Finance 3770 part 1
You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________.
$100,000
You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________. A) $100,000 B) $500,000 C) $250,000 D) This problem cannot be solved.
$100,000
Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp. has 4 million shares outstanding, and its managers and employees have stock options for 2 million shares, what is its diluted EPS in 2008?
$1.67
A home buyer buys a house for $2,155,000 . She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment? A) $11,342.47 B) $10,311.34 C) $12,373.61 D) $8249.07
$10,311.34
Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000 . If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense? A) $200,503 B) $150,377 C) $50,126 D) $100,251
$100,251
A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments? A) $109 B) $218 C) $164 D) $55
$109
If the current market rate of interest is 8%, then the future value (FV) of this stream of cash flows is closest to ________.
$11,699
) Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________.
$110,793
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________. A) $110,793 B) $55,397 C) $77,555 D) $132,952
$110,793
Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%?
$116,667
Ally wishes to leave a provision in her will that t$7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%?
$116,667 PV perpetuity = $7000/0.06 = $116,666.67
A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.6% per year?
$118.00 million
The missing cash flow from year 2 is closest to ________.
$12,000
You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to ________. A) $12,500 B) $12,000 C) $13,000 D) $10,000
$12,000
You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?
$12,151.67
You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years? A) $7291.00 B) $14,582.00 C) $17,012.34 D) $12,151.67
$12,151.67
If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________.
$12,635
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________. A) $14,000 B) $12,727 C) $15,273 D) $17,818
$12,727
A perpetuity has a PV of $20,000 . If the interest rate is 6%, how much will the perpetuity pay every year?
$1200
A perpetuity has a PV of $20,000. If the interest rate is 6%, how much will the perpetuity pay every year?
$1200 20,000 x 0.06 = $1200
A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year?
$13,240.79
A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year? A) $15,888.95 B) $18,537.11 C) $21,185.26 D) $13,240.79
$13,240.79
Country Abalone Cost Exchange Rate: $1 U.S. = Australia AUD 93,500 1.1 AUD Chile CLP 50,990,000 585 CLP Iceland ISK 5,400,000 61 ISK New Zealand NZD 104,000 1.3 NZD South Afri ZAR 640,00 7.8 ZAR Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make? A) $12,333 B) $14,333 C) $14,833 D) $13,333
$13,333
An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity at the end of that 53 years given that the discount rate is 9%?
$13,764.85
An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%?
$142.67
An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%?
$142.67 Calculate PV annuity using TVM keys input PMT = $10, number of years = 98, and interest rate = 7%; computing PV = $142.67
A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900 . After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.)
$145
A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900. After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% over year.)
$145 Calculate the cash flow as the perpetuity whose PV = $2900; hence, the annual heating cost = 2900 x 0.05 = $145
A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan? A) $1663.45 B) $1814.67 C) $1965.89 D) $1512.22
$1512.22
Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%, what is the maximum price he can pay for the car?
$16,598
8) You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years? A) $10,062.20 B) $20,124.40 C) $16,770.33 D) $23,478.46
$16,770.33
You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years?
$16,770.33
Refer to the balance sheet above. What is Luther's net working capital in 2006?
$16.8 million NWC = current assets - current liabilities = 156.4 - 139.6 = 16.8
What is the role of an auditor in financial statement analysis?
1) to ensure that the annual financial statements are prepared accurately 2) to ensure that the annual financial statements are according to GAAP 3) to verify that the info used in preparing the financial statements is reliable
What are the three key determinants of the value of most any asset? Explain.
1. Level (or size) of CF: more value preferred to less. 2. Timing of CF: the sooner cash is received the more value it has. 3. Risk of CF: less risky CFs are more valuable than riskier CFs (or assets)
What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time?
A) 37% B) 44% C) 43% D) 40% Answer: D Explanation: D) Calculate interest rate using TVM keys: input PV = 11,000 , N = 1, and FV = -15,400 ; interest rate = 40%.
What is the yield to maturity of a ten-year, $10,000 bond with a 5.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $9207.93 ? A) 7.79% B) 9.08% C) 6.49% D) 3.24%
Answer: C 6.49
An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%? A) $5776 B) $9626 C) $11,551 D) $13,476
B. Calculate PV annuity using TVM keys: input PMT = 1500, N = 10, I/YR = 9, FV=0 PV=> $9626.39
A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan?
C) $72,416 C) Calculate PV of the ordinary annuity of $1400 paid per month at a periodic interest rate of 6 /12 = 0.500000 % over 60 months = $72,416 .
D
Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity? A) $125,000.00 B) $200,000.00 C) $300,000.00 D) $250,000.00
A
Consider the following timeline detailing a stream of cash flows: year 0: $1000 year 1: $2000 year 2: $3000 year 3: $4000 year 4: ? If the current market rate of interest is 8%, then the future value (FV) of this stream of cash flows is closest to ________. A) $11,699 B) $5850 C) $14,039 D) $18,718
C
Consider the following timeline detailing a stream of cash flows: year 0: ? year 1: $100 year 2: $100 year 3: $200 year 4: $200 If the current market rate of interest is 8%, then the present value (PV) of this stream of cash flows is closest to ________. A) $242 B) $581 C) $484 D) $774
B
Consider the following timeline: year 0: -$150 year 1: $40 year 2: $80 year 3: $100 If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________. A) $167.35 B) -$98.7 C) $98.7 D) -$70
A
Consider the following timeline: year 0: ? year 1: $100 year 2: $200 year 3: $300 If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________. A) $502 B) $653 C) $600 D) $1004
Inflation is calculated as the rate of change in the __________
Consumer price index
2.35
Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?
D
Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio? A) 1.17 B) 0.94 C) 2.81 D) 2.35
C
Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000 . He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan? A) $244,965 B) $428,689 C) $306,206 D) $612,412
Which of the following is a major duty of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities A) I only B) I and II only C) I and III only D) all of the above
D
What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?
The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant.
"If equivalent investment opportunities trade simultaneously in different markets, then they must trade for the same price in both markets."
The Law of One Price
TRUE/FALSE & EXPLAIN: The goal of a financial manager is to maximize earnings.
FALSE. goal is to increase the value of the company = increase shareholder wealth. max. earning NOT the same.⍯ CFs/ are accounting constructs. Can't buy w/ earnings.
I have a friend who offered his girlfriend a choice of an engagement ring or $10,000 worth of Google stock. She took the ring and they're still happily married 6 years later. Assuming Google stock earned 12% per year on average over those 6 years, what would the value of the stock have been today?
FV= 10,000(1.12)6 = 19738.23
C
Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ? A) 4.3 years B) 6.3 years C) 5.3 years D) 7.3 years
false
Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firmʹs assets and the financing of those assets, and a prediction of the firmʹs future performance.
You are in the process of purchasing a new automobile that will cost you $25,000. The dealership is offering you either a $1,000 rebate (applied toward the purchase price) or 3.9% financing for 60 months (with payments made at the end of the month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 7.5% for 60 months. Should you take the $1,000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3.9% APR?
Financing through credit union: First we need the monthly interest rate = APR / m = 0.075 / 12 = 0.00625 or 0.625%. Now: PV=$24,000 (25,000 - 1,000 rebate) I = 0.625 FV = 0 N = 60 Compute PMT = $480.91. Financing through dealership: First we need the monthly interest rate = APR / m = 0.039 / 12 = 0.00325 or 0.325%. Now: PV = $25,000 (no rebate) I = 0.325 FV = 0 N = 60 Compute PMT = $459.29 Since 459.29 < 480.91, go with the dealership financing and forgo the rebate.
C
Refer to the income statement above. Lutherʹs return on equity (ROE) for the year ending December 31, 2005 is closest to ________. A) 247.12 % B) 98.85 % C) 123.56 % D) 148.27 %
1.89
Refer to the partial balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Lutherʹs market -to-book ratio?
If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets.ʺ A) The Net Present Value rule B) The Law of One Price C) The Valuation Principle D) The Time Value of Money
The Law of One Price
When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today.
TRUE
When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today. True or False
TRUE
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008?
The company has increased the risk that it will experience a cash shortfall in the near future.
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008?
The company is having difficulties selling its product.
Which of the following statements regarding annuities is FALSE?
The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments
Which of the following statements regarding annuities is FALSE?
The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments.
What is the general relationship between the absolute values of APR and EAR for an investment?
The APR of a project will either equal its EAR or be smaller than EAR. The APR will equal EAR with annual compounding for all other compounding intervals the APR will be smaller than EAR.
What is the general relationship between the absolute values of APR and EAR for an investment?
The APR of a project will either equal its EAR or be smaller than EAR. The APR will equal EAR with annual compounding for all other compounding intervals the APR will be smaller than EAR.
relationship between APR and EAR for and investment
The APR of a project will either equal its EAR or be smaller than EAR. The APR will equal EAR with annual compounding for all other compounding intervals the APR will be smaller than EAR.
What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?
The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant
Which of the following situations would result in lowering of interest rates by the banking authority of a country? A) The economy is slowing down. B) Inflation is rising rapidly. C) The level of investment is quite high. D) The rate of savings is quite low.
The economy is slowing down.
income statement
The effect on the _____________ will be in the form of a depreciation expense for the first year on the new processing plant.
A
The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to ________. A) 8.30% B) 9.13% C) 9.96% D) 10.79 %
C
The effective annual rate (EAR) for a savings account with a stated APR of 5% compounded daily is closest to ________. A) 5.64% B) 6.15% C) 5.13% D) 6.66%
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between these two years imply about the company?
The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009. 24 / 202 = 0.12; 16 / 212 = 0.08
What is the implied assumption about interest rates when the equation to calculate the present value (PV) of perpetuity is used?
The equation for computation of present value of perpetuity assumes that the interest rates are the same for every maturity on the yield curve.
What is the implied assumption about interest rates when the equation to calculate the present value (PV) of perpetuity is used?
The equation for computation of present value of perpetuity assumes that the interest rates are the same for every maturity on the yield curve.
United States
The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?
C
The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board? A) Germany B) France C) United States D) United Kingdom
a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals
Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability?
Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity?
$250,000.00
Refer to the income statement above. Luther's return on equity (ROE) for the year ending December 31, 2005 is closest to ________.
123.56% ROE = net income/shareholder's equity = 78.585/63.6 = 1.2356 or 123.56%
How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000 ?
4.25 years
C
A house costs $148,000 . It is to be paid off in exactly ten years, with monthly payments of $1737.54 . What is the APR of this loan? A) 6.25% B) 5.25% C) 7.25% D) 8.25%
C
A perpetuity has a PV of $20,000 . If the interest rate is 6%, how much will the perpetuity pay every year? A) $600 B) $960 C) $1200 D) $720
D
A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%? A) $1456 B) $19,867 C) $21,320 D) There is no solution to this problem.
Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value
A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?
Since net working capital is negative, the company will not have enough funds to meet its obligations
A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?
as an outflow under investment activities
A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?
A home buyer buys a house for $2,155,000 . She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment?
A) $11,342.47 B) $10,311.34 C) $12,373.61 D) $8249.07 Answer: B Explanation: B) Calculate bimonthly payment when PV of ordinary annuity = $1,724,000 , periodicinterest=7.70/24%, andnumberofperiods=240.
The effective annual rate (EAR) for a savings account with a stated APR of 5% compounded daily is closest to ________.
A) 5.64% B) 6.15% C) 5.13% D) 6.66% Answer: C Explanation: C) EAR=(1+APR/m)m-1=(1+0.05 /365)365-1=0.0513or5.13%
Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years? A) $128,729 B) $180,221 C) $231,712 D) $139,541
A) Calculate the PV with FV = $600,000, N = 20, and interest = 8%, which = $128,729.
external auditors
As the name implies, ____________ act as third party monitors to a firmʹs financial reporting process.
The yield curve is typically ________.
B) upward sloping
Why is the personal decision a financial manager makes at to wherever to buy or rent an apartment as a personal residence most like the pro decision that managers make as to whether her firm should try to acquire a stake in a fast growing new internet-based company?
Both decisions should be made based upon the tradeoff benefits and costs across time
Is there a need to distinguish between cash inflows and outflows on a timeline?
Cash inflows and outflows should have opposite signs to give meaningful results that can be used in decision making. One convention that is easier to follow is to assign a positive sign to all cash coming in, and a negative sign to all cash going out.
Which of the following best describes why the Valuation Principle is a key concept in making financial decisions? A) It shows how to assign monetary value to intangibles such as good health and well-being. B) It allows fixed assets and liquid assets to be valued correctly. C) It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth. D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
D
Which of the following yield curves would most likely predict a downturn in the economy?
D
A dollar today and a dollar in one year may be considered to be equivalent.
F
To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.
False
principal guiding factor for the financial manager of a firm
Maximizing stockholder wealth is the paramount guiding factor for a firmʹs financial manager. IGNORE THIS
On the (NYSE/NASDAQ), stocks can and do have multiple makers who compete with each other.
NASDAQ
B
Using the above information, how much would you pay for a share of BHP Billiton stock? A) $41.91 B) $41.93 C) $41.65 D) $41.59
A
What is the real interest rate given a nominal rate of 8.9% and an inflation rate of 1.9%? A) 6.9% B) 8.2% C) 9.6% D) 11.0%
D
Which of the following yield curves would most likely predict a downturn in the economy?
What is a competitive market?
a market which is good can be bought and sold at the same price
7. If the discount (or interest) rate is positive, the present value of an expected series of payments will always exceed the future value of the same series. a. True b. False
b. False
Suppose you invested $60 in the Ishares Dividend Stock Fund (DVY) a month ago. It paid a dividend of $0.63 today and then you sold it for $65. What was your return on the investment? a. 6.57% b. 7.51% c. 9.38% d. 10.32%
c. 9.38% $(65 + 0.63) - 60 = 5.63; 5.63 / 60 = 9.38%
The yield curve is typically
upward sloping
growing perpetuity
A __________ is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
perpetuity
A __________ is a stream of equal cash flows that occur at regular intervals and lasts forever.
How can we convert the value of money from one point in time to another?
using the current interest rate
Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ?
5.3 years
A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan? A) $1448.36 B) $1580.03 C) $1316.69 D) $1711.70
$1316.69
Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industries' retained earnings for 2008?
$2.2 million $3.2 - $1 = $2.2 million
If the current market rate of interest is 8%, then the present value (PV) of this stream of cash flows is closest to ________.
$484
Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and ad additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%?
3189.80
Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ? A) 4.3 years B) 6.3 years C) 5.3 years D) 7.3 years
5.3 years
A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?
A) $19,433 A) The first step is to calculate the monthly payment using a present value (PV) of $44,000 monthly interest rate of 6.90/12% = 0.575000 %, and 60 periods, which = $869.18 ; the second step is to use that monthly payment to calculate the present value (PV) of 24 months remaining payment keeping the interest rate unchanged.
A 10% APR with quarterly compounding is equivalent to an EAR of ________.
A) 10.00% B) 10.47% C) 10.38% D) 9.81% Answer: C Explanation: C) EAR=(1+0.10/4)4-1=10.38%
What is the real interest rate given a nominal rate of 8.9% and an inflation rate of 1.9%?
A) 6.9% A) (0.089 ) / (1+ 0.019 ) - 1 = 0.06869 ;real rate = 6.869%
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firmʹs borrowings is closest to ________.
A) 9.00% B) 7.45% C) 11.17% D) 9.31% Answer: D D) EAR = (1 + APR / m)m - 1 = (1 + 0.0900 /4)4 - 1 = 0.09308 or 9.31 %
In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe?
A) Long-term interest rates will tend to be higher than short-term interest rates. B) Long-term interest rates will be about the same as short-term interest rates. C) Both long- and short-term interest rates would be expected to fall sharply. D) No relative change in short and long term interest rates could be predicted. Answer: A
A(n) 12% APR with monthly compounding is closest to ________.
A) an EAR of 10.14 % B) an EAR of 15.22 % C) an EAR of 12.68 % D) an EAR of 25.36 % Answer: C
Which of the following statements regarding the law of one price is INCORRECT?
An important property of the law of one price is that it holds even in markets where arbitrage is possible
What rating must Luther receive on these bonds if they want the bonds to be issued at par? A) A B) B C) BBB D) AA
Answer: A
A five-year bond with a $1,000 face value has a yield to maturity is 5.0% and itʹs coupon rate is 6.0% paid annually. The dirty price of this bond exactly 6 months after its second coupon payment is closest to ________. A) $1087.23 B) $1147.23 C) $1027.23 D) $1057.23
Answer: D $1057.23
The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a BBB rating is closest to ________. A) 112.68 B) 131.46 C) 75.12 D) 93.90
Answer: D 93.90
Refer to the partial balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Lutherʹs market -to-book ratio?
Answer: Market-to-book = Market value of equity / Book value of equity Market-to-book = 8 million × $15 / $63.6 = 1.89
Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industriesʹ retained earnings for 2008?
B) $3.2 - $1 = $2.2 million
Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.
B) $53,635 N = 216 PMT = $100 I = 9/12 PV = 0 Compute FV = $53,635.167
T/F: The real interest rate is the rate of growth of one's purchasing power due to money invested
FALSE
T/F: The term"opportunity" in opportunity cost of capital comes from the fat that any worthwhile opportunity for investment will have a cost: the risk to the capital invested
FALSE
T/F: To calculate a cash flows present value (PV) you must compound it
FALSE
T/F: To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefits is received.
FALSE
Cash flows from an annuity occur every year in the future.
False
D
Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000 . If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense? A) $200,503 B) $150,377 C) $50,126 D) $100,251
Which of the following statements is FALSE?
Fundamentally, interest rates are determined by the Federal reserve
Columbia recently announced a $400 million gift from alumnus John Kluge to fund scholarships. If Columbia's endowment interest rate is 7% and it wants the scholarships to keep up with 4% expected inflation, what amount could it disburse in scholarships next year?
Growing perpetuity. PV=$400m g=4% r=7% $400m=CF1/.07-.04= $12m
B
If $432 invested today yields $450 in a yearʹs time, what is the discount factor? A) 0.10 B) 0.96 C) 1.96 D) 1.92
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? Investment X Year 1 = 5,000 Year 2 = 7,000 Year 3 = 9,000 Year 4 = 11,000 Investment Y Year 1 = 11,000 Year 2 = 9,000 Year 3 = 7,000 Year 4 = 5,000
Investment Y has a higher present value.
A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company?
Investors believe the company's assets are not likely to be profitable since its market value is worth less than its book value.
Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?
It includes cash inflows from services rendered.
true
Price-earnings ratios tend to be high for fast-growing firms.
D
Refer to the balance sheet above. Lutherʹs current ratio for 2006 is closest to ________. A) 1.67 B) 2.22 C) 0.56 D) 1.11
The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero. True or False
TRUE
The one-year discount factor is the discount at which we can purchase money in the future, one year from now. t/f
TRUE
The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.
TRUE
The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted. True or False
TRUE
D
The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation? A) The State Bank would experience a surge in demand for loans. B) The Colonial Bank would experience a surge in demand for deposits. C) The State Bank would experience a fall in demand for deposits. D) The Colonial Bank would experience a surge in demand for loans.
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholders' equity between 2007 and 2008?
The company's net income in 2008 was negative.
How do the growth perpetuity results differ with negative and positive growths of similar magnitude assuming everything else remains unchanged?
The denominator in the formula for growth perpetuity plays in important role on the results for negative and positive growths of similar magnitude. A positive growth results in a smaller denominator thereby increasing the present value (PV). Contrarily, a negative growth results in a larger denominator giving a smaller present value (PV).
Which of the following best describes the valuation principle?
The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. when the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm
After examining the yield curve, what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?
This is an inverted yield curve, which implies that interest rates should be falling in the future. An inverted yield curve is often interpreted as a negative forecast for economic growth. Since each of the last six recessions in the United States were preceded by a period with an inverted yield curve it could be a leading indicator of a future recession.
false
Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements
Which of the following statements regarding arbitrage and securities prices is INCORRECT?
When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds
Advanced Micro Devices (NYSE: AMD) is currently trading at $20.75 on the NYSE. Advanced Micro Devices is also listed on NASDAQ. Assume it is currently trading on NASDAQ at $20.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 1000 shares?
Yes, buy 1,000 shares × 20.50 ($20,500) and sell 1,000 shares × 20.75 ($20,750) = $250.00.
D
You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store? A) $445 B) $545 C) $645 D) $345
A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?
a patent for a drug held by the company
If the exchange rates, after fees, in tokyo are 1,000=6=$9 and the exchange rates in Paris are 1=1.5=171, which of the following is most likely to occur?
a surge in conversion of euros to yen in paris
Cash is a ________. A) long-term asset B) current asset C) current liability D) long-term liability
b
t/f A firm's statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash in a given time period.
true
t/f In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.
true
WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors? A) by decreasing depreciation B) by reducing capital expenditures C) by raising its reported earnings D) by boosting its cash flows
c
t/f Price-earnings ratios tend to be high for fast-growing firms.
true
Accounts payable is a ________.
current liability
Accounts payable is a ________. A. long-term liability B. current asset C. long-term asset D. current liability
current liability
t/f Stockholders' equity is the difference between a firm's assets and a firms liabilities, as shown on the balance sheet.
true
Which of the following is NOT considered to be an operating expense on the income statement?
corporate taxes
For most financial managers, the correct and fundamental goal of financial management is to: a. Maximize sales. b. Maintain steady earnings growth. c. Avoid financial distress. d. Maximize the market value of the existing stock. e. Maximize profits. f. Maximize market share.
d. maximize the market value of the existing stock
A 30-year mortgage loan is a ________.
long-term liability
A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?
revenue received for the delivery of items that have not yet been delivered
E
what is the primary goal of a corporation? A. minimize costs B. minimize inventory C. maximize sales D. maximize profits E. maximize share price (maximize the wealth of the shareholders)
the nominal value and the time stamp
what two pieces of information does every cash flow contain?
Consider the above statement of cash flows. What were AOS Industriesʹ major means of raising money in 2008? A) from investment activities B) by sale of stock C) from its operations D) by issuing debt
D
True or False: Partnerships are the most common type of business firm in the world.
False
Why is it usually necessary to use the time value of money when performing a cost benefit analysis?
In most invest meant projects, costs are incurred up front, but benefits are received in the future
he Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market. T/F
TRUE
Which of the following yield curves would most likely predict a downturn in the economy?
test bank of 190 Answer:D
A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firm's management discussion and analysis (MD&A)?
that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages
true
true or false: In general, if an action increases a firmʹs value by providing benefits with a value greater than any costs involved, then that action is good for the firmʹs investors.
The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.
True
Whenever a good trades in a competitive market, the price determines the value of the good.
True
B
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________. A) $22,000 B) $20,000 C) $24,000 D) $28,000
B
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________. A) $14,000 B) $12,727 C) $15,273 D) $17,818
In general, if an action increases a firmʹs value by providing benefits with a value greater than any costs involved, then that action is good for the firmʹs investors.
True
10-K
U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
A
What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly? A) $353,818 B) $389,200 C) $424,581 D) $459,963
The buyer of a stock pays the ask price when he buys the stock.
What is the term for the applicable price that I will pay, if I have to buy a stock? IGNORE
As the name implies, external auditors act as third party monitors to a firmʹs financial reporting process
What role do external auditors play in a firmʹs financial reporting process?
All firms quoted on a U.S. exchange are required to use GAAP in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms
What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?
A
Which of the following is NOT an operating expense? A) interest expense B) depreciation and amortization C) selling, general, and administrative expenses D) research and development
corporate taxes
Which of the following is NOT considered to be an operating expense on the income statement?
Which of the following about perpetuities is true?
all the above
Which is not a financial statement that every public company is required to produce? a) income statement b) statement of sources and uses of cash c) balance sheet d) statement of stockholders' equity
b
Which ratio would you use to measure the financial health of a firm by assessing that firm's leverage?
debt-equity or equity multiplier ratio
Assuming that Lutherʹs bonds receive a AA rating, the price of the bonds will be closest to ________. A) $1129 B) $941 C) $1318 D) $753
Answer: B $941
Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon?
Most investment opportunities bear far greater risk than those offered by U.S. treasury securities
The fundamental goal of financial mgmt should be: a. maximize sales b. maximize the market value of the existing stock c. avoid financial distress d. maintain steady earnings growth e. maximize profits f. none of these
b. maximize the market value of the existing stock
What are the four financial statements that all public companies must produce?
balance sheet 2. income statement 3. statement of cash flows 4. statement of stockholders' equity
Cash is a ________.
current asset
A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%? A) $2695 B) $4312 C) $5390 D) $3234
$5390
In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer? A) $744,000 B) $1,240,000 C) $992,000 D) $1,488,000
$1,240,000
Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________.
$135.9 million EBITDA = EBIT + depreciation and amortization = 132.5+3.4 = 135.9 million
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________. A) $22,000 B) $20,000 C) $24,000 D) $28,000
$20,000
If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________.
$20,227
Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.
$37,086.78
The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the company's net working capital?
$45 million Net working capital = total current assets - total current liabilities, $89 - $44 = 45 million , as all quantities are expressed in millions of dollars on the table.
The above diagram shows a balance sheet for a certain company. If the company pays back all of its accounts payable today using cash, what will its net working capital be?
$45 million Both cash and accounts payable would fall by the same amount, leaving net working capital the same:
What is the present value (PV) of an investment that will pay $500 in one yearʹs time, and $500 every year after that, when the interest rate is 10%?
$5000
What is the present value (PV) of an investment that will pay $500 in one yearʹs time, and $500 every year after that, when the interest rate is 10%? A) $2500 B) $4000 C) $3000 D) $5000
$5000
What is the present value (PV) of an investment that will pay $500 in one year's time, and $500 every year after that, when the interest rate is 10%?
$5000 PV Perpetuity = 500/0.1 = 5000
You expect KT industries (KTI) will have earnings per share of $4 this year and expect that they will pay out $1.75 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 13% and their equity cost of capital is 10%. The value of a share of KTI's stock today is closest to ________.
$65.12
You are interested in purchasing a new automobile that costs $33,000 . The dealership offers you a special financing rate of 9% APR (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealerʹs financing deal, then your monthly car payments would be closest to ________.
$685
An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year?
$79,228
What are the 4 financial statements that all public companies must produce?
1) balance sheet 2) income statement 3) statement of cash flows 4) statement of stockholders' equity
T/F: Costs and benefits must be put in common terms if they are to be compared.
TRUE
four financial statements that all public companies must produce
1. balance sheet 2. income statement 3. statement of cash flows 4. statement of stockholdersʹ equity
T/F: Dollar amounts received at different points in time cannot be compared in absolute terms
TRUE
What is the role of an auditor in financial statement analysis?
1. to ensure that the annual financial statements are prepared accurately 2. to ensure that the annual financial statements are prepared according to Generally Accepted Accounting Principles (GAAP) 3. to verify that the information used in preparing the annual financial statements is reliable
role of an auditor in financial statement analysis
1. to ensure that the annual financial statements are prepared accurately 2. to ensure that the annual financial statements are prepared according to Generally Accepted Accounting Principles (GAAP) 3. to verify that the information used in preparing the annual financial statements is reliable
What is the role of an auditor in financial statement analysis?
1. to ensure that the annual financial statements are prepared accurately 2. to ensure that the annual financial statements are prepared according to Generally Accepted Accounting Principles (GAAP) 3. to verify that the information used in preparing the annual financial statements is reliable
Refer to the balance sheet above. Luther's current ratio for 2006 is closest to ________.
1.11 current ratio = current assets/current liabilities = 160.3/144.1 = 1.11
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then Luther's market-to-book ratio would be closest to ________.
1.29 MTB = Market Value of Equity / Book Value of Equity = (10.2 million × 16) / 126.7 = 163.2 / 126.7 = 1.288
A pottery factory purchases a continuous belt conveyor kiln for $68,000 . A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22 , over what term is this loan being paid? A) 8 years B) 9 years C) 10 years D) 11 years
10 years
Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio?
2.35 ($1400 - $218) / $504 = 2.35
You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer. You learn that the Dial-o-matic sells for $29.95. Ronco also includes a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95 in this deal. Assuming that there is a competitive market for Ronco items, at what price must Ronco offer this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?
29.95 + 10.95 + 7.95 = $48.85
A friend wants to borrow $100 from you. She promises to pay you back $115 in two years. What annual interest rate is she offering you?
2=N, -100=PV, 0=PMT, 115=FV, compute I, get 7.238%
D
3) Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________. A) private equity funds B) hedge funds C) venture capital funds D) mutual funds
What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time?
40%
A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60% APR. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage? A) 5.5 years B) 8.6 years C) 10.2 years D) 12.8 years
5.5 years
Elinore is asked to invest $5100 in a friendʹs business with the promise that the friend will repay $5610 in one year. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case? A) 7% B) 8% C) 9% D) 10%
8%
if money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment? A) 7 years B) 8 years C) 9 years D) 11 years
9 years
inverted yield curve
After examining the yield curve, what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy? IGNORE THIS
It would be an addition to property, plant and equipment so it would be an investing activity
Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?
C
Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%? A) $58,334 B) $93,334 C) $116,667 D) $70,000
annuity
An _______ is a stream of N equal cash flows paid at regular intervals.
What is the coupon payment of a 25-year $1000 bond with a 4.5% coupon rate with quarterly payments? A) $3.75 B) $11.25 C) $22.50 D) $45.00
Answer: B 11.25
Shown above is information from FINRA regarding one of Caterpillar Financial Servicesʹ bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid annually? A) $1.38 B) $3.95 C) $4.00 D) $4.36
Answer: C $4.00
A limited liability company is essentially ________. A) a limited partnership without limited partners B) a limited partnership without a general partner C) just another name for a limited partnership D) just another name for a corporation
B
Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet? A) It subtracts all expenses and costs related to a firmʹs operating activities. B) It adds all non-cash entries related to a firmʹs operating activities. C) It adds the cash that flows from investors to a firm. D) It removes the cash used for investment purposes.
B>
Which of the following is NOT a role of financial institutions? A) moving funds from savers to borrowers B) spreading out risk-bearing C) printing money for borrowers D) moving funds though time
C
PV of a growing perpetuity
C/ (r - g)
PV of a perpetuity
C/r
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholdersʹ equity between 2007 and 2008? A) The company is very profitable because it is obviously collecting receivables faster. B) The company is selling its property, plant and equipment, which may result in a long-term deficiency in production capacity. C) The companyʹs net income in 2008 was negative. D) No conclusions can be drawn regarding stockholdersʹ equity without additional information.
C>
If $17,000 is invested at 10% per year, in approximately how many years will the investment double? A) 7.3 years B) 8.4 years C) 11.0 years D) 14.6 years
Calculate the N with FV = $34,000, PV = $17,000, and interest = 10%, which = 7.3 years
yes
Can we apply the growing perpetuity equation for negative growth as well?
The above diagram shows a balance sheet for a certain company. If the company buys new property, plant and equipment today using its entire cash balance, what will its net working capital be?
Current assets would fall by $54, with no change in current liabilities. (20+16) - 48 = -12
When the costs of an investment come before that investmentʹs benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors?
D) It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).
A
Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make? A) $18,653.76 B) $22,384.51 C) $26,115.26 D) $29,846.02
For a free-risk investment, the opportunity cost of capital will generally be more than the interest rate offered by U.S. Treasury securities with a similar term.
FALSE
In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline. t/f
FALSE
When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high.
FALSE
B
Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend payment of $25,000,000 paid proportionally to its shareholders, how much of this amount would Helen receive, disregarding tax? A) $3,060,000 B) $2,550,000 C) $3,570,000 D) $2,040,000
A
If $17,000 is invested at 10% per year, in approximately how many years will the investment double? A) 7.3 years B) 8.4 years C) 11.0 years D) 14.6 years
B
If $8000 is invested in a certain business at the start of the year, the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year? A) $158.13 B) $316.25 C) $379.50 D) $506.00
A
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008? A) The company is having difficulties selling its product. B) The company has reduced its debt. C) The company has added a major new asset in terms of plant and equipment. D) The company has experienced a significant rise in its market value.
false
In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.
Which of the following statements regarding the cost-benefit analysis is NOT correct?
In the absence of competitive markets, we can use one-sided prices to determine exact cash values
What care, if any, should be taken when cash flows occur in periodicities that are shorter than a year (e.g., quarterly or monthly cash flows)?
