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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...