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Chapter04-DiscountedCashFlowValuation4-1Chapter04DiscountedCashFlowValuationAnswerKeyMultipleChoiceQuestions1.Anannuitystreamofcashflowpaymentsisasetof:A.levelcashflowsoccurringeachtimeperiodforafixedlengthoftime.B.levelcashflowsoccurringeachtimeperiodforever.C.increasingcashflowsoccurringeachtimeperiodforafixedlengthoftime.D.increasingcashflowsoccurringeachtimeperiodforever.E.arbitrarycashflowsoccurringeachtimeperiodfornomorethan10years.Difficultylevel:EasyTopic:ANNUITYType:DEFINITIONS2.Annuitieswherethepaymentsoccurattheendofeachtimeperiodarecalled_____,whereas_____refertoannuitystreamswithpaymentsoccurringatthebeginningofeachtimeperiod.A.ordinaryannuities;earlyannuitiesB.lateannuities;straightannuitiesC.straightannuities;lateannuitiesD.annuitiesdue;ordinaryannuitiesE.ordinaryannuities;annuitiesdueDifficultylevel:EasyTopic:ANNUITIESDUEType:DEFINITIONSChapter04-DiscountedCashFlowValuation4-23.Anannuitystreamwherethepaymentsoccurforeveriscalleda(n):A.annuitydue.B.indemnity.C.perpetuity.D.amortizedcashflowstream.E.amortizationtable.Difficultylevel:EasyTopic:PERPETUITYType:DEFINITIONS4.Theinterestrateexpressedintermsoftheinterestpaymentmadeeachperiodiscalledthe_____rate.A.statedannualinterestB.compoundannualinterestC.effectiveannualinterestD.periodicinterestE.dailyinterestDifficultylevel:EasyTopic:STATEDINTERESTRATESType:DEFINITIONS5.Theinterestrateexpressedasifitwerecompoundedonceperyeariscalledthe_____rate.A.statedinterestB.compoundinterestC.effectiveannualD.periodicinterestE.dailyinterestDifficultylevel:EasyTopic:EFFECTIVEANNUALRATEType:DEFINITIONSChapter04-DiscountedCashFlowValuation4-36.Theinterestratechargedperperiodmultipliedbythenumberofperiodsperyeariscalledthe_____rate.A.effectiveannualB.annualpercentageC.periodicinterestD.compoundinterestE.dailyinterestDifficultylevel:EasyTopic:ANNUALPERCENTAGERATEType:DEFINITIONS7.Payingofflong-termdebtbymakinginstallmentpaymentsiscalled:A.foreclosingonthedebt.B.amortizingthedebt.C.fundingthedebt.D.callingthedebt.E.Noneoftheabove.Difficultylevel:EasyTopic:AMORTIZATIONType:DEFINITIONS8.Youarecomparingtwoannuitieswhichoffermonthlypaymentsfortenyears.Bothannuitiesareidenticalwiththeexceptionofthepaymentdates.AnnuityApaysonthefirstofeachmonthwhileannuityBpaysonthelastdayofeachmonth.Whichoneofthefollowingstatementsiscorrectconcerningthesetwoannuities?A.Bothannuitiesareofequalvaluetoday.B.AnnuityBisanannuitydue.C.AnnuityAhasahigherfuturevaluethanannuityB.D.AnnuityBhasahigherpresentvaluethanannuityA.E.Bothannuitieshavethesamefuturevalueasoftenyearsfromtoday.Difficultylevel:MediumTopic:ORDINARYANNUITYVERSUSANNUITYDUEType:CONCEPTSChapter04-DiscountedCashFlowValuation4-49.Youarecomparingtwoinvestmentoptions.Thecosttoinvestineitheroptionisthesametoday.Bothoptionswillprovideyouwith$20,000ofincome.OptionApaysfiveannualpaymentsstartingwith$8,000thefirstyearfollowedbyfourannualpaymentsof$3,000each.OptionBpaysfiveannualpaymentsof$4,000each.Whichoneofthefollowingstatementsiscorrectgiventhesetwoinvestmentoptions?A.Bothoptionsareofequalvaluegiventhattheybothprovide$20,000ofincome.B.OptionAisthebetterchoiceofthetwogivenanypositiverateofreturn.C.OptionBhasahigherpresentvaluethanoptionAgivenapositiverateofreturn.D.OptionBhasalowerfuturevalueatyear5thanoptionAgivenazerorateofreturn.E.OptionAispreferablebecauseitisanannuitydue.Difficultylevel:MediumTopic:UNEVENCASHFLOWSANDPRESENTVALUEType:CONCEPTS10.Youareconsideringtwoprojectswiththefollowingcashflows:Whichofthefollowingstatementsaretrueconcerningthesetwoprojects?I.Bothprojectshavethesamefuturevalueattheendofyear4,givenapositiverateofreturn.II.Bothprojectshavethesamefuturevaluegivenazerorateofreturn.III.Bothprojectshavethesamefuturevalueatanypointintime,givenapositiverateofreturn.IV.ProjectAhasahigherfuturevaluethanprojectB,givenapositiverateofreturn.A.IIonlyB.IVonlyC.IandIIIonlyD.IIandIVonlyE.I,II,andIIIonlyDifficultylevel:MediumTopic:UNEVENCASHFLOWSANDFUTUREVALUEType:CONCEPTSChapter04-DiscountedCashFlowValuation4-511.Aperpetuitydiffersfromanannuitybecause:A.perpetuitypaymentsvarywiththerateofinflation.B.perpetuitypaymentsvarywiththemarketrateofinterest.C.perpetuitypaymentsarevariablewhileannuitypaymentsareconstant.D.perpetuitypaymentsnevercease.E.annuitypaymentsnevercease.Difficultylevel:EasyTopic:PERPETUITYVERSUSANNUITYType:CONCEPTS12.Whichoneofthefollowingstatementsconcerningtheannualpercentagerateiscorrect?A.Theannualpercentagerateconsidersinterestoninterest.B.Therateofinterestyouactuallypayonaloaniscalledtheannualpercentagerate.C.Theeffectiveannualrateislowerthantheannualpercentageratewhenaninterestrateiscompoundedquarterly.D.WhenfirmsadvertisetheannualpercentageratetheyareviolatingU.S.truth-in-lendinglaws.E.Theannualpercentagerateequalstheeffectiveannualratewhentherateonanaccountisdesignatedassimpleinterest.Difficultylevel:MediumTopic:ANNUALPERCENTAGERATEType:CONCEPTS13.Whichoneofthefollowingstatementsconcerninginterestratesiscorrect?A.Thestatedrateisthesameastheeffectiveannualrate.B.Aneffectiveannualrateistheratethatappliesifint