In the real world, cash flows can occur with any periodicity but interest rates are generally quoted in annual terms. As such, when cash flows occur at a shorter than annual time interval the interest rates have to be modified to correspond to the cash flow interval. One way to do that is to match the compounding period equal to cash flow interval.
C
Inflation is calculated as the rate of change in the _______. A) unemployment rate B) Gross Domestic Product C) Consumer Price Index D) risk-free rate
Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows?
It would be an addition to property, plant and equipment so it would be an investing activity.
According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?
Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company
Suppose that you borrow $8,000 to buy a car using a loan that calls for monthly payments over 4 years at an APR of 10% compounded monthly. What will your monthly payments be? After 1 year how much principal will you still owe on this loan?
N=4*12=48, I=10/12=.8333, PV=8000, FV=0, PMT=? -> -202.90 After 1 year: N=48-12=36, I=10/12=.8333, PMT=-202.90, FV=0, PV=? $6,288.14
The (NYSE/NASDAQ) is an example of an over-the-counter market, a collection of dealers and market makers connected by computer networks and telephones.
NASDAQ
Many companies start on the (NYSE/NASDAQ) and then move to the (NYSE/NASDAQ) as they grow.
NASDAQ NYSE
What is the net present value (NPV) of an investment that costs $2,500 and pays $1,000 at the end of one, three, and five years?
NPV = -$2,500 + $1,000 / (1.05)1 + $1,000 / (1.046)3 + $1,000 / (1.045)5 = $128.62
Why are arbitrage opportunities short-lived?
Once investors take advantage of the opportunity, prices will respond so that the buying and selling price becomes equal
A
Refer to the balance sheet above. Lutherʹs quick ratio for 2006 is closest to ________. A) 0.87 B) 1.75 C) 0.88 D) 1.31
B
Refer to the balance sheet above. The change in Lutherʹs quick ratio from 2005 to 2006 is closest to ________. A) a decrease of 0.01 B) an increase of 0.01 C) a decrease of 0.02 D) an increase of 0.02
Why must care be taken when comparing a firm's share price to its operating income?
Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
D
Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%? A) -$3189.80 B) -$5907.57 C) 5907.57 D) $3189.80
D
Suppose the term structure of interest rates is shown below: Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31 , then the four year risk-free interest rate is closest to ________. A) 4.01% B) 3.51% C) 5.01% D) 4.51%
Which of the following statements regarding the income statement is INCORRECT?
The income statement shows the cash flows and expenses at a given point in time.
B
The above data is for four regional trucking firms. Based on price-earnings ratios, which firmʹs stock is the best value? A) Firm A B) Firm B C) Firm C D) Firm D
Which of the following is true?
The apr can never exceed the EAR
If the above balance sheet is for a retail company, how has the company's leverage changed between 2007 and 2008?
The company has experienced a significant increase in its leverage.
What will be the effect on the income statement if a firm buys a new processing plant through a new loan?
The effect on the income statement will be in the form of a depreciation expense for the first year on the new processing plant.
C
The effective annual rate (EAR) for a loan with a stated APR of 11% compounded quarterly is closest to ________. A) 12.61 % B) 13.75 % C) 11.46% D) 14.90 %
How can we cross check the statement of cash flows?
The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets.
cross checking statement of cash flows
The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets. this is known as ___________________ statement of cash flows.
Explain the role played by some of the other management disciplines in financial decision making.
The role played by some of the other management disciplines include: Economics: to determine the effect of a price reduction or increase on net income. Marketing: to determine the increase in revenues resulting from an advertising campaign. Strategy: to determine a competitorʹs response to a price decrease or increase.
Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis?
They can be used to convert different services and commodities into equivalent cash values which can be compared
B
Which of the following accounts has the highest EAR? A) one that pays 5.4% every six months B) one that pays 1.0% per month C) one that pays 9.6% per year D) one that pays 2.4% every three months
B
Which of the following is/are TRUE? I. The EAR can never exceed the APR. II. The APR can never exceed the EAR. III. The APR and EAR can never be equal. A) Only I is true. B) Only II is true. C) Only II & III are true. D) Only I & III are true.
C
Which of the following organization forms has the most revenue? A) S corporation B) limited partnership C) C corporation D) limited liability company
C
Which of the following statements is INCORRECT based on the time value of money? A) In general, money today is worth more than money in one year. B) We define the risk-free interest rate (rf) for a given period as the interest rate at which money can be borrowed or lent without risk over that period. C) We refer to (1 - rf) as the interest rate factor for risk-free cash flows. D) For most financial decisions, costs and benefits occur at different points in time.
A
Which of the following would be more typically the responsibility of a controller rather than a treasurer? A) overseeing accounting and tax functions B) capital budgeting C) managing credit D) making investment decisions
Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
Why must care be taken when comparing a firmʹs share price to its operating income?
Which of the following firms would be expected to have a high ROE?
a grocery store chain that has very high turnover, selling many multiples of its assets per year
Amazon.com stock prices gave a realized return of 5%, -5%, 11%, and -11% over four successive quarters. What is the annual realized return for Amazon.com for the year? a. -1.46% b. 2.91% c. 0.00% d. 1.46%
a. -1.46% (1 + 0.05) x (1 - 0.05) x (1 + 0.11) x (1 - 0.11) = 0.9854; 0.9854 - 1 = -1.46%
10. A growing perpetuity where the rate of growth is greater than the discount rate will have an infinitely large present value (PV). a. True b. False
a. True
Which of the following is NOT an operating expense? a. interest expense b. depreciation and amortization c. selling, general, and administrative expenses d. research and development
a. interest expense
operating expenses on the income statement
administrative expenses and overhead, salaries, depreciation and amortization
The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.
auditor
B
consider the following timeline detailing a stream of cash flows: year 0: ? year 1: $5000 year 2: $6000 year 3: $7000 year 4: $8000 If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________. A) $10,114 B) $20,227 C) $24,272 D) $32,363
D
consider the following timeline: year 0: $500 year 1: ? year 2: -$200 If the current market rate of interest is 7%, then the value as of year 1 is closest to ________. A) $0 B) $1000 C) $570 D) $68
The mixture of debt and equity used by the firm to finance its operations is called: a. working capital mgmt b. financial depreciation c. agency cost analysis d. capital budgeting e. capital structure f. none of these
e. capital structure
Six years ago, Mason invested $3,500 in an account paying annually compounded interest. No other investments or withdrawals have been made. Today the account is worth $7,000. What annual rate of return has Mason earned thus far? a. 2% b. 10% c. 36% d. 64.01% e. 100% f. None of these
f. Note that the investment has doubled in 6 years, so use the Rule of 72 for the quickest solution. Rate to double = 72/ # years = 72/6 = 12%, approximately. Or, use r = (FV/PV) 1/t - 1 , r = (7000/3500) 1/6 - 1 = 12.3%
Which of the following is NOT an operating expense?
interest expense
What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? A) inverted; higher B) normal; higher C) inverted; lower D) normal; lower
inverted; lower
A
investment A: rate of return: 6% compounding: yearly investment B: rate of return: 5.9% compounding: semiannually investment C: rate of return: 5.8% compounding: monthly investment D: rate of return: 5.7% compounding: weekly The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR? A) Investment A B) Investment B C) Investment C D) Investment D
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments?
investment Y has a higher present value.
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow? A) It will cause the present value to fall. B) It will cause the present value to rise. C) It will have no effect on the present value. D) The effect cannot be determined with the information provided.
it will cause the present value to fall
Given the above term structure of interest rates, which of the following is most likely in the future? Option I: Interest rates will fall. Option II: Economic growth will slow. Option III: Long-term rates will rise relative to short term rates.
option I only
Whenever a good trades in a competitive market, the ________ determines the value of the good
price
A (public/private) corporation has a limited number of owners and there is no organized market for its shares, making it hard to determine the market price of its shares at any point in time.
private
A (public/private) corporation has many owners and its shares trade on an organized market which provides liquidity for a company's shares and determines the price for those shares.
public
Which of the following is NOT a financial statement that every public company is required to produce?
statement of sources and uses of cash
Which of the following amounts would be included on the right side of a balance sheet?
the amount of deferred tax liability held by the company
Which of the following statements is FALSE about interest rates?
the annual percentage rate indicates the amount of interest including the effect of compounding
The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation? A) The State Bank would experience a surge in demand for loans. B) The Colonial Bank would experience a surge in demand for deposits. C) The State Bank would experience a fall in demand for deposits. D) The Colonial Bank would experience a surge in demand for loans.
the colonial bank would experience a surge in demand for loans
The state bank offers an interest rate of 5.5% on savings and 6% on loans, while the colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation?
the colonial bank would experience a surge in demand for loans
A u.s. based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the french open and the australian open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision?
the cost of the court side advertising at the tennis matches
Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate? A) There is a greater chance that inflation may fall in a longer time-frame. B) The penalties for closing out a long term loan early make them unattractive to many investors. C) Long-term loans typically have ongoing costs that accumulate over the life of the loan. D) The loan values are very sensitive to changes in market interest rates.
the loan values are very sensitive to changes in market interest rates
Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE?
the mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments
You are given two choices of investments, Investment A and investment B. Both investments have the same future cash flows. Investment A has a discount of 4% and investment B has a discount rate of 4% and investment B has a discount rate of 5%. which is true
the present value of cash flows in investment a is higher than the present value of cash flows in investment B
Which of the following is NOT one of the financial statements that must be produced by a public company?
the statement of activities
A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%? A) $1456 B) $19,867 C) $21,320 D) There is no solution to this problem.
there is no solution
The notes to the financial statements would LEAST likely be used for which of the following purposes?
to disclose the financial implications of any off-balance sheet transactions
What are the main types of decisions that financial managers make? Explain which one you think is more critical to firm value
what projects to invest in (capital budgeting), how to finance those investments (cap. structure), day-to-day cash mgmt (working capital/liquidity). Capital budgeting is the most important bc it determines what the firm does and what its cash flows will be.
interest expense
which of the following is NOT an operating expense?
An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made? A) No, because the investment will yield $82,840 less than putting the money in a bank. B) Yes, because the investment will yield $66,272 more than putting the money in a bank. C) Yes, because the investment will yield $74,556 more than putting the money in a bank. D) Yes, because the investment will yield $82,840 more than putting the money in a bank.
yes, because the investment will yield $82,840 more than putting the money in the bank
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%.
$1,445,531
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________. A) $722,766 B) $1,445,531 C) $1,011,872 D) $1,590,084
$1,445,531
What is the most common type of firms in the United States and the world? A) sole proprietorships B) partnerships C) limited partnerships D) corporations
A
Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for the year ending December 31, 2006 Luther's diluted earnings per share are closest to ________.
$1.03 Diluted EPS = Net income / (Shares outstanding + Options contracts outstanding + shares possible from convertible bonds outstanding) = 10.6/(10+0.3+0.0) = 1.03
Refer to the income statement above. For the year ending December 31, 2006 Luther's earnings per share is closest to ________.
$1.03 EPS = net income/shares outstanding = 10.6/10.3 = 1.03
Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________. A) $80,232 B) $160,463 C) $112,324 D) $176,509
$160,463
You are purchasing a new home and need to borrow $260,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.80% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 6.50% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $5200 to cover points you are paying the lender. Assuming you pay the points and borrow from the mortgage lender at 6.50%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________. A) $1844 B) $1676 C) $2011 D) $2347
$1676
If the current market rate of interest is 6%, then the future value (FV) of this stream of cash flows is closest to ________.
$1723
A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent?
$18,287
Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?
$18,653.76
Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make? A) $18,653.76 B) $22,384.51 C) $26,115.26 D) $29,846.02
$18,653.76
A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan? A) $19,433 B) $15,546 C) $23,319 D) $27,206
$19,433
Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest?
$200,000.00
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years? A) $18,111 B) $27,167 C) $31,695 D) $22,639
$22,639
Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pays interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four yearsʹ time? A) $176 B) $308 C) $220 D) $352
$220
You are purchasing a new home and need to borrow $380,000 from a mortgage lender. The mortgage lender quotes you a rate of 5.75% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 5.45% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $7600 to cover points you are paying the lender. Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________. A) $2439 B) $2661 C) $2218 D) $3105
$2218
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $240,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4800 (paid at the end of each month). Your firm can borrow at 7.80% APR with quarterly compounding. The present value (PV) of the lease payments for the delivery truck is closest to ________. A) $190,506 B) $238,132 C) $285,758 D) $333,385
$238,132
A small foundry agrees to pay $220,000 two years from now to a supplier for a given amount of coking coal. The foundry plans to deposit a fixed amount in a bank account every three months, starting three months from now, so that at the end of two years the account holds $220,000 . If the account pays 12.5% APR compounded monthly, how much must be deposited every three months? A) $24,602 B) $27,063 C) $29,523 D) $31,983
$24,602
Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and 75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value (PV), how much will Joe receive for selling the family business?
$254,641 PV = 100,000 + $50,000 / (1.06)^1 + 50,000 / (1.06)^2 + 75,000 / (1.06)^3 = 254,641
An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity at the end of those 22 years, given that the discount rate is 8%?
$2606.47
Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?
$2839 ; $184,565
Refer to the balance sheet above. Luther's quick ratio for 2006 is closest to ________.
0.87 quick ratio = (current assets - inventory)/current liabilities = (171.3-46.1)/143.2 = 0.87
If the interest rate is 9%, the one-year discount factor is equal to ________. A) 0.090 B) 1.090 C) 0.917 D) 0.981
0.917
A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?
$3.8 billion Market cap = $22.15 × 118 = $2.614 billion; book value of equity = 2.614/4.2 = 0.622 billion; debt = 0.622 * 3.2 = 1.991; enterprise value = 2.614 + 1.991 - 0.800 = 3.805 billion
The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________. A) $3010 B) $2408 C) $3612
$3010
Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000 . He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan? A) $244,965 B) $428,689 C) $306,206 D) $612,412
$306,206
A truck costing $111,000 is paid off in monthly installments over four years with 8.10% APR. After three years the owner wishes to sell the truck. What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck? A) $24,956 B) $37,434 C) $31,195 D) $43,673
$31,195
If $8000 is invested in a certain business at the start of the year, the investor will receive $2400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year?
$316.25
Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%?
$3189.80
Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%? A) -$3189.80 B) -$5907.57 C) 5907.57 D) $3189.80
$3189.80
You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months) at 12% APR (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________.
$3193
Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770 . How much was the loan amount for this extension? A) $33,436 B) $40,123 C) $46,810 D) $53,497
$33,436
In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?
$330,000 [($30 × 3.9%) - ($20 × 2.8%)] × 1,000,000 = $330,000
What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly? A) $353,818 B) $389,200 C) $424,581 D) $459,963
$353,818
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Luther's enterprise value?
$385.7 million Enterprise value = Market Value of Equity + Debt - Cash = (10.2 × $16) + $278.6 - $56.1 = $385.7
Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)? A) $314,366 B) $471,549 C) $392,957 D) $432,000
$392,957
If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________.
$40,799
Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.
$53,635
A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%?
$5390
A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%?
$5390 The first step is to calculate the PV perpetuity = $900/0.11 = $8181.82; the next step is to calculate its PV using TVM keys: input FV = $8181.82, number of years = 4, and interest rate = 11%; PV = 5389.6171
A business promises to pay the investor of $6000 today for a payment of $1500 in one year's time, $3000 in two years' time, and $3000 in three years' time. What is the present value of this business opportunity if the rate is 6% per year?
$603.94
A business promises to pay the investor of $6000 today for a payment of $1500 in one yearʹs time, $3000 in two yearsʹ time, and $3000 in three yearsʹ time. What is the present value of this business opportunity if the interest rate is 6% per year?
$603.94
A business promises to pay the investor of $6000 today for a payment of $1500 in one yearʹs time, $3000 in two yearsʹ time, and $3000 in three yearsʹ time. What is the present value of this business opportunity if the interest rate is 6% per year? A) $603.94 B) $301.97 C) $724.73 D) $966.30
$603.94
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%.
$61,303
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________. A) $61,303 B) $30,652 C) $42,912 D) $67,433
$61,303
A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is 11 %? A) $3,840,628.87 B) $5,376,880.42 C) $6,913,131.97 D) $7,681,257.74
$7,681,257.74
An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525 . How much cash will the investor have from the sale, once the mortgage is paid off? A) $57,216 B) $100,129 C) $71,521 D) $143,041
$71,521
A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten yearsʹ time. How much greater is the present value (PV) of this payment if the interest rate is 9% rather than 8%? A) $7178 B) $5742 C) $8613 D) $10,049
$7178
A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan? A) $57,933 B) $86,899 C) $72,416 D) $101,382
$72,416
An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year? A) $39,614 B) $63,382 C) $79,228 D) $95,074
$79,228
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in two yearsʹ time, what is the present value (PV) of that cash flow? A) $76,518 B) $114,777 C) $133,906 D) $95,647
$95,647
An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%?
$9626
An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%?
$9626 Calculate PV annuity using TVM keys: input PMT = $1500 , number of years = 10, and interest rate = 9%; PV = $9626.49 .
You are considering purchasing a new automobile with the upfront cost of $26,000 or leasing it from the dealer for a period of 48 months. The dealer offers you 2.80% APR financing for 48 months (with payments made at the end of the month). Assuming you finance the entire $26,000 through the dealer, your monthly payments will be closest to ________. A) $459 B) $688 C) $573 D) $802
%573
Define the following terms: (a) perpetuity (b) annuity (c) growing perpetuity (d) growing annuity
(a) A perpetuity is a stream of equal cash flows that occur at regular intervals and lasts forever. (b) An annuity is a stream of N equal cash flows paid at regular intervals. (c) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever. (d) A growing annuity is a stream of N growing cash flows, paid at regular intervals.
A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lenderʹs perspective?
*LOOK AT TABLE* C
A tenant wants to lease a building for $50,000 per year. She signs a five-year rental agreement that states that she will pay $25,000 every six months for the next five years. Which of the following is the timeline for her rental payments, assuming she makes the first payment immediately?
*LOOK AT TABLE* D
Explain the determinants of the required rate of return (interest rate)
- Real (risk free) rate of interest (aka basic time value of money): the underlying compensation you demand even if you know you'll get your money back. -Expected inflation: to account for the expectation that prices will rise before you get your money -Risk: the riskier the loan/investment, the higher return you'll require
On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B? A) -$1.33 B) -$0.67 C) $1.06 D) $1.60
-$1.33
The net present value (NPV) of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________. A) $91.37 B) $137.05 C) $114.21 D) -$114.21
-114.21
In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009? A) -2.6% B) 2.6% C) -2.8% D) 2.8%
-2.6%
A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month? A) 0.56% B) 5.63% C) 0.51% D) 0.61% E) 0.66%
.56%
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $300,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to ________. A) 0.5298 % B) 0.7947 % C) 0.6623 % D) 0.6667 %
.6623%
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in 2008?
0.50 EPS = Net income / Shares outstanding = $10 million / 20 million shares = $0.50 per share
21. Austin Danger Powers was cryogenically frozen for 30 years. Assume that he had savings totaling $50,000 when he was frozen. If his money was invested at 10% for the 30 years he was frozen (from 1967 to 1997), how much of an annual cash flow (an annuity) could he fund starting in 1998 and lasting for 25 years? Assume a return of 10% per year throughout this problem.
1. find FV of 50k FV=PV(1+r)^n = 50,000(1.10)^30=872,470.11 N=30, I=10, PV=50000, PMT=0, FV=> 872,470.11 2. N=25, I=10, PV=872,470.11, FV=0, PMT > 96,118.35
GenCorp. has a total debt of $140 million and stockholders' equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorp's market debt-equity ratio?
1.35 140 / ($4.00 × 26) = 1.35
Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0. Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7. How much asset turnover should manufacturer B have to match manufacturer A's ROE?
1.59% ROEA = 2.2 × 1.7 × 5.0 = 18.7; 18.7 / (2.5 × 4.7) = 1.59
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.
1.72 D / E = Total debt / Total equity Total Debt = Notes payable (10.5) + current maturities of longterm debt ((39.6) + long term debt (231.3) = 281.4 million total equity = 10.2 * 16 = 163.2, so D/E = 281.4/163.2 = 1.72
A
10) Which of the following situations would result in lowering of interest rates by the banking authority of a country? A) The economy is slowing down. B) Inflation is rising rapidly. C) The level of investment is quite high. D) The rate of savings is quite low.
U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form?
10-K
Refer to the income statement above. Luther's net profit margin for the year ending December 31, 2005 is closest to ________.
11.61% net profit margin = net income / sales = 66.105 /569.6 = 0.1161 = 11.61%
Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt? A) 112 months B) 113 months C) 120 months D) 122 months
122 months
Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________.
160,463
Refer to the income statement above. Luther's return on assets (ROA) for the year ending December 31, 2005 is closest to ________.
17.43% ROA = Net income / Total assets This is a little tricky in that Total Assets are not given in the problem. The student must remember the basic balance sheet equation A = L + SE. Total Liabilities and Shareholders' Equity is given and this is the same as Total Assets. So, ROA = 67.405/386.7 = 0.1743 or 17.43%
D
19) Which of the following statements is FALSE? A) The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan. B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. D) Fundamentally, interest rates are determined by the Federal Reserve.
Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________.
2.25 D / E = Total debt / Total equity Total debt = notes payable (10.7) + current maturities of long-term debt (38.7) + long-term debt (234.4) = 283.8 million total equity = 125.9, so D/E = 283.8/125.9 = 2.25
Refer to the income statement above. Luther's operating margin for the year ending December 31, 2005 is closest to ________.
20.36% Operating margin = Operating income / Sales = $114.6 / $562.8 = 0.2036 or 20.36%
A
22) You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow? A) It will cause the present value to fall. B) It will cause the present value to rise. C) It will have no effect on the present value. D) The effect cannot be determined with the information provided.
B
27) Whenever a good trades in a competitive market, the ________ determines the value of the good. A) supply B) price C) demand D) cost
B
3) The notes to the financial statements would LEAST likely be used for which of the following purposes? A) to provide information regarding the context in which these financial numbers were generated B) to disclose the financial implications of any off-balance sheet transactions C) to show how the value of assets listed in the financial statements were arrived at D) to explain the method of accounting that was used in the preparation of the financial statements
Michael has a credit card debt of $60,000 that has a 10% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 9% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt?
308 months
What is the bid-ask spread? A) the difference in price available for an immediate sale of a stock and the immediate purchase of the stock B) all of the costs and fees that a stock exchange charges in order to process a transaction C) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor D) the difference in the selling price of a stock between different exchanges
A
C
4) A lender lends $10,100, which is to be repaid in annual payments of $2070 for 6 years. Which of the following shows the timeline of the loan from the lenderʹs perspective? A) Year 1: -$10,100 Year 2: $2070 Year 3: $2070 Year 4: $2070 Year 5: $2070 Year 6: $2070 B) Year 1: 0 Year 2: $2070 Year 3: $2070 Year 4: $2070 Year 5: $2070 Year 6: $2070 C) Year 0: -$10,100 Year 1:$2070 Year 2: $2070 Year 3: $2070 Year 4: $2070 Year 5: $2070 Year 6: $2070 D) Year 0: -$10,100 Year 1: $2070 Year 2: $4070 Year 3: $6070 Year 4: $8070 Year 5: $10,070 Year 6: $12,070
Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31 , then the four year risk-free interest rate is closest to ________. A) 4.01% B) 3.51% C) 5.01% D) 4.51%
4.51%
What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time? A) 37% B) 44% C) 43% D) 40%
40%
C
5) Which of the following best describes why a firm produces financial statements? A) to use as a tool when planning future investments within a firm B) to increase the intrinsic value of a firm C) to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business D) to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future
Joseph buys a Hummer for $59,000 , financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions? A) 59.57 months B) 57.07 months C) 54.57 months D) 60.57 months
57.07 months
A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton? A) 3010 U.S. dollars per ton B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR
5888 Brazilian reals per ton, with $0.507 U.S = 1 BRL
If the one-year discount factor is equal to 0.94340, the interest must be equal to ________, A) 3.0% B) 4.8% C) 5.5% D) 6.0%
6%
You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________.
6.0%
You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________. A) 5.0% B) 7.1% C) 6.0% D) 8.2%
6.0%
A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000 . Which of the following is closest to the interest rate being offered by the dealer?
6.8%
A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is 11 %?
7,681,257.74
Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282 . Which of the following loans offers monthly payments closest to $282 ? A) 7.8% APR for 36 months B) 7.8% APR for 48 months C) 7.8% APR for 60 months D) 7.8% APR for 72 months
7..8% APR for 72 months
A house costs $148,000 . It is to be paid off in exactly ten years, with monthly payments of $1737.54 . What is the APR of this loan? A) 6.25% B) 5.25% C) 7.25% D) 8.25%
7.25%
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firmʹs borrowings is closest to ________. A) 9.00% B) 7.45% C) 11.17% D) 9.31%
9.31%
A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case? A) by supplying incentives so the agents act in the way principal desires B) by ensuring that all workers co-operate to maximize the gains of their section C) by making the agents into principals themselves D) by maximizing the information that the principal obtains about the behavior of the agents
A
A sole proprietorship is owned by ________. A) one person B) two or more persons C) shareholders D) bankers
A
Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. B) Company A has greater leverage than Company B. C) Company A has less leverage than Company B. D) Company A and Company B have roughly equivalent enterprise values.
A
On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction? A) The transaction was between the corporation and investors. B) Shares of Google from this time onward could be traded between investors on a stock exchange. C) The shares were the first to be privately issued by Google. D) Google was at the time a recently founded company seeking capital with which to expand.
A
What is the most common way that agency conflict problems are addressed in most corporations? A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders B) by terminating the employment of employees who are found to have put their own interests above those of the company C) by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise D) by prosecuting managers who have been found to have illegally used company moneys for their own benefit
A
Which of the following types of firms does NOT have limited liability? A) sole proprietorships B) limited partnerships C) corporations D) none of the above
A
Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers? A) Bill chooses to pursue a risky investment for the company's funds because his compensation will substantially rise if it succeeds. B) Sue instructs her staff to skip safety inspections in one of the company's factories, knowing that it will likely fail the inspection and incur significant costs to fix. C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimer's disease, judging the drug's chances of succeeding as low. D) Michael chooses to enhance his firm's reputation at some cost to its shareholders by sponsoring a team of athletes for the Olympics.
A
Which of the following would be more typically the responsibility of a controller rather than a treasurer? A) overseeing accounting and tax functions B) capital budgeting C) managing credit D) making investment decisions
A
Which of the stock markets listed below is the smallest, as judged by trading volume? A) Deutsche Börse B) London Stock Exchange C) NASDAQ D) NYSE Euronext (US)
A
Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage? A) debt-equity or equity multiplier ratio B) market-to-book ratio C) market debt-equity ratio \ D) current or quick ratio
A
Whose interests should a financial manager consider paramount when making a decision? A) the stockholders who have risked their money to become owners of the company B) the employees and associated stakeholders who are employed by the company C) the public who consume the company's goods and services D) the senior management and associated colleagues at the executive level within the company
A
C
A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan? A) $1448.36 B) $1580.03 C) $1316.69 D) $1711.70
D
A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan? A) $1663.45 B) $1814.67 C) $1965.89 D) $1512.22
You are the CEO of a company and you are considering entering into an agreement to have your company buy another company. You think the price might be too high, but you will be the CEO of the combined, much larger company. You know that when the company gets bigger, your pay and prestige will increase. What is the nature of the agency conflict here and how is it related to ethical considerations? (Select all the choices that apply.) A. There is an ethical dilemma when the CEO of a firm has incentives that are opposite to those of the shareholders. B. There is a legal issue when the CEO of a firm has incentives that are opposite to those of the shareholders. C. In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because your pay and prestige will improve. D. In this case, you (as the CEO) have an incentive to potentially overpay for another company (which would be damaging to your shareholders) because the value of the combined company will improve
A & C
Recall the last time you ate at an expensive restaurant where you paid the bill. Now think about the last time you ate at a similar restaurant, but your parents paid the bill. Did you order more food (or more expensive food) when your parents paid? Explain how this relates to the agency problem in corporations. (Select all the choices that apply.) A. In both situations there may be a lack of interest in controlling costs if those costs are not borne directly by the person making the decision. B. Your situation could never lead to an agency problem since your parents would only want the best for you. C. While you may be faced with an agency problem (spending more when your parents are buying than you would if you were paying), corporate managers are seldom faced with such decisions. D. The agency problem leads an individual (in your case) and corporate managers (in the corporate setting) to put their own self-interest ahead of the interests of the shareholders (your parents in your case).
A & D
Why do all shareholders agree on the same goal for the financial manager? (Select all the choices that apply.) A. All of the decisions by the financial manager are made within the context of the overriding goal of financial management—to maximize the wealth of the owners, the stockholders. B. All of the decisions by the financial manager are made within the context of the overriding goal of financial management—to maximize the wealth of the corporation. C. The stockholders have invested in the corporation, putting their money at risk to become the managers of the corporation. D. The stockholders have invested in the corporation, putting their money at risk to become the owners of the corporation
A & D
5. The timeline shown below best describes which of the following situations? Date(Months) 0 1 2 3 4 5 Cash Flows -$250 -$250 -$250 -$250 -$250 -$250 a. You make payments of $250 per month for six months. b. You receive payments of $250 per month for six months. c. You make payments of $250 per month for five months. d. You receive payments of $250 per month for five months.
A - a. You make payments of $250 per month for six months.
Consider the following returns: Year End Stock X Realized Return Stock Y Realized Return Stock Z Realized Return 2004 20.1% -14.6% 0.2% 2005 72.7% 4.3% -3.2% 2006 -25.7% -58.1% -27.0% 2007 56.9% 71.1% 27.9% 2008 6.7% 17.3% -5.1% 2009 17.9% 0.9% -11.3% The covariance between Stock X's and Stock Y's returns is closest to: A 0.10 B 0.29 C 0.12 D 0.69
A 0.10
C
A 10% APR with quarterly compounding is equivalent to an EAR of ________. A) 10.00% B) 10.47% C) 10.38% D) 9.81%
D
A 12% APR with bi-monthly compounding is equivalent to an EAR of ________. A) 11.98% B) 12.50% C) 12.00% D) 12.62%
A
A 2013 Toyota Camry can be bought in Buffalo, NY, for $18,620. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2013 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.92 Canadian? A) $17,130 B) $24,287 C) $20,239 D) $28,335
long-term liability
A 30-year mortgage loan is a ________.
A
A 30-year mortgage loan is a ________. A) long-term liability B) current liability C) current asset D) long-term asset
C
A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $3.00 dividend? A) $1.68 B) $2.53 C) $2.11 D) $2.95
D
A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend? A) $2.72 B) $4.08 C) $4.76 D) $3.40
C
A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $6.00 dividend? A) $3.31 B) $4.96 C) $4.14 D) $5.79
Which of the following statements is FALSE? A On average, larger stocks have higher volatility than smaller stocks. B Portfolios of large stocks are typically less volatile than individual large stocks. C On average, smaller stocks have higher returns than larger stocks. D On average, Treasury Bills have lower returns than corporate bonds.
A On average, larger stocks have higher volatility than smaller stocks.
f the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in the balance sheet between 2007 and 2008? A) The company is having difficulties selling its product. B) The company has reduced its debt. C) The company has added a major new asset in terms of plant and equipment. D) The company has experienced a significant rise in its market value.
A The company is having difficulties selling its product.
D
A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision? A) the cost of the machine used to produce the sunscreen B) the manufacturing process of the sunscreen C) the cost of the existing advertising campaign D) the cost of the courtside advertising at the tennis matches
A
A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan? A) $19,433 B) $15,546 C) $23,319 D) $27,206
growing annuity
A ________ is a stream of N growing cash flows, paid at regular intervals.
D
A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. A) shareholder proposal B) leveraged buyout C) shareholder action D) hostile takeover
corporation
A ___________ has a separate legal identity from those of its owners. This separation gives the owners limited liability for the actions of this. The down side is the process of double taxation for each dollar earned by this, once when it is earned by this and subsequently when it is passed on to the owners.
