FIN 311 Test #1

CH5-PP: Definition/use of "Number of Periods (t)?

- When we are valuing the cash flow or when a future cash flow occurs. - Or the number of periods in an annuity.

CH5-PP: Time 0 is today, time _ is one period from today.

1

CH1: The relationship between stockholders and management can best be described as a(n) ______ relationship. A: Contradictory B: Irrelevant C: Agency D: Mentoring

C: Agency

CH6: How frequently does continuous compounding occur? A: 1,000,000 times a year B: 1,000 times a year C: Every instant D: 100 times a year

C: Every instant

CH5-PP: To find the number of periods, start with the basic equation and solve for t (use natural logs).

FV = PV(1 + r)^t t = ln(FV / PV) / ln(1 + r)

CH5-PP: In General FV1 = PV + PV x r or

FV1 = PV(1+r)

CH1: Finance is mainly important to study if you are planning a career in finance. True or False?

False

CH1: It is sometimes argued that, left to themselves, managers tend to minimize the amount of resources over which they have control. True or False?

False

CH6: True or false: There is only one way to quote interest rates.

False

CH6-PP: Four methods to answer Future value of an annuity questions.

Formula: FVA = CF(1 + r)^t-1 / r Tables: FVA = CF(FVIFAr,t) Calculator Excel: =FV(rate,nper,pmt,PV,type)

CH5-PP: What is the definition of Interest Rate (r)?

"Exchange Rate" between earlier money and later money. - Discount Rate - Cost of capital - Opportunity cost of capital - Required return or required rate of return

CH6: What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?

$100{[1 - (1 / (1.10)^20)] / 0.10}

CH6: Formula that shows the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year?

$100{[1 - (1 / (1.10)^3)] / 0.10}

CH1-PP: The Agency Problem

- Agency relationship. (Principle hires an agent to represent his/her interests. Stockholders (principals) hire managers (agents) to run the company.) - Agency problem. (Conflict of interest between principal and agent.) - Managers are expected to act in the best interest of shareholders.

CH6: Which of the following processes can be used to calculate future value for multiple cash flows (select all that apply)? A: Discount all of the cash flows back to Year 0 B: Compound the accumulated balance forward one year at a time C: Calculate the future value of each cash flow first and then add them up D: Find the future value of a single lump sum amount

- B: Compound the accumulated balance forward one year at a time - C: Calculate the future value of each cash flow first and then add them up

Ch6: When the U.S. government wants to borrow money for the long-term (more than one year) it issues (select all that apply): A: Treasury stocks B: Treasury bonds C: Treasury bills D: Treasury notes

- B: Treasury bonds - D: Treasury notes

CH1-PP: Disadvantages of Corporation?

- Double taxation (income taxed at the corporate rate and then dividends taxed at the personal rate).

CH1-PP: Advantages of a Sole Proprietorship?

- Easiest to start. - Least regulated. - Single owner keeps all the profits. - Taxed once as personal income.

CH1-PP: Advantages of Corporation?

- Limited liability. - Unlimited life. - Separation of ownership and management. - Transfer of ownership is easy. - Easier to raise capital.

CH1-PP: Disadvantages of a Sole Proprietorship?

- Limited to life of the owner. - Equity capital limited to owner's personal wealth. - Unlimited liability. - Difficult to sell ownership interest.

CH1-PP: Managing Managers

- Managerial compensation. (Incentives can be used to align management and stockholders interests. The incentives need to be structured carefully to make sure that they achieve their goal.) - Corporate control (The threat of a takeover may result in better management.) - Other stakeholders.

CH1-PP: Conflicts of Interest?

- Shareholders. They invest in the firm and share in the profits. (Capital gains &/or dividends). Vote on major decisions (Mergers, takeovers, etc). Managers. Run the firm on a day to day basis. (Want job security, high salaries, fame, perquisites).

