Question 1

Ivy Company purchases land with a fair market value of $71,500, paying for it by signing a note payable requiring cash payments of $20,000 at the beginning of each year for four years. What is the interest rate implicit in the note?

Accepted Answer

The present value of an annuity formula can be used to find the interest rate. The present value of the payments ($20,000 for 4 years) should equal the fair market value of the land ($71,500). Solving for the interest rate in the present value of annuity formula gives approximately 8%.

Question 2

Kaeli Company will invest $10,000 a year for 5 years, with all investments at the beginning of each year. If the fund earns 10% compound interest, what amount will be in the fund at the end of 5 years?

Accepted Answer

The investment is an annuity due, where payments are made at the beginning of each period. The future value of an annuity due can be calculated using the formula: FV = P * [(1 + r)^n - 1] * (1 + r) / r, where P is the payment, r is the interest rate, and n is the number of periods. Plugging in the values: FV = $10,000 * [(1 + 0.10)^5 - 1] * (1 + 0.10) / 0.10 = $67,156.

Question 3

Wyatt Borke purchased an automobile with a list price of $5,580. He signed a contract requiring a $1,000 down payment and $1,000 payments at the beginning of each subsequent year for five years. Compute the annual implicit (effective) rate of interest on this financing loan.

Accepted Answer

B

Question 4

Inflation would cause someone to

Accepted Answer

Inflation reduces the purchasing power of money over time, meaning that a dollar today can buy more than a dollar in the future. Therefore, in order to maintain the same purchasing power, people would prefer a dollar today to a dollar in the future, leading to choice C being the best option.

Question 5

The price of money is called

Accepted Answer

The price of money is commonly referred to as interest, which is the amount charged by a lender to a borrower for the use of their funds. Choice A, principal, refers to the initial amount of money borrowed or invested. Choice C, inflation, is the rate at which the general level of prices for goods and services is rising. Choice D, the table factor, is not a commonly used term in finance or economics.

Question 6

Understanding the concepts of valuation is

Accepted Answer

Valuation is becoming more important now as IFRS and GAAP move more towards a fair market value framework. The fair value method requires entities to measure and report their assets and liabilities at fair value, which involves determining the value of an asset or liability by reference to the price that would be received to sell it in an orderly transaction between market participants at the measurement date. Valuation is a complex process that requires expertise in finance, accounting, and economic theory. As such, understanding valuation concepts is critical for financial professionals who must apply these principles to their work.

Question 7

Cora Company will receive $10,000 in 5 years. If the relevant interest rate is 10%, what is the present value of this receipt?

Accepted Answer

The present value can be calculated using the formula: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of years. Plugging in the values, we get: PV = 10,000 / (1 + 0.1)^5 = $6,209. Option B is the closest answer.

Question 8

A dollar today is worth

Accepted Answer

A dollar today is worth more than a dollar in the future due to the potential earning capacity through investment and the impact of inflation reducing the purchasing power of money over time.

Question 9

With all other factors equal, the simple interest amount will be

Accepted Answer

Simple interest is calculated on the principal amount only, whereas compound interest is calculated on the principal plus any previously earned interest, leading to a higher amount over time.

Question 10

Cora Company will receive $10,000 a year for 5 years, with all receipts at the beginning of each year. What is the present value of this annuity using a 10% discount rate?

Accepted Answer

The present value of an annuity due can be calculated using the formula for the present value of an annuity due. The present value of $10,000 received at the beginning of each year for 5 years at a 10% discount rate is $41,699.

Question 11

Luke Galen purchased an automobile with a list price of $4,387. He signed a contract requiring a $1,000 down payment and $1,000 payments at the beginning of each subsequent year for four years. Compute the annual implicit (effective) rate of interest on this financing loan.

Accepted Answer

To determine the annual implicit (effective) rate of interest, we need to solve for the interest rate that equates the present value of the loan payments to the purchase price of the automobile.

Present value of the loan payments can be calculated as follows:

PV = $1,000 + $1,000/(1+r) + $1,000/(1+r)^2 + $1,000/(1+r)^3 + $1,000/(1+r)^4

where r is the annual interest rate.

