Question 1

If a bond has a contract rate of interest of 6%, but the discount rate of interest is 8%, the bond
A) will sell at a discount (less than face value).
B) will sell at a premium (more than face value).
C) may sell at either a premium or a discount.
D) will sell at its face value.

Accepted Answer

When the contract rate (coupon rate) of a bond is lower than the discount rate (market rate), the bond will sell at a discount because investors can get a higher return elsewhere, so they will pay less for the bond.

Question 2

In order to compute the present value of an annuity, it is necessary to know the
1) discount rate.
2) number of discount periods and the amount of the periodic payments or receipts.
A) 1.
B) 2.
C) Both 1 and 2.
D) Something in addition to 1 and 2.

Accepted Answer

The answer of In order to compute the present value...

Question 3

Travis Tucker invests $10,655.04 now for a series of $1,500 annual returns beginning one year from now. Travis will earn 10% on the initial investment. How many annual payments will Travis receive?
A) 10
B) 12
C) 13
D) 15

Accepted Answer

To find the number of payments, we use the formula for the present value of an annuity: PV = PMT * [(1 - (1 + r)^-n) / r]. Here, PV = $10,655.04, PMT = $1,500, and r = 0.10. Solving for n gives approximately 13 payments.

Question 4

Dodd Company is considering an investment, which will return a lump sum of $675,000 four years from now. Below is some of the time value of money information that Dodd has compiled that might help in planning compounded interest decisions. $\begin{array}{ll}
\text { Present value of } 1 \text { for } 4 \text { periods at } 10 \% & 0.68301 \
\text { Future value of } 1 \text { for } 4 \text { periods at } 10 \% & 1.46410 \
\text { Present value of an annuity of } 1 \text { for } 4 \text { periods at } 10 \% & 3.16986 \
\text { Future value of an annuity of } 1 \text { for } 4 \text { periods at } 10 \% & 4.64100
\end{array}$ To the closest dollar, what amount should Dodd Company pay for this investment to earn a 10% return?
A) $405,000
B) $270,000
C) $461,032
D) $534,914

Accepted Answer

The present value of the lump sum is $461,032. This is calculated by multiplying the future value of $675,000 by the present value of 1 for 4 periods at 10%, which is 0.68301.

Question 5

Koppernaes Corporation earns 12% on an investment that will return $1,350,000, 7 years from now. Below is some of the time value of money information that Koppernaes has compiled that might help in planning compounded interest decisions. $\begin{array}{lr}
\text { Present value of } 1 \text { for } 7 \text { periods at } 12 \% & 0.45235 \
\text { Future value of } 1 \text { for } 7 \text { periods at } 12 \% & 2.21068 \
\text { Present value of an annuity of } 1 \text { for } 7 \text { periods at } 12 \% & 4.56376 \
\text { Future value of an annuity of } 1 \text { for } 7 \text { periods at } 12 \% & 10.08901
\end{array}$ To the closest dollar, what is the amount Koppernaes should invest now to earn this rate of return?
A) $298,442
B) $610,673
C) $1,134,,000
D) $616,107

Accepted Answer

The answer of Koppernaes Corporation earns 12% on an investment...

Question 6

Glover Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 8%, payable semiannually. The discount rate for such securities is 10%. How much can Glover expect to receive from the sale of these bonds?
A) $2,768,338
B) $3,000,000
C) $3,243,315
D) $3,231,660

Accepted Answer

The bonds are issued at a discount because the contract rate (8%) is lower than the market discount rate (10%). The present value of the bond's cash flows (interest and principal) at the market rate will be less than the face value, resulting in a price of $2,768,338.

Question 7

Mango Madness Company is considering purchasing equipment. The equipment will produce the following cash flows: Year $1 \quad \$ 40,000$
Year $2 \quad \$ 30,000$ Mango Madness requires a minimum rate of return of 10%. What is the maximum price Mango Madness should pay for this equipment?
A) $61,157.10
B) $36,363.60
C) $70,000
D) $35,000

Accepted Answer

The maximum price is the present value of the cash flows discounted at the required rate of return (10%). The present value of $40,000 in year 1 is $36,363.64 and $30,000 in year 2 is $24,793.46, totaling $61,157.10.

