FIN3403 - Gunter - Exam 1

Bonner Automotive has shareholders' equity of $218,700. The firm owes a total of $141,000 of which 40 percent is payable within the next year. The firm has net fixed assets of $209,800. What is the amount of the net working capital?

93,500

You collect old coins. Today, you have two coins each of which is valued at $300. One coin is expected to increase in value by 6 percent annually while the other coin is expected to increase in value by 4.5 percent annually. What will be the difference in the value of the two coins 15 years from now? A. $138.38 B. $208.04 C. $241.79 D. $254.24 E. $280.15

A. $138.38 Future value = $300 × (1 + .06)15 = $718.97 Future value = $300 × (1 + .045)15 = $580.58 Difference = $718.97 - $580.58 = $138.38

What is the present value of $150,000 to be received 10 years from today if the discount rate is 11 percent? A. $52,827.67 B. $61,147.07 C. $64,141.41 D. $69,806.18 E. $73,291.06

A. $52,827.67 Present value = $150,000 × [1/1 + .11)10] = $52,827.67

You want to have $25,000 saved 6 years from now to buy a house. How much less do you have to deposit today to reach this goal if you can earn 5.5 percent rather than 5 percent on your savings? Today's deposit is the only deposit you will make to this savings account. A. $524.24 B. $691.18 C. $724.60 D. $745.11 E. $819.02

A. $524.24 Present value = $25,000 × [1/(1 + .05)6] = $18,655.38 Present value = $25,000 × [1/(1 + .055)6] = $18,131.15 Difference = $18,655.38 - $18,131.15 = $524.24

Today, you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent? A. $55,032.54 B. $57,414.06 C. $58,235.24 D. $59,122.08 E. $59,360.45

A. $55,032.54 Future value = $36,000 × (1 + .036)12 = $55,032.54

Which one of the following will produce the highest present value interest factor? A. 6 percent interest for five years B. 6 percent interest for eight years C. 6 percent interest for ten years D. 8 percent interest for five years E. 8 percent interest for ten years

A. 6 percent interest for five years

Which one of the following statements related to the cash flow to creditors is correct? A. If the cash flow to creditors is positive, then the firm must have borrowed more money than it repaid. B. If the cash flow to creditors is negative, then the firm must have a negative cash flow from assets. C. A positive cash flow to creditors represents a net cash outflow from the firm. D. A positive cash flow to creditors means that a firm has increased its long-term debt. E. If the cash flow to creditors is zero, then a firm has no long-term debt.

A. A positive cash flow to creditors represents a net cash outflow from the firm.

The interest rate that is most commonly quoted by a lender is referred to as which one of the following? A. Annual percentage rate. B. Compound rate. C. Effective annual rate. D. Simple rate. E. Common rate.

A. Annual percentage rate

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at year 5 and an annual percentage rate of 10 percent? A. Annual. B. Semiannual. C. Monthly. D. Daily. E. Continuous.

A. Annual.

A business created as a distinct legal entity and treated as a legal "person" is called a: A. Corporation. B. Sole proprietorship. C. General partnership. D. Limited partnership. E. Unlimited liability company.

A. Corporation.

For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase. A. Depreciation. B. Net capital spending. C. Change in net working capital. D. Taxes. E. Production costs.

A. Depreciation.

Which one of these is a working capital management decision? A. Determining the minimum level of cash to be kept in a checking account. B. Determining the best method of producing a product. C. Determining the number of employees needed to work during a particular shift. D. Determining when to replace obsolete equipment. E. Determining if a competitor should be acquired.

A. Determining the minimum level of cash to be kept in a checking account.

Amortized loans must have which one of these characteristics? A. Either equal or unequal principal payments over the life of the loan. B. One lump-sum principal payment. C. Increasing payments over the life of the loan. D. Equal interest payments over the life of the loan. E. Declining periodic payments.

A. Either equal or unequal principal payments over the life of the loan.

You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now? A. Future value B. Present value C. Principal amounts D. Discounted value E. Invested principal

A. Future value

The higher the degree of financial leverage employed by a firm is, the: A. Higher is the probability that the firm will encounter financial distress. B. Lower is the amount of debt incurred. C. Less debt a firm has per dollar of total assets. D. Higher is the number of outstanding shares of stock. E. Lower is the balance in accounts payable.

A. Higher is the probability that the firm will encounter financial distress.

The articles of incorporation: I. Describe the purpose of the firm. II. Are amended periodically. III. Set forth the number of shares of stock that can be issued. IV. Detail the method that will be used to elect corporate directors. A. I and III only. B. I and IV only. C. II and III only. D. II and IV only. E. I, III, and IV only.

A. I and III only.

RTF Oil has total sales of $911,400 and costs of $787,300. Depreciation is $52,600 and the tax rate is 34 percent. The firm does not have any interest expense. What is the operating cash flow?

$99,790

Jensen Enterprises paid $1,300 in dividends and $920 in interest this past year. Common stock increased by $1,200 and retained earnings decreased by $310. What is the net income for the year?

$990

This morning, you borrowed $13,400 at a 6.9 percent annual interest rate. You are to repay the loan principal plus all of the loan interest in one lump sum three years from today. How much will you have to repay?

$16,369.59

You estimate that you will owe $39,950 in student loans by the time you graduate. The interest rate is 3.75 percent. If you want to have this debt paid in full within 10 years, how much must you pay each month?

$399.74

You are going to loan a friend $6,000 for one year at an interest rate of 4.5 percent, compounded annually. How much additional interest could you have earned if you had compounded the rate continuously rather than annually?

$.6.17

The Overside Market is obligated to pay its creditors $11,800 today. The firm's assets have a current market value of $10,900. What is the current market value of the shareholders' equity?

$0

Waldo expects to receive the following payments: year 1 = $50,000; year 2 = $28,000; year 3 = $12,000. All of this money will be saved for his retirement. If he can earn an average annual return of 10.5 percent, how much will he have in his account 25 years after making the first deposit?

$1,033,545

You want to buy a new sports car for $55,000. The contract is in the form of a 60-month annuity due at an APR of 6 percent, compounded monthly. What will be your monthly payment?

$1,058.01

An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent, what is the most you are willing to pay as a lump sum today to buy this annuity?

$44,591.11

Nadine is retiring today at age 66 and expects to live to age 82. She has $136,000 in her retirement savings account. She is somewhat conservative with her money and expects to earn 6 percent during her retirement years. How much can she withdraw from her retirement savings each month if she plans to spend her last penny on the morning of her death?

$1,103.56

On the day you entered college, you borrowed $25,000 on an interest-only, four-year loan at 4.75 percent from your local bank. Payments are to be paid annually. What is the amount of your loan payment in year 2?

$1,187.50

Kaylor Equipment Rental paid $75 in dividends and $511 in interest expense. The addition to retained earnings is $418 and net new equity is $500. The tax rate is 35 percent. Sales are $15,900 and depreciation is $680. What are the earnings before interest and taxes?

$1,269.46

Goods Guys Foods established a trust fund that provides $125,000 in scholarships each year for needy students. The trust fund earns a fixed 7.25 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest income is distributed?

$1,724,138

Sue plans to save $4,500, $0, and $5,500 at the end of each of the next three years, respectively. What will her investment account be worth at the end of the third year if she earns an annual rate of 4.15 percent?

$10,381.25

You are borrowing money today at 8.48 percent, compounded annually. You will repay the principal plus all the interest in one lump sum of $12,800 two years from today. How much are you borrowing?

$10,877.04

At the beginning of the year, the long-term debt of a firm was $72,918 and total debt was $138,407. At the end of the year, long-term debt was $68,219 and total debt was $145,838. The interest paid was $6,430. What is the amount of the cash flow to creditors?

$11,129

Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, how much can he afford to borrow to purchase a car?

$11,697.88

You have your choice of two investment accounts. Investment A is a five-year annuity that features end-of-month $2,500 payments and has an interest rate of 11.5 percent compounded monthly. Investment B is a 10.5 percent continuously compounded lump sum investment, also good for five years. How much would you need to invest in B today for it to be worth as much as investment A five years from now?

$119,176.06

Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years?

$12,093

Island News purchased a piece of property for $1.36 million. The firm paid a down payment of 12 percent in cash and financed the balance. The loan terms require monthly payments for 10 years at an annual percentage rate of 4.75 percent, compounded monthly. What is the amount of each mortgage payment?

$12,548.18

You just signed a consulting contract that will pay you $38,000, $52,000, and $85,000 annually at the end of the next three years, respectively. What is the present value of these cash flows given a discount rate of 10.5?

$139,975

Trish receives $450 on the first of each month. Josh receives $450 on the last day of each month. Both Trish and Josh will receive payments for next four years. At a discount rate of 9.5 percent, what is the difference in the present value of these two sets of payments?

$141.80

You borrow $230,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 25 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

$153,524

What is the future value of $1,400 a year for 35 years at 6 percent interest? Assume annual compounding.

$156,009

Ernie's Home Repair had beginning long-term debt of $51,207 and ending long-term debt of $36,714. The beginning and ending total debt balances were $59,513 and $42,612, respectively. The interest paid was $2,808. What is the amount of the cash flow to creditors?

$17,301

You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $30 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2 percent interest per month. How much money are you borrowing?

$171.40

Jones Stoneware has a $65,000 liability it must pay four years from today. The company is opening a savings account so that the entire amount will be available when this debt comes due. The plan is to make an initial deposit today and then deposit an additional $10,000 at the end of each of the four years. The account pays a 4.5 percent rate of return. How much does the firm need to deposit today?

$18,631.23

A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

$18,700

Western Bank offers you a $10,000, 6-year term loan at 7 percent annual interest. What is the amount of your annual loan payment?

$2,097.96

You are scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

$2,170.39

The present value of the following cash flow stream is $5,933.86 when discounted at 11 percent annually. What is the value of the missing cash flow? Year Cash Flow 1 $2,000 2 ? 3 1,750 4 1,250

$2,500

You would like to establish a trust fund to provide $140,000 a year forever for your heirs. The expected rate of return is 5.45 percent. How much money must you deposit today to fund this gift?

$2,568,807

You are comparing two annuities with equal present values. The applicable discount rate is 7.25 percent. One annuity pays $2,500 on the first day of each year for 15 years. How much does the second annuity pay each year for 15 years if it pays at the end of each year?

$2,681.25

DLM preferred stock has a 5.8 percent dividend yield. The stock is currently priced at $36.20 per share. What is the amount of the annual dividend?

