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AGEC 330 Exam 3
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Terms in this set (154)
Loan payment includes a real return and an inflation premium.
True
As time passes, the financial gap (net returns to land minus the loan payment) can disappear.
True
Suppose that a $3,900/ acre loan is expected to be fully amortized at 25% over 15 years. Calculate the amount of loan payment per period.
$1,010
Net returns to land have an inflation premium and are expected to increase at the rate of inflation.
False
The maximum bid price of land can be found by setting the NPV equal to one and solving for cost.
False
In practice, the maximum bid price would be found by varying the asking price in the present value model until the net present value converged to zero.
True
The maximum bid price of land can be found by setting the NPV equal to zero and solving for the initial cost of the land.
True
The maximum bid price of land is the most one can pay for an acre of land sand still be a profitable investment.
True
The maximum bid price would allow the investor to earn the rate-of-return stipulated by the discount rate, given data about all of the other factors.
True
The maximum bid price would allow the investor to earn the rate-of-return stipulated by the discount rate, given data about all of the other factors.
True
A/An __________ for land is the purchase price that would yield a break-even or zero net present value for a land investment.
maximum bid price
The purchase price on a piece of land is $600. The marginal tax rate is 7% and the nominal terminal value is $884. There is an inflation rate of 3% and a growth rate of 2%. What is the nominal after-tax terminal value?
$864.12
The real prices of commodities may decline over time due to the increase of imports from other countries.
True
Assume that the nominal after-tax net return for year 1: $45, year 2: $47, year 3 $49. The after-tax risk adjusted discount rate is 6%, the growth rate is 3%, and the inflation rate is 4%. What is the present value of the after-tax net return?
$125.42
A farmer is planning on investing in land with real net returns of $11.11 per acre and assuming these real returns will increase by 5.49% each year. The marginal tax rate is 19.56% and the inflation rate is 3.37%. This farmer is going to sell this piece of land in 3 years.
Calculate the real net return at the end of year 2.
Calculate the nominal net return at the end of year 3.
Calculate the after-tax nominal net return at the end of year 3.
1. $12.37
2. $14.41
3. $11.59
The real prices of commodities may decline over time due to more efficient production technology.
True
If the real land price is $650 in year five and the inflation rate is 4%. The marginal tax rate is 8% and the growth rate is 3%. Calculate the nominal terminal value for the fifth year?
$790.82
Assume that the real net return in the second year is $45 with a growth rate of 2%, inflation rate of 3%, and a tax rate of 6%. What is the nominal net return in the second year?
$47.74
If the real land price is 4600 in year three and the inflation rate is 3%. The marginal tax rate is 6% and the growth rate is 2%. Calculate the nominal terminal value for the third year?
$655.63
If land was purchased for $500 per acre and the real price of land increases at 6% each year. The marginal tax rate is 10% and the inflation rate is 4%. The land will be sold in three years. What will the real land price be in three years?
$595.51
If land was purchased for $550 per acre and the real price of land increases at 5% each year. The marginal tax rate is 6% and the inflation rate is 3%. The land will be sold in four years. What will the real land price be at the time of the sale>
$694.36
Assume that the real net return of an investment is $50 per acre with a growth rate of 2% each year and an inflation rate of 4%. What is the real net return in the 2nd year?
$52.02
If land was purchased for $600 per acre and the real price of land increases at 4% each year. The marginal tax rate is 8% and the inflation rate is 3%. The land will be sold in five years. What will the real land price be at the time of the sale?
$729.99
the purchase price on a piece of land is $600. The marginal tax rate is 7% and the nominal terminal value $884. There is an inflation rate of 3% and a growth rate of 2%. What is the nominal after-tax terminal value?
$864.12
When comparing two investments like a used squeeze chute and a new squeeze chute, this would be referred to as
Mutually exclusive investment
When choosing between the best investment when using credit rationing it is important to rank the investments using the annuity equivalent from highest to lowest.
True
External capital rationing means that a farmer chooses to limit the capital invested in his business.
False
When choosing the best mutually exclusive investment you select the investment with the highest annuity equivalent.
True
When choosing the best mutually exclusive investment you select the investment with the lowest annuity equivalent.