CH1-PP: Business Ethics

- Short term performance vs. long term viability. - Benefits to ethical behavior (Avoiding fines & legal expenses, Building public trust, Attracting new business, Attracting employees, Supporting the economic viability of the community.)

CH5-PP: There are four parts to the present value equation. What are they? If we know any three, can we solve for the fourth?

- The for parts of PV, FV, r & t. - Yes, if we know any of the three parts we can solve for the fourth.

CH1-PP: Advantages of a Partnership?

- Two or more partnerships. - More capital available. - Relatively easy to start. - Income taxed once as personal income.

CH1-PP: Disadvantages of a Partnership?

- Unlimited liability (General partnership) (Limited partnership). - Partnership dissolves when one partner dies or wishes to sell. - Difficult to transfer ownership.

CH5-HW: For each of the following, compute the future value. 1. Present Value: $2,597 Years: 11 Interest Rate: 13% 2. Present Value: $7,834 Years: 7 Interest Rate: 9% 3. Present Value: $81,286 Years: 14 Interest Rate: 12% 4. Present Value: $213,612 Years: 16 Interest Rate: 6%

1. $9,961.73 2. $14,320.86 3. $397,253.81 4. $542,649.60

CH5-HW: For each of the following, compute the present value. 1. Future Value: $16,832 Years: 17 Interest Rate: 9 2. Future Value: $48,318 Years: 9 Interest Rate: 7 3. Future Value: $886,073 Years: 23 Interest Rate: 13 4. Future Value: $550,164 Years: 35 Interest Rate: 21

1. 16,832 2. 48,318 3. 886,073 4. 550,164

CH5-HW: 1. At 4.3 percent interest, how long does it take to double your money? 2. At 4.3 percent interest, how long does it take to quadruple it?

1. 16.47 Years 2. 32.93 Years

CH5-PP: What is the present value of $500 to be received in 5 years? 10 years? The discount rate is 10%.

5 Years: PV = 500 / (1.1)^5 = 310.46 10 Years: PV = 500 / (1.1)^10 = 192.77

CH6-PP: Definition of an annuity?

A series of equal periodic cash flows made at fixed intervals for a specified number of periods.

CH6: A typical investment has a large cash ______ (inflow/outflow) at the beginning and then a cash ______ (inflows/outflows) for many years.

A typical investment has a large cash outflow at the beginning and then a cash inflows for many years.

CH5: Which of the following are correct spreadsheet functions? A: Future value = FV(rate,nper,pmt,pv) B: Discount rate = RATE(nper,pmt,pv,fv) C: Interest rate = DISCOUNT(nper,pmt,pv,fv) D: Present value = PV(rate,nper,pmt,fv)

A, B, & D

CH6: The U.S. government borrows money by issuing (select all that apply): A: Treasury bonds B: Treasury bills C: Treasury notes D: Treasury pass-through certificates

A, B, and C.

CH6: Which of the following should be valued using a perpetuity formula? A: Preferred stock B: An amortized loan with a set amount over a period of time C: Cash flows from a product whose sales are expected to remain constant forever D: A consol (bond that pays interest only and does not mature)

A, C, and D.

CH6: In terms of time to maturity, U.S. Treasury notes and bonds have initial maturities ranging from ___ years. A: 2 to 30 B: 5 to 25 C: 10 to 30 D: 5 to 20

A: 2 to 30

CH6: Which compounding interval will result in the lowest future value assuming everything else is held constant? A: Annual B: Daily C: Quarterly D: Continuous

A: Annual

CH1: (Select all that apply) The possible goal of profit maximization _____. A: Can be achieved by cost-cutting B: Would probably be the most commonly sighted goal for a business C: Should always be a short-term goal D: Avoids maximizing the sales

A: Can be achieved by cost-cutting B: Would probably be the most commonly sighted goal for a business

CH1: In large firms, financial activity is usually associated with which top officer? A: Chief financial officer B: Vice president of production C: Vice president for marketing D: Chief management consultant

A: Chief financial officer

CH1: Some of the cash flow generated by a firm goes back to the financial markets in the form of ______. A: Dividends and debt payments B: Products and services C: Taxes and other payments to the government D: Reinvested cash flows

A: Dividends and debt payments

CH1: (Select all that apply) Which of the following are among the most important questions to be asked when a business is started? A: How will everyday financial activities be handled? B: How much vacation will I be able to take if I own my own business? C: Where will long-term financing be obtained to pay for investments? D: What long-term investments should be made?