A
A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches? A) $24.0 per hour B) $29.0 per hour C) $4.0 per hour D) $48.0 per hour
B
A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent? A) $14,630 B) $18,287 C) $25,602 D) $29,259
A
A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten yearsʹ time. How much greater is the present value (PV) of this payment if the interest rate is 9% rather than 8%? A) $7178 B) $5742 C) $8613 D) $10,049
D
A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year? A) $15,888.95 B) $18,537.11 C) $21,185.26 D) $13,240.79
C
A bank offers a loan that will requires you to pay 7% interest compounded monthly . Which of the following is closest to the EAR charged by the bank? A) 5.78% B) 8.68% C) 7.23% D) 14.46%
C
A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account? A) weekly compounding B) monthly compounding C) semiannual compounding D) annual compounding
C
A bank pays interest semiannually with an EAR of 13%.What is the periodic interest rate applicable semiannually ? A) 5.04% B) 7.56% C) 6.30% D) 12.60 %
A
A business promises to pay the investor of $6000 today for a payment of $1500 in one yearʹs time, $3000 in two yearsʹ time, and $3000 in three yearsʹ time. What is the present value of this business opportunity if the interest rate is 6% per year? A) $603.94 B) $301.97 C) $724.73 D) $966.30
B
A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000 . Which of the following is closest to the interest rate being offered by the dealer? A) 5.8% B) 6.8% C) 7.8% D) 9.8%
B
A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin? A) $0.01, since he paid nothing to obtain the coin and it has a face value of one cent. B) $35,000, since this is the price that the coin would fetch on the open market. C) At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value. D) At least $35,000, since the value of the coin will increase in the future.
D
A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company? A) -$5200 B) $0 C) $15,000 D) $16,000
$3.8 billion
A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value?
D
A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value? A) $1.9 billion B) $3.044 billion C) $4.566 billion D) $3.8 billion
C
A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software? A) $56,500 B) $45,200 C) $113,000 D) $79,100
total benefits no trade refine high grade ore Trade high-grade for low-grade $32000
A company that manufactures copper piping is offering to trade you 5,925 tons of low -grade copper ore for 4,000 tons of high-grade copper ore. Assuming you currently have 4,000 tons of high-grade ore, what are the total benefits and added benefits of taking the trade? IGNORE THIS
a patent for a drug held by the company
A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet?
C
A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet? A) commercial paper held by the company B) the inventory of chemicals used to produce the drugs made by the company C) a patent for a drug held by the company D) the cash reserves of the company
B
A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) The company will have built up debts which must be repaid in order to bring the current models to market. D) Equity must be raised to finance the development of new models to replace the existing models.
B
A companyʹs board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employeesʹ diligence and industry. What general principle is being argued by the board of directors? A) In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. B) Some activities that decrease shareholdersʹ wealth may have intangible benefits which increase the strength of the company overall. C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.
A
A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month? A) 0.56% B) 5.63% C) 0.51% D) 0.61% E) 0.66%
B
A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case? A) by the sale of the assets held by the company that hold most of its value B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors C) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company D) by removing the employees expectations of the continued poor performance of the company
How is a corporation different from most of the other forms of business organizations?
A corporation has a separate legal identity from those of its owners. This separation gives the owners limited liability for the actions of the corporation. The down side is the process of double taxation for each dollar earned by the corporation, once when it is earned by the corporation and subsequently when it is passed on to the owners.
revenue received for the delivery of items that have not yet been delivered
A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet?
What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly?
A) $353,818 A) Calculate EAR = 5.0945 %; Calculate PV Annuity = $353,818
B
A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet? A) the depreciation over the last year in the value of the vehicles owned by the company B) revenue received for the delivery of items that have not yet been delivered C) a loan which must paid back in two years D) prepaid rent on the offices occupied by the company
Which of the following statements is FALSE about calling cash at different points in time?
A dollar in the future is worth more than a dollar today
A
A factory owner wants his workers to produce as many widgets as they can so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the agency conflict problem in this case? A) by supplying incentives so the agents act in the way principal desires B) by ensuring that all workers co-operate to maximize the gains of their section C) by making the agents into principals themselves D) by maximizing the information that the principal obtains about the behavior of the agents
B
A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current of propane need to be in order for the firm to benefit from breaking the contract? A) greater than $2.90 per gallon B) greater than $2.92 per gallon C) greater than $2.94 per gallon D) greater than $2.96 per gallon
A
A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate? A) Real-world decisions are complex and require information from many sources if the decisions are to be valid. B) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision. C) All of the costs and benefits associated with a decision can never be fully identified. D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company.
that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages
A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)?
C
A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)? A) that a large number of funds were allocated to advertising to increase awareness of the firmʹs brand in new areas it had expanded into this year B) that some senior members of the management team have retired in this financial year C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages D) that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic food retailers
true
A firmʹs statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.
B
A home buyer buys a house for $2,155,000 . She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment? A) $11,342.47 B) $10,311.34 C) $12,373.61 D) $849.07
A
A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60% APR. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage? A) 5.5 years B) 8.6 years C) 10.2 years D) 12.8 years
C
A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan? A) $57,933 B) $86,899 C) $72,416 D) $101,382
A
A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900 . After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.) A) $145 B) $160 C) $175 D) $190
B
A limited liability company is essentially ________. A) a limited partnership without limited partners B) a limited partnership without a general partner C) just another name for a limited partnership D) just another name for a corporation
What are the main differences between a limited partnership and a limited liability corporation?
A limited partnership is required to have at least one general partner. A limited liability corporation is similar to a limited partnership but without the general partner.
main differences between a limited partnership and a limited liability corporation
A limited partnership is required to have at least one general partner. A limited liability corporation is similar to a limited partnership but without the general partner.
B
A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.6% per year? A) $94.40 million B) $118.00 million C) $165.20 million D) $188.80 million
Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) unlimited liability D) no separation of ownership and control
C.
C
A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why? A) Because the company has no need of barley, the opportunity should not be taken. B) Because the opportunity does not meet the companyʹs need for wheat, the opportunity should not be taken. C) Because the value of the opportunity is positive, the opportunity should be taken. D) Because the value of the opportunity is negative, the opportunity should not be taken.
It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows
A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?
A
A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded? A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows. B) It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. C) It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows. D) It will be subtracted from Gross Profit on the income statement and therefore, not be recorded separately on the statement of cash flows.
C
A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton? A) 3010 U.S. dollars per ton B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR
C
A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%? A) $2695 B) $4312 C) $5390 D) $3234
C
A pottery factory purchases a continuous belt conveyor kiln for $68,000 . A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22 , over what term is this loan being paid? A) 8 years B) 9 years C) 10 years D) 11 years
The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows
A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?
B
A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A) The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows. C) The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.
B
A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company? A) Investors may consider this firm to be a growth company. B) Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value. C) The firmʹs market value is more than its book value. D) The value of the firmʹs assets is greater than their liquidation value.
D
A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is 11 %? A) $3,840,628.87 B) $5,376,880.42 C) $6,913,131.97 D) $7,681,257.74
A
A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments? A) $109 B) $218 C) $164 D) $55
A
A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true? A) Since net working capital is negative, the company will not have enough funds to meet its obligations. B) Since net working capital is high, the company will likely have little difficulty meeting its obligations. C) Since net working capital is very high, the company will have ample money to invest after it meets its obligations. D) Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.
A
A small foundry agrees to pay $220,000 two years from now to a supplier for a given amount of coking coal. The foundry plans to deposit a fixed amount in a bank account every three months, starting three months from now, so that at the end of two years the account holds $220,000 . If the account pays 12.5% APR compounded monthly, how much must be deposited every three months? A) $24,602 B) $27,063 C) $29,523 D) $31,983
B
A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? A) as an outflow under operating activities B) as an outflow under investment activities C) as an outflow under financial activities D) not recorded on the statement of cash flows
A
A sole proprietorship is owned by ________. A) one person B) two or more persons C) shareholders D) bankers
D
A tenant wants to lease a building for $50,000 per year. She signs a five-year rental agreement that states that she will pay $25,000 every six months for the next five years. Which of the following is the timeline for her rental payments, assuming she makes the first payment immediately? A) Year 0: -$50 year 1: -$50 year 2: -$50 year 3: -$50 year 4: -$50 year 5: -$50 B) year 0: $50 year 1: $50 year 2: $50 year 3: $50 year 4: $50 year 5: $50 C) year 0: $25 year 1: $25 year 2: $25 year 3: $25 year 4: $25 year 5: $25 year 6: $25 year 3 1/2: $25 year 4: $25 year 4 1/2: $25 year 5: $25 D) year 0: -$25 year 1/2: -$25 year 1: -$25 year 1 1/2: -$25 year 2: -$25 year 2 1/2: -$25 year 3: -$25 year 3 1/2: -$25 year 4: -$25 year 4 1/2: -$25 year 5: 0
Why should you approach every problem by drawing a timeline?
A timeline identifies evens in a transaction or investment which might otherwise be overlooked
C
A truck costing $111,000 is paid off in monthly installments over four years with 8.10% APR. After three years the owner wishes to sell the truck. What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck? A) $24,956 B) $37,434 C) $31,195 D) $43,673
D
A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met? A) The financial manager should seek to make investments that do not harm the interests of the stockholders. B) The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. C) The financial manager should consider the interests and concerns of large shareholders a priority so the needs of those who hold a controlling interest in the company are met. D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.
B
A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now? A) He will earn $1,980,000 less if he releases the wine now. B) He will earn $328,972 more if he releases the wine now. C) He will earn $328,972 less if he releases the wine now. D) He will earn $356,400 more if he releases the wine now.
D
A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer? A) No, the costs are $1500 more than the benefits. B) No, the costs and the benefits are the same. C) Yes, the costs are $2500 less than the benefits. D) Yes, the costs are $2000 less than the benefits.
C
A(n) 12% APR with monthly compounding is closest to ________. A) an EAR of 10.14 % B) an EAR of 15.22 % C) an EAR of 12.68 % D) an EAR of 25.36%
Consider the following timeline detailing a stream of cash flows: TImeline: 0 = ? 1 = 5,000 2 = 6,000 3 = 7,000 4 = 8,000 If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to: ?
A) $10,114 B) $20,227 C) $24,272 D) $32,363 Answer: B Explanation: B) PV = 5,000 / (1 + 0.1)^1 + 6,000 / (1 + 0.1)^2 + 7,000 / (1 + 0.1)^3 + 8,000 / (1 + 0.1)^4 = $20,227.44
You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________.
A) $100,000 B) $500,000 C) $250,000 D) This problem cannot be solved. Answer: A Explanation: A) PVP = C / (r - g) = $10,000 /(0.03 - -0.07 ) = $10,000 / 0.1 = $100,000
Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest?
A) $100,000.00 B) $160,000.00 C) $200,000.00 D) $240,000.00 Answer: C Explanation: C) PV growth perpetuity = $4000 / (0.09 - 0.07) = $200,000.00
A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments? A) $109 B) $218 C) $164 D) $55
A) $109
A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments?
A) $109 A) The first step is to calculate the monthly payment using a present value (PV) of $130,000 monthly interest rate of 6.80/12 = 0.566667 %, and 36 periods, which = $4002.15 ; the second step is to use that monthly payment using a monthly interest rate of 6.30/12 = 0.525000 % and a PV of $130,000 - $2600 = $127,400 to calculate the payment = $3893.10 . The difference of the two = $4002.15 - $3893.10 = $109.05
A small business repairs its store. The builders charge them $130,000 which will be paid back in monthly installments over three years at 6.80% APR. The builders will reduce this rate to 6.30% APR if they pay $2600 up front. By approximately how much will this reduce the monthly loan repayments?
A) $109 B) $218 C) $164 D) $55 Answer: A Explanation: A) The first step is to calculate the monthly payment using a present value (PV) of $130,000 monthly interest rate of 6.80 /12 = 0.566667 %, and 36 periods, which = $4002.15 ; the second step is to use that monthly payment using a monthly interest rate of 6.30 /12 = 0.525000 % and a PV of $130,000 - $2600 = $127,400 to calculate the payment = $3893.10 . The difference of the two = $4002.15 - $3893.10 = $109.05
Which of the following organization forms has the most revenue? A) S corporation B) limited partnership C) C corporation D) limited liability company
C.
Consider the following timeline detailing a stream of cash flows: 0=1,000 1=2,000 2=3,000 3=4,000 4=? If the current market rate of interest is 8%, then the future value (FV) of this steam of cash flows is closest to: ?
A) $11,699 B) $5850 C) $14,039 D) $18,718 Answer: A Explanation: A) $11,699 FV = 1,000(1 + 0.08)4 + 2,000(1 + 0.08)3 + 3,000(1 + 0.08)2 + 4,000(1 + 0.08)1 = $11,699
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________.
A) $110,793 B) $55,397 C) $77,555 D) $132,952 Answer: A Explanation: A) This is a two-step problem.
You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: The missing cash flow from year 2 is closest to ________
A) $12,500 B) $12,000 C) $13,000 D) $10,000 Answer: B NPV = PV benefits - PV of costs $2,278 = $10,000 / (1.10)1 + X / (1.10)2 + $15,000 / (1.10)3 - $28,000 $30,278 = $10,000 / (1.10)1 + X / (1.10)2 + $15,000 / (1.10)3 $30,278 = $9,091 + X / (1.10)2 + $11,270 $9,917 = X / (1.10)2 X = 11,999.57
Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity?
A) $125,000.00 B) $200,000.00 C) $300,000.00 D) $250,000.00 Answer: D Explanation: D) PV growth perpetuity = $10,000 / (0.09 - 0.05) = $250,000.00
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________.
A) $14,000 B) $12,727 C) $15,273 D) $17,818 Answer: B Explanation: B) First we need the monthly interest rate = APR / m = 0.0615 / 12 = 0.005125 or 0.5125 %. Now: I = 0.5125 FV = 0 N = 36 (remaining payments 60 - 24 = 36) PMT = 388.05 Compute PV = $12,727.23
A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent?
A) $14,630 B) $18,287 C) $25,602 D) $29,259 Answer: B Explanation: B) Calculate PMT with FV = $80,000 , interest = 6% and N = 4, which gives PMT = $18,287.32 .
Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following?
A) $1420 ; $110,739 B) $2271 ; $166,109 C) $2839 ; $184,565 D) $3123 ; $221,478 Answer: C Explanation: C) FV = 1000 (1 + 0.11 )10 = $2839 ; FV = 1000 (1 + 0.11 )50 = $184,565
A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan?
A) $1448.36 B) $1580.03 C) $1316.69 D) $1711.70 Answer: C Explanation: C) Calculate the PMT when PV of ordinary annuity = $50,000 , periodicinterest=12/12%, andnumberofperiods=48.
A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2900. After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 5% per year.) A) $145 B) $160 C) $175 D) $190
A) $145
A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year?
A) $15,888.95 B) $18,537.11 C) $21,185.26 D) $13,240.79 Answer: D Explanation: D) Calculate PMT using TVM keys: input PV = 130,000 , N = 20, and interest rate = 8%; PMT = $13,240.787 .
If 8,000 is invested in a certain business at the start of the year, the investor will receive 2,400 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 6% per year?
A) $158.13 B) $316.25 C) $379.50 D) $506.00 Answer: B Explanation: B) CalculatetheNPVusingCFkeys:inputCF0=-$8000,CF1=$2400,andF1=4 using interest = 6%, which gives NPV = $316.25
Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%, what is the maximum price he can pay for the car?
A) $16,598 B) $19,918 C) $23,237 D) $26,557 Answer: A Explanation: A) Calculate PV using TVM keys: input PMT = $5000 , N= 4, and interest rate = 7.9%; PV = $16,597.5634 .
A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan?
A) $1663.45 B) $1814.67 C) $1965.89 D) $1512.22 Answer: D Explanation: D) Calculate the PMT when PV of ordinary annuity = $52,000 , periodic interest = 3/12%, and number of periods = 36.
A 2013 Toyota Camry can be bought in Buffalo, NY, for $18,620. The same model Camry can be purchased across the Canadian border in Hamilton, ON. If cars could be freely traded across the border, what would be the expected price of a 2013 Toyota Camry in Hamilton in Canadian dollars, given that $1 U.S. is equal to $0.92 Canadian? A) $17,130 B) $24,287 C) $20,239 D) $28,335
A) $17,130 The expected price in Hamilton in Canadian dollars is $18,620 ∗ 0.92 = $17,130
Consider the following timeline detailing a stream of flows: 0=100 1=200 2 = 300 3=400 4=500 5=? If the current market rate of interest is 6%, then the future value (FV) of this steam of cash flows is closest to: ?
A) $1723 B) $1,500 C) $2068 D) $2757 Answer: A Explanation: A) FV = 100(1 + 0.06)5 + 200(1 + 0.06)4 + 300(1 + 0.06)3 + 400(1 + 0.06)2 + 500(1 + 0.06)1 = $1723
Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pays interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four yearsʹ time?
A) $176 B) $308 C) $220 D) $352 Answer: C Explanation: C) First calculate the APR using an EAR of 14.7% and monthly compounding, which comes to 13.7937 %. Then using a periodic rate of 13.7937 /12, calculate the payment over 48 months that gives a future value (FV) of $14,000 , which is $110.15.
Terms in years: Rate: 1 = 1.8% 2 = 2.25% 3 = 2.30% 4 = 2.66% 5 = 3.13% The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years?
A) $18,111 B) $27,167 C) $31,695 D) $22,639 Answer: D Explanation: D) PV of $11,000 at 1.8% for 1 year = $5893.91 ; PV of $11,000 at 2.25% for 2 years = $5710.89 ; PV of $11,000 at 2.30% for 3 years = $5604.34 ; PV of $11,000 at 2.66% for 4 years = $5401.90 ; sum of these four PVs = $22,638.99 .
Dan buys a property for $210,000. He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make? A) $18,653.76 B) $22,384.51 C) $26,115.26 D) $29,846.02
A) $18,653.76
Dan buys a property for $210,000 . He is offered a 30-year loan by the bank, at an interest rate of 8% per year. What is the annual loan payment Dan must make?
A) $18,653.76 B) $22,384.51 C) $26,115.26 D) $29,846.02 Answer: A Explanation: A) Calculate PMT using TVM keys: input PV = 210,000 , N = 30, and interest rate = 8%; PMT = $18,653.76 .
You are purchasing a new home and need to borrow $260,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.80% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 6.50% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $5200 to cover points you are paying the lender. Assuming you pay the points and borrow from the mortgage lender at 6.50%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________.
A) $1844 B) $1676 C) $2011 D) $2347 Answer: B Explanation: B) First we need the monthly interest rate = APR / m = 0.0650 / 12 = 0.005417 or 0.5417 %. Now: PV = 265,200 (2 points) I = 0.5417 FV = 0 N = 360 (30 years × 12 months) Compute PMT = $1676.24 .
A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan? A) $19,433 B) $15,546 C) $23,319 D) $27,206
A) $19,433
A Xerox DocuColor photocopier costing $44,000 is paid off in 60 monthly installments at 6.90% APR. After three years the company wishes to sell the photocopier. What is the minimum price for which they can sell the copier so that they can cover the cost of the balance remaining on the loan?
A) $19,433 B) $15,546 C) $23,319 D) $27,206 Answer: A Explanation: A) The first step is to calculate the monthly payment using a present value (PV) of $44,000 monthly interest rate of 6.90 /12% = 0.575000 %, and 60 periods, which = $869.18 ; the second step is to use that monthly payment to calculate the present value (PV) of 24 months remaining payment keeping the interest rate unchanged.
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $240,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4800 (paid at the end of each month). Your firm can borrow at 7.80% APR with quarterly compounding. The present value (PV) of the lease payments for the delivery truck is closest to ________.
A) $190,506 B) $238,132 C) $285,758 D) $333,385 Answer: B Explanation: B) First we need to calculate the monthly discount rate for the lease arrangement. EAR=(1+APR/m)m-1=(1+0.078 /4)4-1=0.08031 or8.031% Monthly rate = (1 + EAR)(1/12) - 1= (1 + 0.08031 )(1/12) - 1 = 0.006458 = 0.6458 % Now we can apply the PVA formula to calculate the PV of the lease or by calculator: I = 0.6458 N = 60 (5 years × 12 months/yr) FV = 0 PMT = $4800 Compute PV = $238,132 .
Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000 . If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense?
A) $200,503 B) $150,377 C) $50,126 D) $100,251 Answer: D D) Current Mortgage Payment: P/Y = 12, N = 360, I/Y = 6.20 , PV = $206,000 , Solve forPMT= 1261.69 Current Mortgage Balance: P/Y = 12, N = 300, I/Y = 6.20 , PMT = 1261.69 , Solve for PV = $192,159.69 Total of Remaining Payments on Current Mortgage = 300 × $1261.69 = $378,505.83 New Mortgage Payment: P/Y = 12, N = 240, I/Y = 3.95 , PV = $192,159.69 , Solve for PMT = $1159.39 Total Payments on New Mortgage: 240 × $1159.39 = $278,254.41 Difference in Total of Payments = $378,505.83 - $278,254.41 = $100,251`
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________.
A) $22,000 B) $20,000 C) $24,000 D) $28,000 Answer: B Explanation: B) First we need the monthly interest rate = APR / m = 0.0595 / 12 = 0.004958 or 0.4958 %. Now: I = 0.4958 FV = 0 N = 60 PMT = $386.19 Compute PV = $20,000
A small foundry agrees to pay $220,000 two years from now to a supplier for a given amount of coking coal. The foundry plans to deposit a fixed amount in a bank account every three months, starting three months from now, so that at the end of two years the account holds $220,000 . If the account pays 12.5% APR compounded monthly, how much must be deposited every three months?
A) $24,602 A) Calculate the EAR = 13.2416 %; calculate APR with quarterly compounding = 12.6307 %; calculate the payment for 8 quarters with $220,000 as future value (FV).
Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770 . How much was the loan amount for this extension?
A) $33,436 B) $40,123 C) $46,810 D) $53,497 Answer: A Explanation: A) Calculate the PV annuity of $770 for 48 months at 5.00 /12 = 0.416667 %, which = $33,436
A small foundry agrees to pay $220,000 two years from now to a supplier for a given amount of coking coal. The foundry plans to deposit a fixed amount in a bank account every three months, starting three months from now, so that at the end of two years the account holds $220,000 . If the account pays 12.5% APR compounded monthly, how much must be deposited every three months?
A) $24,602 B) $27,063 C) $29,523 D) $31,983 Answer: A Explanation: A) Calculate the EAR = 13.2416 %; calculate APR with quarterly compounding = 12.6307 %; calculate the payment for 8 quarters with $220,000 as future value (FV).
A truck costing $111,000 is paid off in monthly installments over four years with 8.10% APR. After three years the owner wishes to sell the truck. What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck?
A) $24,956 B) $37,434 C) $31,195 D) $43,673 Answer: C Explanation: C) The first step is to calculate the monthly payment using a present value (PV) of $111,000 monthly interest rate of 8.10 /12 = 0.675000 %, and 48 periods, which = $2715.05 ; the second step is to use that monthly payment to calculate the present value (PV) of 12 months remaining payment keeping the interest rate unchanged.
A backhoe can dig 180 feet of trench per hour and costs $720 per hour to hire and operate. A ditch digger can dig 6 feet of trench per hour. Based on this information, what is the most a ditch digger can charge for per hour when digging ditches? A) $24.0 per hour B) $29.0 per hour C) $4.0 per hour D) $48.0 per hour
A) $24.0 per hour A) To be competitive, the ditch digger could not charge more than what the backhoe costs; cost per feet of ditch for backhoe = $720 /180 < = $4.0; charge per hour by ditch digger = $4.0 × 6 = $24.0
Consider the following timeline detailing a stream of cash flows: 0 = ? 1 = 100 2 = 100 3 = 200 4 = 200 If the current market rate of interest is 8%, then the present value (PV) of this steam of cash flows is closest to: ?
A) $242 B) $581 C) $484 D) $774 Answer: C Explanation: C) PV = 100 /( 1 + 0.08)1 + 100 / (1 + 0.08)2 + 200 / (1 + 0.08)3 + 200 / (1 + 0.08)4 = $484.10
You are purchasing a new home and need to borrow $380,000 from a mortgage lender. The mortgage lender quotes you a rate of 5.75% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 5.45% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $7600 to cover points you are paying the lender. Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________.
A) $2439 B) $2661 C) $2218 D) $3105 Answer: C Explanation: C) First we need the monthly interest rate = APR / m = 0.0575 / 12 = 0.004792 or 0.4792 %. Now: PV = $380,000 (no points) I = 0.4792 FV = 0 N = 360 (30 years × 12 months) Compute PMT = $2217.58 .
Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000 . He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan?
A) $244,965 B) $428,689 C) $306,206 D) $612,412 Answer: C Explanation: C) The first step is to calculate the monthly payment using a present value (PV) of $432,000 , monthly interest rate of 7.80 /12 = 0.650000 %, and 60 periods, which = $8718.11 ; the second step is to use that monthly payment to calculate the present value (PV) of 40 months keeping the interest rate unchanged, which = $306,206.10
You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months) at 12% APR (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________.
A) $2554 B) $4470 C) $3193 D) $5109 Answer: C Explanation: C) PV = 290,000 I=1 N = 240 FV = 0 Compute payment = $3193.15 .
A rich donor gives a hospital $1,040,000 one year from today. Each year after that, the hospital will receive a payment 6% larger than the previous payment, with the last payment occurring in ten yearsʹ time. What is the present value (PV) of this donation, given that the interest rate is 11 %?
A) $3,840,628.87 B) $5,376,880.42 C) $6,913,131.97 D) $7,681,257.74 Answer: D Explanation: D) Payment in 10th year = $1,040,000 × (1 + 0.06)^10 = $1,862,481.6044 ; PV of growth perpetuity in year 10 = $1,862,481.6044 /(0.11 - 0.06 ) = $37,249,632.088 ; PV of this CF at time zero = $13,118,742.261 ; PV of entire CF = $1,040,000 / (0.11 - 0.06) = $20,800,000.000 ; Differenceofthetwocashflows=$20,800,000.000 -$13,118,742.261 = $7,681,257.739
Suppose the term structure of interest rates is shown below: Term 1 year 2 years 3 years 5 years 10 years 20 years Rate (EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15% The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________. A) $3010 B) $2408 C) $3612 D) $4214
A) $3010
The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________.
A) $3010 A) PV = $1100 / (1 + 0.050) + $1100 / (1 + 0.048)2 + $1100 / (1 + 0.046)3 = 3010.33
Suppose the term structure of interest rates is shown below: Term: Rate (EAR%): 1=5.00% 2=4.80% 3=4.60% 5=4.50% 10=4.25% 20=4.15% The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________.
A) $3010 B) $2408 C) $3612 D) $4214 Answer: A Explanation: A) PV = $1100 / (1 + 0.050) + $1100 / (1 + 0.048)2 + $1100 / (1 + 0.046)3 = 3010.33
Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)?
A) $314,366 B) $471,549 C) $392,957 D) $432,000 Answer: C Explanation: C) First calculate the APR with quarterly compounding, which equals 8.62%; then using a periodic interest rate of 8.62/4%, calculate the present value (PV) of an annuity of $54,000 for eight periods.
Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770 . How much was the loan amount for this extension?
A) $33,436 A) Calculate the PV annuity of $770 for 48 months at 5.00/12 = 0.416667 %, which = $33,436 .
When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high. True or False
FALSE
What is the present value (PV) of an investment that pays $100,000 every year for four years if the interest rate is 5% APR, compounded quarterly?
A) $353,818 B) $389,200 C) $424,581 D) $459,963 Answer A Explanation: Diff: 2 Var: 35 Skill: Analytical AACSB Objective: Analytic Skills Author: DS Question Status: Previous Edition A) Calculate EAR = 5.0945 %; Calculate PV Annuity = $353,818
You are considering purchasing a new automobile with the upfront cost of $25,000 or leasing it from the dealer for a period of 60 months. The dealer offers you 4.00% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $25,000 through the dealer, your monthly payments will be closest to ________.
A) $368 B) $460 C) $552 D) $645 Answer: B Explanation: B) First we need the monthly interest rate = APR / m = 0.0400 / 12 = 0.003333 or 0.3333 %.
Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $37,086.78 B) $22,252.07 C) $44,504.14 D) $51,921.49
A) $37,086.78
Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________.
A) $37,086.78 A) N = 18 PMT = $1200 I=6 PV = 0 Compute FV = $37,086.78 .
An investment pays you 30,000 at the end of this year, and 10,000 at the end of each of the following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year?
A) $39,614 B) $63,382 C) $79,228 D) $95,074 Answer: C
You are considering purchasing a new automobile with the upfront cost of $26,000 or leasing it from the dealer for a period of 48 months. The dealer offers you 2.80% APR financing for 48 months (with payments made at the end of the month). Assuming you finance the entire $26,000 through the dealer, your monthly payments will be closest to ________.
A) $459 B) $688 C) $573 D) $802 Answer: C Explanation: C First we need the monthly interest rate = APR / m = 0.0280 / 12 = 0.002333 or 0.002333 %. Now: PV = $26,000 I = 0.2333 FV = 0 N = 48 Compute PMT = $573.20 .
If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________. A) $502 B) $653 C) $600 D) $1004
A) $502
You are interested in purchasing a new automobile that costs $33,000 . The dealership offers you a special financing rate of 9% APR (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealerʹs financing deal, then your monthly car payments would be closest to ________.
A) $548 B) $685 C) $959 D) $1096 Answer: B Explanation: B) PV = 33,000 I = 0.75 N = 60 FV = 0 Compute payment = $685.03 .
An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525 . How much cash will the investor have from the sale, once the mortgage is paid off?
A) $57,216 B) $100,129 C) $71,521 D) $143,041 Answer: C Explanation: C) The first step is to calculate the monthly payment using a present value (PV) of $608,000 , monthly interest rate of 8.10 /12 = 0.675000 %, and 300 periods, which = $4732.9906 ; the second step is to use that monthly payment to calculate the present value (PV) of 282 months keeping the interest rate unchanged which = $596,004.59 ; finally calculate the difference between $667,525 - $596,004.59 = $71,520.55 .
A homeowner has five years of monthly payments of $1400 before she has paid off her house. If the interest rate is 6% APR, what is the remaining balance on her loan?
A) $57,933 B) $86,899 C) $72,416 D) $101,382 Answer: C Explanation: C) Calculate PV of the ordinary annuity of $1400 paid per month at a periodic interest rate of 6 /12 = 0.500000 % over 60 months = $72,416 .
A business promises to pay the investor of $6000 today for a payment of $1500 in one year's time, $3000 in two years' time, and $3000 in three years' time. What is the present value of this business opportunity if the interest rate is 6% per year? A) $603.94 B) $301.97 C) $724.73 D) $966.30
A) $603.94
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________.
A) $61,303 B) $30,652 C) $42,912 D) $67,433 Answer: A
If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________. A) $688.07 today B) $750 today C) $825.68 today D) None of the above
A) $688.07 today
A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten yearsʹ time. How much greater is the present value (PV) of this payment if the interest rate is 9% rather than 8%?
A) $7178 A) PV of $180,000 at 8% for 10 years = $81,522.05 ; PV of $180,000 at 9% for 10 years = $74,344.30 ; difference = $7177.75
A bank lends some money to a business. The business will pay the bank a single payment of $176,000 in ten yearsʹ time. How much greater is the present value (PV) of this payment if the interest rate is 9% rather than 8%?
A) $7178 B) $5742 C) $8613 D) $10,049 Answer: A Explanation: A) PV of $180,000 at 8% for 10 years = $81,522.05 PV of $180,000 at 9% for 10 years = $74,344.30 ; difference = $7177.75
The effective annual rate (EAR) for a loan with a stated APR of 11% compounded quarterly is closest to ________.
A) 12.61 % B) 13.75 % C) 11.46% D) 14.90 % Answer: C Explanation: C) EAR=(1+APR/m)^m-1=(1+0.11/4)^4-1=0.1146 or 11.46%
A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 6%, what should be the coupon rate offered if the bond is to trade at par? A) 3% B) 5% C) 6% D) 7%
Answer: C 6%
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________.
A) $722,766 B) $1,445,531 C) $1,011,872 D) $1,590,084 Answer: B
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in two yearsʹ time, what is the present value (PV) of that cash flow? Terms in Years: Rate: 2 = 2.25% 5 = 3.125% 10=3.5% 30=4.375%
A) $76,518 B) $114,777 C) $133,906 D) $95,647 Answer: D Explanation: D) Using FV = $100,000 , find the present value (PV) at 2.25 % for 2 years.
Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________.