False
When finding an annuity equivalent of a capitam investment and inflation is assumed to be zero, we use the formula A=NPV/[USPV(r%,N)]
True
As long as an investment is profitable we should always accept it.
False
If capital is restricted, internally or externally, all investments with the NPV>0 can be accepted.
False
For mutually exclusive investments, or if there is capital rationing, investments should be compared.
True
External capital rationing means that there is a limit to how much capital a farmer can obtain from external sources to invest in his business.
True
When choosing the best investment when using credit rationing it is important to rank the investments using the annuity equivalent form lowest to highest.
False
Suppose that an after-tax risk-adjusted discount rate is 4.18%. The inflation rate is expected to be 4.00%. What is the real discount rate?
-0.78%
When choosing the best investment when using credit rationing it is important to rank the investments using the annuity equivalent from highest to lowest.
True
When finding the present value of an annuity equivalent we use A=A/[USPVr%,N]
False
Use the nominal discount rate to appropriately account for inflation when calculating the annuity equivalent for an investment.
False
When we calculate the annuity equivalent, it is best to use nominal discount rate.
False
We always use the ________ discount rate to calculate the NPV when using nominal cash flows.
nominal
If capital is restricted, internally or externally, all investments with NPV>0 can be accepted.
False
External capital rationing means that there is a limit to how much capital a farmer can obtain from external sources to invest in his business
True
When we calculate the annuity equivalent, it is best to use a _________ discount rate.
real
Internal capital rationing meant that a farmer chooses to limit the capital invested in his business.
False
Annuity equivalent is an uniform annuity over the life of an investment that is equivalent to the investments net present value.
True
If it is known in advance that investments are acceptable it is okay to omit common cash flows when comparing.
True
When we calculate the annuity equivalent, it is best to use a ___________ discount rate.
real
Use the real discount rate to appropriately account for inflation when calculating the annuity equivalent for an investment.
True
As long as an investment is profitable we should always accept it.
False
Suppose that the after-tax risk-adjusted discount rate is 10.14%. The inflation rate is expected to be 2.00%. What is the real discount rate?
1.98%
A tractor with a cost of $75,000 has a depreciable life of 12 years. There is a marginal tax rate of 15%, and interest rate of 8%, and a pretax discount rate of 10%. What is the tax savings from depreciation?
$937.50
A tractor with a cost of $45,000 has a depreciable life of 10 years. There is a marginal tax rate of 25%, an interest rate of 10%, and a pretax discount rate of 12%. what is the tax savings from depreciation?
$1,125
A combine with a cost of $150,000 has a depreciable life of 15 years. There is a marginal tax rate of 20%, an interest rate of 8%, and a pretax discount rate of 10%. What is the tax savings from depreciation?
$2,000
A rancher purchased a new trailer for $10,000. The bank is willing to loan him $6,000. The terminal value of this investment is $3,500. There is a marginal tax rate of 15%, a growth rate of 4%, and a discount rate of 12%. What is the after-tax terminal value of this investment?
$3,575
An investment with a net present value of -$40,000 will have a life of 15 years. There is a real discount rate of 8.5%, a growth rate of 3%, and a marginal tax rate of 15%. What is the annuity equivalent?
$4,816
A farmer requires a pre-tax rate of return 15%, there is a marginal tax rate of 23%, and there is a risk premium of 4%. What is the discount rate?
14.63%
Suppose that the marginal tax rate is 25%, before-tax nominal discount rate of 16%, risk premium of 3%, and an expected inflation rate of 5%. What is the real discount rate?
8.81%
A farmer requires a pre-tax rate of return 10%, there is a marginal tax rate of 20%, and there is a risk premium of 3%. What is the discount rate?
10.4%
In purchase, the buyer will take the ownership of the asset and the seller will lose the ownership.
True
Lease is a contract by which control over the right to use an asset is transferred from one party (______) to another party (_______) for a specific time in return for a rental payment to cover the lessor's cost of ownership.
the lessor; the lessee
Lessee is the owner of an asset who permits another party to use the asset under a lease.