A: How will everyday financial activities be handled? & C: Where will long-term financing be obtained to pay for investments? & D: What long-term investments should be made?

CH1: The five main areas of finance are corporate finance, _____, financial institutions, international finance, and fintech. A: Investments B: Credit cards C: Loans D: Economics

A: Investments

CH1: (Select all that apply) Which of the following are true of a sole proprietorship? A: It is the simplest type of business to form. B: It is easy to transfer ownership. C: A proprietorship has a limited life. D: A sole proprietor can issue stock to raise capital.

A: It is the simplest type of business to form. & C: A proprietorship has a limited life.

CH1: Which of the following, according to the textbook, are possible financial goals for a company? A: Maximize profits B: Minimize costs C: Incur bankruptcy D: Survival

A: Maximize profits & B: Minimize costs & D: Survival

CH6: Which of the following are annuities (select all that apply)? A: Monthly rent payments in a lease B: Installment loan payments C: Tips to a waiter D: Monthly grocery bill

A: Monthly rent payments in a lease B: Installment loan payments

CH5: What are the two major forms of long-term debt? A: Public issue and privately placed B: Indentured and free C: Privately placed and unsecured D: Current and deferred

A: Public issue and privately placed

CH1: Which of the following is not an important question that must be asked when starting a firm? A: Which type of operating system should you use for your computers? B: How will you manage your everyday financial activities? C: What long-term investments should you take on? D: Where will you get the long-term financing to pay for your investment?

A: Which type of operating system should you use for your computers?

CH1: (Select all that apply) Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley? A: WorldCom B: Disney C: Tyco D: Enron

A: WorldCom & C: Tyco & D: Enron

CH6: Which of the following is a perpetuity? A: A constant stream of cash flows for a fixed period B: A growing stream of cash flows for a fixed period C: A constant stream of cash flows forever D: An undulating stream of cash flows forever

C: A constant stream of cash flows forever

CH6: When calculating the future value of multiple cash flows using a spreadsheet, you must: A: calculate the future value of each cash flow then add the compounded values together B: use the time value of money tables to calculate the future value of each cash flow C: calculate the present value of each cash flow then add the discounted values together

A: calculate the future value of each cash flow then add the compounded values together

CH6: When calculating the present value of multiple cash flows using a spreadsheet, you must: A: calculate the present value of each cash flow then add the discounted values together B: calculate the future value of each cash flow then add the compounded values together C: use the time value of money tables to calculate the present value of each cash flow

A: calculate the present value of each cash flow then add the discounted values together

CH5: Future value is the ________ value of an investment at some time in the future. A: cash B: indirect C: relational D: interest

A: cash

CH5: The idea behind ______ is that interest is earned on interest. Multiple choice question. A: compounding B: reinsurance C: simplification D: rebounding

A: compounding

CH5: The reason that interest rate risk is greater for ____ term bonds than for ____ term bonds is that the change in rates has a greater effect on the present value of the ____ than on the present value of the ____. A: long; short; face value; coupon payments B: short; long; face value; coupon payments C: long; short; coupon payments; face value

A: long; short; face value; coupon payments

CH5: If you want to know how much you need to invest today at 12 percent compounded annually in order to have $4,000 in five years, you will need to find a(n) _______ value. A: present B: past C: idealistic D: future

A: present

CH5: Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate? A: r = (1,000/100)^(1/10) - 1 B: r = (1,000/100) x (1/10) - 1s C: r = (1,000/100) - 1 D: r = 1,000 x (1/10) - 1