$2.10

The Lakeside Inn had operating cash flow of $48,450. Depreciation was $6,700 and interest paid was $2,480. A net total of $2,620 was paid on long-term debt. The firm spent $24,000 on fixed assets and decreased net working capital by $1,330. What is the amount of the cash flow to stockholders?

$20,680

At the beginning of the year, a firm had current assets of $121,306 and current liabilities of $124,509. At the end of the year, the current assets were $122,418 and the current liabilities were $103,718. What is the change in net working capital?

$21,903

Global Tours had current assets of $1,360 and current liabilities of $940 as of the beginning of the year. At the end of the year, current assets are $1,720 and current liabilities are $1,080. What was the change in net working capital for the year?

$220

Your grandfather left you an inheritance that will provide an annual income for the next 20 years. You will receive the first payment one year from now in the amount of $16,500. Every year after that, the payment amount will increase by 5 percent. What is your inheritance worth to you today if you can earn 7.5 percent on your investments?

$247,750

You need a 30-year, fixed-rate mortgage to buy a new home for $225,000. Your bank will lend you the money at an APR of 5.5 percent with monthly compounding. You can only afford monthly payments of $1,000 for principal and interest, so you offer to pay off any remaining loan balance at the end of the loan term in the form of a single balloon payment. What will be the amount of the balloon payment?

$253,550

You are buying a pre-owned car today at a price of $8,500. You are paying $300 down in cash and financing the balance for 36 months at 7.75 percent. What is the amount of each monthly loan payment?

$256.01

Beginning three months from now, you want to be able to withdraw $1,700 each quarter from your bank account to cover college expenses. The account pays .45 percent interest per quarter. How much do you need to have in your account today to meet your expense needs over the next four years?

$26,187.10

Stephanie is going to contribute $250 on the first of each month, starting today, to her retirement account. Her employer will provide a 50 percent match. In other words, her employer will add $125 to the amount Stephanie saves. If both Stephanie and her employer continue to do this and she can earn a monthly interest rate of .5 percent, how much will she have in her retirement account 25 years from now?

$261,172

You just purchased an annuity that will pay you $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent?

$266,498

Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,400 on the first day of each year, starting immediately and continuing for 20 years. What is the value of this inheritance today if the applicable discount rate is 6.75 percent?

$27,677.34

The government has imposed a fine on JJ's Place. The fine calls for annual payments of $60,000, $70,000, $75,000, and $50,000, respectively, over the next four years. The first payment is due one year from today. The government plans to invest the funds until the final payment is collected and then donate the entire amount, including the investment earnings, to help the local community shelter. The government will earn 5.5 percent on the funds held. How much will the community shelter receive four years from today?

$277,491

Your parents have made you two offers. The first offer includes annual gifts of $10,000, $11,000, and $12,000 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 8 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

$28,216

Your employer contributes $60 a week to your retirement plan. Assume you work for your employer for another 20 years and the applicable discount rate is 9 percent. Given these assumptions, what is this employee benefit worth to you today?

$28,927.38

You are planning to save for retirement over the next 15 years. To do this, you will invest $1,100 a month in a stock account and $500 a month in a bond account. The return on the stock account is expected to be 7 percent, and the bond account will pay 4 percent. When you retire, you will combine your money into an account with a 5 percent return. How much can you withdraw each month during retirement assuming a 20-year withdrawal period?

$3,113.04

You just won the magazine sweepstakes and opted to take unending payments. The first payment will be $21,500 and will be paid one year from today. Every year thereafter, the payments will increase by 2.5 percent annually. What is the present value of your prize at a discount rate of 7.9 percent?

$398,148

During the year, RIT Corp. had sales of $565,600. Costs of goods sold, administrative and selling expenses, and depreciation expenses were $476,000, $58,800, and $42,800, respectively. In addition, the company had an interest expense of $112,000 and a tax rate of 32 percent. What is the operating cash flow for the year? Ignore any tax loss carryback or carry-forward provisions.

$30,800

Your firm has total assets of $4,900, fixed assets of $3,200, long-term debt of $2,900, and short-term debt of $1,400. What is the amount of net working capital?

$300

You just settled an insurance claim. The settlement calls for increasing payments over a five-year period. The first payment will be paid one year from now in the amount of $7,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments?

$31,063.79

You are the recipient of a gift that will pay you $25,000 one year from now and every year thereafter for the following 24 years. The payments will increase in value by 2.5 percent each year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift?

$316,172

Troy will receive $7,500 at the end of year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of year 5 if the interest rate is 8 percent?

$33,445

Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of $209,411. During the year, assets with a combined book value of $6,943 were sold. Depreciation for the year was $42,822. What is the amount of net capital spending?

$33,763

Four years ago, Ship Express purchased a mailing machine at a cost of $218,000. This equipment is currently valued at $97,400 on today's balance sheet but could actually be sold for $92,900. This is the only fixed asset the firm owns. Net working capital is $41,300 and long-term debt is $102,800. What is the book value of shareholders' equity?

$35,900

The Widget Co. purchased new machinery three years ago for $4 million. The machinery can be sold to the Roman Co. today for $2 million. The Widget Co.'s current balance sheet shows net fixed assets of $2,500,000, current liabilities of $1,375,000, and net working capital of $725,000. If all the current assets were liquidated today, the company would receive $1.9 million in cash. The book value of the Widget Co.'s assets today is _____ and the market value of those assets is _____.

$4,600,000; $3,900,000

You want to be a millionaire when you retire in 40 years and can earn an annual return of 12.5 percent. How much more will you have to save each month if you wait 15 years to start saving versus if you start saving at the end of this month?

$414.34

Racing Engines wants to save $750,000 to buy some new equipment four years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. The firm can earn 4.75 percent on its savings. How much does the firm have to save each quarter to achieve its goal?

$42,337.00

A preferred stock pays an annual dividend of $4.10. What is one share of this stock worth today if the rate of return is 9.68 percent?

$42.36

This morning, you borrowed $162,000 to buy a house. The mortgage rate is 4.35 percent. The loan is to be repaid in equal monthly payments over 20 years with the first payment due one month from today. Assume each month is equal to 1/12 of a year and all taxes and insurance premiums are paid separately. How much of the second payment applies to the principal balance?

$426.11

You want to start your own consulting business and believe it could produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $450,000. At a 14 percent discount rate, what is this business idea worth today?

$430,109

A wealthy benefactor just contributed to your college's scholarship program. This gift will provide $20,000 in scholarships next year with that amount increasing by 2 percent annually thereafter.. If the discount rate is 6.5 percent, what is the current value of this perpetual gift?

$444,444

You are borrowing $21,800 to buy a car. The terms of the loan call for monthly payments for five years at 8.25 percent interest. What is the amount of each payment?

$444.64

You are considering a project that will provide annual cash inflows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 12.5 percent?

$47,615

Andre's Bakery has sales of $613,000 with costs of $479,000. Interest expense is $26,000 and depreciation is $42,000. The tax rate is 25 percent. What is the net income?

$49,500

You are considering two savings options. Both options offer a rate of return of 11 percent. The first option is to save $2,500, $1,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today?

$5,663.26

The beginning of year balance sheet of The Beach Shoppe showed long-term debt of $2.1 million, while the end of year balance sheet showed long-term debt of $2.3 million. The annual income statement showed an interest expense of $250,000. What was the cash flow to creditors for the year ?

$50,000

Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $187,000, $220,000, and $245,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 13.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?

$503,098

One year ago, JK Mfg. deposited $20,500 in an investment account for the purpose of buying new equipment four years from today. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today. How much will be available when it is ready to buy the equipment, assuming the account pays 3.5 interest?

$52,648

John's Auto Repair just took out a $52,000, 10-year, 8 percent, interest-only loan from the bank. Payments are made annually. What is the amount of the loan payment in year 10?

$56,160

Webster World has sales of $13,800, costs of $5,800, depreciation expense of $1,100, and interest expense of $700. What is the operating cash flow if the tax rate is 32 percent?

$6,016

Your car dealer is willing to lease you a new car for $190 a month for 36 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 6.5 percent, what is the current value of the lease?

$6,232.80

Your grandmother is gifting you $150 a month for four years while you attend college to earn your bachelor's degree. At a 4.8 percent discount rate, what are these payments worth to you on the day you enter college?

$6,539.14

A firm has net working capital of $560. Long-term debt is $3,970, total assets are $7,390, and fixed assets are $3,910. What is the amount of the total liabilities?

$6,890

The Distribution Point plans to save $2,000 a month for the next 3 years for future emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit that would yield the same amount of savings as the monthly deposits after 3 years?

$67,485.97

Suppose you are given the following information for Bayside Bakery: sales = $30,000; costs = $15,000; addition to retained earnings = $4,221; dividends paid = $469; interest expense = $1,300; tax rate = 30 percent. What is the amount of the depreciation expense?

$7,000

On the day you entered college, you borrowed $30,000 from your local bank. The terms of the loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full one year after you graduate. Interest is to be paid annually at the end of each year. Assume that you complete college in four years. How much total interest will you pay on this loan assuming you paid as agreed?

$7,125

A firm's balance sheet showed beginning net fixed assets of $3.6 million and ending net fixed assets of $3.4 million. The depreciation expense is $900,000. What was the net capital spending for the year?

$700,000

You just acquired a 30-year mortgage in the amount of $179,500 at 4.75 percent interest, compounded monthly. Payments will be equal over the life of the loan with the first payment due one month after the date of the loan. How much of the first payment will be interest?

$710.52

On June 1, you borrowed $195,000 to buy a house. The mortgage rate is 5.25 percent. The loan is to be repaid in equal monthly payments over 15 years. All taxes and insurance premiums are to be paid separately. The first payment is due on July 1. How much of the first payment applies to the principal balance?

$714.43

A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital?

$720

Beach Front Industries has sales of $546,000, costs of $295,000, depreciation expense of $37,000, interest expense of $15,000, and a tax rate of 32 percent. The firm paid $59,000 in cash dividends. What is the addition to retained earnings?

$76,320

Travis International has a one-time expense of $2.86 million that must be paid three years from now. Since the firm cannot raise that amount in one day, it wants to save an equal amount each month over the next three years to fund this expense. If the firm can earn 2.1 percent on its savings, how much must it save each month?

$77,037.69

What is the future value of $12,000 a year for 40 years at 11.5 percent interest?

$8,014,195

The tax rates are as shown. Nevada Mining currently has taxable income of $97,800. How much additional tax will the firm owe if taxable income increases by $21,000? Tax Income Tax Rate 0-50k 15% 50k-75k 25% 75k-100k 34% 100k-335k 39%

$8,080

Your broker is offering 1.2 percent compounded daily on its money market account. If you deposit $7,500 today, how much will you have in your account 15 years from now?