False
Operating lease is a long-term contractual arrangement in which the lessee acquires control of an asset in return for rental payments to the lessor.
False
Custom hire is an extension of capital leasing whose main feature is the formal involvement of a lender in providing debt capital to finance the lessor's purchase of the leased asset.
False
Capital lease (sometimes called Finance Lease) is a long-term contractual arrangement in which the lessee does not acquire control of an asset.
False
The _______ (sometimes called finance lease) is a long-term contractual arrangement in which the lessee acquires control of an asset in return for rental payments to the lessor.
Capital lease
A leveraged Lease is a form of leasing that combines the hiring of labor services with the use of the tangible asset.
False
All of the following non-interest costs are important to consider when comparing loans. Service Fees, Prepaid Interest, Fees for Credit Reports, Compensating Balances, and Stock Requirements.
True
The effective rate is the discount rate that equates to zero the sum of the present values of al cash flows associated with the loan transaction.
False
The actuarial rate is the rate that accounts for the compounding effects over the number of conversion periods.
False
Given that there is a quarterly actuarial interest rate of 4.38%. What is the annual percentage rate?
17.53%
When comparing loans based on the least cost when the conversion periods are the same, one can compare the actuarial or annual percentage rate.
True
When comparing loans based not he least cost one must choose the loan with the least cost. However, it is not important to account for the time value of money.
False
Add-on Method is a method of computing interest, with which, the interest is calculated on the original loan principal for the entire period of the loan.
True
Remaining-Balance Method is a method of computing interest, with which, interest is calculated by multiplying th principal outstanding by the effective rate for the prey din question.
False
When comparing loans based on the least cost when the conversion periods are different, on can compare the actuarial or annual percentage rate of the loans.
False
Given that there is monthly actuarial interest rate of 1.93%. What is the annual percentage rate?
23.19%
Non interest Costs indicate in addition to interest, all charges that are payable _______ by the borrower and that are imposed _____ by the lender as incident to or as a condition of the extension of the loan.
directly or indirectly
It is important to include non-interest costs when calculating the decision criteria to compare loans.
True
The actuarial rate is the interest rate on an investment or loan diwthouty adjusting for inflation.
False
When comparing loans based on the least cost when the conversion periods are the same, one can compare the effective rates.
False
In general, the cost of _____ is higher than the cost of ______.
equity/debt
Remaining-Balance Method is a method of computing interest, with which, interest is calculate by multiplying the principal outstanding by the contractual rate for the period in question.
True
Given that there is a quarterly actuarial interest rate of 5.12% What is the annual percentage rate?
20.47%
The Add-on method is a method of computing interest, with which the interest is calculated on the original loan for the entire period of the loan.
True
Remaining-Balance Method is a method of computing interest, with which, interest is calculated by multiplying the principal outstanding by the contractual rate for the period in question.
True
The actuarial rate s the rate that accounts for the compounding effects over the number of conversion periods.
False
A __________ balance is a minimum balance that must be maintained by borrower in savings account to offset a portion of the cost that a ban faces when extending a loan to a business.
compensating
Access to ________ is limited in Agriculture.
equity capital
In addition to interest, non interest costs consist of all charges that are payable directly or indirectly to the borrower and that are imposed directly or indirectly by the lender as incident to or as a condition of the extension of the loan.
True
Stock requirement is the requirement by the _______ that its borrowers purchase stock in the system from loan proceeds.
Farm Credit System
The actuarial rate is the interest rate on an investment or loan without adjusting for inflation.
False
When comparing loans based on the lest cost when the conversion periods are the same, one can compare the effective rates.
Fasle
_________ are residual claimants of profit.
Equity holders
A ____________ balance is a minimum balance that must be maintained by borrower in savings account to offset a portion of the cost that a bank faces when extending a loan to a business.
compensating
Cost of equity is the rate of return a firm theoretically pays to its equity investors, i.e. shareholders, to compensate for the risk they undertake by investing their capital
True
A farmer is planning to borrow $4,800 for a year. Bank A has an interest rate of 10.96% compounded annually. While Bank B has an interest rate of 8.43% compounded annually.
-Calculate the amount of interest paid to Bank A.