Question 8

Montz Company is considering investing in an annuity contract that will return $80,000 annually at the end of each year for 12 years. Montz has obtained the following values related to the time value of money to help in its planning process and compounded interest decisions. $\begin{array}{lr}
\text { Present value of } 1 \text { for } 12 \text { periods at } 9 \% & 0.35554 \
\text { Future value of } 1 \text { for } 12 \text { periods at } 9 \% & 2.81267 \
\text { Present value of an annuity of } 1 \text { for } 12 \text { periods at } 9 \% & 7.16073 \
\text { Future value of an annuity of } 1 \text { for } 12 \text { periods at } 9 \% & 20.14072
\end{array}$ To the closest dollar, what amount should Montz Company pay for this investment if it earns a 9% return?
A) $994,132
B) $1,185,014
C) $1,611,258
D) $572,858

Accepted Answer

The answer of Montz Company is considering investing in an...

Question 9

Ando Company earns 11% on an investment that pays back $660,000 at the end of each of the next 5 years. Ando finance department has the following values related to the time value of money to help in its planning process and compounded interest decisions. $\begin{array}{ll}
\text { Present value of } 1 \text { for } 5 \text { periods at } 11 \% & 0.59345 \
\text { Future value of } 1 \text { for } 5 \text { periods at } 11 \% & 1.68506 \
\text { Present value of an annuity of } 1 \text { for } 5 \text { periods at } 11 \% & 3.69590 \
\text { Future value of an annuity of } 1 \text { for } 5 \text { periods at } 11 \% & 6.22780
\end{array}$ To the closest dollar, what is the amount Ando invested to earn the 11% rate of return?
A) $1,112,139
B) $391,677
C) $2,439,294
D) $178,577

Accepted Answer

The answer of Ando Company earns 11% on an investment...

Question 10

Wiggins Company is considering purchasing equipment. The equipment will produce the following cash flows: Year 1, $50,000; Year 2, $90,000; Year 3, $130,000. Below is some of the time value of money information that Wiggins has compiled that might help them in their planning and compounded interest decisions. $$\begin{array} { | l | r | r | r | } 
\hline & 1 \text { period, } 11 \% & 2 \text { periods, } 11 \% & 3 \text { periods, } 11 \% \
\hline \text { Present value of 1 } & 0.90090 & 0.81162 & 0.73119 \
\hline \text { Future value of 1 } & 1.11000 & 1.23210 & 1.36763 \
\hline \text { Present value of an annuity of 1 } & 0.90090 & 1.71252 & 2.44371 \
\hline \text { Future value of an annuity of 1 } & 1.00000 & 2.12000 & 3.37440 \
\hline
\end{array}$$ Wiggins requires a minimum rate of return of 11%. To the closest dollar, what is the maximum price Wiggins should pay for the equipment?
A) $219,137
B) $213,146
C) $218,099
D) $208,499

Accepted Answer

The answer of Wiggins Company is considering purchasing equipment. The...

Question 11

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is
A) increased.
B) decreased.
C) not changed.
D) equal to the stated rate of interest.

Accepted Answer

The present value of a future cash flow decreases as the discount rate increases. Therefore, if the discount rate is increased, the present value of $10,000 to be received in 5 years will be smaller.

Question 12

The amount you must deposit now in your savings account paying 6% interest, in order to accumulate $20,000 for a down payment 5 years from now on a new Ferrari 458 is
A) $4,000.00.
B) $14,945.20.
C) $14,924.40.
D) $14,000.00.

Accepted Answer

The answer of The amount you must deposit now in...

Question 13

Patrick Mazzeo has been offered the opportunity of investing $89,278.45 now. The investment will earn 8% per year and at the end of its life will return $250,000 to Patrick. How many years must Patrick wait to receive the $250,000?
A) 10~11
B) 11~12
C) 12~13
D) 13~14

Accepted Answer

The answer of Patrick Mazzeo has been offered the opportunity...

Question 14

Potter Company has purchased a patent that requires annual payments of $31,250 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the patent?
A) $187,500
B) $128,482
C) $172,679
D) $120,469

Accepted Answer

The amount to record the patent is the present value of the annuity of $31,250 for 6 years at a 12% discount rate. Using the present value of annuity formula, the calculation results in approximately $128,482.

Question 15

The amount you must deposit now in your savings account paying 5% interest, in order to accumulate $18,000 for your first tuition payment when you start law school in 3 years is
A) $15,300.00.
B) $14,094.00.
C) $15,549.12.
D) $15,947.28.