A) $80,232 B) $160,463 C) $112,324 D) $176,509 Answer: B Explanation: B) FV of a growing annuity
Suppose the term structure of interest rates is shown below: Term: Rate (EAR%): 1=5.00% 2=4.80% 3=4.60% 5=4.50% 10=4.25% 20=4.15% The net present value (NPV) of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________.
A) $91.37 B) $137.05 C) $114.21 D) -$114.21 Answer: D Explanation: D) NPV = -4320 + 1600 / (1.05)1 +1600 / (1.046)3 + 1600 / (1.045)5 = -$114.21
A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of the winnings at the time of her final payment, given that the interest rate is 8.6% per year?
A) $94.40 million B) $118.00 million C) $165.20 million D) $188.80 million Answer: B Explanation: B) Calculate the FV with PMT = $6 million, interest = 8.6%, and N = 12, which gives FV = $118.00 million.
On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B? A) -$1.33 B) -$0.67 C) $1.06 D) $1.60
A) -$1.33 cash out= -$116 × (1 + 0.01) = -$117.16 cash in = $117 × (1 - 0.01) = $115.83; the net effect = -$117.16 + $115.83 = -$1.33
In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009?
A) -2.6% A) 0.1% - 2.7% = -2.6%
In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009?
A) -2.6% B) 2.6% C) -2.8% D) 2.8% Answer: A Explanation: A) 0.1% - 2.7% = -2.6%
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $300,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to ________.
A) 0.5298 % B) 0.7947 % C) 0.6623 % D) 0.6667 % Answer: C Explanation: C) EAR=(1+APR/m)m-1=(1+0.08/4)4-1=0.08243 or 8.243% Monthly rate = (1 + EAR)(1/12) - 1= (1 + 0.08243 )(1/12) - 1 = 0.006623 = 0.6623 %
A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month?
A) 0.56% A) The percentage of outstanding principal paid is the monthly periodic interest rate = 6.75/12 = 0.56%.
A construction company takes a loan of $1,531,000 to cover the cost of a new grader. If the interest rate is 6.75% APR, and payments are made monthly for five years, what percentage of the outstanding principal does the company pay in interest each month?
A) 0.56% B) 5.63% C) 0.51% D) 0.61% E) 0.66% Answer: A Explanation: A) The percentage of outstanding principal paid is the monthly periodic interest rate = 6.75/12 = 0.56%.
In 2007, interest rates were about 4.5% and inflation was about 2.8%. What was the real interest rate in 2007?
A) 1.58% B) 1.61% C) 1.62% D) 1.65% Answer: D D) 1.045 / 1.028 = 1.0165; real rate = 1.65%
If the current inflation rate is 2.0%, then the nominal rate necessary for you to earn a(n) 7.3% real interest rate on your investment is closest to ________.
A) 11.3% B) 9.4% C) 13.2% D) 15.1% Answer: B Explanation: B) nominal = (1 + inflation)(1 + real) - 1 = (1 + 0.073)(1 + 0.02) - 1 = 0.0945or 9.4%
A 12% APR with bi-monthly compounding is equivalent to an EAR of ________.
A) 11.98% B) 12.50% C) 12.00% D) 12.62% Answer: D Explanation: D) EAR={(1+0.12)/6}6-1=12.62%
Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt?
A) 112 months B) 113 months C) 120 months D) 122 months Answer: D Explanation: D) The first step is to calculate the minimum monthly payment using the debt balance of $75,000 and 12% APR compounded monthly, which = $75,000 × 12% / 12 = $750 . The second step is to use the same $750 as payment, and using a discount rate of 4%/12, calculate the number of months required to pay off the present value (PV) of $75,000 , which = 122 months.
Suppose the term structure of interest rates is shown below: Term: Rate (EAR%): 1=5.00% 2=4.80% 3=4.60% 5=4.50% 10=4.25% 20=4.15% Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31 , then the four year risk-free interest rate is closest to ________.
A) 4.01% B) 3.51% C) 5.01% D) 4.51% Answer: D Explanation: D) NPV = 142.31 = -6650 + 1900 / (1.05)1 + 1900 / (1.048)2 + 1900 / (1.046)3 +1900 / (1 + x)4 6650 + 142.31 - 1900 / (1.05)1 + 1900 / (1.048)2 + 1900 / (1.046)3 = 1900 / (1 + x)4 X=0.0451 or4.51%
How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000 ?
A) 4.25 years B) 3.25 years C) 5.25 years D) 6.25 years Answer: A Explanation: A) Calculate N using TVM keys: input PV = 50,000 , interest rate = 10%, and FV = 75,000 ; N = 4.25 years.
Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000 ?
A) 4.3 years B) 6.3 years C) 5.3 years D) 7.3 years Answer: C Explanation: C) Calculate N using TVM keys: input PV = $12,000 , interest rate = 12% , PMT = $3600 ; N = 5.3 years.
You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________.
A) 5.0% B) 7.1% C) 6.0% D) 8.2% Answer: C Explanation: C) PV = -496.97 FV = 1000 PMT = 0 N = 12 Compute I = 6.0%.
A bank pays interest semiannually with an EAR of 13%.What is the periodic interest rate applicable semiannually ?
A) 5.04% B) 7.56% C) 6.30% D) 12.60 % Answer: C Explanation: C) First convert the EAR to APR with semiannually compounding, which equals 12.60 %; now divide this by 2 to get the periodic interest rate = 6.30 %.
A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60% APR. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage? A) 5.5 years B) 8.6 years C) 10.2 years D) 12.8 years
A) 5.5 years
A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60% APR. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?
A) 5.5 years A) The first step is to calculate the monthly payment using a present value (PV) of $227,000 , monthly interest rate of 6.60/12 = 0.55%, and 240 periods, which = $1705.842 ; the second step is to use that monthly payment to calculate the balance at the end of five years, which = $194,594.353 ; next step is to reduce this balance by $50,000 to the new outstanding balance of $144,594.353 ; now calculate the number of months required to pay off this balance, which = 114.45 ; the last step is to calculate the difference between 180 - 114.45 = 65.55 , when divided by 12 gives 5.5 years.
A homeowner has a $227,000 home with a 20-year mortgage, paid monthly at 6.60% APR. After five years he receives $50,000 as an inheritance. If he pays this $50,000 toward his mortgage along with his regular payment, by approximately how many years will it reduce the amount of time it takes him to pay off his mortgage?
A) 5.5 years B) 8.6 years C) 10.2 years D) 12.8 years Answer: A Explanation: A) The first step is to calculate the monthly payment using a present value (PV) of $227,000 , monthly interest rate of 6.60 /12 = 0.55 %, and 240 periods, which = $1705.842 ; the second step is to use that monthly payment to calculate the balance at the end of five years, which = $194,594.353 ; next step is to reduce this balance by $50,000 to the new outstanding balance of $144,594.353 ; now calculate the number of months required to pay off this balance, which = 114.45 ; the last step is to calculate the difference between 180 - 114.45 = 65.55 , when divided by 12 gives 5.5 years.
A bank offers a loan that will requires you to pay 7% interest compounded monthly. Which of the following is closest to the EAR charged by the bank?
A) 5.78% B) 8.68% C) 7.23% D) 14.46 % Answer: C
A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000 . Which of the following is closest to the interest rate being offered by the dealer?
A) 5.8% B) 6.8% C) 7.8% D) 9.8% Answer: B Explanation: B) Calculate interest rate using TVM keys: input PV = $120,000 , N = 6, and PMT = $25,000 ; interest rate = 6.8%.
Joseph buys a Hummer for $59,000 , financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions?
A) 59.57 months B) 57.07 months C) 54.57 months D) 60.57 months Answer: B Explanation: B) The first step is to calculate the monthly payment using a present value (PV) of $59,000 , monthly interest rate of 7.60 /12 = 0.633333 %, and 60 periods, which = $1185.04 ; the second step is to add $50 to this monthly payment giving the new monthly payment of $1235.04 ; the last step is to calculate the time required to pay off the loan = 57.0740 months.
Consider the following investment activities: Investment APR Compounding A 6.0860% Annual B 5.9320% Daily C 5.9997% Quarterly D 5.9936% Monthly The highest effective rate of return you could earn on any of these investments is closest to ________.
A) 6.0860 % B) 6.1110 % C) 6.1610 % D) 6.1360 % Answer: C Explanation: C) EAR(A)=(1+APR/m)m-1=(1+0.060860/1)1-1=6.0860% EAR(B)=(1+APR/m)m-1=(1+0.059320 /365)365-1=6.1110% EAR (C) = (1 + APR / m)m - 1 = (1 + 0.059997 /4)4 - 1 = 6.1360 % EAR(D)=(1+APR/m)m-1=(1+0.059936 /12)12-1=6.1610%
A house costs $148,000 . It is to be paid off in exactly ten years, with monthly payments of $1737.54 . What is the APR of this loan?
A) 6.25% B) 5.25% C) 7.25% D) 8.25% Answer: C Explanation: C) Calculate the periodic interest rate when PV of ordinary annuity = $148,000 , number of months = 120, and monthly payments = $1737.54 ; the periodic interest rate = 0.60 %, which multiplied by 12 gives an APR = 7.25 %.
Refer to the balance sheet above. Lutherʹs quick ratio for 2006 is closest to ________. A) 0.87 B) 1.75 C) 0.88 D) 1.31
A) Quick ratio = (Current assets - Inventory) / Current liabilities Quick ratio = ($171.3 - $46.1) / $143.2 = 0.87
Consider the following investment alternatives: Investment APR Compounding A 6.3830% Annual B 6.2116% Daily C 6.2834% Quarterly D 6.2744% Monthly The lowest effective rate of return you could earn on any of these investments is closest to ?
A) 6.3830 % B) 6.4080 % C) 6.4330 % D) 6.4580 % Answer: A Explanation: A) EAR (A) = (1 + APR / m)m - 1 = (1 + 0.063830 /1)1 - 1 = 6.3830% EAR(B)=(1+APR/m)m-1=(1+0.062116 /365)365-1=6.4080% EAR (C) = (1 + APR / m)m - 1 = (1 + 0.062834 /4)4 - 1 = 6.4330% EAR(D)=(1+APR/m)m-1=(1+0.062744 /12)12-1=6.4580%
The lowest effective rate of return you could earn on any of these investments is closest to ________.
A) 6.3830% A) EAR (A) = (1 + APR / m)m - 1 = (1 + 0.063830 /1)1 - 1 = 6.3830% EAR (B) = (1 + APR / m)m - 1 = (1 + 0.062116 /365)365 - 1 = 6.4080% EAR (C) = (1 + APR / m)m - 1 = (1 + 0.062834 /4)4 - 1 = 6.4330% EAR (D) = (1 + APR / m)m - 1 = (1 + 0.062744 /12)12 - 1 = 6.4580%
What is the real interest rate given a nominal rate of 8.9% and an inflation rate of 1.9%?
A) 6.9% B) 8.2% C) 9.6% D) 11.0% Answer: A Explanation: A) (0.089 ) / (1+ 0.019 ) - 1 = 0.06869 ;real rate = 6.869 %
Elinore is asked to invest $5100 in a friendʹs business with the promise that the friend will repay $5610 in one year. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case?
A) 7% B) 8% C) 9% D) 10% Answer: B Explanation: B) $5508 - $5100 = $408 ; $408 / $5100 = 0.08 or 8%
If $17,000 is invested at 10% per year, in approximately how many years will the investment double? A) 7.3 years B) 8.4 years C) 11.0 years D) 14.6 years
A) 7.3 years
Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282 . Which of the following loans offers monthly payments closest to $282?
A) 7.8% APR for 36 months B) 7.8% APR for 48 months C) 7.8% APR for 60 months D) 7.8% APR for 72 months Answer: D Explanation: D) Calculate N when PV of ordinary annuity = $19,000 - $2,000 - $800 = $16,200 , periodic interest=7.8/12%, and monthly payments=$282.
A pottery factory purchases a continuous belt conveyor kiln for $68,000 . A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22 , over what term is this loan being paid?
A) 8 years B) 9 years C) 10 years D) 11 years Answer: C Explanation: C) Calculate N when PV of ordinary annuity = $68,000 , periodicinterest=6.3/12%, andmonthlypayments=$765.22. N = 156 periods; years = 13 years.
The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to ________.
A) 8.30% A) EAR = (1 + APR / m)m - 1 = (1 + 0.08/12)12 - 1 = 0.0830 or 8.30%.
The effective annual rate (EAR) for a loan with a stated APR of 8% compounded monthly is closest to ________.
A) 8.30% B) 9.13% C) 9.96% D) 10.79 % Answer: A
If the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9%, then the real rate of interest on your investment is closest to ________.
A) 8.5% B) 9.9% C) 11.3% D) 7.0% Answer: D Explanation: D) (1 + nominal rate) = (1 + inflation rate)(1 + real rate) real interest rate = 1 + nominal rate/1 + inflation rate - 1 = 0.070463 or 7.05 %
Which of the following statements is FALSE about valuing cash at different points in time? A) Finding the present value (PV) and compounding are the same. B) A dollar today and a dollar in one year are not equivalent. C) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.
A) Finding the present value (PV) and discounting are the same.
Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steveʹs major error in reasoning when making this decision? A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms. B) He ignores the benefits of consuming the $1.00 today against the benefits of consuming the $1.00 five years from now. C) He fails to consider the costs of not consuming the $1.00 today. D) He considers that the value of the cash he may have in the future is the same as the value of cash he has today.
A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms.
Historically, why were high inflation rates associated with high nominal interest rates?
A) Individuals will spend more when they expect their investments to increase in value. B) Growth in investment and savings is encouraged when consumers are judged to be overspending. C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present. Answer: D
The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR? Rate of Return: 6.0% /5.9%/ 5.8% 5.7% A) Investment A B) Investment B C) Investment C D) Investment D
A) Investment A
The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR?
A) Investment A A) Calculate the EAR for each; A = 6.0%; B = 5.99%; C = 5.96%; D = 5.86%.
Which alternative offers you the lowest effective rate of return?
A) Investment A A) EAR (A) = (1 + APR / m)m - 1 = (1 + 0.069030 /1)1 - 1 = 6.9030% EAR (B) = (1 + APR / m)m - 1 = (1 + 0.066992 /365)365 - 1 = 6.9280% EAR (C) = (1 + APR / m)m - 1 = (1 + 0.067787 /4)4 - 1 = 6.9530% EAR (D) = (1 + APR / m)m - 1 = (1 + 0.067643 /12)12 - 1 = 6.9780%
What are the advantages and disadvantages of corporations and limited companies?
Advantages: -unlimited life -easy transfer of ownership -limited liability -ease of raising capital Disadvantages: -Double taxation (corp. tax and dividends) -cost of set-up and report filing -often higher agency costs than other corporate forms
Consider the following investment alternatives: Investment APR Compounding A 6.9030% Annual B 6.6992% Daily C 6.7787% Quarterly D 6.7643% Monthly Which alternative offers you the lowest effective rate of return?
A) Investment A B) Investment B C) Investment C D) Investment D Answer: A Explanation: A) EAR (A) = (1 + APR / m)m - 1 = (1 + 0.069030 /1)1 - 1 = 6.9030 % EAR(B)=(1+APR/m)m-1=(1+0.066992 /365)365-1=6.9280% EAR (C) = (1 + APR / m)m - 1 = (1 + 0.067787 /4)4 - 1 = 6.9530 % EAR(D)=(1+APR/m)m-1=(1+0.067643 /12)12-1=6.9780%
Consider the following investment alternatives: Investment: APR: Compounding: A 6.2200% Annual B 6.0583% Daily C 6.1277% Quarterly D 6.1204% Monthly
A) Investment A B) Investment B C) Investment C D) Investment D Answer: D Explanation: D)EAR(A)=(1+APR/m)m-1=(1+0.062200/1)1-1= 6.2200% EAR(B)=(1+APR/m)m-1=(1+0.060583/365)365-1= 6.2450% EAR (C) = (1 + APR / m)m - 1 = (1 + 0.061277 /4)4 - 1 = 6.2700 % EAR (D) = (1 + APR / m)m - 1 = (1 + 0.061204 /12)12 - 1 = 6.2950 %
Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true?
A) Investment X has a higher growth rate than Investment Y. B) Investment X has a lower growth rate than Investment Y. C) The answer cannot be determined without knowing the interest rate for both investments. D) With the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value. Answer: A
What is the effective annual rate (EAR)?
A) It is the interest rate that would earn the same interest with annual compounding.
What is the effective annual rate (EAR)?
A) It is the interest rate that would earn the same interest with annual compounding. B) It is the ratio of the number of the annual percentage rate to the number of compounding periods per year. C) It is the interest rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction). D) It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year. Answer: A
When the costs of an investment come before that investmentʹs benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors?
A) It will make it more attractive, since it will increase the investmentʹs net present value (NPV). B) It will make it more attractive, since it will decrease the investmentʹs net present value (NPV). C) It will make it less attractive, since it will increase the investmentʹs net present value (NPV). D) It will make it less attractive, since it will decrease the investmentʹs net present value (NPV). Answer: D
Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it?
A) Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. B) Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven. C) Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven. D) Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven. Answer: D Explanation: D) Calculate PV lease payments = $212,108; subtract $180,000 to get $32,108.
An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright?
A) Leasing costs $116 more than buying. B) Leasing costs $174 more than buying. C) Leasing costs $145 more than buying. D) Leasing costs $289 more than buying. Answer: C Explanation: C) Using a periodic rate of 14% / 12 per month, calculate the present value (PV) of an annuity of $75 for 48 months; then subtract $2600 to calculate the difference in costs.
In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe?
A) Long-term interest rates will tend to be higher than short-term interest rates.
Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon?
A) Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities.
Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon?
A) Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities. B) The return from U.S. Treasury securities generally attracts less tax than the returns from other investments. C) The opportunity cost of capital for a given horizon is generally based on U.S. Treasury securities with that same horizon. D) U.S. Treasury securities are generally considered to be the best alternative to most investments. Answer: A
Which of the following is/are TRUE? I. The EAR can never exceed the APR. II. The APR can never exceed the EAR. III. The APR and EAR can never be equal.
A) Only I is true. B) Only II is true. C) Only II & III are true. D) Only I & III are true. Answer: B
Given the above term structure of interest rates, which of the following is most likely in the future? Option I. Interest rates will fall. Option II. Economic growth will slow. Option III. Long-term rates will rise relative to short term rates.
A) Option I only
Given the above term structure of interest rates, which of the following is most likely in the future? Option I. = Interest rates will fall. Option II. = Economic growth will slow. Option III. = Long-term rates will rise relative to short term rates.
A) Option I only B) Option II only C) Option III only D) Options I and II Answer: A
If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________. A) $502 B) $653 C) $600 D) $1004
A) PV = FV(1 + r)n 100 / (1.08)1 = 92.59 200 / (1.08)2 = 171.47 300 / (1.08)3 = 238.15 Sum = $502.21, which is approximately $502.
A firm that provides tax services to the public intends to offer a premium tax-return service at a higher price than their current services. The managers of the company ask experts in marketing to determine how much an effective ad campaign for such a service would cost, and by how much sales would increase. They consult experts in economics to calculate the increases in revenue from the success of the campaign, experts in operations to determine the cost of offering the service, and experts in strategy to anticipate possible counter-moves by competitors. Which of the following points about the role of financial managers does this example illustrate? A) Real-world decisions are complex and require information from many sources if the decisions are to be valid. B) Determining the costs associated with making a decision is easier than determining the potential benefits of the decision. C) All of the costs and benefits associated with a decision can never be fully identified. D) Ultimately the decision whether to take a certain course of action rests with the financial managers of a company
A) Real-world decisions are complex and require information from many sources if the decisions are to be valid.
Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do? A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude. B) Do nothing; refine the 10,000 bbl of WTI crude. C) Trade the 10,000 bbl WTI crude with the other refiner and refine the 10,150 bbl of ANS crude. D) Trade the 10,000 bbl WTI crude with the other refiner and then sell the 10,150 bbl of ANS crude.
A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude.
Which of the following situations would result in lowering of interest rates by the banking authority of a country?
A) The economy is slowing down
Which of the following situations would result in lowering of interest rates by the banking authority of a country?
A) The economy is slowing down. B) Inflation is rising rapidly. C) The level of investment is quite high. D) The rate of savings is quite low. Answer: A
Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by?
A) The monthly payment will increase by $104.79. B) The monthly payment will decrease by $104.79 C) The monthly payment will increase by $343.12. D) The monthly payment will decrease by $343.12. Answer: B Current Mortgage Payment: P/Y = 12, N = 360, I/Y = 6.5, PV = $200,000, Solve for PMT = $1,264.14 Current Mortgage Balance: P/Y = 12, N = 300, I/Y = 6.5, PMT = $1,264.14, Solve for PV = $187,221.9 New Mortgage Payment: P/Y = 12, N = 240, I/Y = 4.25, PV = $187,222.54, Solve for PMT = $1,159.35 Current Payment - New Payment = $1,159.35- $1,264.14 = -$104.79
Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE?
A) The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments.
Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE?
A) The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments. B) The total amount paid (principal and interest) will increase with $1,000 monthly payment compared to $900 monthly payments. C) The total interest expense will increase with $1,000 monthly payment compared to $900 monthly payments. D) The total principal paid will decrease with $1,000 monthly payment compared to $900 monthly payments. Answer: A
Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?
A) The number of borrowers seeking funds is low. B) The expected inflation rate is expected to be low. C) The borrower is judged to have a low degree of risk. D) The loan will be for a long period of time. Answer: D
Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct?
A) The purchasing power of investors in these bonds grew over the course of the year. B) The real interest rate for investors in these bonds was greater than the rate of inflation. C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. D) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds. Answer: C
Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?
A) There is a greater chance that inflation may fall in a longer time-frame. B) The penalties for closing out a long term loan early make them unattractive to many investors. C) Long-term loans typically have ongoing costs that accumulate over the life of the loan. D) The loan values are very sensitive to changes in market interest rates. Answer: D
Consider the following prices from a McDonaldʹs Restaurant: Big Mac Sandwich: $2.68 Large Coke: $1.45 Large Fries: $1.13 Assume that there is a competitive market for McDonaldʹs food items and that McDonaldʹs sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal? A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67. B) No, no arbitrage opportunity exists. C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.34. D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.67.
A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67. Buy a value meal and sell the Big Mac, Coke and fries. -4.59 + 2.68 + 1.45 + 1.13 = 0.67 (so arbitrage exists)
Like other metals, uranium 308 is traded in competitive markets like the New York metals exchange. Which of the following would value a given weight of uranium 308 the most?
All buyers and sellers would have the same value for 250 pounds of uranium 308
Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats? A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price. B) The posted prices of oats can vary widely between grocery stores, even within the same local area. C) Grocery stores mark up the prices of their oats up to make a profit. D) Grocery stores typically sell oats in different packaging, which results in different prices within the same store.
A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price.
When computing a present value, which of the following is TRUE?
A) You should adjust the discount rate to match the interval between cash flows.
When computing a present value, which of the following is TRUE? A) You should adjust the discount rate to match the interval between cash flows. B) You should adjust the future value to match the present value. C) You should adjust the time period to match the present value. D) You should adjust the cash flows to match the time period of the discount rate.
A) You should adjust the discount rate to match the interval between cash flows.
The yield curve is typically ________.
A) downward sloping B) upward sloping C) flat D) inverted Answer: B
Which of the following computes the growth in purchasing power?
A) growth of money + growth of prices B) (1 + real rate) / (1 + nominal rate) C) (1 + inflation rate) / (1 + nominal rate) D) growth of money / growth of prices Answer: D
Suppose the term structure of interest rates is shown below: Term: Rate (EAR%): 1 year = 5.00% 2 years = 4.80% 3 years = 4.60% 5 years = 4.50% 10 years = 4.35% 20 years = 4.15% What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?
A) inverted; higher B) normal; higher C) inverted; lower D) normal; lower Answer: C
Which of the following accounts has the highest EAR?
A) one that pays 5.4% every six months B) one that pays 1.0% per month C) one that pays 9.6% per year D) one that pays 2.4% every three months Answer: B Explanation: B) Calculate the EAR for each choice and pick the highest: A = 11.09%; B= 12.68%; C = 9.60%; D = 9.95%.
What, typically, is used to calculate the opportunity cost of capital on a risk-free investment?
A) the best expected return offered in any investment available in the market B) the interest rate on U.S. Treasury securities with the same term C) the interest rate of any investments alternatives that are available D) the best rate of return offered by U.S. Treasury securities Answer: B
What is a firm's net income?
A) the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period B) the last or "bottom" line of the income statement C) a measure of the firm's profitability over a given period D) all of the above Answer: D
Which of the following best describes the annual percentage rate?
A) the quoted interest rate which, considered with the compounding period, gives the effective interest rate
Which of the following best describes the annual percentage rate?
A) the quoted interest rate which, considered with the compounding period, gives the effective interest rate B) the effective annual rate, after compounding is taken into account C) the discount rate, when compounded more than once a year or less than once a year D) the discount rate, when effective annual rate is divided by the number of times it is compounded in a year Answer: A
Inflation is calculated as the rate of change in the _______.
A) unemployment rate B) Gross Domestic Product C) Consumer Price Index D) risk-free rate Answer: C
A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?
A) weekly compounding B) monthly compounding C) semiannual compounding D) annual compounding Answer: C Explanation: C) Using an APR = 5.8%, calculate the EAR for the compounding periods given in each choice: A = 5.97%; B = 5.96%; C = 5.88%; D = 5.8%.
In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r) + C2/(1 + r)^2 + . . . . + Cn/(1 + r)^n when determining the present value (PV) of a cash flow stream?
A) when yield curves are flat B) when short-term and long-term interest rates vary widely C) when the inflation rate is high D) when the discount rate is high Answer: B
A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded? A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows. B) It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. C) It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows. D) It will be subtracted from Gross Profit on the income statement and therefore, not be recorded separately on the statement of cash flows.
A.
A sole proprietorship is owned by ________. A) one person B) two or more persons C) shareholders D) bankers
A.
Consider the following timeline: Date 0------1------2------3 ?--$100--$200--$300 Cash flow If the current market rate of interest is 8%, then the present value (PV) of this timeline as of year 0 is closest to ________. A) $502 B) $653 C) $600 D) $1004
A. for each CF, use PV = FV / (1+r)n, then sum. PV= 100 / (1+.08)1 = 92.59 PV = 200 / (1+.08)2 = 171.47 PV = 300 / (1+.08)3 = 238.15 The sum = $502.21, which is approximately $502.
Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years? A) $128,729 B) $180,221 C) $231,712 D) $139,541
A. $128,729
If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or __. A) $688.07 today B) $750 today C) $825.68 today D) None of the above
A. $688.07 today
C
What is the future value (FV) of $20,000 in four years, assuming the interest rate is 4% per year? A) $15,208.16 B) $19,887.59 C) $23,397.17 D) $25,736.89
Income Statement for Xenon Manufacturing: 2008 2009 Total sales 202 212 Cost of sales -148 -172 Gross Profit 54 40 Selling, general, and administrative expenses -22 -20 Research and development -8 -7 Depreciation and amortization -4 -3 Other income 4 6 Earnings before interest and taxes (EBIT) 24 16 Interest income (expense) -7 -4 Pretax income 14 12 Taxes -4 -3 Net Income 10 9 Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in 2008? A. $0.50 B. $0.25 C. $0.40 D. $0.60
A. 0.50 EPS = Net income / Shares outstanding = $10 million / 20 million shares = $0.50 per share
Luther Corporation Consolidated Balance Sheet December 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities and Stockholders' Equity 2006 2005 Current Assets Current Liabilities Cash 65.7 58.5 Accounts payable 87.7 73.5 Accounts receivable 54.4 39.6 Notes payable / short-term debt 9.6 9.6 Inventories 46.1 42.9 Current maturities of long-term debt 39.9 36.9 Other current assets 5.1 3.0 Other current liabilities 6.0 12.0 Total current assets 171.3 144.0 Total current liabilities 143.2 132.0 Long-Term Assets Long-Term Liabilities Land 66.6 62.1 Long-term debt 237.7 168.9 Buildings 106.2 91.5 Capital lease obligations Equipment 119.3 99.6 Less accumulated depreciation (56.6) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 235.5 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 260.5 191.1 Other long-term assets 63.0 42.0 Total liabilities 403.7 323.1 Total long-term assets 358.5 242.7 Stockholders' Equity 126.1 63.6 Total Assets 529.8 386.7 Total liabilities and Stockholders' Equity 529.8 386.7 Refer to the balance sheet above. Luther's quick ratio for 2006 is closest to ________. A. 0.87 B. 1.75 C. 0.88 D. 1.31
A. 0.87 Quick ratio = (Curr. Assets - Inv.)/ Curr. Liab = (171.3-46.1)/143.2 = 0.87
Luther Corporation Consolidated Income Statement Year ended December 31 (in $millions) 2006 2005 Total sales 610.1 578.3 Cost of sales -500.2 -481.9 Gross profit 109.9 96.4 Selling, general, and administrative expenses -40.5 -39.0 Research and development -24.6 -22.8 Depreciation and amortization -3.6 -3.3 Operating income 41.2 31.3 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 31.3 Interest income (expense) -25.1 -15.8 Pretax income 16.1 15.5 Taxes -5.5 -5.3 Net income 10.6 10.2 Price per share $16 $15 Sharing outstanding (millions) 10.0 8.1 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for the year ending December 31, 2006 Luther's diluted earnings per share are closest to ________. A. $1.03 B. $0.51 C. $0.82 D. $1.23
A. 1.03 Diluted EPS = Net income / (Shares outstanding + Options contracts outstanding + shares possible from convertible bonds) = 10.6/(10.0 + 0.3 + 0 ) = 1.03
Luther Corporation Consolidated Income Statement Year ended December 31 (in $millions) 2006 2005 Total sales 610.1 569.6 Cost of sales -500.2 -389.2 Gross profit 109.9 180.4 Selling, general, and administrative expenses -40.5 -39.6 Research and development -24.6 -21.6 Depreciation and amortization -3.6 -3.3 Operating income 41.2 115.9 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 115.9 Interest income (expense) -25.1 -14.2 Pretax income 16.1 101.7 Taxes -5.5 -35.595 Net income 10.6 66.105 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's net profit margin for the year ending December 31, 2005 is closest to ________. A 11.61% B 5.80% C 9.28% D 13.93%
A. 11.61 Net Prof. Margin = Net Inc. / Sales = 66.105/569.6 = 11.61%
Luther Corporation Consolidated Income Statement Year ended December 31 (in $millions) 2006 2005 Total sales 610.1 573.3 Cost of sales -500.2 -389.6 Gross profit 109.9 183.7 Selling, general, and administrative expenses -40.5 -39.8 Research and development -24.6 -22.7 Depreciation and amortization -3.6 -3.2 Operating income 41.2 118 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 118 Interest income (expense) -25.1 -14.3 Pretax income 16.1 103.7 Taxes -5.5 -36.295 Net income 10.6 67.405 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's return on assets (ROA) for the year ending December 31, 2005 is closest to ________. A. 17.43% B. 34.86% C. 13.94% D. 1.99%
A. 17.43 ROA = Net income / Total assets Total Assets= Total Liab. + Sh. Equity = $ 386.7 ROA = 67.405 / 386.7 = 17.43%
Consider the following returns: Year End Stock X Realized Return Stock Y Realized Return Stock Z Realized Return 2004 20.1% -14.6% 0.2% 2005 72.7% 4.3% -3.2% 2006 -25.7% -58.1% -27.0% 2007 56.9% 71.1% 27.9% 2008 6.7% 17.3% -5.1% 2009 17.9% 0.9% -11.3% The Volatility on Stock X's returns is closest to: A 35% B 10% C 13% D 42%
A. 35%
Ford Motor Company had realized returns of 20%, 30%, 30%, and 20% over four quarters. What is the quarterly standard deviation of returns for Ford calculated from this sample? A. 5.77% B. 5.20% C. 6.06% D. 4.62%
A. 5.77% Average return = (20%+ 30% + 30% + 20%) / 4 = 25%; Standard Dev = Square Root of [(20% - 25%)2 + (30% - 25%)2 + (30% - 25%)2 + (20% - 25%)2 ]/ (4-1) = 0.0577
If the returns on a stock index can be characterized by a normal distribution with mean 12%, the probability that returns will be lower than 12% over the next period equals ________. A 50% B 25% C 46% D 33%
A. 50%
If $17,000 is invested at 10% per year, in approximately how many years will the investment double? A) 7.3 years B) 8.4 years C) 11.0 years D) 14.6 years
A. Calculate the N with fv = $34000 pv =$17000 I=10% N=7.3 The rule of 72 can again be used here to find the approximate answer. Rate to double = 72/ # years = 10% = 72/yrs
Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A. Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. B. Company A has greater leverage than Company B. C. Company A has less leverage than Company B. D. Company A and Company B have roughly equivalent enterprise values.