$8,979.10

Rosina plans on saving $2,000 a year and expects to earn an annual rate of 8.8 percent. How much will she have in her account at the end of 43 years?

$831,532

You just won the grand prize in a national writing contest! As your prize, you will receive $1,000 a month for 10 years. If you can earn 7 percent on your money, what is this prize worth to you today?

$86,126.35

Drew owns The What-Not Shop, which he is trying to sell so that he can retire and travel. The shop owns the building in which it is located. This building was built at a cost of $647,000 and is currently appraised at $819,000. The counters and fixtures originally cost $148,000 and are currently valued at $65,000. The inventory is valued on the balance sheet at $319,000 and has a retail market value equal to 1.1 times its cost. Jake expects the store to collect 96 percent of the $21,700 in accounts receivable. The firm has $26,800 in cash and has total debt of $414,700. What is the market value of this firm?

$867,832

What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 23 annual payments?

$9,149.74

You are planning a special wedding three years from today. You don't know who your spouse will be but you do know that you are saving $25,000 today and $35,000 one year from today for this purpose. You also plan to pay the final $45,000 of costs on your wedding day. At a discount rate of 7 percent, what is the current cost of your special wedding?

$94,444

At the beginning of the year, the balance sheet of The Outlet showed $800,000 in the common stock account and $2.6 million in the additional paid-in surplus account. The end-of-year balance sheet showed $872,000 and $4.8 million in the same two accounts, respectively. The company paid out $150,000 in cash dividends during the year. What is the cash flow to stockholders for the year?

-$2,122,000

The Daily News had net income of $121,600 of which 40 percent was distributed to the shareholders as dividends. During the year, the company sold $75,000 worth of common stock. What is the cash flow to stockholders?

-$26,360

You have been purchasing $9,000 worth of stock annually for the past 5 years and now have a portfolio valued at $45,881. What is your annual rate of return?

.97 percent

Your insurance agent is trying to sell you an annuity that costs $50,000 today. By buying this annuity, your agent promises that you will receive payments of $250 a month for the next 20 years. What is the rate of return on this investment?

1.88 percent

You are preparing to make monthly payments of $75, beginning at the end of this month, into an account that pays 6 percent interest compounded monthly. How many payments will you have made when your account balance reaches $10,000?

102

What is the annual percentage rate on a loan with a stated rate of 2.75 percent per quarter?

11.00 percent

The Friendly Bank wants to earn an effective annual return on its consumer loans of 12 percent per year. The bank uses daily compounding. What rate is the bank most apt to quote on these loans?

11.33 percent

Jogging Gear is considering a project with an initial cash requirement of $238,400. The project will yield cash flows of $4,930 monthly for 65 months. What is the rate of return on this project?

11.38 percent

You are considering a one-year discount loan of $16,000. The interest rate is quoted as 7 percent plus 4 points. What is the actual rate you are paying on this loan?

11.46 percent

What is the effective annual rate of 11.9 percent compounded continuously?

12.64 percent

Today, you are retiring. You have a total of $289,416 in your retirement savings. You want to withdraw $2,500 at the beginning of every month, starting today and expect to earn 4.6 percent, compounded monthly. How long will it be until you run out of money?

12.71 years

You are paying an effective annual rate of 15.33 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?

14.35 percent

You are considering an annuity that costs $160,000 today. The annuity pays $17,500 a year at an annual interest rate of 7.5 percent. What is the length of the annuity time period?

16 years

What is the effective annual rate of 14.9 percent compounded continuously?

16.07 percent

Your credit card company charges you 1.65 percent interest per month. What is the annual percentage rate on your account?

19.80 percent

Your credit card company quotes you an interest rate of 21.9 percent based on annual compounding. Interest is billed monthly. What is the actual rate of interest you are paying?

24.24 percent

Your local pawn shop loans money at an annual rate of 23 percent and compounds interest weekly. What is the actual rate being charged on these loans?

25.80 percent

You just received an offer in the mail to transfer your $5,000 balance from your current credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a rate of 5.9 percent. You plan to make payments of $250 a month on this debt. How many fewer payments will you have to make to pay off this debt if you transfer the balance to the new card?

3.05 payments

You grandfather invested $20,000 years ago to provide annual payments of $750 a year to his heirs forever. What is the rate of return?

3.75 percent

MBM estimates its expansion cost at $18.63 million and wants it fully funded upfront. Management has decided to save $1.1 million a quarter for this purpose. The firm earns 6.25 percent, compounded quarterly, on its savings. How long does the firm have to wait before expanding its operations?

3.79 years

Boyer Enterprises had $200,000 in taxable income. What is the firm's average tax rate based on the rates shown in the following table? Tax Income Tax Rate 0-50k 15% 50k-75k 25% 75k-100k 34% 100k-335k 39%

30.63 percent

Winston Industries had sales of $843,800 and costs of $609,900. The firm paid $38,200 in interest and $18,000 in dividends. It also increased retained earnings by $62,138 for the year. The depreciation was $76,400. What is the average tax rate?

32.83 percent

Given the tax rates as shown, what is the average tax rate for a firm with taxable income of $289,740? Tax Income Tax Rate 0-50k 15% 50k-75k 25% 75k-100k 34% 100k-335k 39%

33.22 percent

You just paid $750,000 for an annuity that will pay you and your heirs $36,000 a year forever. What rate of return are you earning on this policy?

4.80 percent

Your father helped you start saving $20 a month beginning on your fifth birthday. He always made you deposit the money into your savings account on the first day of each month just to "start the month out right." Today completes your 17th year of saving and you now have $6,528.91 in this account. What is the rate of return on your savings?

5.15 percent

The Art Gallery is notoriously known as a slow-payer. The firm currently needs to borrow $25,000 and only one company will loan to them. The terms of the loan call for weekly payments of $500 at a weekly interest rate of .45 percent. What is the loan term?

56.77 weeks

You have just purchased a new warehouse. To finance the purchase, you arranged for a 30-year mortgage loan for 65 percent of the $2.5 million purchase price. The monthly payment on this loan will be $10,400. What is the effective annual rate on this loan?

6.82 percent

Today, you borrowed $6,200 on your credit card to purchase some furniture. The interest rate is 14.9 percent, compounded monthly. How long will it take you to pay off this debt assuming that you do not charge anything else and make regular monthly payments of $120?

6.93 years

You want to buy a new sports coupe for $41,750 and the finance office at the dealership has quoted you an APR of 7.6, compounded monthly for 48 months. What is the effective interest rate on this loan?

7.87 percent

First City Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.65 percent annual percentage rate on its loans. What is the maximum rate the bank can actually earn based on the quoted rate?

7.95 percent

Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40th birthday. In an attempt to reach this goal, you decide to save $75 a day, every day, until you turn 40. You open an investment account and deposit your first $75 today. What rate of return must you earn to achieve your goal?

8.09 percent

Al's obtained a discount loan of $71,000 today that requires a repayment of $90,000, 3 years from today. What is the APR on this loan?

8.23 percent

On this date last year, you borrowed $3,400. You have to repay the loan principal plus all of the interest six years from today. The payment that is required at that time is $6,000. What is the interest rate on this loan?

8.45 percent

What is the effective annual rate if a bank charges you an APR of 8.25 percent, compounded quarterly?

8.51 percent

You have been investing $250 a month for the last 13 years. Today, your investment account is worth $73,262. What is your average rate of return on your investments?

8.94 percent

You want to borrow $38,400 and can afford monthly payments of $960 for 48 months, but no more. Assume monthly compounding. What is the highest APR rate you can afford?

9.24 percent

Which of the following are results related to the enactment of the Sarbanes-Oxley Act of 2002? I. Increased foreign stock exchange listings of U.S. stocks. II. Decreased compliance costs. III. Increased privatization of public corporations. IV. Increased public disclosure by all corporations. A. I and III only. B. II and IV only. C. I, II, and III only. D. II, III, and IV only. E. I, III, and IV only.

A. I and III only.

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. Income statement B. Balance sheet. C. Statement of cash flows. D. Tax reconciliation statement. E. Market value report.

A. Income statement

Depreciation for a tax-paying firm: A. Increases expenses and lowers taxes. B. Increases the net fixed assets as shown on the balance sheet. C. Reduces both the net fixed assets and the costs of a firm. D. Is a noncash expense that increases the net income. E. Decreases net fixed assets, net income, and operating cash flows.

A. Increases expenses and lowers taxes.

A general partner: A. Is personally responsible for all the partnership debts. B. Has no say over a firm's daily operations. C. Faces double taxation whereas a limited partner does not D. Has a maximum loss equal to his or her equity investment. E. Receives a salary in lieu of a portion of the profits.

A. Is personally responsible for all the partnership debts.

Which term relates to the cash flow that results from a firm's ongoing, normal business activities? A. Operating cash flow. B. Capital spending. C. Net working capital. D. Cash flow from assets. E. Cash flow to creditors.

A. Operating cash flow

Which one of the following grants an individual the right to vote on behalf of a shareholder? A. Proxy. B. Bylaws. C. Indenture agreement. D. Stock option. E. Stock audit.

A. Proxy.

A positive cash flow to stockholders indicates which one of the following with certainty? A. The dividends paid exceeded the net new equity raised. B. The amount of the sale of common stock exceeded the amount of dividends paid. C. No dividends were distributed, but new shares of stock were sold. D. Both the cash flow to assets and the cash flow to creditors must be negative. E. Both the cash flow to assets and the cash flow to creditors must be positive.

A. The dividends paid exceeded the net new equity raised

Which one of the following is defined as a firm's short-term assets and its short-term liabilities? A. Working capital. B. Debt. C. Investment capital. D. Net capital. E. Capital structure.