-Calculate the amount of interest paid to Bank B.
-Calculate the effective interest rate at Bank A.
-Calculate the effective interest rate at Bank B.
-Which loan has the least cost?
$526.27
$404.75
10.96%
8.43%
B
If a farmer is granted a loan with a contractual rate of 12% and payments will be made quarterly for 3 years fully amortized. What is the effective rate?
12.55%
If a farmer is granted a loan that will be paid over 3 years of fully amortized quarterly payments and there is a contractual rate of 12%. What is the APR?
12%
If a farmer is granted a loan with a contractual rate of 16% and semiannual payments will be made for 3 years fully amortized. What is the effective rate?
16.64%
The actuarial rate can be the same as the APR.
True
If a farmer is granted a loan with a contractual rate of 20% and monthly payments will be made for 5 years fully amortized. What is the effective rate?
21.94%
If a farmer is granted a loan that will be paid over 4 years of fully amortized semiannual payments and there is a contractual rate of 12%. What is the APR?
12%
If the conversion period is 1, the APR is the same last he actuarial rate.
True
The APR can be the same as the effective rate.
True
A farmer is taking out a 20-year loan of $30,000 with fully amortized quarterly payments and an interest rate of 12%. Growth rate of farm returns are expected to be 4% per year. What is the per period payment?
$993.35
If a farmer is granted a loan that will be paid over 2 years of fully amortized monthly payments and there is a contractual rate of 12%. What is the APR?
12%
The APR is calculated before the actuarial rate.
False
If a farmer is granted a loan for $3,000, with a 6 years of fully amortized monthly payments of $75. What is the actuarial rate?
1.82%
If a farmer is given a loan for $2,500, with 5 years of fully amortized quarterly payments of $250. What is the actuarial rate?
7.75%
The effective rate is calculated before the APR.
False
The interest payment is always lower for a fully amortized loan vs an equal principal loan.
False
With a fully amortized loan the interest payment stays constant over the life of the loan.
False
A farmer is taking out a 20-year loan of $30,000 with equal principal annual payments and an interest rate of 12%. Growth rate of the farm returns are expected to be 4% per year. What is the interest payment in the 5th year?
$2,800
A farmer is taking out a 30-year loan of $35,000 with equal principal annual payments and an interest rate of 10%. Growth rate of the farm returns are expected to be 3% per year. What is the interest payment in the 6th year?
$2,916
The principal payment for fully amortized loan is less than an equal principal loan at the beginning but later is greater, centers paribus.
True
A farmer is taking out a 30-year loan of $35,000 with equal principal annual payments and an interest rate of 10%.Inflation rate is expected to be 3% per year. What is the loan balance in the 6th year?
$27,999
The total loan payment decreases over time for equal principal loans.
True
A farmer is taking out a 10-year loan of $25,000 with equal principal annual payments with an interest rate of 12%. Inflation rate is expected to be 4% per year. What is the total payment in the third year?
$4,900
The total loan payment is constant over time for equal principal loans.
False
A farmer is taking out a 30-year loan of $35,000 with equal principal annual payments and an interest rate of 10%. Growth rate of the farm returns are expected to be 3% per year. What is the total payment in the 6th year?
$4,083
The total loan payment is constant for fully amortized loans.
True
The interest payment decreases over time with equal principal loans.
True
The principal for a fully amortized loan is more than an equal principal loan at the beginning but later is less, centers paribus.
False
The total loan payment is decreasing for fully amortized loans.
False
The interest payment is always higher for a fully amortized loan vs. an equal principal loan.
True
A farmer is taking out a 20-year loan of $30,000 with equal principal annual payments and an interest rate of 12%. Growth rate of the farm returns are expected to be 4% per year. What is the loan balance in the 5th year?
$22,500
Given the following info:
Item Bank C
Loan Amt $561.48
Contractual Rate 14.87%
Conversion Periods 1
Life of loan (years) 2
Method of Payment Equal Prin
Fee no
Stock Requirement no
Calculate the total loan payment in year 1.
Calculate the total loan payment in year 2.
Calculate the actuarial rate.