A. Company A is less likely than Company B to have sufficient working capital to meet its short-term needs
Assuming that Lutherʹs bonds receive a AAA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________. A) 28,469 B) 33,213 C) 23,724 D) 18,979
Answer: C 23,724
Balance Sheet Assets Liabilities Current Assets Current Liabilities Cash 50 Accounts payable 42 Accounts receivable 22 Notes payable/short-term debt 7 Inventories 17 Total current assets 89 Total current liabilities 49 Long-Term Assets Long-Term Liabilities Net property, plant, and equipment 121 Long-term debt 128 Total long-term assets 121 Total long-term liabilities 128 Total Liabilities 177 Stockholders' Equity 33 Total Assets 210 Total Liabilities and Stockholders' Equity 210 Income Statement Total sales 312 Cost of sales -210 Gross Profit 102 Selling, general, and administrative expenses -34 Research and development -10 Depreciation and amortization -5 Operating Income 53 Other income - Earnings before interest and taxes (EBIT) 53 Interest income (expense) -20 Pretax income 33 Taxes -8 Net Income 25 The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company? A. It takes on average about 4 weeks to collect payment from its customers. B. It takes on average about 6 weeks to collect payment from its customers. C. It takes on average about 7 weeks to collect payment from its customers. D. It takes on average about 11 weeks to collect payment from its customers.
A. It takes on average about 4 weeks to collect payment from its customers.
A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true? A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true? A. Since net working capital is negative, the company will not have enough funds to meet its obligations. B. Since net working capital is high, the company will likely have little difficulty meeting its obligations. C. Since net working capital is very high, the company will have ample money to invest after it meets its obligations. D. Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.
A. Since net working capital is negative, the company will not have enough funds to meet its obligations.
Investors demand a higher return for investments that have larger fluctuations in values because ________. A. they do not like risk B. they are risk seeking C. they invest for the long term D. they prefer fluctuations
A. They do not like risk
1. Dollar amounts received at different points in time cannot be compared in absolute terms. a. True b. False
A. True
While ________ seems to be a reasonable measure of risk when evaluating a large portfolio, the ________ of an individual security does not explain the size of its average return. A volatility, volatility B the mean return, standard deviation C mode, volatility D mode, mean return
A. Volatility, volatility
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow? A) It will cause the present value to fall. B) It will cause the present value to rise. C) It will have no effect on the present value. D) The effect cannot be determined with this information.
A. it will cause the present value to fall
Which of the following investments had the largest fluctuations overall return over the past eighty years? A. small stocks B. S&P 500 C. corporate bonds D. Treasury bills
A. small stocks
B
Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true? A) Asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B. B) Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets it employs than firm B. C) Both asset turnover ratios and fixed asset turnover ratios indicate that firm A is generating greater revenue per dollar of assets than firm B. D) Fixed asset turnover ratios indicate that firm A generating more sales for the assets it employs than firm B.
Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company
According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?
current liability
Accounts payable is a ________.
D
Accounts payable is a ________. A) long-term liability B) current asset C) long-term asset D) current liability
How do we handle a situation when both compounding period and cash flow interval are given to us but both are less than a year and not equal to each other?
Additional care should be taken when the compounding period is given to us and it does not equal the cash flow interval. This requires some additional steps in computing the applicable interest rate. The compounding interval has to match the cash flow interval to enable transformation to present value (PV) or future value (FV). In most cases, it should be possible to achieve this by calculating the effective annual rate from the given compounding interval and subsequently calculating the annual percentage rate and periodic interest rate for the cash flow interval.
How do we handle a situation when both compounding period and cash flow interval are given to us but both are less than a year and not equal to each other?
Additional care should be taken when the compounding period is given to us and it does not equal the cash flow interval. This requires some additional steps in computing the applicable interest rate. The compounding interval has to match the cash flow interval to enable transformation to present value (PV) or future value (FV). In most cases, it should be possible to achieve this by calculating the effective annual rate from the given compounding interval and subsequently calculating the annual percentage rate and periodic interest rate for the cash flow interval.
Yes, buy 1,000 shares × 20.50 ($20,500) and sell 1,000 shares × 20.75 ($20,750) = $250.00.
Advanced Micro Devices (NYSE: AMD) is currently trading at $20.75 on the NYSE. Advanced Micro Devices is also listed on NASDAQ. Assume it is currently trading on NASDAQ at $20.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 1000 shares?
8) The current zero-coupon yield curve for risk-free bonds is shown above. What is the risk-free interest rate on a 4-year maturity? A) 3.00% B) 3.15% C) 3.25% D) 6.34%"
Answer: C 3.25%
Which of the following is true about perpetuities?
All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. All else equal, the present value of a perpetuity is higher when the interest rate is lower. If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. All of the above are true statements.
What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?
All firms quoted on a U.S. exchange are required to use GAAP in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms.
What role does Generally Accepted Accounting Principles (GAAP) play in the accounting process?
All firms quoted on a U.S. exchange are required to use GAAP in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms.
GAAP
All firms quoted on a U.S. exchange are required to use __________ in their financial reporting process. This standardization process makes it easier to adjust and/or compare the financial figures across different firms.
Which of the following is true about perpetuities?
All of the above are true statements.
B
Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows? A) It would be an expense on the income statement so it would be reflected in operating cash flows. B) It would be an addition to property, plant and equipment so it would be an investing activity. C) It would be an addition to cash so it would be reflected in the change in cash. D) None of the above answers is correct.
Everything else remaining same, under what situation will APR and EAR be equal?
An APR will equal EAR only with annual compounding assuming everything else remains same.
Everything else remaining same, under what situation will APR and EAR be equal?
An APR will equal EAR only with annual compounding assuming everything else remains same.
D
An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $2.00 dividend? A) $1.87 B) $2.81 C) $3.28 D) $2.34
A
An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $5.00 dividend? A) $3.28 B) $3.93 C) $2.62 D) $4.59
inverted
An _____________ yield curve is often interpreted as a negative forecast for economic growth
C
An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright? A) Leasing costs $116 more than buying. B) Leasing costs $174 more than buying. C) Leasing costs $145 more than buying. D) Leasing costs $289 more than buying.
B
An annuity is set up that will pay $1500 per year for ten years. What is the present value (PV) of this annuity given that the discount rate is 9%? A) $5776 B) $9626 C) $11,551 D) $13,476
C
An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%? A) $85.60 B) $171.20 C) $142.67 D) $199.74
D
An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity at the end of that 53 years given that the discount rate is 9%? A) $8258.91 B) $16,517.82 C) $19,270.79 D) $13,764.8
D
An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity at the end of those 22 years, given that the discount rate is 8%? A) $1563.88 B) $3127.76 C) $3649.06 D) $2606.47
C
An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You donʹt care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac? A) $87,000, since the Cadillac could be sold for this price. B) $52,000, since the Cadillac could be bought for this price. C) $35,000, since this is the difference between purchase and resale price of the Cadillac. D) $35,000, since this is the value of the car that you really want to buy.
C
An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year? A) $39,614 B) $63,382 C) $79,228 D) $95,074
D
An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made? A) No, because the investment will yield $82,840 less than putting the money in a bank. B) Yes, because the investment will yield $66,272 more than putting the money in a bank. C) Yes, because the investment will yield $74,556 more than putting the money in a bank. D) Yes, because the investment will yield $82,840 more than putting the money in a bank.
C
An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows? A) $304.91 B) $307.69 C) $300.29 D) $320.00
C
An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525 . How much cash will the investor have from the sale, once the mortgage is paid off? A) $57,216 B) $100,129 C) $71,521 D) $143,041
What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face value and a price of $9400 when released? A) 3.191 % B) 6.000 % C) 6.383% D) 0.009 %
Answer: C 6.383%
D
An investor has the opportunity to buy a $10,000 government bond which is guaranteed to yield 6.5% interest in one yearʹs time. The investor decides to make the investment as there is a net difference between the absolute cost and benefit. Which of the following is NOT a reason that the investorʹs decision may be flawed? A) It does not consider the current market interest rate. B) It does not consider the fact that though costs are incurred today, the benefits occur in one yearʹs time. C) It does not consider the value of the $10,000 in one yearʹs time if invested elsewhere. D) It does not consider whether the $10,000 will be needed elsewhere.
Why should interest rates be generally positive?
An investor should be compensated for foregoing current consumption and, everything else remaining the same, a positive interest rate serves to compensate the investor
Why should interest rates be generally positive?
An investor should be compensated for foregoing current consumption and, everything else remaining the same, a positive interest rate serves to compensate the investor.
interest rates should generally be positive
An investor should be compensated for foregoing current consumption and, everything else remaining the same, a positive interest rate serves to compensate the investor. IGNORE
Which of the following is an example of arbitrage?
An investor, seeing that the price of palladium on the metals exchange in two different countries is sightly different, buys on one and sells on the other to make a profit
You are in the process of purchasing a new automobile that will cost you $25,000. The dealership is offering you either a $1,000 rebate (applied toward the purchase price) or 3.9% financing for 60 months (with payments made at the end of the month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 7.5% for 60 months. Should you take the $1,000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3.9% APR?
Answer: Financing through credit union: First we need the monthly interest rate = APR / m = 0.075 / 12 = 0.00625 or 0.625%. Now: PV=$24,000 (25,000 - 1,000 rebate) I = 0.625 FV = 0 N = 60 Compute PMT = $480.91. Financing through dealership: First we need the monthly interest rate = APR / m = 0.039 / 12 = 0.00325 or 0.325%. Now: PV = $25,000 (no rebate) I = 0.325 FV = 0 N = 60 Compute PMT = $459.29 Since 459.29 < 480.91, go with the dealership financing and forgo the rebate.
What is the net present value (NPV) of an investment that costs $2,500 and pays $1,000 at the end of one, three, and five years?
Answer: NPV = -$2,500 + $1,000 / (1.05)1 + $1,000 / (1.046)3 + $1,000 / (1.045)5 = $128.62
Which of the following formulas is INCORRECT? A) PV of a growing annuity = C x 1/r-g (1 - (1+r/1+g)^N) B) PV of an annuity = C x 1/r(1 - 1/(1+r)^N) C) PV of a growing perpetuity = C/r-g D) PV of a perpetuity = C/r
Answer: A
Which of the following statements regarding growing perpetuities is FALSE? A) We assume that r < g for a growing perpetuity. B) PV of a growing perpetuity = C/ r - g C) To find the value of a growing perpetuity one cash flow at a time would take forever. D) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever.
Answer: A We assume that r < g for a growing perpetuity.
Assuming that Lutherʹs bonds are rated AAA, their price will be closest to ________. A) $1064 B) $1277 C) $1490 D) $852
Answer: A $1064
What must be the price of a $10,000 bond with a 6.1% coupon rate, semiannual coupons, and five years to maturity if it has a yield to maturity of 10% APR? A) $8494.26 B) $10,193.11 C) $11,891.97 D) $6795.41
Answer: A $8494.26
A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.1% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What is the new price of the bond? A) $883.91 B) $1060.69 C) $1237.47 D) $1,000.00
Answer: A $883.91
The credit spread of the BBB corporate bond is closest to ________. A) 0.8% B) 1.10% C) 1.60% D) 0.40%
Answer: A 0.8%
The credit spread of the B corporate bond is closest to ________. A) 1.4% B) 1.70% C) 2.80% D) 0.70%
Answer: A 1.4%
A risk-free, zero-coupon bond with a $5000 face value has 15 years to maturity. The bond currently trades at $3750 . What is the yield to maturity of this bond? A) 1.936 % B) 0.968 % C) 62.500 % D) 75.000 %
Answer: A 1.936 %
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.3%, then the price that this bond trades for will be closest to ________. A) $1063 B) $850 C) $1276 D) $1488
Answer: A 1063
Assuming that Lutherʹs bonds receive a AA rating, the number of bonds that Luther must issue to raise the needed $25 million is closest to ________. A) 27,848 B) 33,417 C) 38,987 D) 22,278
Answer: A 27,848
What is the coupon rate of an eight-year, $10,000 bond with semiannual coupons and a price of $9006.6568 , if it has a yield to maturity of 6.5%? A) 4.888 % B) 5.87% C) 6.84% D) 3.91%
Answer: A 4.888 %
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 5 Price (per $100 face value) 78.35 The yield to maturity for the three-year zero-coupon bond is closest to ________. A) 5.40% B) 2.70% C) 10.80% D) 0.15%
Answer: A 5.40
A firm issues 5-year bonds with a coupon rate of 4.7%, paid semiannually. The credit spread for this firmʹs 5-year debt is 1.2%. New 5-year Treasury notes are being issued at par with a coupon rate of 5.1%. What should the price of the firmʹs outstanding 5-year bonds be if their face value is $1,000? A) $932.28 B) $12.00 C) $1305.19 D) $745.82
Answer: A 932.28
An S corporation earns $9.10 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $5.00 dividend? A) $3.28 B) $3.93 C) $2.62 D) $4.59
Answer: A Explanation: A) $9.10 × 36% = $3.28
Why is the yield to maturity of a zero-coupon, risk-free bond that matures at the end of a given period the risk-free interest rate for that period? A) Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity. B) Since a bondʹs price will converge on its face value as the bond approaches the maturity date, the Law of One Price dictates that the risk-free interest rate will reflect this convergence. C) Since interest rates will rise and fall in response to the movement in bond prices. D) Since there is, by definition, no risk in investing in such bonds, the return from such bonds is the best that can be expected from any investment over the period.
Answer: A Since such a bond provides a risk-free return over that period, the Law of One Price guarantees that the risk-free interest rate equals the yield to maturity.
A corporation issues a bond that generates the above cash flows. If the periods are of 3 -month intervals, which of the following best describes that bond? A) a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly B) a 15-year bond with a notional value of $5000 and a coupon rate of 1.2% paid annually C) a 30-year bond with a notional value of $5000 and a coupon rate of 3.5% paid semiannually D) a 60-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly
Answer: A a 15-year bond with a notional value of $5000 and a coupon rate of 4.6% paid quarterly
Which of the following bonds is trading at a premium? A) a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually B) a ten-year bond with a $4,000 face value whose yield to maturity is 6.0% and coupon rate is 5.9% APR paid semiannually C) a 15-year bond with a $10,000 face value whose yield to maturity is 8.0% and coupon rate is 7.8% APR paid semiannually D) a two-year bond with a $50,000 face value whose yield to maturity is 5.2% and coupon rate is 5.2% APR paid monthly
Answer: A a five-year bond with a $2,000 face value whose yield to maturity is 7.0% and coupon rate is 7.2% APR paid semiannually
Which of the following bonds will be least sensitive to a change in interest rates? A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually
Answer: A a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually
A bond certificate includes ________. A) the terms of the bond B) the individual to whom payments will be made C) the yield to maturity of the bond D) the price of the bond
Answer: A the terms of the bond
Shown above is information from FINRA regarding one of Bank of Americaʹs bonds. How much would the holder of such a bond earn each coupon payment for each $100 in face value if coupons are paid semiannually? A) $1.49 B) $2.15 C) $2.32 D) $4.30
Answer: B $2.15
The Sisyphean Company has a bond outstanding with a face value of $5000 that matures in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.9% and that the coupon payments are to be made semiannually. How much will each semiannual coupon payment be? A) $445.0 B) $222.5 C) $667.5 D) $890.0
Answer: B $222.5
Consider a zero-coupon bond with $100 face value and 15 years to maturity. If the YTM is 7.4%, this bond will trade at a price closest to ________. A) $41.13 B) $34.27 C) $47.98 D) $54.83
Answer: B $34.27
A bond has a $10,000 face value, ten years to maturity, and 8% semiannual coupon payments. What would be the expected difference in this bondʹs price immediately before and immediately after the next coupon payment? A) $800 B) $400 C) $1200 D) $200
Answer: B $400
What is the coupon payment of a 15-year $10,000 bond with a 9% coupon rate with semiannual payments? A) $150.00 B) $450 C) $900.00 D) $1800.00
Answer: B $450
The current zero-coupon yield curve for risk-free bonds is shown above. What is the price of a zero-coupon, four-year, risk-free bond of $100? A) $85.64 B) $87.99 C) $92.15 D) $96.67
Answer: B $87.99
A 20-year bond with a $1,000 face value was issued with a yield to maturity of 4.3% and pays coupons semi-annually. After ten years, the yield to maturity is still 4.3% and the clean price of the bond is $959.71 . After three more months go by, what would you expect the dirty price to be? A) $978.71 B) $969.21 C) $997.71 D) Cannot be determined from information given.
Answer: B $969.21
The above table shows the yields to maturity on a number of two -year, zero-coupon securities. What is the credit spread on a two -year, zero-coupon corporate bond with a B rating? A) 2.4% B) 2.0% C) 2.8% D) 1.6%
Answer: B 2.0%
What is the yield to maturity of a(n) eight-year, $5000 bond with a 4.4% coupon rate and semiannual coupons if this bond is currently trading for a price of $4723.70 ? A) 6.31% B) 5.26% C) 7.36% D) 2.63%
Answer: B 5.26
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 10 years. The bond certificate indicates that the stated coupon rate for this bond is 8.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 11.1%, then the price that this bond trades for will be closest to ________. A) $652 B) $816 C) $979 D) $1142
Answer: B 816
Which of the following statements regarding bonds and their terms is FALSE? A) The amount of each coupon payment is determined by the coupon rate of the bond. B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value. C) The zero-coupon bond has no periodic interest payments. D) Treasury bills are U.S. government bonds with a maturity of up to one year.
Answer: B B) Prior to its maturity date, the price of a zero-coupon bond is always greater than its face value.
A ten-year, zero-coupon bond with a yield to maturity of 4% has a face value of $1000 . An investor purchases the bond when it is initially traded, and then sells it four years later. What is the rate of return of this investment, assuming the yield to maturity does not change? A) 3.20% B) 2.40% C) 4.00% D) 2.00%
Answer: C 4.00%
A $1000 bond with a coupon rate of 6.2% paid semiannually has eight years to maturity and a yield to maturity of 8.3%. If interest rates rise and the yield to maturity increases to 8.6%, what will happen to the price of the bond? A) The price of the bond will fall by $18.93 . B) The price of the bond will fall by $15.78 . C) The price of the bond will rise by $15.78 . D) The price of the bond will not change.
Answer: B B) The price of the bond will fall by $15.78 .
Suppose that when these bonds were issued, Luther received a price of $972.42 for each bond. What is the likely rating that Lutherʹs bonds received? A) AA B) BBB C) B D) A
Answer: B BBB
Which of the following statements regarding bonds and their terms is FALSE? A) Bonds are securities sold by governments and corporations to raise money from investors today in exchange for a promised future payment. B) By convention, the coupon rate is expressed as an effective annual rate. C) Bonds typically make two types of payments to their holders. D) The time remaining until the repayment date is known as the term of the bond
Answer: B By convention, the coupon rate is expressed as an effective annual rate.
Which of the following statements regarding bonds and their terms is FALSE? A) The internal rate of return (IRR) of an investment in a zero-coupon bond is the rate of return that investors will earn on their money if they buy a default-free bond at its current price and hold it to maturity. B) The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond. C) Financial professionals also use the term spot interest rates to refer to the default-free zero-coupon yields. D) When we calculate a bondʹs yield to maturity by solving the formula, (1 + YTM)1 (1 + YTM)2 the yield we compute will be a rate per coupon interval.
Answer: B The yield to maturity of a bond is the discount rate that sets the future value (FV) of the promised bond payments equal to the current market price of the bond.
Which of the following statements regarding bonds and their terms is FALSE? A) One advantage of quoting the yield to maturity rather than the price is that the yield is independent of the face value of the bond. B) Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity. C) Because we can convert any bond price into a yield, and vice versa, bond prices and yields are often used interchangeably. D) The internal rate of return (IRR) of a bond is given a special name, the yield to maturity (YTM).
Answer: B Unlike the case of bonds that pay coupons, for zero-coupon bonds, there is no formula to solve for the yield to maturity.
A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond? A) a 10-year bond with a face value of $2,000 and a coupon rate of 4.8% with monthly payments B) a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments C) a 10-year bond with a face value of $2,009.67 and a coupon rate of 4.8% with monthly payments D) a 10-year bond with a face value of $2,009.67 and a coupon rate of 5.8% with monthly payments
Answer: B a 10-year bond with a face value of $2,000 and a coupon rate of 5.8% with monthly payments
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 8.1% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 10.6%, then this bond will trade at ________. A) a premium B) a discount C) par D) none of the above
Answer: B a discount
A corporate bond which receives a BBB rating from Standard & Poorʹs is considered ________. A) a junk bond B) an investment grade bond C) a defaulted bond D) a high-yield bond
Answer: B an investment grade bond
The above information is for a corporate bond issued by the Markel Corporation. What sort of bond is this? A) a high-risk bond B) an investment grade bond C) a speculative bond D) a high-yield bond
Answer: B an investment grade bond
What is the dirty price of a bond? A) the bondʹs price based only on the bondʹs yield B) the bondʹs actual cash price C) the bondʹs price based only on coupon payments D) the bondʹs price less an adjustment for changes in interest rates
Answer: B the bondʹs actual cash price
Which of the following statements is FALSE? A) The actual return kept by an investor will depend on how the interest is taxed. B) The equivalent after-tax interest rate is r(1 - τ). C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities. D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows.
Answer: C
A mining company needs to raise $100 million in order to begin open -pit mining of a coal seam. The company will fund this by issuing 30-year bonds with a face value of $1,000 and a coupon rate of 6.5%, paid annually. The above table shows the yield to maturity for similar 30-year corporate bonds of different ratings. If the companyʹs bonds are rated A, what will be their selling price? A) $1265.37 B) $1476.27 C) $1054.48 D) $843.58
Answer: C $1054.48
An investor holds a Ford bond with a face value of $5000 , a coupon rate of 8.5%, and semiannual payments that matures on January 15, 2029. How much will the investor receive on January 15, 2029? A) $2606.25 B) $5000.00 C) $5212.50 D) $5425.00
Answer: C $5212.50
A risk-free, zero-coupon bond has 15 years to maturity. Which of the following is closest to the price per $1000 of face value that the bond will trade at if the YTM is 6.1%? A) $663.78 B) $774.42 C) $553.15 D) $885.05
Answer: C $553.15
What must be the price of a $1000 bond with a 5.8% coupon rate, annual coupons, and 20 years to maturity if YTM is 7.8% APR? A) $960.82 B) 1120.95 C) $800.68 D) $640.54
Answer: C $800.68
The above table shows the yields to maturity on a number of three-year, zero-coupon securities. What is the price per $100 of the face value of a three-year, zero-coupon corporate bond with a BBB rating? A) $99.06 B) $115.57 C) $82.55 D) $66.04
Answer: C $82.55
A company issues a ten-year $1,000 face value bond at par with a coupon rate of 6.7% paid semiannually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 8.1%. What was the percentage change in the price of the bond over the past two years? A) -6.50% B) -9.75% C) -8.13% D) -11.38 %
Answer: C -8.13%
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in five years. The bond certificate indicates that the stated coupon rate for this bond is 8.5% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1081.73 , then the YTM for this bond is closest to ________. A) 5.2% B) 7.87% C) 6.56% D) 9.18%
Answer: C 6.56%
Consolidated Insurance wants to raise $35 million in order to build a new headquarters. The company will fund this by issuing 10-year bonds with a face value of $1,000 and a coupon rate of 6.3%, paid semiannually. The above table shows the yield to maturity for similar 10-year corporate bonds of different ratings. Which of the following is closest to how many more bonds Consolidated Insurance would have to sell to raise this money if their bonds received an A rating rather than an AA rating? A) 937 bonds B) 1093 bonds C) 781 bonds D) 625 bonds
Answer: C 781 bonds
An investor purchases a 30-year, zero-coupon bond with a face value of $5000 and a yield to maturity of 8.4%. He sells this bond ten years later. What is the rate of return on his investment, assuming yield to maturity does not change? A) 6.72% B) 5.04% C) 8.40% D) 4.20%
Answer: C 8.40%
Which of the following statements is true of bond prices? A) A fall in bond prices causes interest rates to fall. B) A fall in interest rates causes a fall in bond prices. C) A rise in interest rates causes bond prices to fall. D) Bond prices and interest rates are not connected.
Answer: C A rise in interest rates causes bond prices to fall.
Lloyd Industries raised $28 million in order to upgrade its roller kiln furnace for the production of ceramic tiles. The company funded this by issuing 15-year bonds with a face value of $1,000 and a coupon rate of 6.2%, paid annually. The above table shows the yield to maturity for similar 15-year corporate bonds of different ratings issued at the same time. When Lloyd Industries issued their bonds, they received a price of $962.63. Which of the following is most likely to be the rating these bonds received? A) AA B) A C) BBB D) BB
Answer: C BBB
How are investors in zero-coupon bonds compensated for making such an investment? A) Such bonds are purchased at their face value and sold at a premium on a later date. B) Such bonds make regular interest payments. C) Such bonds are purchased at a discount, below their face value. D) Such bonds have a lower face value as compared to other bonds of similar term.
Answer: C Such bonds are purchased at a discount, below their face value.
Which of the following statements regarding bonds and their terms is FALSE? A) The bond certificate typically specifies that the coupons will be paid periodically until the maturity date of the bond. B) The bond certificate indicates the amounts and dates of all payments to be made. C) The only cash payments the investor will receive from a zero-coupon bond are the interest payments that are paid up until the maturity date. D) The face value of a bond is repaid at maturity
Answer: C The only cash payments the investor will receive from a zero-coupon bond are the interest
Why are the interest rates of U.S. Treasury securities less than the interest rates of equivalent corporate bonds? A) The U.S. government has a high credit spread. B) There is significant risk that the U.S. government will default. C) U.S. Treasury securities are widely regarded to be risk-free. D) U.S. Treasury securities yield inflation adjusted interest rates.
Answer: C U.S. Treasury securities are widely regarded to be risk-free.
Which of the following bonds will be most sensitive to a change in interest rates if all bonds have the same initial yield to maturity? A) a ten-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually B) a ten-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually C) a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually D) a 20-year bond with a $1,000 face value whose coupon rate is 7.4% APR paid semiannually
Answer: C a 20-year bond with a $1,000 face value whose coupon rate is 5.8% APR paid semiannually
Which of the following bonds is trading at par? A) a bond with a $2,000 face value trading at $1,987 B) a bond with a $1,000 face value trading at $999 C) a bond with a $1,000 face value trading at $1,000 D) a bond with a $2,000 face value trading at $2,012
Answer: C a bond with a $1,000 face value trading at $1,000
The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 5 years. The bond certificate indicates that the stated coupon rate for this bond is 10.0% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at ________. A) par B) a discount C) a premium D) none of the above
Answer: C a premium
A university issues a bond with a face value of $5000 and a coupon rate of 4.41% that matures on July 15, 2018. The holder of such a bond receives coupon payments of $110.25 . How frequently are coupon payments made in this case? A) monthly B) quarterly C) semiannually D) annually
Answer: C semiannually
The following table summarizes prices of various default-free zero-coupon bonds (expressed as a percentage of face value): Maturity (years) 1 2 3 4 5 Price (per $100 face value) 94.52 89.68 85.40 81.65 78.35 Based upon the information provided in the table above, you can conclude ________. A) that the yield curve is flat B) nothing about the shape of the yield curve C) that the yield curve is downward sloping D) that the yield curve is upward sloping
Answer: C that the yield curve is downward sloping
If an analyst incorrectly adds cash flows occurring at different points in time, what is the implied assumption in the process?
Answer: Cash flows occurring at different points in time cannot be added because a dollar today is worth more than a dollar tomorrow. In other words, these cash flows are not in the same units. The compounding and discounting effect causes these cash flows to be different across time. However, this is only valid for nonzero interest rates. Hence, the implied assumption in adding cash flows across time is that interest rate is zero.
Which of the following statements is FALSE about interest rates? A) As interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of cash flows. B) The effective annual rate indicates the amount of interest that will be earned at the end of one year. C) The annual percentage rate indicates the amount of simple interest earned in one year. D) The annual percentage rate indicates the amount of interest including the effect of compounding.
Answer: D
Which of the following statements is FALSE? A) The interest rates that banks offer on investments or charge on loans depend on the horizon of the investment or loan. B) The Federal Reserve determines very short-term interest rates through its influence on the federal funds rate. C) The interest rates that are quoted by banks and other financial institutions are nominal interest rates. D) Fundamentally, interest rates are determined by the Federal Reserve.
Answer: D
Which of the following statements is FALSE? A) The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.
Answer: D
A firm issues two -year bonds with a coupon rate of 6.7%, paid semiannually. The credit spread for this firmʹs two -year debt is 0.8%. New two -year Treasury notes are being issued at par with a coupon rate of 3.1%. What should the price of the firmʹs outstanding two -year bonds be per $100 of face value? A) $126.40 B) $147.47 C) $84.27 D) $105.34
Answer: D $105.34
Consider a zero-coupon bond with a $1000 face value and 10 years left until maturity. If the YTM of this bond is 10.2%, then the price of this bond is closest to ________. A) $1000 B) $454.32 C) $530.04 D) $379
Answer: D $379
A risk-free, zero-coupon bond with a face value of $10,000 has 15 years to maturity. If the YTM is 6.1%, which of the following would be closest to the price this bond will trade at? A) $4937 B) $5760 C) $6582 D) $4114
Answer: D $4114
Which of the following best shows the timeline for cash flows from a five-year bond with a face value of $2,000, a coupon rate of 5.0%, and semiannual payments? A)0 1 2 3 4 5 $100 $100 $100 $100 $2100 B)0 1 2 3 9 10 $25 $25 $25 $25 $25 C)0 1 2 3 9 10 $50 $50 $50 $50 $50 D)$5212.50
Answer: D $5212.50
A company releases a five-year bond with a face value of $1000 and coupons paid semiannually. If market interest rates imply a YTM of 8%, which of the following coupon rates will cause the bond to be issued at a premium? A) 7% B) 6% C) 8% D) 10%
Answer: D 10%
The above table shows the price per $100-face value bond of several risk-free, zero-coupon bonds. What is the yield to maturity of the two year, zero-coupon, risk-free bond shown? Price $97.25 $94.53 $91.83 $89.23 $87.53 A) 1.43% B) 5.71% C) 0.05% D) 2.85%
Answer: D 2.85%
Consider a zero-coupon bond with a $1000 face value and 15 years left until maturity. If the bond is currently trading for $431 , then the yield to maturity on this bond is closest to ________. A) 2.89% B) 56.90 % C) 43.10% D) 5.77%
Answer: D 5.77
A bond has five years to maturity, a $1000 face value, and a 5.5% coupon rate with annual coupons. What is its yield to maturity if it is currently trading at $846.11 ? A) 11.41 % B) 13.31 % C) 7.61% D) 9.51%
Answer: D 9.51%
The Sisyphean Company has a bond outstanding with a face value of $5000 that reaches maturity in 8 years. The bond certificate indicates that the stated coupon rate for this bond is 8.2% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $4541.53 , then the YTM for this bond is closest to ________. A) 7.9% B) 11.9% C) 13.8% D) 9.9%
Answer: D 9.9%
The price (expressed as a percentage of the face value) of a one-year, zero-coupon corporate bond with a AAA rating is closest to ________. A) 113.53 B) 132.45 C) 75.69 D) 94.61
Answer: D 94.61
Which of the following is true about the face value of a bond? A) It is the notional amount we use to compute coupon payments. B) It is the amount that is repaid at maturity. C) It is usually denominated in standard increments, such as $1,000. D) All of the above are true.
Answer: D All of the above are true.