A. Working capital

On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today? A. age 29 B. age 30 C. age 31 D. age 32 E. age 33

B $756 = $300 × (1 + .045)t; t = 21 years; Age today = 9 + 21 = 30

You are depositing $1,500 in a retirement account today and expect to earn an average return of 7.5 percent on this money. How much additional income will you earn if you leave the money invested for 45 years instead of just 40 years? A. $10,723.08 B. $11,790.90 C. $12,441.56 D. $12,908.19 E. $13,590.93

B. $11,790.90 Future value = $1,500 × (1 + .075)45 = $38,857.26 Future value = $1,500 × (1 + .075)40 = $27,066.36 Difference = $38,857.26 - $27,066.36 = $11,790.90

You would like to give your daughter $75,000 towards her college education 17 years from now. How much money must you set aside today for this purpose if you can earn 8 percent on your investments? A. $18,388.19 B. $20,270.17 C. $28,417.67 D. $29,311.13 E. $32,488.37

B. $20,270.17 Present value = $75,000 × [1/(1 + .08)17] = $20,270.17

This morning, TL Trucking invested $75,000 to help fund a company expansion project planned for 4 years from now. How much additional money will the firm have 4 years from now if it can earn 5 percent rather than 4 percent on its savings? A. $2,940.09 B. $3,423.58 C. $4,008.17 D. $4,219.68 E. $4,711.08

B. $3,423.58 Future value = $75,000 × (1 + .05)4 = $91,162.97 Future value = $75,000 × (1 + .04)4 = $87,739.39 Difference = $91,162.97 - $87,739.39 = $3,423.58

You have just received notification that you have won the $1.4 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday, 78 years from now. The appropriate discount rate is 8 percent. What is the present value of your winnings? A. $3,288.16 B. $3,459.99 C. $5,309.91 D. $13,333.33 E. $25,000.00

B. $3,459.99 PV = $1,400,000 × [1/(1.08)78] = $3,459.99

Your older sister deposited $5,000 today at 8.5 percent interest for 5 years. You would like to have just as much money at the end of the next 5 years as your sister will have. However, you can only earn 7 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years? A. $321.19 B. $360.43 C. $387.78 D. $401.21 E. $413.39

B. $360.43 Future value = $5,000 × (1 + .085)5 = $7,518.28 Present value = $7,518.28 × [1/(1 + .07)5] = $5,360.43 Difference = $5,360.43 - $5,000 = $360.43

Travis invested $9,250 in an account that pays 6 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually? A. $741.41 B. $773.58 C. $802.16 D. $833.33 E. $858.09

B. $773.58 Simple interest = $9,250 + ($9,250 × .06 × 7) = $13,135 Compound interest = $9,250 × (1 + .06)7 = $13,908.58 Difference = $13,908.58 - $13,135 = $773.58

Suppose you are committed to owning a $140,000 Ferrari. You believe your mutual fund can achieve an annual rate of return of 8 percent and you want to buy the car in 7 years. How much must you invest today to fund this purchase assuming the price of the car remains constant? A. $74,208.16 B. $81,688.66 C. $87,911.08 D. $98,019.82 E. $99,446.60

B. $81,688.66 PV = $140,000 × [1/(1 + .08)7; PV = $81,688.66

Assume the average vehicle selling price in the United States last year was $41,996. The average price 9 years earlier was $29,000. What was the annual increase in the selling price over this time period? A. 3.89 percent B. 4.20 percent C. 4.56 percent D. 5.01 percent E. 5.40 percent

B. 4.20 percent $41,996 = $29,000 × (1 + r)9; r = 4.20 percent

Ten years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today, that account has increased in value to $330,592. What rate of interest is the firm earning on this money? A. 8.80 percent B. 9.78 percent C. 10.75 percent D. 11.28 percent E. 11.53 percent

B. 9.78 percent $330,592 = $130,000 × (1 + r)10; r = 9.78 percent

Which one of the following statements related to annuities and perpetuities is correct? A. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest, compounded annually. B. A perpetuity composed of $100 monthly payments is worth more than an annuity of $100 monthly payments given equal discount rates. C. Most loans are a form of a perpetuity. D. The present value of a perpetuity cannot be computed but the future value can. E. Perpetuities are finite but annuities are not.

B. A perpetuity composed of $100 monthly payments is worth more than an annuity of $100 monthly payments given equal discount rates.

You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis. A. Interest-only loan. B. Amortized loan with equal principal payments. C. Amortized loan with equal loan payments. D. Discount loan. E. Balloon loan where 50 percent of the principal is repaid as a balloon payment.

B. Amortized loan with equal principal payments.

Which one of the following statements is correct concerning a corporation with taxable income of $125,000? A. Net income minus dividends paid will equal the ending retained earnings for the year. B. An increase in depreciation will increase the operating cash flow. C. Net income divided by the number of shares outstanding will equal the dividends per share. D. Interest paid will be included in both net income and operating cash flow. E. An increase in the tax rate will increase both net income and operating cash flow.

B. An increase in depreciation will increase the operating cash flow.

Your credit card charges you 1.5 percent interest per month. This rate when multiplied by 12 is called the: A. Effective annual rate. B. Annual percentage rate. C. Periodic interest rate. D. Compound interest rate. E. Period interest rate.

B. Annual percentage rate.

The book value of a firm is: A. Equivalent to the firm's market value provided that the firm has some fixed assets. B. Based on historical cost. C. Generally greater than the market value when fixed assets are included. D. More of a financial than an accounting valuation. E. Adjusted to the market value whenever the market value exceeds the stated book value.

B. Based on historical cost.

Tracy invested $1,000 five years ago and earns 4 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following? A. Simplifying B. Compounding C. Aggregation D. Accumulation E. Discounting

B. Compounding

Which one of the following is a capital budgeting decision? A. Determining how many shares of stock to issue. B. Deciding whether or not to purchase a new machine for the production line. C. Deciding how to refinance a debt issue that is maturing. D. Determining how much inventory to keep on hand. E. Determining how much money should be kept in the checking account.

B. Deciding whether or not to purchase a new machine for the production line.

Which one of the following is a working capital management decision? A. Determining the amount of equipment needed to complete a job. B. Determining whether to pay cash for a purchase or use the credit offered by the supplier. C. Determining the amount of long-term debt required to complete a project. D. Determining the number of shares of stock to issue to fund an acquisition. E. Determining whether or not a project should be accepted.

B. Determining whether to pay cash for a purchase or use the credit offered by the supplier

Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value? A. Real estate investment. B. Good reputation of the company. C. Equipment owned by the firm. D. Money due from a customer. E. An item held by the firm for future sale.

B. Good reputation of the company.

Which of the following individuals have unlimited liability based on their ownership interest? I. General partner II. Sole proprietor III. Stockholder IV. Limited partner A. II only. B. I and II only. C. II and IV only. D. I, II, and III only. E. I, II, and IV only.

B. I and II only.

Which of the following are current assets? I. Cash II. Trademark III. Accounts receivable IV. Notes payable A. I and II only B. I and III only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV

B. I and III only.

Which of the following represent cash outflows from a corporation? I. Issuance of securities. II. Payment of dividends. III. New loan proceeds. IV. Payment of government taxes. A. I and III only. B. II and IV only. C. I and IV only. D. I, II, and IV only. E. II, III, and IV only.

B. II and IV only

Which of the following are included in current liabilities? I. Note payable to a supplier in 13 months. II. Amount due from a customer last week. III. Account payable to a supplier that is due next week. IV. Loan payable to the bank in 10 months. A. I and III only. B. III and IV only. C. I, II, and III only. D. I, III, and IV only. E. I, II, III, and IV

B. III and IV only.

Which of the following accounts are included in working capital management? I. Accounts Payable II. Accounts Receivable III. Fixed Assets IV. Inventory A. I and II only. B. I and III only. C. II and IV only. D. I, II, and IV only. E. II, III, and IV only.

D. I, II, and IV only.

Which one of the following statements is correct? A. A general partnership is legally the same as a corporation. B. Income from both sole proprietorships and partnerships is taxed as individual income. C. Partnerships are the most complicated type of business to form. D. All business organizations have bylaws. E. Only firms organized as sole proprietorships have limited lives.

B. Income from both sole proprietorships and partnerships is taxed as individual income.

Which one of the following is true according to generally accepted accounting principles? A. Depreciation is recorded based on the market value principle. B. Income is recorded based on the realization principle. C. Costs are recorded based on the realization principle. D. Depreciation is recorded based on the recognition principle. E. Costs of goods sold are recorded based on the matching principle.

B. Income is recorded based on the realization principle.

Which one of the following functions should be the responsibility of the controller rather than the treasurer? A. Daily cash deposit. B. Income tax returns. C. Equipment purchase analysis. D. Customer credit approval. E. Payment to a vendor.

B. Income tax returns

Net capital spending: A. Is equal to ending net fixed assets minus beginning net fixed assets. B. Is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense. C. Reflects the net changes in total assets over a stated period of time. D. Is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital. E. Is equal to the net change in the current accounts.

B. Is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.

Which one of the following statements related to liquidity is correct? A. Liquid assets tend to earn a high rate of return. B. Liquid assets are valuable to a firm. C. Liquid assets are defined as assets that can be sold quickly regardless of the price obtained D. Inventory is more liquid than accounts receivable because inventory is tangible. E. Any asset that can be sold is considered liquid.

B. Liquid assets are valuable to a firm.

Martin invested $1,000 six years ago and expected to have $1,500 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, Martin only has $1,420 in his account today. Which one of the following must be true? A. Martin earned simple interest rather than compound interest. B. Martin earned a lower interest rate than he expected. C. Martin did not earn any interest on interest as he expected. D. Martin ignored the Rule of 72 which caused his account to decrease in value. E. The future value interest factor turned out to be higher than Martin expected.

B. Martin earned a lower interest rate than he expected.

Which one of the following best states the primary goal of financial management? A. Maximize current dividends per share. B. Maximize the current value per share C. Increase cash flow and avoid financial distress. D. Minimize operational costs while maximizing firm efficiency. E. Maintain steady growth while increasing current profits.

B. Maximize the current value per share.

An amortized loan: A. Requires the principal amount to be repaid in even increments over the life of the loan. B. May have equal or increasing amounts applied to the principal from each loan payment. C. Requires that all interest be repaid on a monthly basis while the principal is repaid at the end of the loan term. D. Requires that all payments be equal in amount and include both principal and interest. E. Repays both the principal and the interest in one lump sum at the end of the loan term.

B. May have equal or increasing amounts applied to the principal from each loan payment.

Sixteen years ago, Alicia invested $500. Eight years ago, Travis invested $900. Today, both Alicia's and Travis' investments are each worth $2,400. Assume that both Alicia and Travis continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments? A. Three years from today, Travis' investment will be worth more than Alicia's. B. One year ago, Alicia's investment was worth more than Travis' investment. C. Travis earns a higher rate of return than Alicia. D. Travis has earned an average annual interest rate of 3.37 percent. E. Alicia has earned an average annual interest rate of 6.01 percent.

B. One year ago, Alicia's investment was worth more than Travis' investment. Alicia: $2,400 = $500 × (1 + r)16; r = 10.30 percent Travis: $2,400 = $900 × (1 + r)8; r = 13.04 percent

Which one of the following is classified as a tangible fixed asset? A. Accounts receivable. B. Production equipment. C. Cash. D. Patent. E. Inventory.