A: r = (1,000/100)^(1/10) - 1

CH6:

B

CH6: Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favorite charity by making three equal donations at the end of the next 3 years. Which of the following formulas show how much Ralph will give to the charity each year? A: $1,000 / [(1 − 1/1.10^3) / 0.30] B: $1,000 / [(1 − 1/1.10^3) / 0.10] C: $1,000 / [(1 − 1/1.10^3) / 1.10] D: $1,000 / [(1 − 1/1.30^3) / 0.10]

B: $1,000 / [(1 − 1/1.10^3) / 0.10]

CH5: If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years? A: $130.00 B: $133.10 C: $131.00 D: $121.00

B: $133.10

CH5: Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually? A: =N(40,0.0653,−240) B: =N(0.0653,0,−40,240) C: =NPER(0.0653,0,−40,240) D: =NPER(0,0.0653,−40,240)

B: =N(0.0653,0,−40,240)

CH5: Suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem? A: =NPER(0.06,0,6000,10000) B: =NPER(0.06,0,−6000,10000) C: =NPER(6,0,6000,10000) D: =NPER(6,0,−6000,10000)

B: =NPER(0.06,0,−6000,10000)

CH5: Which of the following can be determined using the future value approach to compound growth developed in this chapter? A: Erratic growth B: Dividend growth C: Sales growth

B: Dividend growth C: Sales growth

CH1: (Select all that apply) When a corporation is formed, it is granted which of the following rights? A: Corporate life of up to 100 years B: Legal powers to sue C: The ability to issue stock D: State citizenship for jurisdictional purposes

B: Legal powers to sue C: The ability to issue stock D: State citizenship for jurisdictional purposes

CH6: Which of the following are real-world examples of annuities? A: Common stock dividends B: Mortgages C: Pensions

B: Mortgages C: Pensions

CH5: The basic present value equation is: A: PV × FVt = (1 + r)t B: PV = FVt / (1+r)t C: FV = PVt / (1+r)^t

B: PV = FVt / (1+r)t

CH1: A business without separate legal authority formed by two or more people is known as a _____. A: Sole proprietorship B: Partnership C: Conglomerate D: Corporation

B: Partnership

CH1: A ______ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm. A: Shareholder B: Stakeholder C: Mortgage holder D: Bondholder

B: Stakeholder

CH6: A growing annuity has a(n) ____. A: finite number of level cash flows B: finite number of growing cash flows C: infinite number of growing cash flows D: infinite number of constant cash flows

B: finite number of growing cash flows

CH5: The basic present value equation underlies many of the _____. A: basic principles of the U.S. tax code B: most important ideas in corporate finance C: most crucial ideas about portfolio risk

B: most important ideas in corporate finance

CH6: One method of calculating future values for multiple cash flows is to compound the accumulated balance forward _____ at a time. A: half a year B: one year C: three years D: two years

B: one year

CH6: An effective annual rate of 7.12 percent is equal to 7 percent compounded ______. A: daily B: semiannually C: continuously D: quarterly

B: semiannually

CH5: What is the future value of $100 compounded for 50 years at 10 percent annual interest? A: $14,987.45 B: $500.00 C: $11,739.09 D: $868.85

C: $11,739.09

CH5: Which formula will you enter into a spreadsheet cell to determine how long it will take $40 to grow to $240 at an interest rate of 6.53% compounded annually? A: =N(0.0653,0,−40,240) B: =N(40,0.0653,−240) C: =NPER(0.0653,0,−40,240) D: =NPER(0,0.0653,−40,240)

C: =NPER(0.0653,0,−40,240)

CH5-PP: To find out the implied interest rate is on an investment, rearrange the basic PV equation and solve for r.