A bond is currently trading below par. Which of the following must be true about that bond? A) The bondʹs yield to maturity is less than its coupon rate. B) The bond is a zero-coupon bond. C) The bondʹs yield to maturity is greater than its coupon rate. D) B or C above
Answer: D B or C above
Which of the following statements regarding bonds and their terms is FALSE? A) Zero-coupon bonds are also called pure discount bonds. B) The internal rate of return (IRR) of an investment opportunity is the discount rate at which the net present value (NPV) of the investment opportunity is equal to zero. C) The yield to maturity for a zero-coupon bond is the return you will earn as an investor from holding the bond to maturity and receiving the promised face value payment. D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.
Answer: D D) When prices are quoted in the bond market, they are conventionally quoted in increments of $1,000.
Which of the following risk-free, zero-coupon bonds could be bought for the lowest price? A) one with a face value of $1,000, a YTM of 4.8%, and 5 years to maturity B) one with a face value of $1,000, a YTM of 3.2%, and 8 years to maturity C) one with a face value of $1,000, a YTM of 6.8%, and 10 years to maturity D) The only cash payments the investor will receive from a zero-coupon bond are the interest
Answer: D The only cash payments the investor will receive from a zero-coupon bond are the interest
A $5000 bond with a coupon rate of 5.7% paid semiannually has ten years to maturity and a yield to maturity of 6.4%. If interest rates fall and the yield to maturity decreases by 0.8%, what will happen to the price of the bond? A) The price of the bond will fall by $293.50 . B) The price of the bond will fall by $352.20 . C) The price of the bond will rise by $410.90 . D) The price of the bond will rise by $293.50 .
Answer: D The price of the bond will rise by $293.50 .
D
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________. A) ($1400) B) $1400 C) ($3908) D) $3908
Which of the following best illustrates why a bond is a type of loan? A) The issuers of bonds make regular payments to bondholders. B) When a company issues a bond, the buyer of that bond becomes an owner of the issuing company. C) Funds raised are used to finance long-term projects. D) When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future
Answer: D When an investor buys a bond from an issuer, the investor is giving money to the issuer, with the assurance that it will be repaid at a date in the future
Which of the following bonds will be most sensitive to a change in interest rates? A) a ten-year bond with a $2,000 face value whose yield to maturity is 5.8% and coupon rate is 5.8% APR paid semiannually B) a 15-year bond with a $5,000 face value whose yield to maturity is 7.4% and coupon rate is 6.2% APR paid annually C) a 20-year bond with a $3,000 face value whose yield to maturity is 6.0% and coupon rate is 5.4% APR paid semiannually D) a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually
Answer: D a 30-year bond with a $1,000 face value whose yield to maturity is 5.5% and coupon rate is 6.4% APR paid annually
If the yield to maturity of all of the following bonds is 6%, which will trade at the greatest premium per $100 face value? A) a bond with a $10,000 face value, four years to maturity and 6.2% semiannual coupon payments B) a bond with a $500 face value, seven years to maturity and 5.2% annual coupon payments C) a bond with a $5,000 face value, seven years to maturity and 5.5% annual coupon payments D) a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments
Answer: D a bond with a $1,000 face value, five years to maturity and 6.3% annual coupon payments
Which of the following best describes a bond rated by Standard & Poorʹs and Moody as B? A) judged to be high quality by all standards B) considered to be medium grade obligations C) neither highly protected nor poorly secured D) generally lacks the characteristics of a desirable investment
Answer: D generally lacks the characteristics of a desirable investment
Refer to the balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Lutherʹs enterprise value?
Answer: Enterprise value = Market value of equity + Debt - Cash Market value of equity = 8 million × $15 = $120 million Debt = Notes payable + Current maturities of long-term debt + Long-term debt Debt = $9.6 + $36.9 + $168.9 = $215.4 Cash = $58.5 So, enterprise value = $120 + 215.4 - 58.5 = $276.90.
You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $3,250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
Answer: Pay the points! Points (6.25% APR) First we need the monthly interest rate = APR / m = 0.0625 / 12 = 0.00520833 or 0.5208%. Now: PV = $328,250 ($325,000 + 1 point) I = 0.5208 FV = 0 N = 360 (30 years × 12 months) Compute PMT = $2,021.01 No Points (6.5% APR) First we need the monthly interest rate = APR / m = 0.065 / 12 = 0.005417 or 0.5417%. Now: PV = $325,000 (no points) I = 0.5417 FV = 0 N = 360 (30 years × 12 months) Compute PMT = $2,054.22 Since $2,021.01 < $2,054.22, pay the points!
Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
Answer: The nominal interest rate can never be negative since by just holding your money you are earning a 0% return (no negative) on your money. The real rate, however, can be negative anytime that the inflation rate exceeds the nominal rate.
Suppose the term structure of interest rates is shown below: Term: Rate (EAR%): 1=5.00% 2=4.80% 3=4.60% 5=4.50% 10=4.25% 20=4.15% After examining the yield curve, what predictions do you have about interest rates in the future? About future economic growth and the overall state of the economy?
Answer: This is an inverted yield curve, which implies that interest rates should be falling in the future. An inverted yield curve is often interpreted as a negative forecast for economic growth. Since each of the last six recessions in the United States were preceded by a period with an inverted yield curve it could be a leading indicator of a future recession.
How do we decide on opportunity cost when we have several opportunities that need to be foregone?
Answer: We rank all the foregone opportunities, and opportunity cost is the second best opportunity that we forego. Thus we select the best opportunity and rank all the alternative opportunities and use the cost of the second best opportunity as opportunity cost.
How does arbitrage help the Law of One Price?
Any arbitrage opportunity will exploit any mispricing to restore the Law of One Price.
Law of One Price
Any arbitrage opportunity will exploit any mispricing to restore the ____________
C
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,100 bbl of Alaska North Slope (ANS) crude oil for 9950 bbl of West Texas Intermediate (WTI) crude oil. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you take the trade is closest to ________. A) $755,650 B) $766,150 C) $767,600 D) $776,650
A
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, what should you do? A) Sell 10,000 bbl WTI crude on the market and use the proceeds to purchase and refine ANS crude. B) Do nothing; refine the 10,000 bbl of WTI crude. C) Trade the 10,000 bbl WTI crude with the other refiner and refine the 10,150 bbl of ANS crude. D) Trade the 10,000 bbl WTI crude with the other refiner and then sell the 10,150 bbl of ANS crude.
B
As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you were to refine this crude oil and sell the unleaded gasoline is closest to ________. A) ($766,150) B) $766,150 C) ($770,032) D) $770,032
B
As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you take the trade is closest to ________. A) ($1550) B) $1550 C) ($3475) D) $3475
D
As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________. A) $794,274 B) $780,000 C) $781,550 D) $784,091
What role do external auditors play in a firm's financial reporting process?
As the name implies, external auditors act as third party monitors to a firm's financial reporting process.
What role do external auditors play in a firmʹs financial reporting process?
As the name implies, external auditors act as third party monitors to a firmʹs financial reporting process
Which of the following balance sheet equations is INCORRECT?
Assets - Current liabilities = Long-term liabilities
B
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $40,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 10%. The future value (FV) at retirement (age 65) of your savings is closest to ________. A) $722,766 B) $1,445,531 C) $1,011,872 D) $1,590,084
A
Assume that you are 30 years old today, and that you are planning on retirement at age 65. Your current salary is $42,000 and you expect your salary to increase at a rate of 5% per year as long as you work. To save for your retirement, you plan on making annual contributions to a retirement account. Your first contribution will be made on your 31st birthday and will be 8% of this yearʹs salary. Likewise, you expect to deposit 8% of your salary each year until you reach age 65. Assume that the rate of interest is 9%. The present value (PV) (at age 30) of your retirement savings is closest to ________. A) $61,303 B) $30,652 C) $42,912 D) $67,433
A
Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE? A) The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments. B) The total amount paid (principal and interest) will increase with $1,000 monthly payment compared to $900 monthly payments. C) The total interest expense will increase with $1,000 monthly payment compared to $900 monthly payments. D) The total principal paid will decrease with $1,000 monthly payment compared to $900 monthly payments.
A _____ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. A. shareholder action B. hostile takeover C. leveraged buyout D. shareholder proposal
B
A company that produces racing motorbikes has several models that sell well within the motorcycle racing community and which are very profitable for the company. Despite having a profitable product, why must this company take care to ensure that it has sufficient cash on hand to meet its obligations? A) Profits from the sales of popular models will be lost when returned to the shareholders in the form of dividends. B) New models will require a lot of money to develop and bring to market before they generate any revenue. C) The company will have built up debts which must be repaid in order to bring the current models to market. D) Equity must be raised to finance the development of new models to replace the existing models.
B
A company's board of directors chooses to provide a comprehensive health care plan for the families of all employees, despite the large cost. They argue that this will not only increase the number of employees who stay with the firm, and thus reduce some costs involved in employee turnover, but also increase the employees' diligence and industry. What general principle is being argued by the board of directors? A) In a conflict between stakeholders in a company, the most important stakeholder is not always the stockholders. B) Some activities that decrease shareholders' wealth may have intangible benefits which increase the strength of the company overall. C) When a conflict of interest arises between shareholders and other stakeholders, in general, the correct solution is the one that creates the greatest good for the greatest number of stakeholders. D) Ethical decisions should be assessed on their moral value, not on their value in dollars and cents.
B
A corporate raider gains a controlling fraction of the shares of a poorly managed company and replaces the board of directors. How does the corporate raider hope to make a profit in this case? A) by the sale of the assets held by the company that hold most of its value B) by the rise in the value of the stock held by the raider when the new board of directors is judged to be superior to the ousted board of directors C) by motivating the board of directors and other stakeholders in the company to make difficult short-term decisions that will increase the long-term viability of the company D) by removing the employees expectations of the continued poor performance of the company
B
B
If the current inflation rate is 2.0%, then the nominal rate necessary for you to earn a(n) 7.3% real interest rate on your investment is closest to ________. A) 11.3% B) 9.4% C) 13.2% D) 15.1%
A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company? A) Investors may consider this firm to be a growth company. B) Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value. C) The firmʹs market value is more than its book value. D) The value of the firmʹs assets is greater than their liquidation value.
B
How do the shareholders of most corporations exercise their control of that corporation? A) by voting on issues that concern them B) by electing members of a board of directors C) by vetting the decisions of the board of directors D) by providing oversight of the day-to-day running of the corporation
B
Put the following steps of the financial cycle in the correct order. I.Money flows to companies who use it to fund growth through new products. II.People invest and save their money. III.Money flows back to savers and investors. A) I, II, and III B) II, I, and III C) III, II, and I D) II, III, and I
B
The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case? A) by increasing the debt burden carried by the company B) by raising the company's equity by encouraging new owners to take a stake in the company C) by decreasing the ratio of equity to debt held by the company D) by increasing the value of shares held by the existing owners of the company
B
What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.
B
What is the process of double taxation for the stockholders in a C corporation? A. The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares B. The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them C. The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation D. Their shares are taxed when they are both bought and sold
B
Which of the following is a measure of the aggregate price level of collections of pre-selected stocks? A) NASDAQ B) S&P 500 C) NYSE D) Euronext
B
Why is a stock exchange like NASDAQ considered a secondary market? A) It trades the second largest volume of shares in the world. B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation. C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart. D) NASDAQ is called a secondary market because NYSE is considered a primary market.
B
Why is the stock price of a company an indication of the performance of the company's senior managers? A) Well-run companies are invariably highly profitable, which leads to a higher share price. B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares. C) Investors who can see that a company is well-run will hold on to their shares, even if the company faces setbacks, since they know that the stock price will likely rise again. D) Larger companies tend to be better run and so have higher stock prices.
B
Yahoo! Inc Last Trade: 18.18 Day's Range: 17.40 - 18.30 Bid: 18.18 Ask: 18.24 If you wanted to sell Yahoo! at the time of this quote, what price per share would you have received? A. 18.30 B. 18.18 C. 18.24 D. 17.40
B
Which of the following statements is FALSE? A The covariance and correlation allow us to measure the co-movement of returns. B Correlation is the expected product of the deviations of two returns. C Because the prices of the stocks do not move identically, some of the risk is averaged out in a portfolio. D The amount of risk that is eliminated in a portfolio depends on the degree to which the stocks face common risks and their prices move together.
B Correlation is the expected product of the deviations of two returns.
The risk that is linked across outcomes is called ________. A diversifiable risk B common risk C uncorrelated risk D independent risk
B common risk
In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer? A) $744,000 B) $1,240,000 C) $992,000 D) $1,488,000
B) $1,240,000 Explanation: B) -13 × 320,000 + 120 × 45,000 = -4,160,000 + 5,400,000 = $1,240,000
A home buyer buys a house for $2,155,000. She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment? A) $11,342.47 B) $10,311.34 C) $12,373.61 D) $8249.07
B) $10,311.34
A home buyer buys a house for $2,155,000 . She pays 20% cash, and takes a fixed-rate mortgage for ten years at 7.70% APR. If she makes semi-monthly payments, which of the following is closest to each of her payment?
B) $10,311.34 B) Calculate bimonthly payment when PV of ordinary annuity = $1,724,000 , periodic interest = 7.70/24%, and number of periods = 240.
A lottery winner will receive $6 million at the end of each of the next twelve years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.6% per year? A) $94.40 million B) $118.00 million C) $165.20 million D) $188.80 million
B) $118.00 million
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________. A) $14,000 B) $12,727 C) $15,273 D) $17,818
B) $12,727
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 6.15% APR. Your monthly payments are $388.05 and you have just made your 24th monthly payment on your SUV. Assuming that you have made all of the first 24 payments on time, then the outstanding principal balance on your SUV loan is closest to ________.
B) $12,727 B) First we need the monthly interest rate = APR / m = 0.0615 / 12 = 0.005125 or 0.5125 %. Now: I = 0.5125 FV = 0 N = 36 (remaining payments 60 - 24 = 36) PMT = 388.05 Compute PV = $12,727.23 .
Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,150 bbl of Alaska North Slope (ANS) crude oil for 10,000 bbl of West Texas Intermediate (WTI) crude oil. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you take the trade is closest to ________. A) ($1550) B) $1550 C) ($3475) D) $3475
B) $1550 Explanation: B) Total Benefits No trade and refine WTI crude (base case) 10,000 bbl × $78 of gasoline/bbl = $780,000 Trade WTI for ANS crude 10,150 bbl × $77 of gasoline/bbl = $781,550 Added Benefits = Total Benefits - Base Case Benefits of trading WTI for ANS crude = $781,550 - $780,000 = $1550
You are purchasing a new home and need to borrow $260,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.80% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 6.50% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $5200 to cover points you are paying the lender. Assuming you pay the points and borrow from the mortgage lender at 6.50%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________.
B) $1676 B) First we need the monthly interest rate = APR / m = 0.0650 / 12 = 0.005417 or 0.5417 %. Now: PV = 265,200 (2 points) I = 0.5417 FV = 0 N = 360 (30 years × 12 months) Compute PMT = $1676.24
A bank is negotiating a loan. The loan can either be paid off as a lump sum of $80,000 at the end of four years, or as equal annual payments at the end of each of the next four years. If the interest rate on the loan is 6%, what annual payments should be made so that both forms of payment are equivalent? A) $14,630 B) $18,287 C) $25,602 D) $29,259
B) $18,287
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________. A) $22,000 B) $20,000 C) $24,000 D) $28,000
B) $20,000
Two years ago you purchased a new SUV. You financed your SUV for 60 months (with payments made at the end of the month) with a loan at 5.95% APR. Your monthly payments are $386.19 and you have just made your 24th monthly payment on your SUV. The amount of your original loan is closest to ________.
B) $20,000 B) First we need the monthly interest rate = APR / m = 0.0595 / 12 = 0.004958 or 0.4958 %. Now: I = 0.4958 FV = 0 N = 60 PMT = $386.19 Compute PV = $20,000
If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to ________. A) $10,114 B) $20,227 C) $24,272 D) $32,363
B) $20,227
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $240,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4800 (paid at the end of each month). Your firm can borrow at 7.80% APR with quarterly compounding. The present value (PV) of the lease payments for the delivery truck is closest to ________.
B) $238,132 B) First we need to calculate the monthly discount rate for the lease arrangement. EAR = (1 + APR / m)m - 1 = (1 + 0.078 / 4)4 - 1 = 0.08031 or 8.031% Monthly rate = (1 + EAR)(1/12) - 1= (1 + 0.08031 )(1/12) - 1 = 0.006458 = 0.6458% Now we can apply the PVA formula to calculate the PV of the lease or by calculator: I = 0.6458 N = 60 (5 years × 12 months/yr) FV = 0 PMT = $4800 Compute PV = $238,132 .
Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity? A) $1,200,000 B) $3,900,000 C) $2,700,000 D) $9,000,000
B) $3,900,000 13,000,000 × ($2.3 - $2.00) = $3,900,000
A coin collector treasures his 1969-S doubled die obverse Lincoln cent because he found it in his pocket change, rather than purchasing it. He can sell it on the open market for $35,000, but would only sell it for at least twice that price, due to its sentimental value to him. It is anticipated that the coin will increase in market value in the foreseeable future. What is the value of the coin? A) $0.01, since he paid nothing to obtain the coin and it has a face value of one cent. B) $35,000, since this is the price that the coin would fetch on the open market. C) At least $35,000, since he could replace the coin for $35,000, but the coin he owns has additional intangible value due to its sentimental value. D) At least $35,000, since the value of the coin will increase in the future.
B) $35,000, since this is the price that the coin would fetch on the open market.
If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________.
B) $40,799 Explanation: B) N = 18 I=7 PMT = $1200 PV = 0 Compute FV = $40,799
On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21? A) $3263 B) $4079 C) $8158 D) $3766
B) $4079
You are considering purchasing a new automobile with the upfront cost of $25,000 or leasing it from the dealer for a period of 60 months. The dealer offers you 4.00% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $25,000 through the dealer, your monthly payments will be closest to ________. A) $368 B) $460 C) $552 D) $645
B) $460
You are considering purchasing a new automobile with the upfront cost of $25,000 or leasing it from the dealer for a period of 60 months. The dealer offers you 4.00% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $25,000 through the dealer, your monthly payments will be closest to ________.
B) $460 B) First we need the monthly interest rate = APR / m = 0.0400 / 12 = 0.003333 or 0.3333 %. Now: PV =$25,000 I = 0.3333 FV = 0 N = 60 Compute PMT = $460.41
What is the present value (PV) of $100,000 received six years from now, assuming the interest rate is 8% per year? A) $60,000.00 B) $63,016.96 C) $78,771.20 D) $110,279.68
B) $63,016.96
You are interested in purchasing a new automobile that costs $33,000. The dealership offers you a special financing rate of (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to ________. A) $548 B) $685 C) $959 D) $1096
B) $685
Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you were to refine this crude oil and sell the unleaded gasoline is closest to ________. A) ($766,150) B) $766,150 C) ($770,032) D) $770,032
B) $766,150 Explanation: B) Total Benefits No trade and refine WTI crude (base case) 9950 bbl × $77 of gasoline/bbl = $766,150
Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008? A) It would have $3,000,000 less cash at the end of 2008. B) It would have $2,925,000 less cash at the end of 2008. C) It would have $1,500,000 less cash at the end of 2008. D) It would have an additional $7,500,000 in cash at the end of 2008.
B) -$3,000,000 + 300,000 × 25% = -$2,925,000
If $432 invested today yields $450 in a year's time, what is the discount factor? A) 0.10 B) 0.96 C) 1.96 D) 1.92
B) 0.96
Joseph buys a Hummer for $59,000, financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions? A) 59.57 months B) 57.07 months C) 54.57 months D) 60.57 months
B) 57.07 months
Joseph buys a Hummer for $59,000 , financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions?
B) 57.07 months B) The first step is to calculate the monthly payment using a present value (PV) of $59,000 , monthly interest rate of 7.60/12 = 0.633333 %, and 60 periods, which = $1185.04 ; the second step is to add $50 to this monthly payment giving the new monthly payment of $1235.04 ; the last step is to calculate the time required to pay off the loan = 57.0740 months.
A businessman wants to buy a truck. The dealer offers to sell the truck for either $120,000 now, or six yearly payments of $25,000. Which of the following is closest to the interest rate being offered by the dealer? A) 5.8% B) 6.8% C) 7.8% D) 9.8%
B) 6.8%
Elinore is asked to invest $5100 in a friendʹs business with the promise that the friend will repay $5610 in one year. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case?
B) 8% B) $5508 - $5100 = $408 ; $408 / $5100 = 0.08 or 8%
*If the current inflation rate is 2.0%, then the nominal rate necessary for you to earn a(n) 7.3% real interest rate on your investment is closest to ________. A) 11.3% B) 9.4% C) 13.2% D) 15.1%
B) 9.4%
If the current inflation rate is 2.0%, then the nominal rate necessary for you to earn a(n) 7.3% real interest rate on your investment is closest to ________.
B) 9.4% B) nominal = (1 + inflation)(1 + real) - 1 = (1 + 0.073 )(1 + 0.02) - 1 = 0.0945or 9.4%
On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21? A) $3263 B) $4079 C) $8158 D) $3766
B) Calculate the FV with PV = $1200, interest = 6%, and N = 21, which = $4079.
What is the present value (PV) of $100,000 received six years from now, assuming the interest rate is 8% per year? A) $60,000.00 B) $63,016.96 C) $78,771.20 D) $110,279.68
B) Calculate the PV with FV = $100,000, interest = 8%, and N = 6, which = $63,016.96.
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt -equity ratio for Luther in 2006 is closest to ________. A) 3.45 B) 1.72 C) 0.86 D) 2.41
B) D / E = Total debt / Total equity Total Debt = Notes payable (10.5) + Current maturities of long-term debt (39.6) + Long-term debt (231.3 ) = 281.4 million Total equity = 10.2 × $16 = $163.2, so D / E = $281.4 / $163.2 = 1.72
Helen owns 10.2% of the stock of the Median Corporation. If Median makes a dividend payment of $25,000,000 paid proportionally toits shareholders ,howmuchofthisamount would Helen receive, disregarding tax?
B) Helen will receive 10.2 % of the dividend payment proportional to her ownership: 0.102 × 25,000,000 = $2,550,000
Which of the following statements regarding the cost-benefit analysis is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.
B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values.
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? A) Investment X has a higher present value. B) Investment Y has a higher present value. C) Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. D) No comparison can be made—we need to know the interest rate to calculate the present value.
B) Investment Y has a higher present value.
Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutyʹs marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one? A) No, since costs are $7,800,000 more than benefits. B) No, since costs are $6,800,000 more than benefits. C) Yes, since the benefits are $3,400,000 more than the costs. D) Yes, since the benefits are $7,300,000 more than the costs.
B) No, since costs are $6,800,000 more than benefits. Explanation: B) 180 × 60,000 = $10,800,000; (180 - 130) × 80,000 = $4,000,000; $10,800,000 - $4,000,000 = $6,800,000
Which of the following is/are TRUE? I. The EAR can never exceed the APR. II. The APR can never exceed the EAR. III. The APR and EAR can never be equal.
B) Only II is true.
ʺIf equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets.ʺ What do we call the above statement? A) The Net Present Value rule B) The Law of One Price C) The Valuation Principle D) The Time Value of Money
B) The Law of One Price
Which of the following statements regarding annuities is FALSE? A)PV of an annuity=C× 1 1- 1 r (1 + r)N B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. C) An annuity is a stream of N equal cash flows paid at regular intervals. D) Most car loans, mortgages, and some bonds are annuities.
B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. Explanation: A perpetuity never ends.
A firm has contracted to supply 500,000 gallons of propane fuel for $1.46 million to the local municipality. The municipality wants to break the contract. What does the minimum current market of propane need to be in order for the firm to benefit from breaking the contract? A) greater than $2.90 per gallon B) greater than $2.92 per gallon C) greater than $2.94 per gallon D) greater than $2.96 per gallon
B) The firm should benefit as long as it gets a price higher than the contract price; contract price = $1,460,000 / 500,000 = $2.92.
Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by?
B) The monthly payment will decrease by $104.79 B) Current Mortgage Payment: P/Y = 12, N = 360, I/Y = 6.5, PV = $200,000, Solve for PMT = $1,264.14 Current Mortgage Balance: P/Y = 12, N = 300, I/Y = 6.5, PMT = $1,264.14, Solve for PV = $187,221.9 New Mortgage Payment: P/Y = 12, N = 240, I/Y = 4.25, PV = $187,222.54, Solve for PMT = $1,159.35 Current Payment - New Payment = $1,159.35- $1,264.14 = -$104.79
Which of the following best describes the valuation principle? A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.
B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis? A) They can be used to determine how much an asset can be sold for. B) They can be used to convert different services and commodities into equivalent cash values which can be compared. C) They allow all commodities and services to be assigned a fixed and unchanging value. D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.
B) They can be used to convert different services and commodities into equivalent cash values which can be compared.
If the current market rate of interest is 13%, then the value of the cash flows in year 0 and year 2 as of year 1 is closest to ________. A) $167.35 B) -$98.7 C) $98.7 D) -$70
B) This is a two part problem involving both present and future values. FV of year 0 c/f = FV = PV(1 + r)n = -150(1.13)1 = -$169.50 PV of year 2 c/f = PV = FV / (1 + r)n = 80 / (1.13)1 = $70.80 So, the answer is -$169.50 + $70.80 = -$98.7
Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today? A) Yes, as the difference between the present value of selling now and selling in one year is $12,300 dollars today. B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today. C) Yes, as the difference between the present value of selling now and selling in one year is $9840 dollars today. D) No, as the difference between the present value of selling now and selling in one year is -$8786 dollars today.
B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today.
Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares? A) No, no arbitrage opportunity exists. B) Yes, buy on NASDAQ and sell on NYSE, make $25. C) Yes, buy on NYSE and sell on NASDAQ, make $25. D) Yes, buy on NASDAQ and sell on NYSE, make $250.
B) Yes, buy on NASDAQ and sell on NYSE, make $25. Yes, buy 100 shares @ 48.50 and sell 100 shares @ 48.75 = $25.00.
What is a competitive market? A) a market in which goods have a different ask price and bid price B) a market in which a good can be bought and sold at the same price C) a market in which a good is sold at a lower price than that for which it can be bought D) a market in which a good is bought for a lower price than that for which it can be sold
B) a market in which a good can be bought and sold at the same price
Which of the following accounts has the highest EAR?
B) one that pays 1.0% per month B) Calculate the EAR for each choice and pick the highest: A = 11.09 %; B= 12.68 %; C = 9.60%; D = 9.95%.
Whenever a good trades in a competitive market, the ________ determines the value of the good A) supply B) price C) demand D) cost
B) price
What, typically, is used to calculate the opportunity cost of capital on a risk-free investment?
B) the interest rate on U.S. Treasury securities with the same term
In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r) + C2/(1 + r)2 + . . . . + Cn/(1 + r)n when determining the present value (PV) of a cash flow stream?
B) when short-term and long-term interest rates vary widely
20) To compute the future value of a cash flow, you must ________. A) discount it B) compound it C) double it D) arbitrage it
B.
A limited liability company is essentially ________. A) a limited partnership without limited partners B) a limited partnership without a general partner C) just another name for a limited partnership D) just another name for a corporation
B.
A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A) The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows. C) The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.
B.
A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? A) as an outflow under operating activities B) as an outflow under investment activities C) as an outflow under financial activities D) not recorded on the statement of cash flows
B.
What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.
B.
Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________. A) 4.51 B) 2.25 C) 1.13 D) 3.16
B. D / E = Total debt / Total equity Total debt = Notes payable (10.7) + Current maturities of long-term debt (38.7) + Long-term debt (234.4 ) = 283.8 million Total equity = 125.9 , so D / E = 283.8 /125.9 = 2.25
How much would you have to invest today at 9% compounded annually to have $35,000 available for the purchase of a car five years from now? a. $20,267.26 b. $22,747.60 c. $24,147.25 d. $26,370.10 e. $28,149.57
B. $22,747.60 N=5 I/YR=9 PV=> FV=35000
Consider the following price and dividend data for Quicksilver Inc.: Date Price ($) Dividend ($) December 31, 2004 $14.87 January 26, 2005 $13.79 $0.14 April 28, 2005 $9.14 $0.14 July 29, 2005 $10.74 $0.14 October 28, 2005 $8.02 $0.14 December 30, 2005 $7.72 Assume that you purchased Quicksilver's stock at the closing price on December 31, 2004 and sold it at the closing price on December 30, 2005. Your realized annual return for the year 2005 is closest to A -47.4% B -45.1% C -42.9% D -40.6%
B. -45.1%
U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form? A. 10-A B. 10-K C. 10-Q D. 10-SEC
B. 10-K
Luther Corporation Consolidated Balance Sheet December 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities and Stockholders' Equity 2006 2005 Current Assets Current Liabilities Cash 65.6 58.5 Accounts payable 88.8 73.5 Accounts receivable 54.3 39.6 Notes payable / short-term debt 10.7 9.6 Inventories 45.8 42.9 Current maturities of long-term debt 38.7 36.9 Other current assets 5.5 3.0 Other current liabilities 6.0 12.0 Total current assets 171.2 144.0 Total current liabilities 144.2 132.0 Long-Term Assets Long-Term Liabilities Land 65.3 62.1 Long-term debt 234.4 168.9 Buildings 109.4 91.5 Capital lease obligations Equipment 116.3 99.6 Less accumulated depreciation (57.9) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 233.1 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 257.2 191.1 Other long-term assets 63.0 42.0 Total liabilities 401.4 323.1 Total long-term assets 356.1 242.7 Stockholders' Equity 125.9 63.6 Total Assets 527.3 386.7 Total liabilities and Stockholders' Equity 527.3 386.7 Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________. A. 4.51 B. 2.25 C. 1.13 D. 3.16
B. 2.25 Total Debt = Notes Payable (10.7) + Curr. Mat. of LT. Debt (38.7) + LT Debt (234.4) D/E = 283.8/125.9 = 2.25
Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $25 $35 40% 25% $25 0% 50% $20 -20% 25% The variance of the return on Alpha Corporation is closest to: a. 5.00% b. 4.75% c. 3.625% d. 3.75%
B. 4.75% E[R] = .25(40%) + .50(0%) + .25(-20%) = 5% Variance: Var[R] = .25(.40 - .05)2 + .50(.00 - .05)2 + .25(-20 - .05)2 = .0475 or 4.75%
Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $25 $35 40% 25% $25 0% 50% $20 -20% 25% The expected return for Alpha Corporation is closest to: A. 6.67% B. 5.00% C. 10% D. 0.00%
B. 5.0% E[R] = .25(40%) + .50(0%) + .25(-20%) = 5%
Which of the following statements is FALSE? A. When an investment is risky, there are different returns it may earn. B. In finance, the variance of a return is also referred to as its volatility. C. The expected or mean return is calculated as a weighted average of the possible returns, where the weights correspond to the probabilities. D. The variance is a measure of how "spread out" the distribution of the return is.
B. In finance, the variance of a return is also referred to as its volatility. Why False? Because, In finance, the standard deviation of a return is also referred to as its volatility.
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? Yr Investment X Investment Y 1 $5,000 $11,000 2 $7,000 $9,000 3 $9,000 $7,000 4 $11,000 $5,000 A) Investment X has a higher present value. B) Investment Y has a higher present value. C) Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. D) No comparison can be made—we need to know the interest rate to calculate the present value.
B. Invest Y has a higher present value/ Y's CFs are larger earlier, while X's are larger later, the PV of Y's will be greater. Y's CF's are weighted more towards the present, which is more valuable.
A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company? A. Investors may consider this firm to be a growth company. B. Investors believe the company's assets are not likely to be profitable since its market value is worth less than its book value. C. The firm's market value is more than its book value. D. The value of the firm's assets is greater than their liquidation value.
B. Investors believe the company's assets are not likely to be profitable since its market value is worth less than its book value.
Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet? A. It subtracts all expenses and costs related to a firm's operating activities. B. It adds all non-cash entries related to a firm's operating activities. C. It adds the cash that flows from investors to a firm. D. It removes the cash used for investment purposes.
B. It adds all non-cash entries related to a firm's operating activities.
Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows? A. It would be an expense on the income statement so it would be reflected in operating cash flows. B. It would be an addition to property, plant and equipment so it would be an investing activity. C. It would be an addition to cash so it would be reflected in the change in cash. D. None of the above answers is correct.
