment
-principal is gradually paid back
-fixed payment but proportion of interest and principal varies across periods
-consumer loans
Raising capital - correct answer long-term securities to help meet needs for funds
-long-term debt (bonds)
-preferred stock
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