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FI 3300 - CORPORATION FINANCE Take-Home Problem Set Three (THPS-3) Fall 2015
All questions are equally weighted.
PART I: MULTIPLE CHOICE – Choose the letter of the most correct answer for each question. Record only one answer per question.
1. Which of the following investment options is most valuable? Assume a positive interest rate, and that all options have the same risk.
a. receiving $20,000 today
b. receiving 10 payments of $2,000 per year with the first payment made today c. receiving $4,000 per year for five years beginning next year
d. receiving $10,000 today and $10,000 next year
e. Without an interest rate there is not enough information to tell.
2. In 3 years you are to receive $5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would:
a. Increase. b. Decrease.
c. Remain unchanged.
d. Either increase or decrease depending on the interest rate. e. Cannot be determined without more information.
3. Assuming an interest rate of 0 percent, which of the following cash-inflow streams should you prefer?
Answer
Choice Year 1
Cash Flow Year 2
Cash Flow Year 3
Cash Flow Year 4
Cash Flow
a. $400 $300 $200 $100
b. $100 $200 $300 $400
c. $250 $250 $250 $250
d. Any of the above, since the each sum to $1,000
4. Assuming an interest rate of 10 percent, which of the following cash-inflow streams should you prefer?
Answer
Choice Year 1
Cash Flow Year 2
Cash Flow Year 3
Cash Flow Year 4
Cash Flow
a. $400 $300 $200 $100
b. $100 $200 $300 $400
c. $250 $250 $250 $250
d. Any of the above, since the each sum to $1,000
5. In a typical loan amortization schedule, the dollar amount of interest paid each period:
a. increases with each payment b. decreases with each payment
c. remains constant with each payment
6. In a typical loan...