FV = PV(1 + r)^t R = (FV/PV)^1/t -1

CH1: What are the two factors that impact whether managers will act in the best interest of stockholders? A: How closely management is micromanaged and the way managers are compensated B: How managers are compensated and how much vacation is provided to employees C: How closely management goals align with stockholder goals and the way managers are compensated D: Whether SOX is used and to what extent poor employee conduct is reprimanded

C: How closely management goals align with stockholder goals and the way managers are compensated

CH1: Capital budgeting is concerned with planning and managing a firm's _____. A: Long-term liabilities B: Current liabilities C: Long-term investments D: Current assets

C: Long-term investments

CH1: (Select all that apply) Which of the following can be used to encourage managers to act in the best interests of shareholders? A: Executive perks B: A larger organization and more employees C: Managerial compensation tied to performance D: Better prospects of promotion

C: Managerial compensation tied to performance D: Better prospects of promotion

CH1: Most equity shares of large firms in the U.S. trade on: A: Commodities markets B: Bond markets C: Organized auction markets D: Options exchanges

C: Organized auction markets

CH1: (Select all that may apply) Corporations in other countries are often called: A: Re-calibrated partnerships B: Autonomous entities C: Public limited companies D: Joint stock companies

C: Public limited companies & D: Joint stock companies

CH1: In addition to the importance of finance for marketing, accounting, and management careers, finance is also now considered a _____ discipline, especially at the graduate level. A: Plant B: MeGa C: STEM D: GRET

C: STEM

CH1: The EBITDA ratio is similar in spirit to: A: Inventory turnover B: The quick ratio C: The PE ratio D: The DuPont Identity

C: The PE ratio

CH1: The financial manager acts in the shareholders' best interests by making decisions that increase the value of _____. A: Pensions B: Managers' salaries C: The stock

C: The stock

CH6: The formula for the annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is ______. A: [1 − (1 / 1.20^30)]/.10] B: [1 − (1.1 / 1.10^30)]/.10] C: [1 − (1 / 1.10^30)]/.10] D: [1 − (1 / 1.10^30)]/.20]

C: [1 − (1 / 1.10^30)]/.10]

CH6: An annuity due is a series of payments that are made ____. A: 1 year hence B: any time in the future C: at the beginning of each period D: 1 year in the past

C: at the beginning of each period

CH5: When the future value formula is used to calculate growth rates, the assumption is that _____ growth rate is achieved each year. A: different B: regressing C: the same D: stair-stepped

C: the same

CH1-: A sole proprietor has ______ personal liability for all business debts and obligations. A: no B: little C: unlimited D: limited

C: unlimited

Equation to find Present Value (PV) of a perpetuity:

CF / r

CH1-PP: Careers in Finance

Corporate Finance, Investment Banking, Money Management, Financial Planning, Commercial Banking, Insurance, Real Estate, Etc.

CH6:

D

CH5: If $100 earns compound interest for 2 years at 10 percent per year, the future value will be ____. A: $120.00 B: $110.00 C: $100.00 D: $121.00

D: $121.00

CH5: Which formula below represents a present value factor? A: 1/N + 1/r B: (1 + r)/t C: 1/(1 + N)r D: 1/(1 + r)t

D: 1/(1 + r)t

CH1: If you hire a real estate company to sell your house, you are most apt to encounter which one of the following? A: Capital structure problem B: Securities Act of 1933 violation C: Securities Exchange Act of 1934 violation D: Agency problem

D: Agency problem

CH1: ______ budgeting is the process of making and managing expenditures on long-term assets. A: Performance-based B: Optional C: Conventional D: Capital

D: Capital

CH1: A corporation is a distinct ______ entity and as such can have a name and take advantage of the legal powers of natural persons. A: Patriotic B: Illegal C: Retributive D: Legal

D: Legal

CH1: In a shareholder-manager relationship, who is the agent? A: Shareholders B: Both shareholders and managers C: Neither shareholders nor managers D: Managers

D: Managers

CH6: Most investments involve _____ cash flows. A: lump sum B: Single C: No D: Multiple

D: Multiple

CH1: The aim of the act known as _____ is to protect investors form corporate abuse. A: EXON B: STEM C: TiMid D: SOX

D: SOX

EAR Equation:

EAR = [1 + APR/m]^m - 1

CH5-PP: What is the definition of Present Value (PV)?

