The present value of a $20,000 perpetuity at a 7 percent discount rate is ________.

What rate of return did Mike earn over the year?

What is the maximum amount of money you would invest in this project if you expect 9 percent rate of return to your investment?

If Dan can earn 10 percent on his contributions, how much will he have at the end of the tenth year?

Chapters 5 and 8 Test #2 Practice Questions 1. In future value or present value problems, unless stated otherwise, cash flows are  assumed to be A. at the end of a time period. B. at Don't forget about the age old question of What analysis is considered as a managerial planning tool?
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the beginning of a time period. C. in the middle of a time period. D. spread out evenly over a time period. 2. The future value interest factor is A. always greater than 1.0. B. sometimes negative. C. always less than 0. D. never greater than 25. 3. The future value of $100 received today and deposited at 6 percent for four years is A. $126. B. $ 79. C. $124. D. $116. 4. If the interest rate is zero, the future value interest factor equals_____. A. -1.0 B. 0.0 C. 1.0  D. 2.0  5. The present value of $100 to be received 10 years from today, assuming an opportunity  cost of 9 percent, is A. $236. B. $699. C. $ 42. D. $ 75. 6. The amount of money that would have to be invested today at a given interest rate over a  specified period in order to equal a future amount is called A. future value. B. present value. C. future value interest factor. D. present value interest factor.7. The present value of $200 to be received 10 years from today, assuming an opportunity  cost of 10 percent, is A. $ 50. B. $200. C. $518. D. $ 77. 8. The future value of a dollar ______ as the interest rate increases and ______ the farther in the future an initial deposit is to be received. A. decreases; decreases B. decreases; increases C. increases; increases D. increases; decreases 9. The annual rate of return is variously referred to as the A. discount rate. B. opportunity cost. C. cost of capital. D. all of the above. 10. An annuity with an infinite life is called A. a perpetuity. B. a premium. C. an indefinite. D. a deep discount. 11. The present value of a $20,000 perpetuity at a 7 percent discount rate is A. $186,915. B. $285,714. C. $140,000. D. $325,000. 12. Dan plans to fund his individual retirement account (IRA) with the maximum  contribution of $2,000 at the end of each year for the next 10 years. If Dan can earn 10  percent on his contributions, how much will he have at the end of the tenth year? A. $12,290 B. $20,000 C. $31,874 D. $51,880 13. You have been offered a project paying $300 at the beginning of each year for the next 20 years. What is the maximum amount of money you would invest in this project if you  expect 9 percent rate of return to your investment? A. $ 2,738.70 B. $ 2,985.18 C. $15,347.70 D. $ 6,000.0014. The present value of $1,000 received at the end of year 1, $1,200 received at the end of  year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7  percent, is A. $2,500. B. $3,043. C. $6,516. D. $2,856. 15. The rate of interest actually paid or earned, also called the annual percentage rate (APR),  is the ______ interest rate. A. effective B. nominal C. discounted D. continuous 16. Betty borrows $50,000 at 10 percent annually compounded interest to be repaid in four  equal annual installments. The actual end-of-year loan payment is A. $10,774. B. $12,500. C. $14,340. D. $15,773. 17. If a person’s required return does not change when risk increases, that person is said to be 1. risk-seeking. 2. risk-indifferent. 3. risk-averse. 4. risk-aware. 18. If a person’s required return decreases for an increase in risk, that person is said to be 1. risk-seeking. 2. risk-indifferent. 3. risk-averse. 4. risk-aware. 19. ______ is the chance of loss or the variability of returns associated with a given asset. A. Return B. Value C. Risk D. Probability20. Last year Mike bought 100 shares of Dallas Corporation common stock for $53 per share. During the year he received dividends of $1.45 per share. The stock is currently selling  for $60 per share. What rate of return did Mike earn over the year? A. 11.7 percent. B. 13.2 percent. C. 14.1 percent. D. 15.9 percent. 21. The ______ measures the dispersion around the expected value. A. coefficient of variation B. chi square C. mean D. standard deviation 22. The ______ is a measure of relative dispersion used in comparing the risk of assets with  differing expected returns. A. coefficient of variation B. chi square C. mean D. standard deviation 23. Since for a given increase in risk, most managers require an increase in return, they are A. risk-seeking B. risk-indifferent C. risk-free D. risk-averse 24. The expected value, standard deviation of returns, and coefficient of variation for asset A  are (See below.) Asset A _______________________________________________________ Possible outcomes Probability Returns (%) _______________________________________________________  Pessimistic .25 5   Most likely .55 10   Optimistic .20 13 A. 10 percent, 8 percent, and 1.25, respectively. B. 9.33 percent, 8 percent, and 2.15, respectively. C. 9.35 percent, 4.68 percent, and 2, respectively. D. 9.35 percent, 2.76 percent, and 0.3, respectively.25. The ______ portfolio maximizes return for a given level of risk, or minimizes risk for a  given level of return. A. efficient B. coefficient C. continuous D. risk-indifferent 26. Perfectly ______ correlated series move exactly together and have a correlation  coefficient of ______, while perfectly ______ correlated series move exactly in opposite  directions and have a correlation coefficient of ______. A. negatively; -1; positively; +1 B. negatively; +1; positively; -1 C. positively; -1; negatively; +1 D. positively; +1; negatively; -1 27. Combining negatively correlated assets having the same expected return results in a  portfolio with ______ level of expected return and ______ level of risk. A. a higher; a lower B. the same; a higher C. the same; a lower D. a lower; a higher 28. An investment advisor has recommended a $50,000 portfolio containing assets R, J, and  K; $25,000 will be invested in asset R, with an expected annual return of 12%; $10,000  will be invested in asset J, with an expected annual return of 18%; and $15,000 will be  invested in asset K, with an expected annual return of 8%. The expected annual return of  this portfolio is A. 12.67% B. 12.00% C. 10.00% D. unable to be determined from the information provided. Figure 501 Expected Return (%) __________________ Year Asset A Asset B Asset C _________________________________________________  1 6 8 6  2 7 7 7  3 8 6 829. The correlation of returns between Asset A and Asset B can be characterized as (See  Figure 501.) A. perfectly positively correlated. B. perfectly negatively correlated. C. uncorrelated. D. cannot be determined. 30. Systematic risk is also referred to as A. diversifiable risk. B. economic risk. C. nondiversifiable risk. D. not relevant. 31. The purpose of adding an asset with a negative or low positive beta is to A. reduce profit. B. reduce risk. C. increase profit. D. increase risk. 32. The beta of the market A. is greater than 1. B. is less than 1. C. is 1. D. cannot be determined. 33. Asset P has a beta of .9. The risk-free rate of return is 8 percent, while the return on the  market portfolio of assets is 14 percent. The asset's required rate of return is A. 13.4 percent. B. 6.0 percent. C. 5.4 percent. D. 10 percent.