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Test Bank For Fundamentals of Corporate Finance 12th Edition By Stephen Ross
Fundamentals of Corporate Finance, 12e (Ross)
Chapter 5 Introduction to Valuation: The Time Value of Money
1) Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning at 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?
A) Barb will earn more interest in Year 1 than Andy will.
B) Andy will earn more interest in Year 3 than Barb will.
C) Barb will earn more interest in Year 2 than Andy.
D) After five years, Andy and Barb will both have earned the same amount of interest.
E) Andy will earn compound interest.
Answer: C
Difficulty: 1 Easy
Topic: Simple and compound interest
Learning Objective: 05-01 Determine the future value of an investment made today.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
2) Nan and Neal are twins. Nan invests $5,000 at 7 percent at age 25. Neal invests $5,000 at 7 percent at age 30. Both investments compound interest annually. Both twins retire at age 60 and neither adds nor withdraws funds prior to retirement. Which statement is correct?
A) Nan will have less money when she retires than Neal.
B) Neal will earn more interest on interest than Nan.
C) Neal will earn more compound interest than Nan.
D) If both Nan and Neal wait to age 70 to retire they will have equal amounts of savings.
E) Nan will have more money than Neal at any age.
Answer: E
Difficulty: 1 Easy
Topic: Future value
Learning Objective: 05-01 Determine the future value of an investment made today.
Bloom’s: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3) You are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?
A) Future value
B) Present value
C) Principal amount
D) Discounted value
E) Invested principal
Answer: A
Difficulty: 1 Easy
Topic: Future value
Learning Objective: 05-01 Determine the future value of an investment made today.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
4) Christina invested $3,000 five years ago and earns 2 percent annual interest. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as:
A) simplifying.
B) compounding.
C) aggregating.
D) accumulating.
E) discounting.
Answer: B
Difficulty: 1 Easy
Topic: Simple and compound interest
Learning Objective: 05-01 Determine the future value of an investment made today.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
5) Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:
A) free interest.
B) bonus income.
C) simple interest.
D) interest on interest.
E) present value interest.
Answer: D
Difficulty: 1 Easy
Topic: Simple and compound interest
Learning Objective: 05-01 Determine the future value of an investment made today.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
6) The interest earned on both the initial principal and the interest reinvested from prior periods is called:
A) free interest.
B) dual interest.
C) simple interest.
D) interest on interest.
E) compound interest.
Answer: E
Difficulty: 1 Easy
Topic: Simple and compound interest
Learning Objective: 05-01 Determine the future value of an investment made today.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
7) Renee invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?
A) Free interest
B) Complex interest
C) Simple interest
D) Interest on interest
E) Compound interest
Answer: C
Difficulty: 1 Easy
Topic: Simple and compound interest
Learning Objective: 05-01 Determine the future value of an investment made today.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) Kurt won a lottery and will receive $1,000 a year for the next 50 years. The current value of these winnings is called the:
A) single amount.
B) future value.
C) present value.
D) simple amount.
E) compounded value.
Answer: C
Difficulty: 1 Easy
Topic: Present value
Learning Objective: 05-02 Determine the present value of cash to be received at a future date.
Bloom’s: Remember
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
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