B. Production equipment.

Which one of the following is a primary market transaction? A. Sale of currently outstanding stock by a dealer to an individual investor. B. Sale of a new share of stock to an individual investor. C. Stock ownership transfer from one shareholder to another shareholder D. Gift of stock from one shareholder to another shareholder. E. Gift of stock by a shareholder to a family member.

B. Sale of a new share of stock to an individual investor.

A business owned by a solitary individual who has unlimited liability for its debt is called a: A. Corporation. B. Sole proprietorship. C. General partnership. D. Limited partnership. E. Limited liability company.

B. Sole proprietorship.

Which one of the following statements related to loan interest rates is correct? A. The annual percentage rate considers the compounding of interest. B. When comparing loans you should compare the effective annual rates. C. Lenders are most apt to quote the effective annual rate. D. Regardless of the compounding period, the effective annual rate will always be higher than the annual percentage rate. E. The more frequent the compounding period, the lower the effective annual rate given a fixed annual percentage rate.

B. When comparing loans you should compare the effective annual rates.

Terry is calculating the present value of a bonus he will receive next year. The process he is using is called: A. growth analysis. B. discounting. C. accumulating. D. compounding. E. reducing.

B. discounting.

The banks in your area offer the following rates of interest on their savings accounts. If you want to open one of these accounts, which bank should you select? Bank A: .75 percent APR with daily compounding. Bank B: .85 percent APR with monthly compounding. Bank C: .8725 percent APR with annual compounding. Bank D: .87 percent APR with quarterly compounding. Bank E: .775 percent APR with semiannual compounding.

Bank D

Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years? A. $12,650 B. $12,967 C. $13,020 D. $13,256 E. $13,500

C. $13,020 Ending value = $10,500 + ($10,500 × .06 × 4) = $13,020

Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest? A. $15,929.47 B. $16,500.00 C. $17,444.86 D. $17,500.00 E. $17,999.45

C. $17,444.86 Present value = $51,480.79 × [1/(1 + .0425)26] = $17,444.86

Imprudential, Inc. has an unfunded pension liability of $850 million that must be paid in 25 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. The relevant discount rate is 6.5 percent. What is the present value of this liability? A. $159,803,162 B. $171,438,907 C. $176,067,311 D. $184,519,484 E. $191,511,367

C. $176,067,311 $850,000,000 × [1/(1.065)25] = $176,067,311

You are scheduled to receive $30,000 in two years. When you receive it, you will invest it for 5 more years, at 6 percent per year. How much money will you have 7 years from now? A. $38,909.19 B. $39,381.16 C. $40,146.77 D. $47,209.19 E. $51,414.73

C. $40,146.77

Gerold invested $5,600 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years? A. $7,710 B. $8,000 C. $8,400 D. $8,678 E. $9,099

C. $8,400 Ending value = $5,600 + ($5,600 × .05 × 10) = $8,400

Theo needs $40,000 as a down payment for a house 6 years from now. He earns 2.5 percent on his savings. Theo can either deposit one lump sum today for this purpose or he can wait a year and deposit a lump sum. How much additional money must he deposit if he waits for one year rather than making the deposit today? A. $778.98 B. $811.13 C. $862.30 D. $948.03 E. $1,020.18

C. $862.30 Present value = $40,000 × [1/(1 + .025)6] = $34,491.87 Present value = $26,000 × [1/(1 + .025)5] = $35,354.17 Difference = $35,354.17 - $34,491.87 = $862.30

You hope to buy your dream car four years from now. Today, that car costs $82,500. You expect the price to increase by an average of 4.8 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it? A. $98,340.00 B. $98,666.67 C. $99,517.41 D. $99,818.02 E. $100,023.16

C. $99,517.41 Future value = $82,500 × (1 + .048)4 = $99,517.41

Forty years ago, your mother invested $5,000. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment? A. 11.68 percent B. 11.71 percent C. 11.78 percent D. 11.91 percent E. 12.02 percent

C. 11.78 percent $430,065.11 = $5,000 × (1 + r)40; r = 11.78 percent

You're trying to save to buy a new $160,000 Ferrari. You have $58,000 today that can be invested at your bank. The bank pays 6 percent annual interest on its accounts. How many years will it be before you have enough to buy the car? Assume the price of the car remains constant. A. 16.67 years B. 17.04 years C. 17.41 years D. 17.87 years E. 18.02 years

C. 17.41 years

You expect to receive $9,000 at graduation in 2 years. You plan on investing this money at 10 percent until you have $60,000. How many years will it be until this occurs? A. 18.78 years B. 19.96 years C. 21.90 years D. 23.08 years E. 25.00 years

C. 21.90 years $60,000 = $9,000 × (1 + .10)t; t = 19.90 years Total time = 2 + 19.90 = 21.90 years

Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 6 percent per year? A. 28.33 years B. 29.98 years C. 30.23 years D. 31.29 years E. 32.08 years

C. 30.23 years $214,800 = $36,900 × (1 + .06)t; t = 30.23 years

Penn Station is saving money to build a new loading platform. Two years ago, they set aside $24,000 for this purpose. Today, that account is worth $28,399. What rate of interest is Penn Station earning on this investment? A. 6.39 percent B. 7.47 percent C. 8.78 percent D. 9.23 percent E. 9.67 percent

C. 8.78 percent $28,399 = $24,000 × (1 + r)2; r = 8.78 percent

Assume the total cost of a college education will be $300,000 when your child enters college in 16 years. You presently have $75,561 to invest. What rate of interest must you earn on your investment to cover the cost of your child's college education? A. 7.75 percent B. 8.50 percent C. 9.00 percent D. 9.25 percent E. 9.50 percent

C. 9.00 percent $300,000 = $75,561 (1 + r)16; r = 9 percent

As of 2015, which one of the following statements concerning corporate income taxes is correct? A. The largest corporations have an average tax rate of 39 percent. B. The lowest marginal rate is 25 percent. C. A firm's tax is computed on an incremental basis. D. A firm's marginal tax rate will generally be lower than its average tax rate once the firm's income exceeds $50,000. E. When analyzing a new project, the average tax rate should be used.

C. A firm's tax is computed on an incremental basis.

Which one of the following accounts is the most liquid? A. Inventory. B. Building. C. Accounts Receivable. D. Equipment. E. Land.

C. Accounts Receivable.

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers? A. Articles of incorporation. B. Corporate breakdown. C. Agency problem. D. Bylaws. E. Legal liability.

C. Agency problem

Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date? A. Income statement. B. Creditor's statement. C. Balance sheet. D. Statement of cash flows. E. Dividend statement.

C. Balance sheet.

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum? A. Amortized loan. B. Continuing loan. C. Balloon loan. D. Pure discount loan. E. Interest-only loan.

C. Balloon loan.

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true? A. Barb will earn more interest the first year than Andy will. B. Andy will earn more interest in year three than Barb will. C. Barb will earn interest on interest. D. After five years, Andy and Barb will both have earned the same amount of interest. E. Andy will earn compound interest.

C. Barb will earn interest on interest.

Why should financial managers strive to maximize the current value per share of the existing stock? A. Doing so guarantees the company will grow in size at the maximum possible rate. B. Doing so increases employee salaries. C. Because they have been hired to represent the interests of the current shareholders. D. Because this will increase the current dividends per share. E. Because managers often receive shares of stock as part of their compensation.

C. Because they have been hired to represent the interests of the current shareholders.

A firm which opts to "go dark" in response to the Sarbanes-Oxley Act: A. Must continue to provide audited financial statements to the public. B. Must continue to provide a detailed list of internal control deficiencies on an annual basis. C. Can provide less information to its shareholders than it did prior to "going dark.". D. Can continue publicly trading its stock but only on the exchange on which it was previously listed. E. Ceases to exist.

C. Can provide less information to its shareholders than it did prior to "going dark.".

Which one of the following business types is best suited to raising large amounts of capital? A. Sole proprietorship. B. Limited liability company. C. Corporation. D. General partnership. E. Limited partnership.

C. Corporation.

Which one of the following statements is correct? A. The majority of firms in the U.S. are structured as corporations. B. Corporate profits are taxable income to the shareholders when earned. C. Corporations can raise large amounts of capital generally easier than partnerships can. D. Stockholders face no potential losses related to their corporate investment. E. Corporate shareholders elect the corporate president.

C. Corporations can raise large amounts of capital generally easier than partnerships can.

Which one of the following is an unintended result of the Sarbanes-Oxley Act? A. More detailed and accurate financial reporting. B. Increased management awareness of internal controls. C. Corporations delisting from major exchanges. D. Increased responsibility for corporate officers. E. Identification of internal control weaknesses.

C. Corporations delisting from major exchanges

Which one of the following will increase the cash flow from assets, all else equal? A. Decrease in cash flow to stockholders. B. Decrease in operating cash flow. C. Decrease in the change in net working capital. D. Decrease in cash flow to creditors. E. Increase in net capital spending.

C. Decrease in the change in net working capital.

An interest rate on a loan that is compounded monthly but expressed as an annual rate would be an example of which one of the following rates? A. Stated rate. B. Discounted annual rate. C. Effective annual rate. D. Periodic monthly rate. E. Consolidated monthly rate

C. Effective annual rate.

An ordinary annuity is best defined by which one of the following? A. Increasing payments paid for a definitive period of time. B. Increasing payments paid forever. C. Equal payments paid at the end of regular intervals over a stated time period. D. Equal payments paid at the beginning of regular intervals for a limited time period. E. Equal payments that occur at set intervals for an unlimited period of time.

C. Equal payments paid at the end of regular intervals over a stated time period.

A business formed by two or more individuals who each have unlimited liability for all of the firm's business debts is called a: A. Corporation. B. Sole proprietorship. C. General partnership. D. Limited partnership. E. Limited liability company.

C. General partnership.

Which one of these sets forth the common set of standards and procedures by which audited financial statements are prepared? A. The Matching Principle. B. The Cash Flow Identity. C. Generally Accepted Accounting Principles. D. Financial Accounting Reporting Principles. E. Standard Accounting Value Guidelines.

C. Generally Accepted Accounting Principles.

Which of the following are cash flows from a corporation into the financial markets? I. Repayment of long-term debt. II. Payment of government taxes. III. Payment of loan interest. IV. Payment of quarterly dividend. A. I and II only. B. I and III only. C. II and IV only. D. I, III, and IV only. E. I, II, and III only.