$364.23
$322.49
14.87%
If it is given that the loan amount is $130.00, the percent stock requirement is .02, and the credit fee is $18.76.
Calculate the loan principal.
Calculate the required stock purchase.
$151.79
$3.04
If it is given that the loan amount is $320, the percent stock requirement is .08, and the credit fee is 10.81.
Calculate the loan principal.
Calculate the required stock purchase.
$359.57
$28.77
The effective interest rate is the interest rate stated on a bank promissory note.
False
The market interest rate is the interest rate stated on a bank promissory note.
False
Points are the parent principal paid as prepaid interest.
True
The principal is the loan principal minus prepaid interest that was financed.
True
A bank has agreed to lend you $610,900 for a home loan. The loan will be fully amortized over 60 years at 10.59% with .56 points. The loan payments will be mostly. the closing cost is estimated to be $3,712.
Calculate the amount of loan payments.
$5,464.27
The market rate is the interest rate stated on a bank promissory note.
False
The money cost of borrowing is the difference between the total money that the borrower receives from the loan (sometimes different from the total loans and the total money paid to retire the loan.
True
Assume that you borrow money to include the loan amount needed closing cost and points. What is the loan principal if the loan amount is needed in $564, the closing cost is $55, and the points are .73?
$623.55
The written summary by a qualified individual setting for an estimated value of a specific asset or group of assets, usually used in reference to real estate.
Appraisal
A bank has agreed to lend you $840,100 for a home loan. The loan will be fully amortized over 52 years at 10.61% with .3 points. The loan payments will be mostly. the closing cost is estimated to be $4.542.
Calculate the prepaid interest.
$2,541.55
Points are the percent of principal paid as prepaid interest.
True
Assume that you borrow money Assume that you borrow money to include the loan amount needed closing cost and points. What is the loan principal if the loan amount is needed in $438, the closing cost is $45, and the points are .88?
$487.29
When finding the prepaid interest the points are multiplied by the loan principal.
True
A bank has agreed to lend you $840,100 for a home loan. The loan will be fully amortized over 52 years at 10.61% with .3 points. The loan payments will be mostly. the closing cost is estimated to be $4.542.
Calculate the actuarial rate.
0.8918%
A lender's use of fees, compensation deposit balances, and stock requirements increase the annual effective interest rate paid by the borrower.
True
What is the prepaid interest if the loan principal is $575 with .55 points?
$3.16
The actuarial interest rate is the interest rate stated on a bank promissory note.
False
The costs incurred by borrowers and sellers in completing a loan transaction.
Closing cost
A bank has agreed to end you $53,000 for a home loan. The loan will be fully amortized over 39 years at 13.50% with .44 points. The loan payments will be monthly. The closing cost is estimated to be $3,894 and you plan to refinance the mortgage in 8 years.
Calculate the APR
14.6372%
A bank has agreed to end you $53,000 for a home loan. The loan will be fully amortized over 39 years at 13.50% with .44 points. The loan payments will be monthly. The closing cost is estimated to be $3,894 and you plan to refinance the mortgage in 8 years.
Calculate the prepaid interest.
$251.44
A bank has agreed to lend you $524,000 for a home loan. The loan will be fully amortized over 40 years at 5.33% with .58 points. The loan payments will be monthly. The closing cost is estimated to be $2,579 and you plan to refinance the mortgage in 6 years.
Calculate the APR
6.0924%
A bank has agreed to lend you $524,000 for a home loan. The loan will be fully amortized over 40 years at 5.33% with .58 points. The loan payments will be monthly. The closing cost is estimated to be $2,579 and you plan to refinance the mortgage in 6 years.
Calculate the loan principal.
$529,650.98
A bank has agreed to lend you $627,000 for a home loan. The loan will be fully amortized over 25 years at 15.49% with .41 points. The loan payments will be monthly. The closing cost is estimated to be $2,237 and you plan to refinance the mortgage in 5 years.
Calculate the book value at the end of the 5th year.
$615,871.65
the purchase price on a piece of land is $600. The marginal tax rate is 7% and the nominal terminal value $884. There is an inflation rate of 3% and a growth rate of 2%. What is the nominal after-tax terminal value?
$864.12
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