Earlier money on a timeline.

CH5-HW: Your coin collection contains fifty 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2067, assuming they appreciate at an annual rate of 4.3 percent?

Future Value: $6,333.82

CH5: ______ value is the cash value of an investment at some time in the _______.

Future value is the cash value of an investment at some time in the future.

CH5-HW: Suppose you are committed to owning a $275,000 Ferrari. If you believe your mutual fund can achieve an annual rate of return of 11.2 percent and you want to buy the car in 9 years (on the day you turn 30), how much must you invest today?

Investment: $105,776.60

CH5-HW: You're trying to save to buy a new $275,000 Ferrari. You have $50,000 today that can be invested at your bank. The bank pays 4.8 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

It will take 36.37 years.

CH5-PP: What is the definition of Future Value (FV)?

Later money on a timeline.

CH5: Longer-term bonds have (smaller/greater) interest rate sensitivity because a (smaller/larger) portion of a bond's value comes from the face amount.

Longer-term bonds have greater interest rate sensitivity because a larger portion of a bond's value comes from the face amount.

CH6-HW: You want to buy a new sports car from Muscle Motors for $64,500. The contract is in the form of a 60-month annuity due at an APR of 5.4 percent. What will your monthly payment be?

Monthly Payment: $1,223.54

CH6-HW: You're prepared to make monthly payments of $225, beginning at the end of this month, into an account that pays an APR of 6.5 percent compounded monthly. How many payments will you have made when your account balance reaches $15,000?

Number of Payments: 57

CH6-PP: Three types of annuities?

Ordinary Annuity, Annuity Due, and a Deferred Annuity.

CH5-PP: Future Value as a general growth formula - Suppose your company expects to increase unit sales of widgets by 15% per year for the next 5 years. If you currently sell 3 million widgets in one year, how many widgets do you expect to sell in 5 years?

PV = 3,000,000, r = 15%, t = 5. We are computing FV5. FVt = PV(1+r)^t = 3,000,000 (1.15)^5 = 6,034,072.

CH5-PP: The basic present value equation is:

PV = FV / (1 + r)^t

CH6-HW: Given a discount rate of 4.6 percent per year, what is the value at Date t = 7 of a perpetual stream of $7,300 payments with the first payment at Date t = 15?

Perpetuity Value: $115,835.32

CH5-PP: Assumptions - Positive value cash flows are _____ and negative value cash flows are _______.

Positive value cash flows are inflows and negative value cash flows are outflows.

CH5: The ______ value is the current value of future cash flows discounted at the appropriate discount rate.

Present

CH5-HW: You have just received notification that you have won the $2 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 80 years from now. What is the present value of your windfall if the appropriate discount rate is 9.1 percent?

Present Value: $1,883.87

CH5-HW: Imprudential, Incorporated, has an unfunded pension liability of $450 million that must be paid in 20 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 5.2 percent, what is the present value of this liability?

Present Value: $163,266,738.60

CH6-HW: A 15-year annuity pays $1,750 per month, and payments are made at the end of each month. If the APR is 9 percent compounded monthly for the first seven years, and APR of 6 percent compounded monthly thereafter, what is the value of the annuity today?

Present Value: $179,859.81

CH6-HW: The appropriate discount rate for the following cash flows is 9.32 percent per year. Year 1, Cash Flow: $2,480 Year 2, Cash Flow: $0 Year 3, Cash Flow: $3,920 Year 4, Cash Flow: $2,170 What is the present value of the cash flows?

Present Value: $6,788.39

CH5-PP: What is the present value of $500 received in 5 years if the interest rate is 10%? 15%?