D. I, III, and IV only.

You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner. A. I only B. II only C. I and III only D. I and IV only E. II and III only

C. I and III only

Which of the following parties are considered stakeholders of a firm? I. Employee II. Long-term creditor III. Government IV. Common stockholder A. I only. B. IV only. C. I and III only. D. II and IV only. E. II, III, and IV only.

C. I and III only.

Which of the following are advantages of the corporate form of business ownership? I. Limited liability for firm debt. II. Double taxation. III. Ability to raise capital. IV. Unlimited firm life. A. I and II only. B. III and IV only. C. I, III, and IV only. D. II, III, and IV only. E. I, II, III, and IV.

C. I, III, and IV only.

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts? A. The present values of Luis and Soo Lee's monies are equal. B. In future dollars, Soo Lee's money is worth more than Luis' money. C. In today's dollars, Luis' money is worth more than Soo Lee's. D. Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money. E. Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.

C. In today's dollars, Luis' money is worth more than Soo Lee's.

The growth of both sole proprietorships and partnerships is frequently limited by their: A. Double taxation. B. Bylaws. C. Inability to raise cash. D. Limited liability. E. Organizational articles.

C. Inability to raise cash.

A business partner whose potential financial loss in the partnership will not exceed his or her investment in that partnership is called a: A. General partner. B. Sole proprietor. C. Limited partner. D. Corporate shareholder. E. Zero partner.

C. Limited partner.

Sam, Alfredo, and Juan want to start a small U.S. business. Juan will fund the venture but wants to limit his liability to his initial investment and has no interest in the daily operations. Sam will contribute his full efforts on a daily basis but has limited funds to invest in the business. Alfredo will be involved as an active consultant and manager and will also contribute funds. Sam and Alfredo are willing to accept liability for the firm's debts as they feel they have nothing to lose by doing so. All three individuals will share in the firm's profits and wish to keep the initial organizational costs of the business to a minimum. Which form of business entity should these individuals adopt? A. Sole proprietorship. B. Joint stock company. C. Limited partnership. D. General partnership. E. Corporation.

C. Limited partnership.

Which one of the following statements concerning net working capital is correct? A. The lower the value of net working capital is, the greater is the ability of a firm to meet its current obligations. B. An increase in net working capital must also increase current assets. C. Net working capital increases when inventory is sold for cash at a profit. D. Firms with equal amounts of net working capital are also equally liquid. E. Net working capital is a part of the operating cash flow.

C. Net working capital increases when inventory is sold for cash at a profit.

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. A. Both options are of equal value since they both provide $12,000 of income. B. Option A has the higher future value at the end of year three. C. Option B has a higher present value at time zero. D. Option B is a perpetuity. E. Option A is an annuity.

C. Option B has a higher present value at time zero.

Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her winnings today discounted at her discount rate is called which one of the following? A. Single amount B. Future value C. Present value D. Simple amount E. Compounded value

C. Present value

Samantha opened a savings account this morning. Her money will earn 5 percent interest, compounded annually. After five years, her savings account will be worth $5,600. Assume she will not make any withdrawals. Given this, which one of the following statements is true? A. Samantha deposited more than $5,600 this morning. B. The present value of Samantha's account is $5,600. C. Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest. D. Samantha would have had to deposit more money to have $5,600 in five years if she could have earned 6 percent interest. E. Samantha will earn an equal amount of interest every year for the next five years.

C. Samantha could have deposited less money and still had $5,600 in five years if she could have earned 5.5 percent interest.

Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning? A. Free interest B. Complex interest C. Simple interest D. Interest on interest E. Compound interest

C. Simple interest

Which one of the following characteristics applies to a limited liability company? A. Available only to firms having a single owner. B. Limited liability for limited partners only. C. Taxed similar to a partnership. D. Taxed similar to a C corporation. E. All income generated is totally tax-free.

C. Taxed similar to a partnership.

Which one of the following statements concerning interest rates is correct? A. Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. B. The effective annual rate decreases as the number of compounding periods per year increases. C. The effective annual rate equals the annual percentage rate when interest is compounded annually. D. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. E. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

C. The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which one of the following statements related to an income statement is correct? Assume accrual accounting is used. A. The addition to retained earnings is equal to net income plus dividends paid. B. Credit sales are recorded on the income statement when the cash from the sale is collected. C. The labor costs for producing a product are expensed when the product is sold. D. Interest is a non-cash expense. E. Depreciation increases the marginal tax rate.

C. The labor costs for producing a product are expensed when the product is sold.

Which one of the following statements is correct concerning the NYSE? A. The publicly traded shares of a NYSE-listed firm must be worth at least $250 million. B. The NYSE is the largest dealer market for listed securities in the United States. C. The listing requirements for the NYSE are more stringent than those of NASDAQ. D. Any corporation desiring to be listed on the NYSE can do so for a fee. E. The NYSE is an OTC market functioning as both a primary and a secondary market.

C. The listing requirements for the NYSE are more stringent than those of NASDAQ.

Which one of the following statements concerning a sole proprietorship is correct? A. A sole proprietorship is designed to protect the personal assets of the owner. B. The profits of a sole proprietorship are subject to double taxation. C. The owner of a sole proprietorship is personally responsible for all of the company's debts. D. There are very few sole proprietorships remaining in the U.S. today. E. A sole proprietorship is structured the same as a limited liability company.

C. The owner of a sole proprietorship is personally responsible for all of the company's debts.

How is the principal amount of an interest-only loan repaid? A. The principal is forgiven over the loan period; thus it does not have to be repaid. B. The principal is repaid in decreasing increments and included in each loan payment. C. The principal is repaid in one lump sum at the end of the loan period. D. The principal is repaid in equal annual payments. E. The principal is repaid in increasing increments through regular monthly payments.

C. The principal is repaid in one lump sum at the end of the loan period.

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: A. Took place in the primary market. B. Occurred in a dealer market. C. Was facilitated in the secondary market. D. Involved a proxy. E. Was a private placement.

C. Was facilitated in the secondary market

Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now? A. remains constant B. increases C. decreases D. becomes negative E. cannot be determined from the information provided

C. decreases

The process of determining the present value of future cash flows in order to know their worth today is called which one of the following? A. compound interest valuation B. interest on interest computation C. discounted cash flow valuation D. present value interest factoring E. complex factoring

C. discounted cash flow valuation

According to the Rule of 72, you can do which one of the following? A. double your money in five years at 7.2 percent interest B. double your money in 7.2 years at 8 percent interest C. double your money in 5 years at 14.4 percent interest D. triple your money in 7.2 years at 5 percent interest E. triple your money at 10 percent interest in 7.2 years

C. double your money in 5 years at 14.4 percent interest

You just received $225,000 from an insurance settlement. You have decided to set this money aside and invest it for your retirement. Currently, your goal is to retire 25 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 10.5 percent rather than just 8 percent? A. $417,137 B. $689,509 C. $1,050,423 D. $1,189,576 E. $1,818,342

D. $1,189,576 Future value = $225,000 × (1 + .105)25 = $2,730,483 Future value = $225,000 × (1 + .08)25 = $1,540,907 Difference = $2,730,483 - $1,540,907 = $1,189,576

Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today. B. $100 of inventory which is sold today on credit for $103. C. $100 of inventory which is discounted and sold for $97 cash today. D. $100 of inventory that is sold today for $100 cash. E. $100 accounts receivable that will be collected in full next week.

D. $100 of inventory that is sold today for $100 cash.

You own a classic automobile that is currently valued at $150,000. If the value increases by 6.5 percent annually, how much will the automobile be worth ten years from now? A. $244,035.00 B. $251,008.17 C. $270,013.38 D. $281,570.62 E. $291,480.18

D. $281,570.62 Future value = $150,000 × (1 + .065)10 = $281,570.62

The cash flow related to interest payments less any net new borrowing is called the: A. Operating cash flow. B. Capital spending cash flow. C. Net working capital. D. Cash flow from assets. E. Cash flow to creditors.

E. Cash flow to creditors.

When you retire 40 years from now, you want to have $1.2 million. You think you can earn an average of 12 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 2 years from today. How much more will you have to deposit as a lump sum if you wait for 2 years before making the deposit? A. $1,414.14 B. $2,319.47 C. $2,891.11 D. $3,280.78 E. $3,406.78

D. $3,280.78 Present value = $1,200,000 × [1/(1 + .12)40] = $12,896.16 Present value = $1,200,000 × [1/(1 + .12)38] = $16,176.94 Difference = $16,176.94 - $12,896.16 = $3,280.78

In 1895, the winner of a competition was paid $150. In 2006, the winner's prize was $70,000. What will the winner's prize be in 2040 if the prize continues increasing at the same rate? A. $289,400 B. $321,122 C. $379,311 D. $459,866 E. $548,121

D. $459,866 $70,000 = $150 × (1 = r)111; r = 5.6927277 percent FV = $70,000 × (1 + .056927277)34 = $459,866

Suppose that the first comic book of a classic series was sold in 1954. In 2000, the estimated price for this comic book in good condition was about $340,000. This represented a return of 27 percent per year. For this to be true, what was the original price of the comic book in 1954? A. $5.00 B. $5.28 C. $5.50 D. $5.71 E. $6.00

D. $5.71 PV = $340,000 × [1/(1 + .27)46; PV = $5.71

At 8 percent interest, how long would it take to quadruple your money? A. 16.55 years B. 16.64 years C. 17.09 years D. 18.01 years E. 18.56 years

D. 18.01 years $4 = $1 × (1 + .08)t; t = 18.01 years

One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn? A. 6.59 percent B. 6.67 percent C. 6.88 percent D. 6.92 percent E. 7.01 percent

D. 6.92 percent $1,924.62 = $1,800 × (1 + r)1; r = 6.92 percent

Fourteen years ago, your parents set aside $7,500 to help fund your college education. Today, that fund is valued at $26,180. What rate of interest is being earned on this account? A. 7.99 percent B. 8.36 percent C. 8.51 percent D. 9.34 percent E. 10.06 percent

D. 9.34 percent $26,180 = $7,500 × (1 + r)14; r = 9.34 percent

Which one of the following statements is generally correct? A. Private placements must be registered with the SEC. B. All secondary markets are auction markets. C. Dealer markets have a physical trading floor. D. Auction markets match buy and sell orders. E. Dealers arrange trades but never own the securities traded.

D. Auction markets match buy and sell orders.

The _____ tax rate is equal to total taxes divided by total taxable income. A. Deductible. B. Residual. C. Total. D. Average. E. Marginal.

