Weighted Average Cost Of Capital (Wacc) X1 Trivia Quiz

52 Questions | By RaminE | Updated: Mar 20, 2022 | Attempts: 342

Questions

Settings

Create your own Quiz

Questions and Answers

1.

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7%. The parents deposit $2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, then the amount available for the daughter's college expenses on her 18th birthday is closest to:
- A.
  
  $42,825
- B.
  
  $97,331
- C.
  
  $67,998
- D.
  
  103,063
2.

Consider a growing perpetuity that will pay $100 in one year. Each year after that, you will receive a payment on the anniversary of the last payment that is 6% larger than the last payment. This pattern of payments will continue forever. If the interest rate is 11%, then the value of this perpetuity is closest to:
- A.
  
  $1667
- B.
  
  $588
- C.
  
  $2000
- D.
  
  $909
3.

You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 8% per year forever. If the appropriate interest rate is 6%, then the value of this mining operation is closest to:
- A.
  
  $71,429
- B.
  
  $500,000
- C.
  
  $166,667
- D.
  
  This problem cannot be solved.
4.

Cash is a:
- A.
  
  Long-term asset
- B.
  
  Current asset
- C.
  
  Current liability
- D.
  
  Long-term liability
5.

Which of the following statements regarding the balance sheet is INCORRECT?
- A.
  
  The balance sheet provides a snapshots of the firm's financial position at a given point in time.
- B.
  
  The balance sheet lists the firm's assets and liabilities.
- C.
  
  The balance sheet reports stockholders' equity on the right hand side.
- D.
  
  The balance sheet reports liabilities on the left hand side.
6.

Which of the following balance sheet equations is INCORRECT?
- A.
  
  Assets - Liabilities = Shareholders' Equity
- B.
  
  Assets = Liabilities + Shareholders' Equity
- C.
  
  Assets - Current Liabilities = Long Term Liabilities
- D.
  
  Assets - Current Liabilities = Long Term Liabilities + Shareholders' Equity
7.

A 30 year mortgage loan is a:
- A.
  
  Long-term liability.
- B.
  
  Current liability.
- C.
  
  Current asset.
- D.
  
  long-term asset.
8.

At an annual interest rate of 7%, the future value of $5000 in five years is closest to:
- A.
  
  $3565
- B.
  
  $6750
- C.
  
  $7015
- D.
  
  $7035
9.

Your great aunt Matilda put some money in an account for you on the day you were born. This account pays 8% interest per year. On your 21st birthday the account balance was $5033.83. The amount of money that your great aunt Matilda originally put in the account is closest to:
- A.
  
  $600
- B.
  
  $800
- C.
  
  $1000
- D.
  
  $1200
10.

Which of the following statements regarding growing perpetuities is FALSE?
- A.
  
  We assume that r < g for a growing perpetuity.
- B.
  
  PV of a growing perpetuity =
- C.
  
  To find the value of a growing perpetuity one cash flow at a time would take forever.
- D.
  
  A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
11.

Which of the following statements regarding growing annuities is FALSE?
- A.
  
  A growing annuity is a stream of N growing cash flows, paid at regular intervals.
- B.
  
  We assume that g < r when using the growing annuity formula.
- C.
  
  PV of a growing annuity = C ×
- D.
  
  A growing annuity is like a growing perpetuity that never comes to an end.
12.

Which of the following statements is FALSE?
- A.
  
  The difference between an annuity and a perpetuity is that an annuity ends after some fixed number of payments.
- B.
  
  Most car loans, mortgages, and some bonds are annuities.
- C.
  
  A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
- D.
  
  An annuity is a stream of N equal cash flows paid at irregular intervals.
13.

The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to:
- A.
  
  7.72%
- B.
  
  8.00%
- C.
  
  8.30%
- D.
  
  8.66%
14.

The effective annual rate (EAR) for a savings account with a stated APR of 4% compounded daily (use 365 day year) is closest to:
- A.
  
  3.92%
- B.
  
  4.00%
- C.
  
  4.08%
- D.
  
  14.60%
15.

You are purchasing a new home and need to borrow $250,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.25% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay 2 points, they can offer you a lower rate of 6.0% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points you will need to borrow an additional $5000 to cover points you are paying the lender. Assuming you don't pay the points and borrow from the mortgage lender at 6.25%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to:
- A.
  
  $694
- B.
  
  $708
- C.
  
  $1540
- D.
  
  $1600
16.

You are purchasing a new home and need to borrow $250,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.25% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay 2 points, they can offer you a lower rate of 6.0% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points you will need to borrow an additional $5000 to cover points you are paying the lender. Assuming you pay the points and borrow from the mortgage lender at 6.00%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to:
- A.
  
  $708
- B.
  
  $1530
- C.
  
  $1540
- D.
  
  $1600
17.

Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.9% APR. You monthly payments are $617.16 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to:
- A.
  
  $14,808
- B.
  
  $22,212
- C.
  
  $32,000
- D.
  
  $37,020
18.

Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.9% APR. You monthly payments are $617.16 and you have just made your 24th monthly payment on your SUV.Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to:
- A.
  
  $14,808
- B.
  
  $20,300
- C.
  
  $22,212
- D.
  
  $32,000
19.

Which of the following statements is FALSE?
- A.
  
  The relationship between the investment term and the interest rate is called the term structure of interest rates.
- B.
  
  Real interest rates indicate the rate at which your money will grow if invested for a certain period.
- C.
  
  The yield curve is a potential leading indicator of future economic growth.
- D.
  
  D) The shape of the yield curve will be strongly influenced by interest rate expectations.
20.

Which of the following statements is FALSE?
- A.
  
  The plot of the relationship between the investment risk and the interest rate is call the yield curve.
- B.
  
  Each of the last six recessions in the United States was preceded by a period with an inverted yield curve.
- C.
  
  The nominal interest rate does not represent the increase in purchasing power that will result from investing.
- D.
  
  A risk-free cash flow received in two years should be discounted at the two-year interest rate.
21.

Which of the following statements is FALSE?
- A.
  
  The principal or face value of a bond is the notional amount we use to compute the interest payments.
- B.
  
  Payments are made on bonds until a final repayment date, called the term date of the bond.
- C.
  
  The coupon rate of a bond is set by the issuer and stated on the bond certificate.
- D.
  
  The promised interest payments of a bond are called coupons.
22.

Which of the following statements is FALSE?
- A.
  
  The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond.
- B.
  
  The bond certificate indicates the amounts and dates of all payments to be made.
- C.
  
  The only cash payments the investor will receive from a zero coupon bond are the interest payments that are paid up until the maturity date.
- D.
  
  Usually the face value of a bond is repaid at maturity.
23.

Which of the following statements is FALSE?
- A.
  
  The amount of each coupon payment is determined by the coupon rate of the bond.
- B.
  
  Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
- C.
  
  The simplest type of bond is a zero-coupon bond.
- D.
  
  Treasury bills are U.S. government bonds with a maturity of up to one year.
24.

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 9.0%, then the price that this bond trades for will be closest to:
- A.
  
  $946
- B.
  
  $919
- C.
  
  $1086
- D.
  
  $1000
25.

Assuming the appropriate YTM on the Sisyphean bond is 9%, then this bond will trade at
- A.
  
  A premium.
- B.
  
  A discount.
- C.
  
  Par.
- D.
  
  None of the above