Rate = 10%: PV = 500 / (1.1)^5 = 310.46 Rate = 15%: PV = 500 / (1.15)^5 = 248.59

CH6-HW: You are serving on a jury. A plaintiff is suing the city for injuries sustained after a freak street sweeper accident. In the trial, doctors testified that it will be five years before the plaintiff is able to return to work. The jury has already decided in favor of the plaintiff. You are the foreperson of the jury and propose that the jury give the plaintiff an award to cover the following: (a) The present value of two years' back pay. The plaintiff's annual salary for the last two years would have been $43,000 and $46,000, respectively. (b) The present value of five years' future salary. You assume the salary will be $51,000 per year. (c) $150,000 for pain and suffering. (d) $20,000 for court costs. Assume that the salary payments are equal amounts paid at the end of each month. If the interest rate you choose is an EAR of 5.9 percent, what is the size of the settlement? If you were the plaintiff, would you like to see a higher or lower interest rate?

Settlement Size: $485,167.85 You would prefer a lower interest rate.

CH1-PP: Three Major Forms of Business Organization are?

Sole Proprietorship, Partnership (General, Limited), Corporation (LLC).

CH6: APR Definition is?

The interest rate per period multiplied by the number of periods in the year

CH6: EAR Definition is?

The interest rate stated as through it were compounded once per year

CH5: True or false: The formula for a present value factor is 1 / (1+r)t True or False?

True. This is the present value interest factor, not the present value itself. In order to get PV, you need to multiply FV by this factor. Notice how as the denominator becomes larger due to higher interest or longer periods, it reduces the factor.

CH6-HW: What is the value today of $5,100 per year, at a discount rate of 7.9 percent, if the first payment is received 6 years from today and the last payment is received 20 years from today?

Value Today: $30,030.78

CH6-HW: The present value of the following cash flow stream is $8,200 when discounted at 9 percent annually. What is the value of the missing cash flow? Year 1, Cash Flow: $2,100 Year 2, Cash Flow: $? Year 3, Cash Flow: $2,740 Year 4, Cash Flow: $3,270

Year 2 Cash Flow: $2,187.36

CH6-HW: You plan to deposit $4,900 at the end of each of the next 20 years into an account paying 10.3 percent interest. a.How much money will you have in the account in 20 years? b.How much will you have if you make deposits for 40 years?

a. Future value of 20 deposits: $290,390.14 b. Future value of 40 deposits: $2,353,356.38

CH6-HW: Your Christmas ski vacation was great, but it unfortunately ran a bit over budget. All is not lost: You just received an offer in the mail to transfer your $15,000 balance from your current credit card, which charges an annual rate of 18.6 percent, to a new credit card charging a rate of 9.2 percent. a. How much faster could you pay the loan off by making your planned monthly payments of $275 with the new card? b. What if there was a fee of 2 percent charged on any balances transferred?

a. Number of months: 50.49 b. Number of months with 2% fee: 48.59

CH6-HW: Investment X offers to pay you $5,300 per year for eight years, whereas Investment Y offers to pay you $7,300 per year for five years. a. Calculate the present value for Investment X and Y if the discount rate is 5 percent. b. Calculate the present value for Investment X and Y if the discount rate is 15 percent.

a. Present value of Investment X at 5%: $34,255.03 a. Present value of Investment Y at 5%: $31,605.18 b. Present value of Investment X at 15%: $23,782.80 b. Present value of Investment Y at 15%: $24,470.73

CH6-HW: You want to be a millionaire when you retire in 40 years. a. How much do you have to save each month if you can earn an APR of 10.2 percent? b. How much do you have to save each month if you wait 10 years before you begin your deposits? c. How much do you have to save each month if you wait 20 years before you begin your deposits?

a. Savings per month starting today: $148.77 b. Savings per month starting in 10 years: $423.87 c. Savings per month starting in 20 years: $1,283.10

