Midterm #1 –Fall 2017 – Econ 134A

October 19, 2017

Test Form A

Name (Please Print) : ______

Seat:______

By signing below, I acknowledge that I have checked photo identification to the people to my immediate left and right, and that the name matches what is listed on the test and scantron. (Students do not need to go across an aisle to check identification.) If a student does not have a photo identification, I will report it to the instructor before the test starts.

I am also aware that I need to bubble in the form letter and my name and perm number on my scantron, and include my name, perm number, and section time on the open response sheet. I am aware that not having a photo identification may result in receiving a score of zero on the test if I do not talk to the instructor immediately before or after the test.

Finally, by signing below, I acknowledge that this test will count as part of my course grade. If I fail to turn in the test, a score of zero will be entered.

Name (Please Print):______

Signature______

Econ 134AJohn Hartman

Test 1, Form AOctober 19, 2017

Instructions:

YOU WILL TURN IN YOUR SCANTRON AND THE PROBLEMS PAGE. MAKE SURE ALL WORK AND ANSWERS ARE PROVIDED ON THESE. BUBBLE IN YOUR TEST FORM, NAME, AND PERM NUMBER ON YOUR SCANTRON.

You have 60 minutes to complete this test, unless you arrive late. Late arrival will lower the time available to you, and you must finish at the same time as all other students.

Cheating will not be tolerated during any test. Any suspected cheating will be reported to the relevant authorities on this issue.

You are allowed to use a nonprogrammable four-function or scientific calculator that is NOT a communication device. You are NOT allowed to have a calculator that stores formulas, buttons that automatically calculate IRR, NPV, or any other concept covered in this class. You are NOT allowed to have a calculator that has the ability to produce graphs. If you use a calculator that does not meet these requirements, you will be assumed to be cheating.

Unless otherwise specified, you can assume the following:

  • Negative internal rates of return are not possible.
  • Equivalent annual cost problems are in real dollars.

You are allowed to turn in your test early if there are at least 10 minutes remaining. As a courtesy to your classmates, you will not be allowed to leave during the final 10 minutes of the test.

Your test should have 10 multiple choice questions (20 points) and 2 problems (14 points). The maximum possible point total is 34 points. If your test is incomplete, it is your responsibility to notify a proctor to get a new test.

For your reference, an example of a well-labeled graph is below:

MULTIPLE CHOICE: Answer the following questions on your scantron. Each correct answer is worth 2 points. All incorrect or blank answers are worth 0 points. If there is an answer that does not exactly match the correct answer, choose the closest answer.

1. Thomas is investing in a project that requires $50,000 to be paid today. He will receive $60,000 in 30 months. What is the annual internal rate of return for this investment?

A. 7.4%B. 7.6%C. 7.8%D. 8.0%E. 8.2%

2. Alice will receive 25 payments of $100 each month, starting 8 months from today. What is the present value of these payments if her effective annual interest rate is 12.683%?

A. $2200B. $2150C. $2100D. $2050E. $2000

3.Clara notices that the price of toilets has increased from $200 to $230 over the last year. If toilets have increased in price at the same rate as inflation, and the nominal interest rate over the last year was 8%, what was the real rate of return over the last year?

A. –6%B. –3%C. 0%D. 3%E. 6%

4. Which of the following describes an erosion?

A. A new product or service introduced leads to a reduction in sales of products or services already on the market

B. A new product or service introduced leads to an increase in sales of products or services already on the market

C. A declining real interest rate as inflation increases

D. A declining nominal interest rate

E. A declining inflation rate due to a decrease in the nominal interest rate

5.Robert is acquiring a negative amortization loan today, with monthly payments. He is borrowing $50,000. Which of the following amounts could be the first minimum required monthly payment if the stated annual interest rate of the loan is 6%, compounded monthly? (If more than one answer is possible, pick (E).)

A. $200B. $250C. $300D. $350E. More than one answer is possible

6. A stated annual interest rate of 42%, compounded six times per year, is equivalent to a stated annual rate of _____%, compounded seven times per year.

A. 41.8B. 41.9C. 42.0D. 42.1E. 42.2

7. Justine is about to borrow $100,000 from the Henin-Hardy-Hertz Bank. The stated annual interest rate for paying back the loan is 9%, compounded monthly. Suppose that the loan is amortized over 100 months with monthly payments starting in one month, and that Justine will pay an equal amount of principal each month. How much will the 4th payment be?

A. $1750B. $1725C. $1525D. $1475E. $1425

8.Juana will invest in a new product being developed by a small company. She invests $900 today and receives $300 per year, forever, starting in 10 years. What is her profitability index if her appropriate effective annual discount rate is 8%?

A. 4B. 2C. 1.75D. 0.6E. 0.5

For the next two questions, assume you receive $1200 annually forever. Assume the effective annual discount rate is 20%. Determine the present value given the following assumptions.

9. You receive the first payment in six months, with subsequent payments made every 12 months.

A. $5,500B. $5,700C. $6,200D. $6,600E. $7,000

10. You receive the first payment one year from today, but you receive $600 every six months.

A. $5,500B. $5,700C. $6,200D. $6,600E. $7,000

Name______Perm #______Day/time of section______

For the following problems, you will need to write out the solution. You must show all work to receive credit. Each problem (or part of problem) shows the maximum point value. Provide at least four significant digits to each answer or you may not receive full credit for a correct solution.Show all work in order to receive credit. You will receive partial credit for incorrect solutions in some instances. Clearly circle your answer(s) or else you may not receive full credit for a complete and correct solution.

11. (8 points) Suppose that you are advising a couple just about to get married about how much they need to save for retirement. The couple will retire in 20 years. The amount they will need to withdraw 20 years from today will be $1,000,000. They will continue to make yearly withdrawals of $1,000,000 every year after that (on the same date) until 45 years from today. When you ask the couple how they plan to save for retirement, they tell you that they want to make 10 equal deposits of $X each year, starting five years from now. The total of these payments will be exactly enough to cover all of their retirement expenses. Find X if the effective annual interest rate is 7%.

12. (6 points) A single deposit of $12,000 today will take how many years to grow to $10,000,000 if the effective annual interest rate is 4%. Assume no other deposits or withdrawals are made.

NOTE: YOU CAN TEAR THIS SHEET OFF AND USE AS EXTRA SCRATCH PAPER. PLEASE NOTE THAT ANYTHING ON THIS SHEET WILL NOT BE GRADED UNLESS EXPLICITLY SPECIFIED ON THE TEST.

Perpetuity

Annuity

Growing perpetuity

Growing annuity

Quadratic formula

ax2 + bx + c = 0 

Logarithmic rule

ab= c b = log c / log a