Jenna Kiragis

4/26/2014
FIN 534 Homework Chapter 4
Dr. SHAW

1. Which of the following statements is CORRECT?
a. Some of the cash flows shown on a time line can be in the form of annuity pay
ments, but none can be uneven amounts.
ANSWER c. Time lines are useful for visualizing complex problems prior to doing
actual calculations.
Explanation: In Section 4.1 of our book, I find that time lines are especially i
mportant when you need to analyze complex problems. Time lines can give you a vi
sual solution and help lay out an answer before solving the equation with a regu
lar calculator (Brigham & Ehrhardt, 2014).
2. Which of the following statements is CORRECT?
a. Some of the cash flows shown on a time line can be in the form of annuity pay
ments, but none can be uneven amounts.

ANSWER e. Time lines can be constructed for annuities where the payments occur a
t either the beginning or the end of the periods.
Explanation: In the Annuities section of our book, we see that time lines are us
ed to give a visual representation of when payments are being made. During an Or
dinary Annuity schedule, payments are made at the end of the period. While looki
ng at an Annuity Due schedule which payments are due at the beginning of the per
iod (Brigham & Ehrhardt, 2014).
3. Which of the following statements is CORRECT?
ANSWER Time lines can be constructed to deal with situations where some of the c
ash flows occur annually but others occur quarterly.
Explanation: In this question, we are discussing uneven or irregular cash flows.
There are two important classes of uneven cash flows (1) the cash flow stream c
onsists of a series of annuity payments plus additional final lump sum in Year N
, and (2) all other uneven streams. A time line that is drawn out can show a vis
ual representation of how these uneven cash flows will develop over time (Brigha
m & Ehrhardt, 2014).
4. Which of the following statements is CORRECT?
ANSWER e. Time lines can be constructed where some of the payments constitute an
annuity but others are unequal and thus are not part of the annuity.
Explanation: Just like the previous questions, we can draw a time line to repres
ent any problem or situation at hand. Time lines are good at showing payments ma
de (or to be made) in a graphical sense. These amounts can be the same or differ
ent.
5. You plan to analyze the value of a potential investment by calculating the su
m of the present values of its expected cash flows. Which of the following would
lower the calculated value of the investment?
ANSWER c. The discount rate increases.
Explanation: When looking at or finding the present value, the rates and amount
are set for the example, no more and no less. By changing any variable, you chan
ge the equation. In this question, in order to lower the calculated value of the
investment, we would need to increase the discount rate. The book states on pag
e 150, When interest rate change, the prices of outstanding bonds also change, but
inversely to the change in rates. Thus, bond prices decline if rates rise, and p
rices increase if rates fall. This holds for all bonds, both consols and those w
ith finite maturities (Brigham & Ehrhardt, 2014).
Brigham, E., & Ehrhardt, M. (2014). Financial management. (14th ed.). Mason, Ohi
o: Cengage Learning.