CH5-HW: You have just made your first $5,500 contribution to your retirement account. Assume you earn a return of 10 percent per year and make no additional contributions. a. What will your account be worth when you retire in 45 years? b. What if you wait 10 years before contributing?

a: Future Value for starting now: $400,897.66 b: Future value if waiting 10 years: $154,563.40

CH5-PP: Future Value - a: Suppose you put $1,000 in a savings account today. This account earns 5% per year. How much is in your savings account at the end of one year (Future Value, FV1)? b: Suppose you leave the money in for another year. How much will you have two years from now? c: How much will be in your bank account at the end of 5 years?

a: Interest = 1,000(.05) = 50 Value in one year = principal + interest = 1,000 + 50 = 1,050 b: We can compute the Future Value of the amount in the investment at the end of the first year. We know that the $1,050 will earn 5% interest. $1,050 x .05 = $52.50 So at the end of the second year, you will have $1,050 + $52.50 = $1,102.50. c: PV = $1,000, r = 5%, t = 5. We are computing FV5 FVt = PV(1 + r)^t = 1,000(1.05)^5 = $1,276.28

CH6-HW: You want to buy a new sports coupe for $84,500, and the finance office at the dealership has quoted you an APR of 4.7 percent for a 60-month loan to buy the car. a.What will your monthly payments be? b.What is the effective annual rate on this loan?

a: Monthly Payment is $1,583.01 b: Effective Annual Rate is 4.80%

CH5-HW: The "Brasher doubloon," which was featured in the plot of the Raymond Chandler novel, The High Window, was sold at auction in 2018 for $5.5 million. The coin had a face value of $15 when it was first issued in 1787 and had been previously sold for $430,000 in 1979. a. At what annual rate of return did the coin appreciate from its minting to the 1979 sale? b. What annual rate of return did the 1979 buyer earn on his purchase? c. At what annual rate of return did the coin appreciate from its minting to the 2014 sale?

a: Rate of Return = 5.49% b: Rate of Return = 6.75% c: Rate of Return = 5.70%

CH6: The ______ percentage rate is the interest rate charged per period multiplied by the number of periods in a year.

annual

CH6: The formula for the _______ present value is C × [(1 − Present value factor)/r].

annuity

CH1: A _____ corporation is for profit, and has the legal attributes of accountability, transparency, and purpose.

benefit

CH5: The process of leaving your money and any accumulated interest in an investment for more than one period, thereby reinvesting the interest, is called ______.

compounding

CH1: It is argued that, left to themselves, managers would tend to maximize the amount of resources over which they have control or, more generally, ______ power or wealth.

corporate

CH1: Joint-stock company is another name for what is referred to as a ______ in the United States.

corporation

CH1: EBITDA multiple is equal to the enterprise value ______ (divided/multiplied) by EBITDA.

divided

CH6: An annuity ___ is an annuity for which the cash flows occur at the beginning of each period.

due

CH5-PP: Assumptions - Unless otherwise stated, future cash flows occur at the beginning or end of the period?

end

CH5-PP: "Discounting" means finding present value of some ______ amount.

future

CH5-PP: The "value" of something refers to the present value unless we specially indicate that we want the _____ value.

future

CH5-PP: For a given interest rate - the longer the time period, the higher or lower the present value?

lower

CH1: Because ownership in a corporate is spread over a huge number of shareholders, it can be argued that ______ effectively controls the firm.

managers

CH5-PP: The single most important skill for a student to learn in this course is the __________of money through time.

manipulation

CH5-PP: There are how many appropriate discount rates for each problem?

one

CH1: The goal of the for-profit business is to maximize ____ equity.

owners

CH6:

present

CH5-PP: If you are using a financial calculator, be sure to remember the sign convention or you will receive an error (or a nonsense answer) when solving for _ or _.

r or t.

CH5: The discount rate is also called the rate of _____

return

CH5-PP: For a given time period - the higher the interest rate, the smaller or larger the present value?

smaller

CH6:

true