D. Average.

Which one of the following terms is defined as the management of a firm's long-term investments? A. Working capital management. B. Financial allocation. C. Agency cost analysis. D. Capital budgeting. E. Capital structure.

D. Capital Budgeting

The cash flow of a firm that is available for distribution to the firm's creditors and stockholders is called the: A. Operating cash flow. B. Net capital spending. C. Net working capital. D. Cash flow from assets. E. Cash flow to stockholders.

D. Cash flow from assets.

You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value? A. A sudden and unexpected increase in inflation. B. The replacement of old inventory items with more desirable products. C. Improvements to the surrounding area by other store owners. D. Construction of a new restricted access highway located between the store and the surrounding residential areas. E. Addition of a stop light at the main entrance to the store's parking lot.

D. Construction of a new restricted access highway located between the store and the surrounding residential areas.

Which form of business structure is most associated with agency problems? A. Sole proprietorship. B. General partnership. C. Limited partnership. D. Corporation. E. Limited liability company.

D. Corporation.

Which type of business organization has all the respective rights and privileges of a legal person? A. Sole proprietorship. B. General partnership. C. Limited partnership. D. Corporation. E. Limited liability company.

D. Corporation.

Which one of the following is a capital structure decision? A. Determining which one of two projects to accept. B. Determining how to allocate investment funds to multiple projects. C. Determining the amount of funds needed to finance customer purchases of a new product. D. Determining how much debt should be assumed to fund a project. E. Determining how much inventory will be needed to support a project.

D. Determining how much debt should be assumed to fund a project.

Noncash items refer to: A. Accrued expenses. B. Inventory items purchased using credit. C. The ownership of intangible assets such as patents. D. Expenses which do not directly affect cash flows. E. Sales which are made using store credit.

D. Expenses which do not directly affect cash flows.

Cash flow from assets is also known as the firm's: A. Capital structure. B. Equity structure. C. Hidden cash flow. D. Free cash flow. E. Historical cash flow.

D. Free cash flow.

A limited partnership: A. Has an unlimited life. B. Can opt to be taxed as a corporation. C. Terminates at the death of any limited partner. D. Has a greater ability to raise capital than a sole proprietorship. E. Consists solely of limited partners.

D. Has a greater ability to raise capital than a sole proprietorship

Which one of the following is an agency cost? A. Accepting an investment opportunity that will add value to the firm. B. Increasing the quarterly dividend. C. Investing in a new project that creates firm value. D. Hiring outside accountants to audit the company's financial statements. E. Closing a division of the firm that is operating at a loss.

D. Hiring outside accountants to audit the company's financial statements.

Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. Interest expense. II. Taxes. III. Cost of goods sold. IV. Depreciation. A. IV only. B. II and IV only. C. I and III only. D. I and IV only. E. I, II, and IV only.

D. I and IV only

An increase in the depreciation expense will do which of the following for a firm with taxable income of $80,000? I. Increase net income. II. Decrease net income. III. Increase the cash flow from assets. IV. Decrease the cash flow from assets. A. I only. B. II only. C. I and III only. D. II and III only. E. II and IV only.

D. II and III only

Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment? A. I and IV only. B. II and III only. C. I, II, and III only. D. II, III, and IV only. E. I, II, III, and IV.

D. II, III, and IV only

Which one of the following is NOT included in cash flow from assets? A. Accounts payable. B. Inventory. C. Sales. D. Interest expense E. Cash account.

D. Interest expense.

Steve invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as: A. Free interest. B. Bonus income. C. Simple interest. D. Interest on interest. E. Present value interest.

D. Interest on interest.

Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjected. Which form of business entity should they consider to replace their general partnership assuming they wish to remain the only two owners of their business? Whichever organization they select, they wish to be treated equally. A. Sole proprietorship. B. Joint stock company. C. Limited partnership. D. Limited liability company. E. Corporation.

D. Limited liability company.

Decisions made by financial managers should primarily focus on increasing which one of the following? A. Size of the firm. B. Growth rate of the firm. C. Gross profit per unit produced. D. Market value per share of outstanding stock. E. Total sales.

D. Market value per share of outstanding stock.

Which one of the following statements concerning net working capital is correct? A. Net working capital increases when inventory is purchased with cash. B. Net working capital excludes inventory. C. Total assets must increase if net working capital increases. D. Net working capital may be a negative value. E. Net working capital is the amount of cash a firm currently has available for spending.

D. Net working capital may be a negative value.

Which one of these is most apt to be a fixed cost? A. Raw materials. B. Manufacturing wages. C. Management bonuses. D. Office salaries. E. Shipping and freight.

D. Office salaries.

The entire repayment of which one of the following loans is computed simply by computing one single future value? A. Interest-only loan. B. Balloon loan. C. Amortized loan. D. Pure discount loan. E. Bullet loan.

D. Pure discount loan.

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. Amortized. B. Continuous. C. Balloon. D. Pure discount. E. Interest-only.

D. Pure discount.

Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following? A. Primary, dealer market. B. Secondary, dealer market. C. Primary, auction market. D. Secondary, auction market. E. Secondary, OTC market.

D. Secondary, auction market.

Public offerings of debt and equity must be registered with which one of the following? A. New York Board of Governors. B. Federal Reserve. C. NYSE Registration Office. D. Securities and Exchange Commission. E. Market Dealers Exchange.

D. Securities and Exchange Commission.

Financial managers should primarily focus on the interests of: A. Stakeholders. B. The vice president of finance. C. Their immediate supervisor. D. Shareholders. E. The board of directors.

D. Shareholders.

Which one of the following statements concerning stock exchanges is correct? A. NASDAQ is a broker market. B. The NYSE is a dealer market. C. The exchange with the strictest listing requirements is NASDAQ. D. Some large companies are listed on NASDAQ. E. Most debt securities are traded on the NYSE.

D. Some large companies are listed on NASDAQ.

Which one of the following statements related to an income statement is correct? A. Interest expense increases the amount of tax due. B. Depreciation does not affect taxes since it is a non-cash expense. C. Net income is distributed to dividends and paid-in surplus. D. Taxes reduce both net income and operating cash flow. E. Interest expense is included in operating cash flow.

D. Taxes reduce both net income and operating cash flow.

What is the relationship between present value and future value interest factors? A. The present value and future value factors are equal to each other. B. The present value factor is the exponent of the future value factor. C. The future value factor is the exponent of the present value factor. D. The factors are reciprocals of each other. E. There is no relationship between these two factors.

D. The factors are reciprocals of each other.

Which one of the following must be true if a firm had a negative cash flow from assets? A. The firm borrowed money. B. The firm acquired new fixed assets. C. The firm had a net loss for the period. D. The firm utilized outside funding. E. Newly issued shares of stock were sold.

D. The firm utilized outside funding.

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in forty years. Which one of the following statements is correct? A. The interest you earn six years from now will equal the interest you earn ten years from now. B. The interest amount you earn will double in value every year. C. The total amount of interest you will earn will equal $1,000 × .06 × 40. D. The present value of this investment is equal to $1,000. E. The future value of this amount is equal to $1,000 × (1 + 40).06.

D. The present value of this investment is equal to $1,000.

Interest earned on both the initial principal and the interest reinvested from prior periods is called: A. Free interest. B. Dual interest. C. Simple interest. D. Interest on interest. E. Compound interest.

E. Compound interest.

Which one of the following accurately defines a perpetuity? A. A limited number of equal payments paid in even time increments. B. Payments of equal amounts that are paid irregularly but indefinitely. C. Varying amounts that are paid at even intervals forever. D. Unending equal payments paid at equal time intervals. E. Unending equal payments paid at either equal or unequal time intervals.

D. Unending equal payments paid at equal time intervals.

Which one of the following variables is the exponent in the present value formula? A. present value. B. future value. C. interest rate. D. time. E. There is no exponent in the present value formula.

D. time.

A year ago, you deposited $40,000 into a retirement savings account at a fixed rate of 5.5 percent. Today, you could earn a fixed rate of 6.5 percent on a similar type account. However, your rate is fixed and cannot be adjusted. How much less could you have deposited last year if you could have earned a fixed rate of 6.5 percent and still have the same amount as you currently will when you retire 38 years from today? A. $10,118.42 less B. $10,333.33 less C. $11,417.09 less D. $12,274.12 less E. $12,313.30 less

E. $12,313.30 less Future value = $40,000 × (1 + .055)38+1 = $322,779.48 Present value = $322,779.48 × [1/(1 + .065)38+1] = $27,686.70 Difference = $40,000 - $27,686.70 = $12,313.30

You have just made a $1,500 contribution to your individual retirement account. Assume you earn a 12 percent rate of return and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would be if you waited another 10 years before making this contribution? A. $8,306.16 B. $9,658.77 C. $16,311.18 D. $16,907.17 E. $17,289.75

E. $17,289.75 FV = $1,500 × (1 + .12)25 = $25,500.10 FV = $1,500 × (1 + .12)15 = $8,210.35 Difference = $17,289.75

You just received a $3,000 gift from your grandmother. You have decided to save this money so that you can gift it to your grandchildren 50 years from now. How much additional money will you have to gift to your grandchildren if you can earn an average of 8.5 percent instead of just 8 percent on your savings? A. $17,318.09 B. $22,464.79 C. $25,211.16 D. $28,811.99 E. $36,554.11

E. $36,554.11 Future value = $3,000 × (1 + .085)50 = $177,258.95 Future value = $3,000 × (1 + .08)50 = $140,704.84 Difference = $177,258.95 - $140,704.84 = $36,554.11

Your coin collection contains fifty-four 1941 silver dollars. Your grandparents purchased them for their face value when they were new. These coins have appreciated at a 10 percent annual rate. How much will your collection be worth when you retire in 2060? A. $3,611,008 B. $3,987,456 C. $4,122,394 D. $4,421,008 E. $4,551,172

E. $4,551,172 FV = $54 × (1.10)119 = $4,551,172

What is the future value of $6,200 invested for 23 years at 9.25 percent compounded annually? A. $22,483.60 B. $27,890.87 C. $38,991.07 D. $41,009.13 E. $47,433.47

E. $47,433.47 Future value = $6,200 × (1 + .0925)23 = $47,433.47

You invested $1,400 in an account that pays 5 percent simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually? A. $749.22 B. $830.11 C. $882.19 D. $901.15 E. $914.62

E. $914.62 Simple interest = $1,400 + ($1,400 × .05 × 20) = $2,800 Annual compounding = $1,400 × (1.05)20 = $3,714.62 Difference = $3,714.62 - $2,800 = $914.62

A Canadian consol is best categorized as: A. An ordinary annuity. B. An amortized cash flow. C. An annuity due. D. A discounted loan. E. A perpetuity.