B. It would be an addition to property, plant and equipment so it would be an investing activity.
If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________. A) $24,479 B) $40,799 C) $48,959 D) $57,119
B. N = 18; I = 7; PMT = $1200; PV = 0; Compute FV = $40,799
You are interested in purchasing a new automobile that costs $33,000. The dealership offers you a special financing rate of 9% APR (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to ________. A) $548 B) $685 C) $959 D) $1096
B. PV = 33,000 ; I = 0.75 ; N = 60 ; FV = 0 ; Compute payment = $685.03.
A printing company prints a brochure for a client and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A. The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B. The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows. C. The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D. The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.
B. The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.
Refer to the balance sheet above. The change in Lutherʹs quick ratio from 2005 to 2006 is closest to ________. A) a decrease of 0.01 B) an increase of 0.01 C) a decrease of 0.02 D) an increase of 0.02
B.) Quick ratio in 2006 = ($158.9 - $46.5) / $144.1 = 0.78 Quick ratio in 2005 = ($144.0 - $42.9) / 132 = 0.77 So, the quick ratio increased by 0.78 - 0.77 = 0.01.
Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows? A) It would be an expense on the income statement so it would be reflected in operating cash flows. B) It would be an addition to property, plant and equipment so it would be an investing activity. C) It would be an addition to cash so it would be reflected in the change in cash. D) None of the above answers is correct.
B>
D
Balance Sheet Assets: Current Assets: Cash 46 Accounts receivable 23 Inventories 20 Total current assets 89 Long-Term Assets: Net property, plant, and equipment 121 Total long-term assets 121 Total Assets 210 Liabilities: Current Liabilities: Accounts payable 39 Notes payable/short-term debt 5 Total current liabilities 44 Long-Term Liabilities: Long-term debt 133 Total long-term liabilities 133 Total Liabilities 177 Stockholders Equity 33 Total Liabilities and 210 Stockholders Equity The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the companyʹs net working capital? A) $133 million B) $2 million C) $89 million D) $45 million
Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct? A) Joe has no management authority within the partnership. B) Jane is legally involved in the managerial decision making of the firm. C) Jane's liability for the firm's debts consists solely of her investment in the firm. D) Withdrawal of Jane from the partnership will dissolve the partnership.
C
D
If the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9%, then the real rate of interest on your investment is closest to ________. A) 8.5% B) 9.9% C) 11.3% D) 7.0%
B
Balance Sheet Assets: Current Assets: Cash 48 Accounts receivable 25 Inventories 16 Total current assets 89 Long-Term Assets: Net property, plant, and equipment 121 Total long-term assets 121 total assets 210 Liabilities: Current Liabilities: Accounts payable 35 Notes payable/short-term debt 5 Total current liabilities 40 Long-Term Liabilities: Long-term debt 137 Total long-term liabilities 137 Total Liabilities 177 Stockholders Equity 33 Total Liabilities and stockholders' equity 210 The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the companyʹs long -term assets were judged to depreciate at an extra $5 million per year? A) Net property, plant, and equipment would rise to $126 million, and total assets and stockholdersʹ equity would be adjusted accordingly. B) Net property, plant, and equipment would fall to $116 million, and total assets and stockholdersʹ equity would be adjusted accordingly. C) Long-term liabilities would rise to $131 million, and total liabilities and stockholdersʹ equity would be adjusted accordingly. D) Long-term liabilities would fall to $111 million, and total liabilities and stockholdersʹ equity would be adjusted accordingly.
D
Balance Sheet Assets: Current Assets: Cash 49 Accounts receivable 21 Inventories 18 Total current assets 88 Long-Term Assets: Net property, plant, and equipment 122 Total long-term assets 122 Total Assets 210 Liabilities Current Liabilities: Accounts payable 38 Notes payable/short-term debt 5 Total current liabilities 43 Long-Term Liabilities: Long-term debt 134 Total long-term liabilities 134 Total Liabilities 177 Stockholders Equity 33 Total Liabilities and 210 Stockholders Equity The above diagram shows a balance sheet for a certain company. If the company pays back all of its accounts payable today using cash, what will its net working capital be? A) $131 million B) $6 million C) $88 million D) $45 million
C
Balance Sheet Assets: Current Assets: Cash 53 Accounts receivable 23 Inventories 17 Total current assets 93 Long-Term Assets: Net property, plant, and equipment 117 Total long-term assets 117 total assets 210 Liabilities: Current Liabilities: Accounts payable 40 Notes payable/short-term debt 5 Total current liabilities 45 Long-Term Liabilities: Long-term debt 133 Total long-term liabilities 133 Total Liabilities 178 Stockholders Equity 32 Total Liabilities and Stockholders Equity 210 The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 5 million shares outstanding, and these shares are trading at a price of $6.39 per share, what does this tell you about how investors view this firmʹs book value? A) Investors consider that the firmʹs market value is worth very much less than its book value. B) Investors consider that the firmʹs market value is worth less than its book value. C) Investors consider that the firmʹs market value and its book value are roughly equivalent. D) Investors consider that the firmʹs market value is worth more than its book value.
A
Balance Sheet Assets: Current Assets: Cash 54 Accounts receivable 20 Inventories 16 Total current assets 90 Long-Term Assets: Net property, plant, and equipment 120 Total long-term assets 120 total assets 210 Liabilities: Current Liabilities: Accounts payable 42 Notes payable/short-term debt 6 Total current liabilities 48 Long-Term Liabilities: Long-term debt 129 Total long-term liabilities 129 Total Liabilities 177 Stockholders Equity 33 Total Liabilities and Stockholders Equity 210 The above diagram shows a balance sheet for a certain company. If the company buys new property, plant and equipment today using its entire cash balance, what will its net working capital be? A) -$12 million B) $12 million C) -$24 million D) $24 million
B
Based on the information shown above, how much would you receive from selling 2,000 shares of the above stock? A) €40,840 B) €40,740 C) €41,000 D) €42,560
D
Based on the information shown above, what would it cost to buy 1,000 shares of the above stock? A) $91,110 B) $91,300 C) $91,320 D) $91,650
The manufacturer of breakfast cereals has the opportunity to purchase.... etc... should this opportunity be take and why?
Because the value of the opportunity is positive the opportunity should be taken
A
Big Mac Sandwich $2.68 Large Coke $1.45 Large Fries $1.13 A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assume that there is a competitive market for McDonaldʹs food items and that McDonaldʹs sells the Big Mac value meal for $4.59. Does an arbitrage opportunity exists and if so how would you exploit it and how much would you make on one value meal? A) Yes, buy a value meal and then sell the Big Mac, Coke, and fries to make arbitrage profit of $0.67. B) No, no arbitrage opportunity exists. C) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $1.34. D) Yes, buy a Big Mac, Coke, and fries, then sell a value meal to make arbitrage profit of $0.67.
C
Big Mac Sandwich $2.81 Large Coke $1.49 Large Fries $1.14 A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assuming that there is a competitive market for McDonaldʹs food items, at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the Law of One Price? A) $4.08 B) $4.62 C) $5.44 D) $6.80
Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it? A) Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. B) Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven. C) Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven. D) Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.
Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.
In most corporations, to whom does the chief financial officer report? A) shareholders B) the board of directors C) the chief executive officer D) the controller
C
In which of the following ways is a limited liability company like a corporation? A) It was created and developed first in the United States. B) It can choose to be considered a partnership for tax purposes. C) Its owners' liability is restricted to their investment. D) It is directly managed by the owners.
C
D
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 12% per year? A) $32,500.00 B) $1,273,296.69 C) $1,348,196.50 D) $1,497,996.11
Which of the following is NOT a reason why a firm's financial managers must take great care when making investment decisions? A) These investment decisions determine whether the firm will add value for its owners. B) These investments determine the long-term directions in which the company may move. C) These investment decisions determine the corporation's mix of debt and equity. D) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits.
C
Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) unlimited liability D) no separation of ownership and control
C
Which of the following is not a role of financial institutions? A. Moving funds through time B. Moving funds from savers to borrowers C. Printing money for borrowers D. Spreading out risk - bearing
C
Which of the following is typically the major factor in limiting the growth of sole proprietorships? A) The organizational structure of such firms tends to become extremely complicated over time. B) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or wishes to sell the firm. C) The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts. D) Investors have a great deal of control over the day-to-day running of such firms, leading to confusion when conflicts in direction arise.
C
Which of the following organization forms has the most revenue? A) S corporation B) limited partnership C) C corporation D) limited liability company
C
Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership
C
Yahoo! Inc. Last Trade: 18.18 Day's Range: 17.40 - 18.30 Bid: 18.18 Ask: 18.24 If you wanted to buy Yahoo! at the time of this quote, what price per share would you have paid? A. 18.30 B. 18.18 C. 18.24 D. 17.40
C
Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year? A) one that pays $900 now B) one that pays $1080 in two years C) one that pays $1350 in five years D) one that pays $1620 in ten years
C a-$900 b-$998.52 c-$1109.60 <<< d-$1094.41
PV of Growing Annuity
C * (1/ (r - g)) [ 1- [(1 +g) / (1 + r)]^N]
PV of an annuity
C * (1/r) [ 1 - 1/(1 +r)^N]
Consider the following average annual returns: Investment Average Return Small Stocks 23.5% S&P 500 13.1% Corporate Bonds 7.3% Treasure Bonds 6.1% Treasury Bills 4.0% What is the excess return for the portfolio of small stocks? A 11.7% B 16.6% C 19.5% D 17.6%
C 19.5%
Which of the following statements is FALSE? A Dividing the covariance by the volatilities ensures that correlation is always between -1 and +1. B Volatility is the square root of variance. C The closer the correlation is to 0, the more the returns tend to move together as a result of common risk. D If two stocks move together, their returns will tend to be above or below average at the same time, and the covariance will be positive.
C The closer the correlation is to 0, the more the returns tend to move together as a result of common risk.
A company intends to install new management software for its warehouse. The software will cost $47,000 to buy and will cost an additional $148,000 to install and implement. It is anticipated that it will save the company $44,000 through reductions in staff and $69,000 in general inventory costs in the first year after installation. What is the total benefit to the company in the first year if they choose to install the software? A) $56,500 B) $45,200 C) $113,000 D) $79,100
C) $113,000 Explanation: C) $44,000 + $69,000 = $113,000
Ally wishes to leave a provision in her will that $7000 will be paid annually in perpetuity to a local charity. How much must she provide in her will for this perpetuity if the interest rate is 6%? A) $58,334 B) $93,334 C) $116,667 D) $70,000
C) $116,667
If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________.
C) $12,635 N = 24 I=8 PMT = $1200 FV = 0 Compute PV = $12,635 .
A $50,000 new car loan is taken out with the terms 12% APR for 48 months. How much are monthly payments on this loan?
C) $1316.69 C) Calculate the PMT when PV of ordinary annuity = $50,000 , periodic interest = 12/12%, and number of periods = 48.
An annuity pays $10 per year for 98 years. What is the present value (PV) of this annuity given that the discount rate is 7%? A) $85.60 B) $171.20 C) $142.67 D) $199.74
C) $142.67
You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years? A) $10,062.20 B) $20,124.40 C) $16,770.33 D) $23,478.46
C) $16,770.33
You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years?
C) $16,770.33 Explanation: C) N = 48 I = 6/12 PMT = $310 PV = 0 Compute FV = $16,770.33
Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pays interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four years' time? A) $176 B) $308 C) $220 D) $352
C) $220
Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pays interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four yearsʹ time?
C) $220 C) First calculate the APR using an EAR of 14.7% and monthly compounding, which comes to 13.7937 %. Then using a periodic rate of 13.7937 /12, calculate the payment over 48 months that gives a future value (FV) of $14,000 , which is $110.15.
You are purchasing a new home and need to borrow $380,000 from a mortgage lender. The mortgage lender quotes you a rate of 5.75% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 5.45% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $7600 to cover points you are paying the lender. Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________.
C) $2218 C) First we need the monthly interest rate = APR / m = 0.0575 / 12 = 0.004792 or 0.4792 %. Now: PV = $380,000 (no points) I = 0.4792 FV = 0 N = 360 (30 years × 12 months) Compute PMT = $2217.58 .
What is the future value (FV) of $20,000 in four years, assuming the interest rate is 4% per year? A) $15,208.16 B) $19,887.59 C) $23,397.17 D) $25,736.89
C) $23,397.17
Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information? A) $2460 B) $13,863 C) $27,726 D) $32,460
C) $27,726
An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows? A) $304.91 B) $307.69 C) $300.29 D) $320.00
C) $300.29
*Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000 . He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan? A) $244,965 B) $428,689 C) $306,206 D) $612,412
C) $306,206
Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000. He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan? A) $244,965 B) $428,689 C) $306,206 D) $612,412
C) $306,206
Corey buys 10 Tufflift 4-post, 4.5-ton car hoists for his parking garage at a total cost of $432,000 . He finances this with a five-year loan at 7.80% APR with monthly payments. After he has made the first 20 payments, how much is the outstanding principal balance on his loan?
C) $306,206 C) The first step is to calculate the monthly payment using a present value (PV) of $432,000 , monthly interest rate of 7.80/12 = 0.650000 %, and 60 periods, which = $8718.11 ; the second step is to use that monthly payment to calculate the present value (PV) of 40 months keeping the interest rate unchanged, which = $306,206.10 .
A truck costing $111,000 is paid off in monthly installments over four years with 8.10% APR. After three years the owner wishes to sell the truck. What is the closest amount from the following list that he needs to pay on his loan before he can sell the truck?
C) $31,195 C) The first step is to calculate the monthly payment using a present value (PV) of $111,000 monthly interest rate of 8.10/12 = 0.675000 %, and 48 periods, which = $2715.05 ; the second step is to use that monthly payment to calculate the present value (PV) of 12 months remaining payment keeping the interest rate unchanged.
An elderly relative offers to sell you their used 1958 Cadillac Eldorado for $52,000. You note that very similar cars are selling on the open market for $87,000. You donʹt care for classic cars and would rather buy a new Ford Explorer for $35,000. What is the net value of buying the Cadillac? A) $87,000, since the Cadillac could be sold for this price. B) $52,000, since the Cadillac could be bought for this price. C) $35,000, since this is the difference between purchase and resale price of the Cadillac. D) $35,000, since this is the value of the car that you really want to buy.
C) $35,000, since this is the difference between purchase and resale price of the Cadillac.
Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)? A) $314,366 B) $471,549 C) $392,957 D) $432,000
C) $392,957
Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)?
C) $392,957 C) First calculate the APR with quarterly compounding, which equals 8.62%; then using a periodic interest rate of 8.62/4%, calculate the present value (PV) of an annuity of $54,000 for eight periods.
Consider the following prices from a McDonaldʹs Restaurant: Big Mac Sandwich: $2.81 Large Coke: $1.49 Large Fries: $1.14 A McDonaldʹs Big Mac value meal consists of a Big Mac sandwich, large Coke, and a large fries. Assuming that there is a competitive market for McDonaldʹs food items, at what price must a Big Mac value meal sell to insure the absence of an arbitrage opportunity and uphold the Law of One Price? A) $4.08 B) $4.62 C) $5.44 D) $6.80
C) $5.44 $2.81 + $1.49 + $1.14 = $5.44
A perpetuity will pay $900 per year, starting five years after the perpetuity is purchased. What is the present value (PV) of this perpetuity on the date that it is purchased, given that the interest rate is 11%? A) $2695 B) $4312 C) $5390 D) $3234
C) $5390
You are considering purchasing a new automobile with the upfront cost of $26,000 or leasing it from the dealer for a period of 48 months. The dealer offers you 2.80% APR financing for 48 months (with payments made at the end of the month). Assuming you finance the entire $26,000 through the dealer, your monthly payments will be closest to ________.
C) $573 C) First we need the monthly interest rate = APR / m = 0.0280 / 12 = 0.002333 or 0.002333 %. Now: PV = $26,000 I = 0.2333 FV = 0 N = 48 Compute PMT = $573.20 .
An investor buys a property for $608,000 with a 25-year mortgage and monthly payments at 8.10% APR. After 18 months the investor resells the property for $667,525 . How much cash will the investor have from the sale, once the mortgage is paid off?
C) $71,521 C) The first step is to calculate the monthly payment using a present value (PV) of $608,000 , monthly interest rate of 8.10/12 = 0.675000 %, and 300 periods, which = $4732.9906 ; the second step is to use that monthly payment to calculate the present value (PV) of 282 months keeping the interest rate unchanged which = $596,004.59 ; finally calculate the difference between $667,525 - $596,004.59 = $71,520.55 .
Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Another oil refiner is offering to trade you 10,100 bbl of Alaska North Slope (ANS) crude oil for 9950 bbl of West Texas Intermediate (WTI) crude oil. Assuming you just purchased 9950 bbl of WTI crude at the current market price, the total revenue (cost) to you if you take the trade is closest to ________. A) $755,650 B) $766,150 C) $767,600 D) $776,650
C) $767,600 Explanation: C) Total Benefits Trade WTI for ANS crude 10,100 bbl × $76 of gasoline/bbl = $767,600
An investment pays you $30,000 at the end of this year, and $10,000 at the end of each of the four following years. What is the present value (PV) of this investment, given that the interest rate is 5% per year? A) $39,614 B) $63,382 C) $79,228 D) $95,074
C) $79,228
You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it? A) -$320 B) -$340 C) -$300 D) $300
C) -$300 Explanation: C) (-57 × 1000) + (900 × 63) = -$300
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $300,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to ________.
C) 0.6623% C) EAR = (1 + APR / m)m - 1 = (1 + 0.08/4)4 - 1 = 0.08243 or 8.243% Monthly rate = (1 + EAR)(1/12) - 1= (1 + 0.08243 )(1/12) - 1 = 0.006623 = 0.6623%
If the interest rate is 9%, the one-year discount factor is equal to ________. A) 0.090 B) 1.090 C) 0.917 D) 0.981
C) 0.917
A pottery factory purchases a continuous belt conveyor kiln for $68,000. A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22, over what term is this loan being paid? A) 8 years B) 9 years C) 10 years D) 11 years
C) 10 years
A pottery factory purchases a continuous belt conveyor kiln for $68,000 . A 6.3% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $765.22 , over what term is this loan being paid?
C) 10 years C) Calculate N when PV of ordinary annuity = $68,000 , periodic interest = 6.3/12%, and monthly payments = $765.22 . N = 156 periods; years = 13 years.
A 10% APR with quarterly compounding is equivalent to an EAR of ________.
C) 10.38% C) EAR = (1 + 0.10 / 4)4 - 1 = 10.38%
The effective annual rate (EAR) for a loan with a stated APR of 11% compounded quarterly is closest to ________.
C) 11.46% C) EAR = (1 + APR / m)m - 1 = (1 + 0.11/4)4 - 1 = 0.1146 or 11.46%
An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows? A) $304.91 B) $307.69 C) $300.29 D) $320.00
C) 120/(1.04) + 200/(1.042) = 115.38 + 184.91 = 300.29
The effective annual rate (EAR) for a savings account with a stated APR of 5% compounded daily is closest to ________.
C) 5.13% C) EAR = (1 + APR / m)m - 1 = (1 + 0.05 / 365)365 - 1 = 0.0513 or 5.13%
Faisal has $12,000 in his savings account and can save an additional $3600 per year. If interest rates are 12%, how long will it take his savings to grow to $47,000? A) 4.3 years B) 6.3 years C) 5.3 years D) 7.3 years
C) 5.3 years
A metal fabrication company is pricing raw supplies of aluminum. The following are the costs to the company to receive one ton of aluminum from various sources. Which source offers the best price for aluminum per ton? A) 3010 U.S. dollars per ton B) 3185 Australian dollars per ton, with $0.953 U.S. = 1 AUD C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL D) 105,517 Indian rupees per ton, with $0.029 U.S. = 1 INR
C) 5888 Brazilian reals per ton, with $0.507 U.S. = 1 BRL Explanation: A) $3010 B) 3185 × 0.953 = $3035 C) 5888 × 0.507 = $2985 D) 105,517 × 0.029 = $3060
The highest effective rate of return you could earn on any of these investments is closest to ________.
C) 6.1610% C) EAR (A) = (1 + APR / m)m - 1 = (1 + 0.060860 /1)1 - 1 = 6.0860% EAR (B) = (1 + APR / m)m - 1 = (1 + 0.059320 /365)365 - 1 = 6.1110% EAR (C) = (1 + APR / m)m - 1 = (1 + 0.059997 /4)4 - 1 = 6.1360% EAR (D) = (1 + APR / m)m - 1 = (1 + 0.059936 /12)12 - 1 = 6.1610%
A bank pays interest semiannually with an EAR of 13%. What is the periodic interest rate applicable semiannually ? A) 5.04% B) 7.56% C) 6.30% D) 12.60%
C) 6.30%
A bank pays interest semiannually with an EAR of 13%. What is the periodic interest rate applicable semiannually? A) 5.04% B) 7.56% C) 6.30% D) 12.60%
C) 6.30%
A bank pays interest semiannually with an EAR of 13%. What is the periodic interest rate applicable semiannually ?
C) 6.30% C) First convert the EAR to APR with semiannually compounding, which equals 12.60 %; now divide this by 2 to get the periodic interest rate = 6.30%.
A bank offers a loan that will requires you to pay 7% interest compounded monthly. Which of the following is closest to the EAR charged by the bank? A) 5.78% B) 8.68% C) 7.23% D) 14.46%
C) 7.23%
A bank offers a loan that will requires you to pay 7% interest compounded monthly . Which of the following is closest to the EAR charged by the bank?
C) 7.23% C) EAR = {(1 + APR) / m}m - 1; EAR = {(1 + 0.07) / 12}12 - 1; 0.0723 × 100 = 7.23%
A house costs $148,000. It is to be paid off in exactly ten years, with monthly payments of $1737.54. What is the APR of this loan? A) 6.25% B) 5.25% C) 7.25% D) 8.25%
C) 7.25%
A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?
C) semiannual compounding C) Using an APR = 5.8%, calculate the EAR for the compounding periods given in each choice: A = 5.97%; B = 5.96%; C = 5.88%; D = 5.8%.
A house costs $148,000 . It is to be paid off in exactly ten years, with monthly payments of $1737.54 . What is the APR of this loan?
C) 7.25% C) Calculate the periodic interest rate when PV of ordinary annuity = $148,000 , number of months = 120, and monthly payments = $1737.54 ; the periodic interest rate = 0.60%, which multiplied by 12 gives an APR = 7.25%.
Which of the following is an example of arbitrage? A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%. C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit. D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.
C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit.
A manufacturer of breakfast cereals has the opportunity to purchase barley at $3.00 a bushel for 10,000 bushels, if it also buys 5,000 bushels of wheat at $16.00 per bushel. However, the manufacturer does not use any barley in its products, and currently needs 20,000 bushels of wheat. If the current market price of barley is $3.80 per bushel and that of wheat is $15.80 per bushel, should this opportunity be taken, and why? A) Because the company has no need of barley, the opportunity should not be taken. B) Because the opportunity does not meet the companyʹs need for wheat, the opportunity should not be taken. C) Because the value of the opportunity is positive, the opportunity should be taken. D) Because the value of the opportunity is negative, the opportunity should not be taken.
C) Because the value of the opportunity is positive, the opportunity should be taken. C) (0.8 × 10,000) - (0.2 × 5,000) = 8,000 - 1,000 = $7,000
What is the future value (FV) of $20,000 in four years, assuming the interest rate is 4% per year? A) $15,208.16 B) $19,887.59 C) $23,397.17 D) $25,736.89
C) Calculate the FV with PV = $20,000,interest = 4%, and N = 4, which = $23,397.17.
What is the present value (PV) of $50,000 received twenty years from now, assuming the interest rate is 6% per year? A) $32,500.00 B) $13,251.70 C) $15,590.24 D) $27,282.92
C) Calculate the PV with FV = $50,000, interest = 6%, and N = 20, which = $15,590.24.
What is the present value (PV) of $90,000 received six years from now, assuming the interest rate is 5% per year? A) $58,500.00 B) $57,085.48 C) $67,159.39 D) $117,528.93
C) Calculate the PV with FV = $90,000, interest = 5%, and N = 6, which = $67,159.39.
the N using the rule of 72. Then, N = 72/8 = 9 years.
C) CalculatewithFV=$1350,interest=4%,andnumberofyears=5, which gives PV = $1109.60
Inflation is calculated as the rate of change in the _______.
C) Consumer Price Index
Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct?
C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.
An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright? A) Leasing costs $116 more than buying. B) Leasing costs $174 more than buying. C) Leasing costs $145 more than buying. D) Leasing costs $289 more than buying
C) Leasing costs $145 more than buying.
An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright?
C) Leasing costs $145 more than buying. C) Using a periodic rate of 14% / 12 per month, calculate the present value (PV) of an annuity of $75 for 48 months; then subtract $2600 to calculate the difference in costs.
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then Lutherʹs market-to-book ratio would be closest to ________. A) 2.58 B) 0.64 C) 1.29 D) 1.80
C) MTB = Market Value of Equity / Book Value of Equity = (10.2 million × 16) / 126.7 = 163.2 / 126.7 = 1.288
Why are arbitrage opportunities short-lived? A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down. B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values. C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal.
Which of the following statements is FALSE?
C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities.
Which of the following statements regarding arbitrage and security prices is INCORRECT? A) We call the price of a security in a normal market the no-arbitrage price for the security. B) In financial markets it is possible to sell a security you do not own by doing a short sale. C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. D) The general formula for the no-arbitrage price of a security is Price(security) = PV (all cash flows paid by the security).
C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds.
A(n) 12% APR with monthly compounding is closest to ________.
C) an EAR of 12.68% C) EAR = {(1 + 0.12) / m}m - 1 = 12.68 %.
What is the shape of the yield curve and what expectations are investors likely to have about future interest rates?
C) inverted; lower
2. A lender lends $10,000, which is to be repaid in annual payments of $2,000 in the 6 subsequent years. Which of the following shows the timeline of the loan from the lender's perspective? a. b. c. d. Year 1 -$10,000 Year 1 0 Year 0 -$10,000 Year 0 -$10,000 Year 2 $2000 Year 2 $2000 Year 1 $2000 Year 1 $2000 Year 3 $2000 Year 3 $2000 Year 2 $2000 Year 2 $4000 Year 4 $2000 Year 4 $2000 Year 3 $2000 Year 3 $6000 Year 5 $2000 Year 5 $2000 Year 4 $2000 Year 4 $8000 Year 6 $2000 Year 6 $2000 Year 5 $2000 Year 5 $10,000 Year 6 $2000 Year 6 $12,000
C. -10000, 2000, 2000, 2000, 2000, 2000, 2000
4. Samantha enters a rental agreement for bedroom furniture. She will pay $60 per month for one year. Which of the following shows the timeline of her payments if the first payment is a month from now? a. b. Date(Months) Cash Flows c. Date (Months) Cash Flows Date(Months) 0 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 5 6 7 8 9 10 11 Date (Months) Cash Flows 12 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 8 9 10 11 12 d. 0 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 -$60 CashFlows -$60 -$120-$180-$240-$300-$360-$480-$540-$600-$660-$720-$780-$840
C. 0, -60, -60, -60, -60, -60, -60, -60, -60, -60, -60, -60, -60,
*An investment will pay you $120 in one year and $200 in two years. If the interest rate is 4%, what is the present value of these cash flows? A) $304.91 B) $307.69 C) $300.29 D) $320.00
C. 120/(1.04) + 200/(1.04^2) = 115.38 + 184.91 = 300.29 (do separately on calc and add)
What is the present value (PV) of $50,000 received twenty years from now, assuming the interest rate is 6% per year? A) $32,500.00 B) $13,251.70 C) $15,590.24 D) $27,282.92
C. $15,590.24
If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ___. A) $462.96 in one year B) $500.00 in one year C) $540.00 in one year D) None of the above
C. $540.00 in one year N=1 I/YR=8 PV=500 FV=>
What is the present value (PV) of $90,000 received six years from now, assuming the interest rate is 5% per year? A) $58,500.00 B) $57,085.48 C) $67,159.39 D) $117,528.93
C. $67,159.39
Consider the following returns: Year End Stock X Realized Return Stock Y Realized Return Stock Z Realized Return 2004 20.1% -14.6% 0.2% 2005 72.7% 4.3% -3.2% 2006 -25.7% -58.1% -27.0% 2007 56.9% 71.1% 27.9% 2008 6.7% 17.3% -5.1% 2009 17.9% 0.9% -11.3% The Correlation between Stock X's and Stock Y's returns is closest to: A 0.58 B 0.29 C 0.69 D 0.10
C. 0.69
Luther Corporation Consolidated Balance Sheet December 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities and Stockholders' Equity 2006 2005 Current Assets Current Liabilities Cash 59.5 58.5 Accounts payable 88.9 73.5 Accounts receivable 55.1 39.6 Notes payable / short-term debt 10.4 9.6 Inventories 45.9 42.9 Current maturities of long-term debt 37.3 36.9 Other current assets 5.5 3.0 Other current liabilities 6.0 12.0 Total current assets 166.0 144.0 Total current liabilities 142.6 132.0 Long-Term Assets Long-Term Liabilities Land 66.1 62.1 Long-term debt 236 168.9 Buildings 109.4 91.5 Capital lease obligations Equipment 118.5 99.6 Less accumulated depreciation (54.9) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 239.1 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 258.8 191.1 Other long-term assets 63.0 42.0 Total liabilities 401.4 323.1 Total long-term assets 362.1 242.7 Stockholders' Equity 126.7 63.6 Total Assets 528.1 386.7 Total liabilities and Stockholders' Equity 528.1 386.7 Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then Luther's market-to-book ratio would be closest to ________. A. 2.58 B. 0.64 C. 1.29 D. 1.80
C. 1.29 MTB = Market Value of Equity / Book Value of Equity = (10.2 million × 16) / 126.7 = 163.2 / 126.7 = 1.288
Luther Corporation Consolidated Balance Sheet December 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities and Stockholders' Equity 2006 2005 Current Assets Current Liabilities Cash 57.6 58.5 Accounts payable 86.0 73.5 Accounts receivable 55.2 39.6 Notes payable / short-term debt 10.5 9.6 Inventories 45.6 42.9 Current maturities of long-term debt 39.6 36.9 Other current assets 5.6 3.0 Other current liabilities 6.0 12.0 Total current assets 164.0 144.0 Total current liabilities 142.1 132.0 Long-Term Assets Long-Term Liabilities Land 66.4 62.1 Long-term debt 231.3 168.9 Buildings108.3 91.5 Capital lease obligations Equipment 114.3 99.6 Less accumulated depreciation (54.4) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 234.6 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 254.1 191.1 Other long-term assets 63.0 42.0 Total liabilities 396.2 323.1 Total long-term assets 357.6 242.7 Stockholders' Equity 125.4 63.6 Total Assets 521.6 386.7 Total liabilities and Stockholders' Equity 521.6 386.7 Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt-equity ratio for Luther in 2006 is closest to ________. A. 3.45 B. 0.68 C. 1.72 D. 2.41
C. 1.72 Total debt = Notes Payable + Cur. Mat. LT debt + LT debt = 10.5 + 39.6 + 231.3 = 281.4 D/E ratio = 281.4/ 163.2 = 1.72
Luther Corporation Consolidated Income Statement Year ended December 31 (in $millions) 2006 2005 Total sales 610.1 579.1 Cost of sales -500.2 -378.8 Gross profit 109.9 200.3 Selling, general, and administrative expenses -40.5 -39.6 Research and development -24.6 -20.9 Depreciation and amortization -3.6 -3.7 Operating income 41.2 136.1 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 136.1 Interest income (expense) -25.1 -15.2 Pretax income 16.1 120.9 Taxes -5.5 -42.315 Net income 10.6 78.585 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's return on equity (ROE) for the year ending December 31, 2005 is closest to ________. A. 247.12% B. 98.85% C. 123.56% D. 148.27%
C. 123.56 ROE = Net Inc / Sh. Holders' Equity = 78.585 / 63.6 = 123.56%
If an analyst incorrectly adds cash flows occurring at different points in time, what is the implied assumption in the process?
Cash flows occurring at different points in time cannot be added because a dollar today is worth more than a dollar tomorrow. In other words, these cash flows are not in the same units. The compounding and discounting effect causes these cash flows to be different across time. However, this is only valid for nonzero interest rates. Hence, the implied assumption in adding cash flows across time is that interest rate is zero
current asset
Cash is a ________.
