Chapter 5 Introduction to Valuation The Time Value of Money

Total debt ratio = .2 = TD/TA
TA/TD = 1/.2
1 + TE/TD = 5
TE/TD = 4
TD/TE = .25

TA/TE = 1 + TD/TE
TA/TE = 1.25

ROE = .056(1.76)(1.25)
ROE = .1232, or 12.32%

Retention ratio = 1 − .7
Retention ratio = .3

Sustainable growth rate = [.1232(.3)]/{1 − [.1232(.3)]}
Sustainable growth rate = .0384, or 3.84%
100) E
ROE = $63,000/$168,500
ROE = .3739, or 37.39%

Retention ratio = ($63,000 − 37,800)/$63,000
Retention ratio = .40, or 40%

Sustainable growth rate = [.3739(.40)]/{1 − [.3739(.40)]}
Sustainable growth rate = .1759, or 17.59%

Student name:
1) Thomas invests $111 in an account that pays 5 percent simple interest. How much money
will Thomas have at the end of 5 years?
1)

, A) $138.75
B) $134.92
C) $133.20
D) $141.67
E) $144.30



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Simple and compound interest
Section : 5.1 Future Value and Compounding
Learning Objective : 05-01 Determine the future value of an investment made today.
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




2) Beatrice invests $1,460 in an account that pays 5 percent simple interest. How much
more could she have earned over a 6-year period if the interest had been compounded annually?
2)


A) $41.57
B) $58.54
C) $34.64
D) $351.24
E) $24.13



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Simple and compound interest
Section : 5.1 Future Value and Compounding
Learning Objective : 05-01 Determine the future value of an investment made today.
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible

,3) You can invest in an account that pays simple interest or an account that pays compound
interest. In either case, you plan to invest $3,500 today and both accounts have an annual interest
rate of 9 percent. How much more interest will you receive in the 6th year in the account that
pays compound interest?
3)


A) $183.34
B) $169.67
C) $186.83
D) $182.52
E) $315.00



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Topic : Simple and compound interest
Section : 5.1 Future Value and Compounding
Learning Objective : 05-01 Determine the future value of an investment made today.
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




4) What is the future value of $2,938 invested for 9 years at 4.6 percent compounded
annually?
4)


A) $3,605.23
B) $6,601.19
C) $4,403.89
D) $6,487.17
E) $3,597.03

, Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Section : 5.1 Future Value and Compounding
Learning Objective : 05-01 Determine the future value of an investment made today.
Topic : Future value - single cash flow
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




5) Five years from today, you plan to invest $3,850 for 8 additional years at 5.9 percent
compounded annually. How much will you have in your account 13 years from today?
5)


A) $8,111.63
B) $6,476.61
C) $6,090.16
D) $6,593.84
E) $5,127.91



Question Details
AACSB : Analytical Thinking
Difficulty : 1 Basic
Section : 5.1 Future Value and Compounding
Learning Objective : 05-01 Determine the future value of an investment made today.
Topic : Future value - single cash flow
Bloom's : Understand
Accessibility : Keyboard Navigation
Accessibility : Screen Reader Compatible




6) Today, your dream car costs $65,500. You feel that the price of the car will increase at an
annual rate 2.4 percent. If you plan to wait 4 years to buy the car, how much will it cost at that
time?
6)