E. A perpetuity.

You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities? A. These annuities have equal present values but unequal future values. B. These two annuities have both equal present and future values. C. Annuity B is an annuity due. D. Annuity A has a smaller future value than annuity B. E. Annuity B has a smaller present value than annuity A.

E. Annuity B has a smaller present value than annuity A.

A stakeholder is: A. A person who owns shares of stock. B. Any person who has voting rights based on stock ownership of a corporation. C. A person who initially founded a firm and currently has management control over that firm. D. A creditor to whom a firm currently owes money. E. Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

E. Any person or entity other than a stockholder or creditor who potentially has a claim on the cash flows of a firm.

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. Working capital management. B. Cash management. C. Cost analysis. D. Capital budgeting. E. Capital structure.

E. Capital structure

The decision to issue additional shares of stock is an example of which one of the following? A. Working capital management. B. Net working capital decision. C. Capital budgeting. D. Controller's duties. E. Capital structure decision.

E. Capital structure decision.

Net working capital is defined as: A. Total liabilities minus shareholders' equity. B. Current liabilities minus shareholders' equity. C. Fixed assets minus long-term liabilities. D. Total assets minus total liabilities. E. Current assets minus current liabilities.

E. Current assets minus current liabilities

Corporate bylaws: A. Must be amended should a firm decide to increase the number of shares authorized. B. Cannot be amended once adopted. C. Define the name by which the firm will operate. D. Describe the intended life and purpose of the organization. E. Determine how a corporation regulates itself.

E. Determine how a corporation regulates itself.

Which of the following should a financial manager consider when analyzing a capital budgeting project? I. Project start-up costs. II. Timing of all projected cash flows. III. Dependability of future cash flows. IV. Dollar amount of each projected cash flow. A. I and IV only. B. I, II, and IV only. C. I, II, and III only. D. II, III, and IV only. E. I, II, III, and IV.

E. I, II, III, and IV

Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. Compensation based on the value of the stock. II. Stock option plans. III. Threat of a company takeover. IV. Threat of a proxy fight. A. I and II only. B. III and IV only. C. I, II, and III only. D. I, III, and IV only. E. I, II, III, and IV.

E. I, II, III, and IV.

Which of the following is (are) included in the market value of a firm but is (are) excluded from the firm's book value? I. Value of management skills. II. Value of a copyright. III. Value of the firm's reputation. IV. Value of employee's experience. A. I only. B. II only. C. III and IV only. D. I, II, and III only. E. I, III, and IV only.

E. I, III, and IV only.

Which of the following apply to a partnership that consists solely of general partners? I. Double taxation of partnership profits. II. Limited partnership life. III. Active involvement in the firm by all the partners. IV. Unlimited personal liability for all partnership debts. A. II only. B. I and II only. C. II and III only. D. I, II, and IV only. E. II, III, and IV only.

E. II, III, and IV only.

Which one of the following best illustrates that the management of a firm is adhering to the goal of financial management? A. Increase in the amount of the quarterly dividend. B. Decrease in the per unit production costs. C. Increase in the number of shares outstanding D. Decrease in the net working capital. E. Increase in the market value per share.

E. Increase in the market value per share.

Which one of the following actions by a financial manager is most apt to create an agency problem? A. Refusing to borrow money when doing so will create losses for the firm. B. Refusing to lower selling prices if doing so will reduce the net profits. C. Refusing to expand the company if doing so will lower the value of the equity. D. Agreeing to pay bonuses based on the market value of the company stock rather than on the firm's level of sales. E. Increasing current profits when doing so lowers the value of the firm's equity.

E. Increasing current profits when doing so lowers the value of the firm's equity.

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment? A. Amortized loan. B. Modified loan. C. Balloon loan. D. Pure discount loan. E. Interest-only loan.

E. Interest-only loan.

Which one of the following statements concerning a sole proprietorship is correct? A. The life of a sole proprietorship is potentially unlimited. B. A sole proprietor can generally raise large sums of capital quite easily. C. Transferring ownership of a sole proprietorship is easier than transferring ownership of a corporation. D. A sole proprietorship is taxed the same as a C corporation. E. It is easy to create a sole proprietorship.

E. It is easy to create a sole proprietorship.

The Sarbanes-Oxley Act of 2002 is a governmental response to: A. Decreasing corporate profits. B. The terrorists attacks on 9/11/2001. C. A weakening economy. D. Deregulation of the stock exchanges. E. Management greed and abuses.

E. Management greed and abuses.

The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate. A. Mean. B. Residual. C. Total. D. Average. E. Marginal.

E. Marginal.

Which one of the following best describes the primary advantage of being a limited partner instead of a general partner? A. Tax-free income. B. Active participation in the firm's activities. C. No potential financial loss. D. Greater control over the business affairs of the partnership. E. Maximum loss limited to the capital invested.

E. Maximum loss limited to the capital invested.

Which one of the following statements is correct given the following two sets of project cash flows? Assume a positive discount rate. Year -- Project A -- Project B Year 1 -- $4,000 -- $2,000 Year 2 -- 3,000 --- 3,000 Year 3 -- 0 -------- 2,000 Year 4 -- 3,000 --- 3,000 A. The cash flows for Project B are an annuity, but those of Project A are not. B. Both sets of cash flows have equal present values as of time zero. C. The present value at time zero of the final cash flow for Project A will be discounted using an exponent of three. D. Both projects have equal values at any point in time since they both pay the same amount in total. E. Project B is worth less today than Project A.

E. Project B is worth less today than Project A.

You are considering two projects with the following cash flows: Year -- Project X -- Project Y Year 1 -- $8,500 -- $7,000 Year 2 -- 8,000 --- 7,500 Year 3 -- 7,500 --- 8,000 Year 4 -- 7,000 --- 8,500 Which one of the following statements is true concerning these two projects given a positive discount rate? A. Both projects have the same future value at the end of Year 4. B. Both projects have the same value at Time 0. C. Both projects are ordinary annuities. D. Project Y has a higher present value than Project X. E. Project X has both a higher present and a higher future value than Project Y.

E. Project X has both a higher present and a higher future value than Project Y.

Which one of the following is a means by which shareholders can replace company management? A. Stock options. B. Promotion. C. Sarbanes-Oxley Act. D. Agency play. E. Proxy fight.

E. Proxy fight.

Shareholders' equity: A. Is referred to as a firm's financial leverage. B. Is equal to total assets plus total liabilities. C. Decreases whenever new shares of stock are issued. D. Includes patents, preferred stock, and common stock. E. Represents the residual value of a firm.

E. Represents the residual value of a firm.

Which one of the following will decrease the value of a firm's net working capital? A. Using cash to pay a supplier. B. Depreciating an asset. C. Collecting an accounts receivable. D. Purchasing inventory on credit. E. Selling inventory at a loss.

E. Selling inventory at a loss.

Which one of the following parties has ultimate control of a corporation? A. Chairman of the board. B. Board of directors. C. Chief executive officer. D. Chief operating office. E. Shareholders.

E. Shareholders.

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts? A. Sue will have less money when she retires than Neal. B. Neal will earn more interest on interest than Sue. C. Neal will earn more compound interest than Sue. D. If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings. E. Sue will have more money than Neal as long as they retire at the same time.

E. Sue will have more money than Neal as long as they retire at the same time.

Corporate dividends are: A. Tax-free income because they represent a repayment of the cost to purchase corporate shares. B. Not taxed as shareholders pay taxes on corporate income when it is earned. C. Tax-free since the corporation pays tax on that income when it is earned. D. Taxed at both the corporate and the personal level when the dividends are paid. E. Taxable as personal income when received by shareholders even though that income was taxed at the corporate level.

E. Taxable as personal income when received by shareholders even though that income was taxed at the corporate level.

Which one of the following statements related to taxes is correct? A. The marginal tax rate must be equal to or lower than the average tax rate for a firm. B. The tax for a firm is computed by multiplying the firm's current marginal tax rate times the taxable income. C. Additional income is taxed at a firm's average tax rate. D. Given the tax structure in 2014, the highest average corporate tax rate is 34 percent. E. The marginal tax rate for a firm can be either higher than or the same as the average tax rate.

E. The marginal tax rate for a firm can be either higher than or the same as the average tax rate.

Which one of these statements related to growing annuities and perpetuities is correct? A. You can compute the present value of a growing annuity but not a growing perpetuity. B. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. C. The future value of an annuity will decrease if the growth rate is increased. D. An increase in the rate of growth will decrease the present value of an annuity. E. The present value of a growing perpetuity will decrease if the discount rate is increased.

E. The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of the following correctly defines the upward chain of command in a typical corporate organizational structure? A. The vice president of finance reports to the chairman of the board. B. The chief executive officer reports to the president. C. The controller reports to the president. D. The treasurer reports to the vice president of finance. E. The chief operations officer reports to the vice president of production.

E. The treasurer reports to the vice president of finance.

Which one of the following statements correctly defines a time value of money relationship? A. Time and future values are inversely related, all else held constant. B. Interest rates and time are positively related, all else held constant. C. An increase in a positive discount rate increases the present value. D. An increase in time increases the future value given a zero rate of interest. E. Time and present value are inversely related, all else held constant.

E. Time and present value are inversely related, all else held constant.

The controller of a corporation generally reports directly to the: A. Board of directors. B. Chairman of the board. C. Chief executive officer. D. President. E. Vice president of finance.

E. Vice president of finance

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following? A. current yield B. effective rate C. compound rate D. simple rate E. discount rate

E. discount rate

You are considering five loan offers. The only significant difference between them is their interest rates. Given the following information, which offer should you accept? (Assume a 365-day year.) Offer A: 6.75 percent APR with daily compounding. Offer B: 6.8 percent APR with monthly compounding. Offer C: 7 percent APR with annual compounding. Offer D: 6.825 percent APR with quarterly compounding. Offer E: 6.85 percent APR with semiannual compounding.

Offer E

You just received an insurance settlement offer related to an accident you had three years ago. The offer provides you with three choices: Option A: $1,500 a month for 6 years Option B: $1,025 a month for 10 years Option C: $85,000 as a lump sum payment today You can earn 7.5 percent on your investments and do not care if you personally receive the funds or if they are paid to your heirs should you die within the settlement period. Which option should you select and why is that option justified?

Option A: It has the greatest value today.

As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why?

You should accept the $200,000 because the payments are only worth $195,413 to you today.

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

You should accept the second offer because it has the larger net present value.