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AFU 07201 - REVIEW QUESTIONS
BEF 1,
INTRODUCTION TO FINANCE AND TIME VALUE OF MONEY
1. If you wish to accumulate $140,000 in 13 years, how much must you deposit today in an
account that pays an annual interest rate of 14%?
2. What will $247,000 grow to be in 9 years if it is invested today in an account with an annual
interest rate of 11%?
3. How many years will it take for $136,000 to grow to be $468,000 if it is invested in an
account with an annual interest rate of 8%?
4. At what annual interest rate must $137,000 be invested so that it will grow to be $475,000 in
14 years?
5. If you wish to accumulate $197,000 in 5 years, how much must you deposit today in an
account that pays a quoted annual interest rate of 13% with semi-annual compounding of
interest?
6. What will $153,000 grow to be in 13 years if it is invested today in an account with a quoted
annual interest rate of 10% with monthly compounding of interest?
7. How many years will it take for $197,000 to grow to be $554,000 if it is invested in an
account with a quoted annual interest rate of 8% with monthly compounding of interest?
8. At what quoted annual interest rate must $134,000 be invested so that it will grow to be
$459,000 in 15 years if interest is compounded weekly?
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9. You are offered an investment with a quoted annual interest rate of 13% with quarterly
compounding of interest. What is your effective annual interest rate?
10. You are offered an annuity that will pay $24,000 per year for 11 years (the first payment will
occur one year from today). If you feel that the appropriate discount rate is 13%, what is the
annuity worth to you today?
11. If you deposit $16,000 per year for 12 years (each deposit is made at the end of each year) in
an account that pays an annual interest rate of 14%, what will your account be worth at the end
of 12 years?
12. You plan to borrow $389,000 now and repay it in 25 equal annual installments (payments
will be made at the end of each year). If the annual interest rate is 14%, how much will your
annual payments be?
ADDITIONAL TUTORIAL QUESTIONS.
QUESTION ONE
A firm wants to open a new coal mine in Kiwira-Mbeya, Tanzania. The price of coal is very
volatile and the projected cashflows over the next five years are : TZS. 100,000,000 , TZS.
250,000,000 , TZS. 10,000,000 , TZS. 200,000,000 and TZS. 50,000,000 respectively. After
that cashflows will be a constant TZS. 150,000,000 per year for next 20 years at which time the
mine closes. If 7% is the appropriate discount rate for the first five years and is 8% after that,
what is the present value of the mine?
ANSWER : Total Present Value = 508,208,960 + 1,050,025,440
QUESTION TWO
An annual interest rate of 12% compounded monthly has an effective yield of? ANSWER:
12.68%
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QUESTION THREE
You are borrowing TZS. 80,000,000 for 25 years at 10% nominal annual interest. How much
must your annually payments be if you will completely retire the loan over the 25-year period by
factor formula?
Answer: TZS. 8,813,480
QUESTION FOUR
Your uncle makes payments of TZS. 500,000 every year, with the first payment coming one year
from today. If the discount rate is 5%, what is the present value of the arrangement?
Answer: TZS. 10,000,000
QUESTION FIVE
KISHOIYA just purchased a new house at Upanga for TZS. 120,000,000. He was able to make a
down payment equal to 25% of the value of the house; the balance was mortgaged. The rate by
the bank is 10% compounded annually. The mortgage has a 20 year amortization period .
a) What will be the size of the payments? ANSWER: PMT = TZS. 10,571,320
b) What will be the balance remaining on the mortgage after 5 years?
ANSWER:TZS . 80,409,000
QUESTION SIX
If you borrow TZS. 150,000,000 for a house at 8% compound annual interest rate for 30 years,
what is your monthly payment by general formula? Answer: TZS. 10,935,730
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QUESTION SEVEN
An annual interest rate of 12% compounded monthly has an effective yield of? Answer: 12.68%
QUESTION EIGHT
Now that you are graduated from IFM, you also have to start paying back your student loans to
the loan boad (HELSB). You borrowed a total of TZS. 12,500,000. You plan to pay back the
loan over 10 years at an interest rate of 9.4% interest, compounded monthly. How much will
your monthly payments be?
Answer: TZS.161,060
QUESTION NINE
Ambrin Corp. expects to receive $2,000 per year for 10 years and $3,500 per year for the next 10
years. What is the present value of this 20 year cash flow? Use an 11% discount rate.
