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COB 300B Actual Exam |Questions with 100% Correct Verified Answers
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COB 300B Actual Exam |Questions with 100% Correct Verified Answers
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COB 300B Actual Exam |Questions with100% Correct Verified Answers
What is an opportunity cost? How is this concept used in TVM analysis, and where is it shown
on a time line? Is a single number used in all situations? - ✔✔The opportunity cost is the rate
of interest one could earn on an alternative investment with a riskequal to the risk of the
investment in question. This is the value of I in the TVM equations, and it isshown on the top of
a time line between the first and second tick marks. It is not a single rate—the opportunity cost
rate varies depending on the riskiness and maturity of an investment, and italso varies from
year to year depending on inflationary expectations
Explain whether the following statement is true or false: $100 a year for 10 years is an annuity,
but $100 in Year 1, $200 in Year 2, and $400 in Years 3 through 10 does not constitute an
annuity. However, the second series contains an annuity. - ✔✔True. The second series is an
uneven cash flow stream, but it contains an annuity of $400 for 8years. The series could also be
thought of as a $100 annuity for 10 years plus an additional payment of $100 in Year 2, plus
additional payments of $300 in Years 3 through 10
If a firm's earnings per share grew from $1 to $2 over a 10-year period, the total growth would
be 100%, but the annual growth rate would be less than 10%. True or false? Explain. (Hint: If
you aren't sure, plug in some numbers and check it out.) - ✔✔True, because of compounding
effects
—growth on growth. The following example demonstrates the point. The annual growth rate is
I in the following equation:
$1(1 + I)10 = $2
.We can find I in the equation above as follows:
Using a financial calculator input N = 10, PV = -1, PMT = 0, FV = 2, and I/YR = ? Solving for I/YR
you obtain 7.18%.
,Viewed another way, if earnings had grown at the rate of 10% per year for 10 years, then EPS
would have increased from $1.00 to $2.59, found as follows: Using a financial calculator, input
N =10, I/YR = 10, PV = -1, PMT = 0, and FV = ?.
Solving for FV you obtain $2.59.
This formulation recognizes the "interest on interest" phenomenon.
Would you rather have a savings account that pays 5% interest compounded semiannually or
one that pays 5% interest compounded daily? Explain. - ✔✔For the same stated rate, daily
compounding is best. You would earn more "interest on interest."
To find the present value of an uneven series of cash flows, you must find the PVs of the
individual cash flows and then sum them. Annuity procedures can never be of use, even when
some of the cash flows constitute an annuity, because the entire series is not an annuity. True
or false? Explain. - ✔✔False. One can find the present value of an embedded annuity and
add this PV to the PVs of theother individual cash flows to determine the present value of the
cash flow stream.
The present value of a perpetuity is equal to the payment on the annuity, PMT, divided by the
interest rate, I : . What is the future value of a perpetuity of PMT dollars per year? (Hint: The
answer is infinity, but explain why.) - ✔✔The concept of a perpetuity implies that payments
will be received forever. FV Perpetuity =PV Perpetuity (1 + I)infinity =infinity
Banks and other lenders are required to disclose a rate called the APR. What is this rate? Why
did Congress require that it be disclosed? Is it the same as the effective annual rate? If you were
comparing the costs of loans from different lenders, could you use their APRs to determine the
loan with the lowest effective interest rate? Explain. - ✔✔The annual percentage rate (APR)
is the periodic rate times the number of periods per year. It is also called the nominal, or stated,
rate. With the "Truth in Lending" law, Congress required that financial institutions disclose the
APR so the rate charged would be more "transparent" to consumers. The APR is equal to the
effective annual rate only when compounding occurs annually. If more frequent compounding
occurs, the effective rate is always greater than the annual percentage rate. Nominal rates can
be compared with one another, but only if the instruments being compared use the same
, number of compounding periods per year. If this is not the case, then the instruments being
compared should be put on an effective annual rate basis for comparisons.
What is a loan amortization schedule, and what are some ways these schedules are used? -
✔✔A loan amortization schedule is a table showing precisely how a loan will be repaid. It
gives the required payment on each payment date and a breakdown of the payment, showing
how much is interest and how much is repayment of principal. These schedules can be used for
any loans that are paid off in installments over time such as automobile loans, home mortgage
loans, student loans, and many business loans.
If you deposit $2,000 in a bank account that pays 6% interest annually, how much will be in
your account after 5 years? - ✔✔FV5 = $2,000(1.06)^5= $2,000 (1.338226) =$2,676.45
What is the present value of a security that will pay $29,000 in 20 years if securities of equal risk
pay 5% annually? - ✔✔$10,929.80
Your parents will retire in 19 years. They currently have $350,000 saved, and they think they
will need $800,000 at retirement. What annual interest rate must they earn to reach their goal,
assuming they don't save any additional funds? - ✔✔4.45%.
If you deposit money today in an account that pays 4% annual interest, how long will it take to
double your money? - ✔✔I=4
PV= -1
FV= 2
N= 17.67
You have $33,556.25 in a brokerage account, and you plan to deposit an additional $5,000 at
the end of every future year until your account totals $220,000. You expect to earn 12%
annually on the account. How many years will it take to reach your goal? - ✔✔I= 12
PV= - 33556.25
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