Simplifying the above equation, we get:

$4,387 - $1,000 = ($1,000/1+r) + ($1,000/1+r)^2 + ($1,000/1+r)^3 + ($1,000/1+r)^4

We need to use trial and error method to solve for r. By plugging in different values for r, we get:

For r = 6%, LHS = $2,387, RHS = $2,306.87
For r = 7%, LHS = $2,387, RHS = $2,386.07
For r = 8%, LHS = $2,387, RHS = $2,469.77
For r = 9%, LHS = $2,387, RHS = $2,571.73

Since RHS values increase as we increase the interest rate, and the closest value to $2,387 is at r = 7%, the answer is (C) 7%.

Question 12

Kaeli Company will invest $10,000 on January 1. If the fund earns 10% compound interest, what amount will be in the fund at the end of 5 years?

Accepted Answer

Since the interest is compounded annually, we can use the formula: A = P(1 + r)^n, where A is the ending amount, P is the initial investment, r is the interest rate as a decimal, and n is the number of compounding periods. Plugging in the values, we get:
A = 10,000(1 + 0.10)^5
A = 16,105. Therefore, the amount in the fund at the end of 5 years will be $16,105.

Question 13

The present value of an annuity due, as compared to the present value of an ordinary annuity of the same length and interest rate, will

Accepted Answer

The present value of an annuity due is always greater than the present value of an ordinary annuity of the same length and interest rate because payments for an annuity due are made at the beginning of each period, allowing each payment to accrue interest for one additional period compared to an ordinary annuity, where payments are made at the end of each period.

Question 14

A company purchases a piece of property with a fair market value of $100,000, paying for it by signing a note payable requiring cash payments of $20,000 at the beginning of each year for six years. What is the interest rate implicit in the note?

Accepted Answer

The interest rate implicit in the note can be found by calculating the internal rate of return (IRR) for the cash flows. The present value of the annuity of $20,000 for six years should equal the fair market value of $100,000. Using financial formulas or a financial calculator, the IRR that equates these cash flows is approximately 8%.

Question 15

Cora Company will receive $10,000 a year for 5 years, with all receipts at yearend. What is the present value of this annuity using a 10% discount rate?

Accepted Answer

We can use the formula for the present value of an annuity:

PV = C x [(1 - (1 / (1 + r)^n)) / r]

PV = 10,000 x [(1 - (1 / (1 + 0.10)^5)) / 0.10]
PV = 10,000 x [(1 - 0.6209) / 0.10]
PV = 10,000 x 6.791
PV = 67,910

Therefore, the present value of the annuity is $37,908.

Question 16

The future value of an annuity due, as compared to the future value of an ordinary annuity of the same length and interest rate, will

Accepted Answer

The future value of an annuity due will always be greater than the future value of an ordinary annuity of the same length and interest rate. This is because with an annuity due, payments are made at the beginning of each period, allowing for an extra period of compound interest to accrue.

Question 17

Kaeli Company will invest $10,000 a year for 5 years, with all investments at yearend. If the fund earns 10% compound interest, what amount will be in the fund at the end of 5 years?

Accepted Answer

Using the formula for future value of an annuity: FV = PMT x (((1 + r)^n - 1) / r) where FV is the future value, PMT is the annual investment, r is the interest rate, and n is the number of years. Plugging in the values: FV = 10,000 x (((1 + 0.1)^5 - 1) / 0.1) FV = 10,000 x (1.61051) FV = $<<10000*1.61051=16105.1>>16,105.10 Since the question asks for the total amount at the end of 5 years, we need to add the total amount of investments made: Total = FV + (PMT x n) Total = $16,105.10 + ($10,000 x 5) Total = $<<16105.1+50000=66105.1>>66,105.10 Therefore, the closest answer choice is B) $61,051.

Question 18

Lilly Company purchases land with a fair market value of $49,175, paying for it by signing a note payable requiring cash payments of $10,000 at the end of each year for six years. What is the interest rate implicit in the note?

Accepted Answer

The answer of Lilly Company purchases land with a fair...

Question 19

The size of the time value of money gets

Accepted Answer

The time value of money refers to the idea that money available now is worth more than the same amount of money at a future time. This is because money can earn interest over time. Therefore, the size of the time value of money increases as interest rates increase and as the time period gets longer since the opportunity to earn interest is greater.

Question 20

Cash payments of equal amounts, made at the beginning of each period, is called an

Accepted Answer

The answer of Cash payments of equal amounts, made at...

Quiz 15: The Time Value of Money