Accepted Answer

The correct answer is C. $15,549.12.To calculate the amount you need to deposit now, you can use the formula:P = F / (1 + r)^nwhere:P is the present value (the amount you need to deposit now)F is the future value (the amount you want to accumulate, $18,000)r is the annual interest rate (5%)n is the number of years (3)Plugging in the values, we get:P = 18000 / (1 + 0.05)^3P = 18000 / 1.157625P = $15,549.12Therefore, you need to deposit $15,549.12 now in order to accumulate $18,000 in 3 years at 5% interest.

Question 16

Mergenthaler Company has just purchased machinery that requires annual payments of $50,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments?
A) $142,749
B) $200,000
C) $58,719
D) $225,201

Accepted Answer

The present value of an annuity can be calculated using the formula: PV = PMT × [(1 - (1 + r)^-n) / r], where PMT is the annual payment, r is the discount rate, and n is the number of periods. Plugging in the values: PV = $50,000 × [(1 - (1 + 0.15)^-4) / 0.15] = $142,749.

Question 17

If Jane Key invests $15,501.28 now and she will receive $40,000 at the end of 11 years, what annual rate of interest will she be earning on her investment?
A) 8%
B) 8.5%
C) 9%
D) 10%

Accepted Answer

The future value formula is FV = PV * (1 + r)^n. Solving for r, we get r = (FV/PV)^(1/n) - 1. Plugging in the values: r = (40000/15501.28)^(1/11) - 1 ≈ 0.09 or 9%.

Question 18

Suppose you have a winning lottery ticket and you are given the option of accepting $7,000,000 three years from now or taking the present value of the $7,000,000 now. The sponsor of the prize uses a 6% discount rate. If you elect to receive the present value of the prize now, the amount you will receive is
A) $5,877,340.
B) $6,046,880.
C) $6,230,000.
D) $7,000,000.

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value, r is the discount rate, and n is the number of years. Plugging in the values: PV = $7,000,000 / (1 + 0.06)^3 = $5,877,340.

Question 19

Valente Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 10%, payable semiannually. The discount rate for such securities is 8%. How much can Valente expect to receive from the sale of these bonds?
A) $2,768,338
B) $3,000,000
C) $3,243,315
D) $3,231,660

Accepted Answer

The bonds will be sold at a premium because the contract rate (10%) is higher than the discount rate (8%). The present value of the bond's cash flows (interest payments and principal) at the discount rate will be higher than the face value, resulting in $3,243,315.

Question 20

When determining the proceeds received when issuing a bond, the factor applied to the amount of the bond principal is determined from the table of the
A) present value of 1.
B) present value of an annuity 1.
C) future value of 1.
D) future value of an annuity 1.

Accepted Answer

The answer of When determining the proceeds received when issuing...

Quiz 14: Understanding Investments and Acquisitions in Accounting

If a bond has a contract rate of interest of 6%, but the discount rate of interest is 8%, the bond

In order to compute the present value of an annuity, it is necessary to know the 1) discount rate. 2) number of discount periods and the amount of the periodic payments or receipts.

Travis Tucker invests $10,655.04 now for a series of $1,500 annual returns beginning one year from now. Travis will earn 10% on the initial investment. How many annual payments will Travis receive?

Glover Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 8%, payable semiannually. The discount rate for such securities is 10%. How much can Glover expect to receive from the sale of these bonds?

The present value of $10,000 to be received in 5 years will be smaller if the discount rate is

The amount you must deposit now in your savings account paying 6% interest, in order to accumulate $20,000 for a down payment 5 years from now on a new Ferrari 458 is

Patrick Mazzeo has been offered the opportunity of investing $89,278.45 now. The investment will earn 8% per year and at the end of its life will return $250,000 to Patrick. How many years must Patrick wait to receive the $250,000?

Potter Company has purchased a patent that requires annual payments of $31,250 to be paid at the end of each of the next 6 years. The appropriate discount rate is 12%. What amount will be used to record the patent?

The amount you must deposit now in your savings account paying 5% interest, in order to accumulate $18,000 for your first tuition payment when you start law school in 3 years is

Mergenthaler Company has just purchased machinery that requires annual payments of $50,000 to be paid at the end of each of the next 4 years. The appropriate discount rate is 15%. What is the present value of the payments?

If Jane Key invests $15,501.28 now and she will receive $40,000 at the end of 11 years, what annual rate of interest will she be earning on her investment?

Valente Company is about to issue $3,000,000 of 5-year bonds, with a contract rate of interest of 10%, payable semiannually. The discount rate for such securities is 8%. How much can Valente expect to receive from the sale of these bonds?

When determining the proceeds received when issuing a bond, the factor applied to the amount of the bond principal is determined from the table of the