A. $19,034
B. $27,870
C. $32,389
D. none of these
QUESTION TEN
The higher the rate used in determining the future value of a $1 annuity,
A. the smaller the future value at the end of the period.
B. the greater the future value at the end of a period.
C. the greater the present value at the beginning of a period.
D. none of these - the interest has no effect on the future value of an annuity.
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QUESTION ELEVEN
Mr. Darden is selling his house for TZS 200,000,000. He bought it for TZS 164,000,000 ten
years ago. What is the annual return on his investment?
QUESTION TWELVE
You will deposit $2,000 today. It will grow for 6 years at 10% interest compounded
semiannually. You will then withdraw the funds annually over the next 4 years. The annual
interest rate is 8%. Your annual withdrawal will be:
A. $2,340
B. $4,332
C. $797
D. $1,085
QUESTION THIRTEEN
You have been hired as a financial advisor to Michael Jordan. He has received two offers for
playing professional basketball and wants to select the best offer, based on considerations of
money only. Offer A is a $10m offer for $2m a year for 5 years. Offer B is a $11m offer of $1m
a year for four years and $7m in year 5. What is your advice assume an interest rate of 8%?
QUESTION FOURTEEN
What is the present value of TZS 2,500,000 semiannual payments received at the beginning of
each period for the next 10 years? The APR is 6%.
QUESTION FIFTEEN
Why is there a conflict of interest between the agent and the principal in an agency
relation? What are agency costs?
QUESTION SIXTEEN
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Explain the role of agency theory in corporate governance
QUESTION SEVENTEEN
Which is worth more at 10 percent, compounded annually:
TZS 1,000,000 in hand today or TZS 2,000,000 due in 5 years?
QUESTION EIGHTEEN
Which of the following continuously compounded rates corresponds to an effective annual
rate of 7.45 percent?
A.7.19%.
B.7.47%.
C. 7.73%.
QUESTION NINETEEN
How much amount should an investor deposit in an account earning a continuously
compounded interest rate of 8% for a period of 5 years so as to earn TZS 2,238,000?
QUESTION TWENTY
How long will it take an investment of TZS 2,500,000 to grow three times in value to TZS
7,500,000? Assume that the interest rate is 6 percent per year compounded annually.
What is the interest on interest earned?
QUESTION TWENTY ONE
Which one of the following actions by a financial manager is most apt to create an agency
problem?
A. refusing to borrow money when doing so will create losses for the firm
B. refusing to lower selling prices if doing so will reduce the net profits
C. refusing to expand the company if doing so will lower the value of the equity
D. agreeing to pay bonuses based on the market value of the company stock rather than on the
firm's level of sales
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E. increasing current profits when doing so lowers the value of the firm's equity
QUESTION TWENTY TWO
Which one of the following is an agency cost?
A. accepting an investment opportunity that will add value to the firm
B. increasing the quarterly dividend
C. investing in a new project that creates firm value
D. hiring outside accountants to audit the company's financial statements
E. closing a division of the firm that is operating at a loss
QUESTION TWENTY THREE
Which one of the following best states the primary goal of financial management?
A. maximize current dividends per share
B. maximize the current value per share
C. increase cash flow and avoid financial distress
D. minimize operational costs while maximizing firm efficiency
E. maintain steady growth while increasing current profits
QUESTION TWENTY FOUR
Which one of the following is a capital structure decision?
A. determining which one of two projects to accept
B. determining how to allocate investment funds to multiple projects
C. determining the amount of funds needed to finance customer purchases of a new product
D. determining how much debt should be assumed to fund a project
E. determining how much inventory will be needed to support a project
QUESTION TWENTY FIVE
Which one of the following statements concerning a sole proprietorship is correct?
A. The life of a sole proprietorship is potentially unlimited.
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B. A sole proprietor can generally raise large sums of capital quite easily.
C. Transferring ownership of a sole proprietorship is easier than transferring ownership of a
corporation.
D. A sole proprietorship is taxed the same as a C corporation.
E. It is easy to create a sole proprietorship.
QUESTION TWENTY SIX
Which one of the following best states the primary goal of financial management?
A. maximize current dividends per share
B. maximize the current value per share
C. increase cash flow and avoid financial distress
D. minimize operational costs while maximizing firm efficiency
E. maintain steady growth while increasing current profits
QUESTION TWENTY SEVEN
Which of the following parties are considered stakeholders of a firm?
I. employee
II. long-term creditor
III. government
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IV. common stockholder
A. I only
B. IV only
C. I and III only
D. II and IV only
E. II, III, and IV only