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Free CMA Exam Braindumps (page: 150)

Page 150 of 336
PDF with 1336 Questions
View Related Case Study

Essex Corporation is evaluating a lease that takes effect on March 1. The company must make eight equal payments, with the first payment due on March 1. The concept most relevant to the evaluation of the lease is the

  1. Present value of an annuity due.
  2. Present value of an ordinary annuity
  3. Future value of an annuity due.
  4. Future value of an ordinary annuity.

Answer(s): A

Explanation:

An annuity is a series of cash flows or other economic benefits occurring at fixed intervals, ordinarily as a result of an investment, Present value is the value at a specified time of an amount or amounts to be paid or received later, discounted at some interest rate. In an annuity due, the payments occur at the beginning, rather than at the end, of the periods. Thus, the present value of an annuity due includes the initial payment at its undiscounted amount. Evaluation of an investment decision. e.g.. a lease, that involves multi-period cash payments (an annuity) requires an adjustment for the time value of money. Because of the interest factor, a dollar today is worth more than a dollar in the future. Consequently, comparison of different investments requires restating their future benefits and costs in terms of present values. This lease should therefore be evaluated using the present value of an annuity due.



View Related Case Study

Which formula is used to determine the future value that will be available if a given amount of money is invested?

  1. Option
  2. Option
  3. Option
  4. Option

Answer(s): A

Explanation:

The basic formula used is PV(1 + j)fl = FV i.e., the present value times one plus the interest rate to the nth power equals the future value at the end of the nth time period. When the present amount is known (e.g., A = $100). as well as the interest rate (e.g., i = 10%) and the number of time pentodes (e.g., n = 2). the future value can be calculated as $100(1 + .10)2 $121. A is typical' used in the formula, but it stands (or the PV or FV (whichever is not on the other side of the equals sign).



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The discount rate ordinal' used in present value calculations is the

  1. Federal Reserve rate
  2. Treasury bill rate.
  3. Minimum desired rate of return set by the firm.
  4. Prime rate.

Answer(s): C

Explanation:

The discount rate most often used in present value calculators is the minimum desired rate of return as set by management. The NPV arrived at in this calculation is a first step in the decision process. It indicates how the project's return compares vent the minimum deseed rate of return



View Related Case Study

You have just purchased a 15-year, $ 1.000 par value bond. The coupon rate on this bond is 9% annually, with interest being paid each 6 months. If you expect to earn a 12% nominal rate of return on this bond, how much did you pay for it?

  1. $642.76
  2. $793.43
  3. $875.38
  4. $950.75

Answer(s): B

Explanation:

The cash flows consist of interest of $45 every 6 months for 15 years (30 periods), and $1,000 t the end of the 30th interest period. The 12% discount rate translates to 6% every 6 months. Thus, the calculation is:



Page 150 of 336



Post your Comments and Discuss Financial CMA exam with other Community members:

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