Luther Corporation Consolidated Income Statement Year ended December 31 (in $millions) 2006 2005 Total sales 610.1 562.8 Cost of sales -500.2 -380.8 Gross profit 109.9 182 Selling, general, and administrative expenses -40.5 -40.7 Research and development -24.6 -23.4 Depreciation and amortization -3.6 -3.3 Operating income 41.2 114.6 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 114.6 Interest income (expense) -25.1 -14.1 Pretax income 16.1 100.5 Taxes -5.5 -35.175 Net income 10.6 65.325 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's operating margin for the year ending December 31, 2005 is closest to ________. A. 10.18% B. 16.29% C. 20.36% D. 24.43%
C. 20.36 Operating margin = Operating income / Sales = $114.6 / $562.8 = 0.2036 or 20.36%
Consider the following probability distribution of returns for Alpha Corporation: Current Stock Price ($) Stock Price in One Year ($) Return R Probability PR $25 $35 40% 25% $25 0% 50% $20 -20% 25% The standard deviation of the return on Alpha Corporation is closest to: A. 22.4% B. 19.0% C.21.8% D. 19.4%
C. 21.8% E[R] = .25(40%) + .50(0%) + .25(-20%) = 5% Var(R) = PR × (R - E[R])2 = .25(.40 - .05)2 + .50(.00 - .05)2 + .25(-20 - .05)2 = .0475 or 4.75% SD(R) = Square Root of Variance = .2179 or 21.79%
Consider the following returns: Year End Stock X Realized Return Stock Y Realized Return Stock Z Realized Return 2004 20.1% -14.6% 0.2% 2005 72.7% 4.3% -3.2% 2006 -25.7% -58.1% -27.0% 2007 56.9% 71.1% 27.9% 2008 6.7% 17.3% -5.1% 2009 17.9% 0.9% -11.3% The Volatility on Stock Y's returns is closest to: A 35% B 31% C 42% D 18%
C. 42%
The S&P 500 index delivered a return of 20%, -10%, 20%, and 5% over four successive years. What is the average annual return for four years? A. 10.50% B. 13.13% C. 8.75% D. 9.63%
C. 8.75% (20 - 10 + 20 + 5) / 4 = 8.75%
You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years? A) $10,062.20 B) $20,124.40 C) $16,770.33 D) $23,478.46
C. N = 48 ; I = 6/12 ; PMT = $310 ; PV = 0 ; Compute FV = $16,770.33
Which of the following best describes why the left and right sides of a balance sheet are equal? A. In a properly run business, the value of liabilities will not exceed the assets held by the company. B. By definition, the assets plus the liabilities will be the same as the stockholders' equity. C. The assets must equal liabilities plus stockholders' equity because stockholders' equity is the difference between the assets and the liabilities. D. By accounting convention, the assets of a company must be equal to the liabilities of that company.
C. The assets must equal liabilities plus stockholders' equity because stockholders' equity is the difference between the assets and the liabilities.
A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet? A. commercial paper held by the company B. the inventory of chemicals used to produce the drugs made by the company C. a patent for a drug held by the company D. the cash reserves of the company
C. a patent for a drug held by the company
If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment? A) 7 years B) 8 years C) 9 years D) 11 years
C. calculate the N using the rule of 72. Then, N = 72/8 = 9 years.
Which of the following amounts would be included on the right side of a balance sheet? A. the value of government bonds held by the company B. the cash held by the company C. the amount of deferred tax liability held by the company D. the amount of money owed to the company by customers who have not yet paid for goods and services they have received
C. the amount of deferred tax liability held by the company
Which of the following best describes why a firm produces financial statements? A. to use as a tool when planning future investments within a firm B. to increase the intrinsic value of a firm C. to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business D. to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future
C. to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business
Luther Corporation Consolidated Balance Sheet December 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities and Stockholders' Equity 2006 2005 Current AssetsCurrent Liabilities Cash 56.1 58.5 Accounts payable 88.1 73.5 Accounts receivable 54.5 39.6 Notes payable / short-term debt 10.9 9.6 Inventories 44.8 42.9 Current maturities of long-term debt 40.7 36.9 Other current assets 5.0 3.0 Other current liabilities 6.0 12.0 Total current assets 160.4 144.0 Total current liabilities 145.7 132.0 Long-Term Assets Long-Term Liabilities Land 66.8 62.1 Long-term debt 227 168.9 Buildings 108.5 91.5 Capital lease obligations Equipment 117.1 99.6 Less accumulated depreciation (54.4) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 238 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 249.8 191.1 Other long-term assets 63.0 42.0 Total liabilities 395.5 323.1 Total long-term assets 361 242.7 Stockholders' Equity 125.9 63.6 Total Assets 521.4 386.7 Total liabilities and Stockholders' Equity 521.4 386.7 Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Luther's enterprise value? A.-$540.0 million B.$771.4 million C. $385.7 million D. $521.4 million
C.385.7 Million Enterprise value = Market Value of Equity + Debt - Cash = (10.2 × $16) + $278.6 - $56.1 = $385.7
Why do we care so much about cash flows and market values in finance and not about earnings and book values?
Cash flows determine the value of the firm. a share of stock is only worth $ bc it's a claim to future cash flows, which can be consumed. mkt values are forward looking, estimate the value today of an asset based on its ability to generate cash flows now and into the future. Earnings not CFs, start as CFs but make non-CF adjustments. a poor representation of underlying CFs. Book values are historical and backward looking, often having nothing to do with actual value of an asset or its ability to generate CFs.
B
Cash is a ________. A) long-term asset B) current asset C) current liability D) long-term liability
Coloma should not trade. It should keep the high grade ore and refine it.
Coloma Cooper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore. Because of its higher copper content, Coloma can produce $940 worth of copper from one ton of high -grade copper ore. A mining company is offering to trade 7,250 tons of low-grade copper ore for 5,000 tons of high-grade copper ore. Assuming Coloma currently has 5,000 tons of high -grade ore, what should it do? Trade or not trade? IGNORE THIS
Low-Grade Copper Ore- $571 per Ton High-Grade Copper Ore- $843 per Ton Coloma Cooper Incorporated is able to produce $640 worth of copper from one ton of low-grade copper ore. Because of its higher copper content, Coloma can produce $940 worth of copper from one ton of high -grade copper ore. A mining company is offering to trade 7,250 tons of low-grade copper ore for 5,000 tons of high-grade copper ore. Assuming Coloma currently has 5,000 tons of high -grade ore, what should it do?
Coloma should not trade. It should keep the high grade ore and refine it. Total Benefits No trade and refine high-grade ore (base case): 5,000 tons × $940 of copper/ton = $4,700,000 Trade high-grade for low-grade: 7,250 tons × $640 of copper/ton = $4,640,000
Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.
Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?
A
Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. B) Company A has greater leverage than Company B. C) Company A has less leverage than Company B. D) Company A and Company B have roughly equivalent enterprise values.
Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information?
Company A is less likely than Company B to have sufficient working capital to meet its short-term needs.
C
Consider the above Income Statement for CharmCorp. All values are in millions of dollars. If CharmCorp. has 4 million shares outstanding, and its managers and employees have stock options for 2 million shares, what is its diluted EPS in 2008 ? A) $0.83 B) $1.33 C) $1.67 D) $2.00
C
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2008 and 2009. What does the change in the gross margin between these two years imply about the company? A) The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009. B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009. C) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2008 and 2009. D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.
C
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the operating margin for 2008 and 2009. What does the change in the operating margin between these two years imply about the company? A) The efficiency of Xenon Manufacturing has significantly risen between 2008 and 2009. B) The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them rose between 2008 and 2009. C) The efficiency of Xenon Manufacturing has significantly fallen between 2008 and 2009. D) The leverage of Xenon Manufacturing fell slightly between 2008 and 2009.
A
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. If Xenon Manufacturing has 20 million shares outstanding, what is its EPS in 2008 ? A) $0.50 B) $0.25 C) $0.40 D) $0.60
B
Consider the above statement of cash flows. If all amounts shown above are in millions of dollars, what were AOS Industriesʹ retained earnings for 2008? A) $5.2 million B) $2.2 million C) $4.4 million D) $3.1 million
B
Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008? A) It would have $3,000,000 less cash at the end of 2008. B) It would have $2,925,000 less cash at the end of 2008. C) It would have $1,500,000 less cash at the end of 2008. D) It would have an additional $7,500,000 in cash at the end of 2008.
D
Consider the above statement of cash flows. What were AOS Industriesʹ major means of raising money in 2008? A) from investment activities B) by sale of stock C) from its operations D) by issuing debt
D
Consider the above statement of cash flows. Which of the following is true of AOS Industriesʹ operating cash flows? A) It collected more cash from its customers than it charged. B) It sold more inventory than it bought. C) It charged more on its accounts payable back than it paid back. D) All of the above are true.
D
Consider the following investment alternatives: Which alternative offers you the highest effective rate of return? A)Investment A B) Investment B C)Investment C D)Investment D
C
Consider the following investment alternatives: The highest effective rate of return you could earn on any of these investments is closest to ________. A) 6.0860 % B) 6.1110 % C) 6.1610 % D) 6.1360 %
A
Consider the following investment alternatives: Which alternative offers you the lowest effective rate of return? A) investment A B) investment B C) investment C D) investment D
A
Consider the following timeline detailing a stream of cash flows: year 0: $100 year 1: $200 year 2: $300 year 3: $400 year 4: $500 year 5: ? If the current market rate of interest is 6%, then the future value (FV) of this stream of cash flows is closest to ________. A) $1723 B) $1,500 C) $2068 D) $2757
A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $3.00 dividend? A. $1.68 B) $2.53 C) $2.11 D) $2.95
Corporate tax = $4.30 × 35% = $1.51 ; Personal tax = $3.00 × 20% = $0.60 Total = $1.51 + $0.60 = $2.11
17) A C corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $6.00 dividend? A) $3.31 B) $4.96 C) $4.14 D) $5.79
Corporate tax = $8.30 × 39% = $3.24 , Personal tax = $6 × 15% = $0.90 Total = $3.24 + $0.90 = $4.14
Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.?
Corporate tax paid on $3.4 earnings = $3.4 × 0.35 = 1.190 earnings after-tax = 3.4 - 1.190 = $2.210 earnings distributed as dividends = $2.210 - $1 = $1.2100 taxes paid on dividends by a shareholder = 1.2100 × 0.125 = 0.1513 after-tax dividends per share = 1.2100 - 0.1513 = $1.0588 hence a holder of 100,000 shares receives 1.0588 × 100,000 = $105,875
B
Cronus Airlines has a contract that gives them the opportunity to purchase up to 13,000,000 gallons of jet fuel at $2.00 per gallon. The current market price of jet fuel is $2.3 per gallon. Cronus believes they will only need 4,000,000 gallons of jet fuel. What is the value of this opportunity? A) $1,200,000 B) $3,900,000 C) $2,700,000 D) $9,000,000
12) What is the major advantage corporations have over other business entities? A) It is easier for a corporation to raise capital than other forms of businesses. B) A corporation is treated as a separate legal entity for tax and legal purposes. C) A corporation's shares can be freely traded among its shareholders. D) All of the above are advantages that a corporation has over other business forms.
D
A ________ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO. A) shareholder proposal B) leveraged buyout C) shareholder action D) hostile takeover
D
A factory owner wants his workers to produce as many widgets as they can, so he pays his workers based on how many widgets they produce. However, in order to make sure that the workers do not rush and produce a large number of poorly made widgets, he checks the widgets at random at various stages of their manufacture. If a defect is found in a widget, the pay of the entire section of the factory responsible for that defect is docked. How is this factory owner seeking to solve the principal - agent problem in this case? A. By making the agents into principals themselves B. By ensuring that all workers co - operate to maximize the gains of their section C. By maximizing the information that the principal obtains about the behavior of the agents D. By supplying incentives so the agents act in the way principal desires
D
A typical company has many types of shareholders, from individuals holding a few shares, to large institutions that hold very large numbers of shares. How does a financial manager ensure that the priorities and concerns of such disparate stockholders are met? A) The financial manager should seek to make investments that do not harm the interests of the stockholders. B) The decisions taken by the financial manager should be solely influenced by the benefit to the company since, by maximizing its fitness, he or she will also maximize the benefits of that company to the shareholders. C) The financial manager should consider the interests and concerns of large shareholders a priority so the needs of those who hold a controlling interest in the company are met. D) In general, all shareholders will agree that they are better off if the financial manager works to maximize the value of their investment.
D
In which of the following relationships is an agency conflict problem LEAST likely to arise? A) the relationship between a hire-car company and the persons who hire that company's cars regarding the treatment of those cars B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks C) the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied D) the relationship between a driver and the passengers in a car regarding the safe driving of that car
D
Investments by wealthy individuals and endowments is a major source of money for each of the following EXCEPT ________. A) private equity funds B) hedge funds C) venture capital funds D) mutual funds
D
Over four-fifths of all U.S. business revenue is generated by which type of firms? A) sole proprietorships B) partnerships C) limited partnerships D) corporations
D
What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership? A) The owners of a limited liability company have personal obligation for debts incurred by the company. B) There is no separation between the company and its owners in a limited liability company. C) The owners of a limited liability company can withdraw from the company without the company being dissolved. D) The owners of a limited liability company can take an active role in running the company.
D
What is the most important duty of a firm's financial officer? A) to ensure that the firm has enough cash on hand to meet its commitments at any given time B) to decide how to pay for investments C) to manage working capital D) to make investment decisions
D
Which of the following features of a corporation is LEAST accurate? A) The owners' identity is separate from a corporation. B) The owners of a corporation are not liable for any obligations the corporation enters into. C) Changes in ownership do not result in the dissolution of the corporation. D) Earnings from a corporation are taxed only once.
D
Which of the following is NOT a function of the board of directors? A) determining how top executives should be compensated B) monitoring the performance of the company C) answering to shareholders of the company D) day-to-day running of the company
D
Which of the following is unique for an S corporation? A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firm's profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. D) None of the above statements is unique.
D
Which of the following is unique for an S corporation? A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firmʹs profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. D) None of the above statements is unique.
D
Which of the following should be true for an asset to be considered liquid? A) It pays regular dividends. B) It can be bought and sold at an organized stock market or bourse. C) It is offered for sale on both primary and secondary markets. D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.
D
Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party. B) The interests of the various owners may conflict with each other. C) The owners may not be U.S. citizens or residents. D) There are often many owners, and they can often change as they buy and sell stock.
D
Why is it difficult to determine the market price of a private corporation's shares at any point in time? A) It is difficult to obtain enough information to accurately value such a company. B) The price of its shares is fixed by the owners. C) It has a limited number of owners. D) There is no organized market for its shares.
D
Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property? A) The number of owners, and hence the spread of risk among these owners, is not limited. B) Its owners are liable for any obligations it enters into. C) The state in which a corporation is incorporated provides safeguards against any wrongdoing by the corporation. D) It is a legally defined, artificial entity that is separate from its owners.
D
Within the corporation, the most important type of decision that the financial manager makes is: A. Make decisions about the staffing of the tax and accounting departments B. Manage cash flow from operating activities C. Make financing decisions D. Make investment decisions E. Make decisions regarding the size of the dividend
D
The monthly mortgage payment on your house is $821.69. It is a 30-year mortgage at 6.5% compounded monthly. How much did you borrow? a. $ 85,000 b. $100,000 c. $115,000 d. $130,000 e. $140,000
D Use a monthly rate of 6.5%/12, N=30*12=360 mos., & the given PMT; solve for PV. (Ensure FV=0)
Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity? A) $125,000.00 B) $200,000.00 C) $300,000.00 D) $250,000.00
D PV growth perpetuity = 10,000/(0.09-0.05) = $250,000.00
Big Cure and Little Cure are both pharmaceutical companies. Big Cure presently has a potential "blockbuster" drug before the Food and Drug Administration (FDA) waiting for approval. If approved, Big Cure's blockbuster drug will produce $1 billion in net income for Big Cure. Little Cure has ten separate, less important drugs before the FDA waiting for approval. If approved, each of Little Cure's drugs would produce $100 million in net income. The probability of the FDA approving a drug is 40%. What is the expected payoff for Big Cure's blockbuster drug? A $100 million B $0 C $1 billion D $400 million
D $400 million
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 12% per year? A) $32,500.00 B) $1,273,296.69 C) $1,348,196.50 D) $1,497,996.11
D ) Calculate the FV with PV = $50,000, interest = 12%, and N = 30, which = $1,497,996.11.
Which of the following statements is FALSE? A A stock's return is perfectly positively correlated with itself. B When the covariance equals 0, the stocks have no tendency to move either together or in opposition of one another. C The closer the correlation is to -1, the more the returns tend to move in opposite directions. D The variance of a portfolio depends only on the variance of the individual stocks.
D The variance of a portfolio depends only on the variance of the individual stocks.
The excess return is generally estimated as the difference between the average return on a security and the average return for ________. A Treasury bonds B a portfolio of securities with similar risk C a broad-based market portfolio like the S&P 500 index D Treasury bills
D Treasury bills
Five years ago you took out a 30-year mortgage with an APR of 6.20% for $206,000 . If you were to refinance the mortgage today for 20 years at an APR of 3.95%, how much would you save in total interest expense?
D) $100,251 D) Current Mortgage Payment: P/Y = 12, N = 360, I/Y = 6.20,PV = $206,000 , Solve for PMT = 1261.69 Current Mortgage Balance: P/Y = 12, N = 300, I/Y = 6.20, PMT = 1261.69 , Solve for PV = $192,159.69 Total of Remaining Payments on Current Mortgage = 300 × $1261.69 = $378,505.83 New Mortgage Payment: P/Y = 12, N = 240, I/Y = 3.95, PV = $192,159.69 , Solve for PMT = $1159.39 Total Payments on New Mortgage: 240 × $1159.39 = $278,254.41 Difference in Total of Payments = $378,505.83 - $278,254.41 = $100,251
You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years?
D) $12,151.67 N = 48 I = 12 /12 PMT = $320 FV = 0 PV = $12,151.67
A bank offers a home buyer a 20-year loan at 8% per year. If the home buyer borrows $130,000 from the bank, how much must be repaid every year? A) $15,888.95 B) $18,537.11 C) $21,185.26 D) $13,240.79
D) $13,240.79
Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make? A) $12,333 B) $14,333 C) $14,833 D) $13,333
D) $13,333 Explanation: D) 9.52 million/102 yen = $93,333; cost = 104,000/1.3 NZD = $80,000; $93,333 - $80,000 = $13,333.
An annuity pays $13 per year for 53 years. What is the future value (FV) of this annuity at the end of that 53 years given that the discount rate is 9%?
D) $13,764.85 Using TVM keys input PMT = $13, number of years = 53, and interest rate = 9%; computing PV = $13,764.85 .
A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan? A) $1663.45 B) $1814.67 C) $1965.89 D) $1512.22
D) $1512.22
A $52,000 loan is taken out on a boat with the terms 3% APR for 36 months. How much are the monthly payments on this loan?
D) $1512.22 D) Calculate the PMT when PV of ordinary annuity = $52,000 , periodic interest = 3/12%, and number of periods = 36.
A company decides to close down its plastics division. It has on hand 20 tons of styrene monomer, a raw material that has a market price of $800 per ton, which had been originally purchased at $750 per ton. Given that the company has no use for the styrene monomer, and that it would cost the company $5200 to store it, what is the total value of the 20 tons of styrene monomer to the company? A) -$5200 B) $0 C) $15,000 D) $16,000
D) $16,000 Value of 20 tons monomer = 20 × 800 = $16,000
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years? A) $18,111 B) $27,167 C) $31,695 D) $22,639
D) $22,639
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years?
D) $22,639 D) PV of $11,000 at 1.8% for 1 year = $5893.91 ; PV of $11,000 at 2.25% for 2 years = $5710.89 ; PV of $11,000 at 2.30% for 3 years = $5604.34 ; PV of $11,000 at 2.66% for 4 years = $5401.90 ; sum of these four PVs = $22,638.99 .
Clarissa wants to fund a growing perpetuity that will pay $10,000 per year to a local museum, starting next year. She wants the annual amount paid to the museum to grow by 5% per year. Given that the interest rate is 9%, how much does she need to fund this perpetuity? A) $125,000.00 B) $200,000.00 C) $300,000.00 D) $250,000.00
D) $250,000.00
An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity at the end of those 22 years, given that the discount rate is 8%? A) $1563.88 B) $3127.76 C) $3649.06 D) $2606.47
D) $2606.47
An annuity pays $47 per year for 22 years. What is the future value (FV) of this annuity at the end of those 22 years, given that the discount rate is 8%?
D) $2606.47 D) Using TVM keys input PMT = $47, number of years = 22, and interest rate = 8%; computing FV = $2606.47 .
Salvatore has the opportunity to invest in a scheme which will pay $5000 at the end of each of the next 5 years. He must invest $10,000 at the start of the first year and an additional $10,000 at the end of the first year. What is the present value of this investment if the interest rate is 3%? A) -$3189.80 B) -$5907.57 C) 5907.57 D) $3189.80
D) $3189.80
You have a used CD store. At an estate sale, you can purchase 230 compact discs for $356.5. You believe you could sell the CDs for an average of $3.05 each. What is the net benefit of buying the CDs at the estate sale and selling them in your store? A) $445 B) $545 C) $645 D) $345
D) $345 Explanation: D) ($3.05 × 230) - $356.5 = $701.5 - $356.5 = $345
Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $76 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $77 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the added benefit (cost) to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________. A) ($1400) B) $1400 C) ($3908) D) $3908
D) $3908 D) Total Benefits No trade and refine WTI crude (base case) 10,000 bbl × $77 of gasoline/bbl = $770,000 Sell WTI and use proceeds to buy ANS 10,000 bbl WTI × $73.06/bbl = $730,600 Buy ANS crude $730,600 / $71.75/bbl of ANS = 10,182.58 or approx 10,183 bbl of ANS Benefit 10,183 bbl × $76 of gasoline/bbl = $773,908 Added Benefits = Total Benefits - Base Case Sell WTI and use proceeds to buy ANS = $773,908 - $770,000 = $3908
An S corporation earns $6.00 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $2.00 dividend? A) $1.87 B) $2.81 C) $3.28 D) $2.34
D) $6.00 × 39% = $2.34
Alaska North Slope Crude Oil (ANS) $71.75/bbl West Texas Intermediate Crude Oil (WTI) $73.06/bbl As an oil refiner, you are able to produce $77 worth of unleaded gasoline from one barrel of Alaska North Slope (ANS) crude oil. Because of its lower sulfur content, you can produce $78 worth of unleaded gasoline from one barrel of West Texas Intermediate (WTI) crude. Assuming you currently have 10,000 bbl of WTI crude, the total benefits to you if you were to sell the 10,000 bbl of WTI crude and use the proceeds to purchase and refine ANS crude is closest to ________ A) $794,274 B) $780,000 C) $781,550 D) $784,091
D) $784,091 Total Benefits Sell WTI and use proceeds to buy ANS 10,000 bbl WTI × $73.06/bbl = $730,600 Buy ANS crude $730,600 /$71.75/bbl ANS = 10,182.58 or approx 10,183 bbl ANS 10,183 bbl × $77 of gasoline/bbl = $784,091
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in two years' time, what is the present value (PV) of that cash flow? A) $76,518 B) $114,777 C) $133,906 D) $95,647
D) $95,647
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. If an investment offers a risk-free cash flow of $100,000 in two yearsʹ time, what is the present value (PV) of that cash flow?
D) $95,647 D) Using FV = $100,000 , find the present value (PV) at 2.25% for 2 years.
Convex Industries has inventories of $218 million, current assets of $1.4 billion, and current liabilities of $504 million. What is its quick ratio? A) 1.17 B) 0.94 C) 2.81 D) 2.35
D) ($1400 - $218 ) / $504 = 2.35
Suppose the term structure of interest rates is shown below: Term 1 year 2 years 3 years 5 years 10 years 20 years Rate (EAR%) 5.00% 4.80% 4.60% 4.50% 4.25% 4.15% The net present value (NPV) of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________. A) $91.37 B) $137.05 C) $114.21 D) -$114.21
D) -$114.21
he net present value (NPV) of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________.
D) -$114.21 D) NPV = -4320 + 1600 / (1.05)1 +1600 / (1.046)3 + 1600 / (1.045)5 = -$114.21
In 2007, interest rates were about 4.5% and inflation was about 2.8%. What was the real interest rate in 2007? A) 1.58% B) 1.61% C) 1.62% D) 1.65%
D) 1.65%
In 2007, interest rates were about 4.5% and inflation was about 2.8%. What was the real interest rate in 2007?
D) 1.65% D) 1.045 / 1.028 = 1.0165; real rate = 1.65%
A 12% APR with bi-monthly compounding is equivalent to an EAR of ________.
D) 12.62% D) EAR = {(1 + 0.12) / 6}6 - 1 = 12.62%
Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt? A) 112 months B) 113 months C) 120 months D) 122 months
D) 122 months
Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt?
D) 122 months D) The first step is to calculate the minimum monthly payment using the debt balance of $75,000 and 12% APR compounded monthly, which = $75,000 × 12% / 12 = $750 . The second step is to use the same $750 as payment, and using a discount rate of 4%/12, calculate the number of months required to pay off the present value (PV) of $75,000 , which = 122 months.
Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. Theminimum monthly payment only requires him to pay the interest on his debt. He receives anoffer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt ontothis card and makes the same monthly payment as before, how long will it take him to pay offhis credit card debt?
D) 122 monthsD) The first step is to calculate the minimum monthly payment using the debtbalance of $75,000 and 12% APR compounded monthly,which = $75,000 × 12% / 12 = $750 . The second step is to use the same $750 aspayment, and using a discount rate of 4%/12, calculate the number of monthsrequired to pay off the present value (PV) of $75,000 , which = 122 months.
GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio? A) 0.67 B) 1.08 C) 2.80 D) 1.35
D) 140 / ($4.00 × 26) = 1.35
Consider an investment that pays $1900 certain at the end of each of the next four years. If the investment costs $6650 and has a net present value (NPV) of $142.31 , then the four year risk-free interest rate is closest to ________.
D) 4.51% D) NPV = 142.31 = -6650 + 1900 / (1.05)1 + 1900 / (1.048)2 + 1900 / (1.046)3 +1900 / (1 + x)4 6650 + 142.31 - 1900 / (1.05)1 + 1900 / (1.048)2 + 1900 / (1.046)3 = 1900 / (1 + x)4 X = 0.0451 or 4.51%
the current inflation rate is 3.6% and you have an investment opportunity that pays 10.9%, then the real rate of interest on your investment is closest to ________.
D) 7.0% D) (1 + nominal rate) = (1 + inflation rate)(1 + real rate) real interest rate = 1 + nominal rate 1 + inflation rate - 1 = 0.070463 or 7.05%
Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282 . Which of the following loans offers monthly payments closest to $282 ?
D) 7.8% APR for 72 months D) Calculate N when PV of ordinary annuity = $19,000 - $2,000 - $800 = $16,200 , periodic interest = 7.8/12%, and monthly payments = $282 .
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firmʹs borrowings is closest to ________.
D) 9.31% D) EAR = (1 + APR / m)m - 1 = (1 + 0.0900 /4)4 - 1 = 0.09308 or 9.31%
15) Which of the following statements is FALSE about valuing cash at different points in time? A) The process of moving forward along the timeline to determine a cash flowʹs value in the future is known as compounding. B) The effect of earning interest on interest is known as compound interest. C) It is only possible to compare or combine values at the same point in time. D) A dollar in the future is worth more than a dollar today.
D) A dollar in the future is worth less than a dollar today.
Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most? A) a power station that uses uranium 308 to produce electrical energy B) a metals trader who stockpiles and sells actual physical quantities of uranium 308 C) a speculator who buys and sells uranium 308 on the market without ever using the metal D) All buyers and sellers would have the same value for 250 pounds of uranium 308.
D) All buyers and sellers would have the same value for 250 pounds of uranium 308.
Which of the following statements regarding the Law of One Price is INCORRECT? A) At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets. C) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. D) An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.
D) An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.
Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company? A) Both decisions involve the purchase of assets that are essential for the existence of the investor B) Both decisions involve the rental of a useful asset. C) Both decisions have the potential to affect the firm. D) Both decisions should be made based upon the tradeoff benefits and costs across time
D) Both decisions should be made based upon the tradeoff benefits and costs across time
Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it?
D) Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven. D) Calculate PV lease payments = $212,108; subtract $180,000 to get $32,108.
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 6% per year? A) $32,500.00 B) $244,098.38 C) $258,457.10 D) $287,174.56
D) Calculate the FV with PV = $50,000,interest = 6%, and N = 30, which = $287,174.56.
Which of the following is the overarching principle that a financial manager should follow when making decisions? A) Decisions should generate the greatest benefits for the firm. B) Decisions should provide benefit to the firm without incurring costs. C) Decisions should be on behalf of the firmʹs owners that give the greatest benefit to those owners, the firmʹs employees and the firmʹs other stakeholders. D) Decisions should increase the value of the firm to its investors.
D) Decisions should increase the value of the firm to its investors.
Which of the following statements is FALSE?
D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term
Which of the following statements is FALSE?
D) Fundamentally, interest rates are determined by the Federal Reserve.
Which alternative offers you the highest effective rate of return?
D) Investment D D) EAR (A) = (1 + APR / m)m - 1 = (1 + 0.062200 /1)1 - 1 = 6.2200% EAR (B) = (1 + APR / m)m - 1 = (1 + 0.060583 /365)365 - 1 = 6.2450% EAR (C) = (1 + APR / m)m - 1 = (1 + 0.061277 /4)4 - 1 = 6.2700% EAR (D) = (1 + APR / m)m - 1 = (1 + 0.061204 /12)12 - 1 = 6.2950%
A company has a share price of $22.15 and 118 million shares outstanding. Its market-to-book ratio is 4.2, its book debt-equity ratio is 3.2, and it has cash of $800 million. How much would it cost to take over this business assuming you pay its enterprise value? A) $1.9 billion B) $3.044 billion C) $4.566 billion D) $3.8 billion
D) Market cap = $22.15 × 118 = $2.614 billion; Book value of equity = $2.614 / 4.2 = 0.622 billion; Debt = $0.622 × 3.2 = 1.991 ; Enterprise value = $2.614 + $1.991 - $0.800 = $3.805 billion
The State Bank offers an interest rate of 5.5% on savings and 6% on loans, while the Colonial Bank offers 6.5% on savings and 7% on loans. Which of the following is the LEAST likely outcome of such a situation? A) The State Bank would experience a surge in demand for loans. B) The Colonial Bank would experience a surge in demand for deposits. C) The State Bank would experience a fall in demand for deposits. D) The Colonial Bank would experience a surge in demand for loans.
D) The Colonial Bank would experience a surge in demand for loans.
Which of the following statements is FALSE about interest rates?
D) The annual percentage rate indicates the amount of interest including the effect of compounding.
Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate?
D) The loan values are very sensitive to changes in market interest rates.
Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower?
D) The loan will be for a long period of time.
Historically, why were high inflation rates associated with high nominal interest rates?
D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present
A perpetuity will pay $5000per year, starting ten years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 5%? A) $1989 B) $39,866 C) $26,330 D) There is no solution to this problem.
D) There is no solution to this problem.
If the current market rate of interest is 7%, then the value as of year 1 is closest to ________. A) $0B) $1000 C) $570 D) $68
D) Two part problem: FV = PV (1 + r)n = 500(1.07)1 = $535 PV = FV / (1 + r)n = -500 / (1.07)1 = -$467 So, the answer is $535 + -$467 = $68.
An investment will pay $289,940 at the end of next year for an investment of $190,000 at the start of the year. If the market interest rate is 9% over the same period, should this investment be made? A) No, because the investment will yield $82,840 less than putting the money in a bank. B) Yes, because the investment will yield $66,272 more than putting the money in a bank. C) Yes, because the investment will yield $74,556 more than putting the money in a bank. D) Yes, because the investment will yield $82,840 more than putting the money in a bank.
D) Yes, because the investment will yield $82,840 more than putting the money in a bank.
D
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 6% per year? A) $32,500.00 B) $244,098.38 C) $258,457.10 D) $287,174.56
A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer? A) No, the costs are $1500 more than the benefits. B) No, the costs and the benefits are the same. C) Yes, the costs are $2500 less than the benefits. D) Yes, the costs are $2000 less than the benefits.
D) Yes, the costs are $2000 less than the benefits. Explanation: D) 0.50 × 4000 = $2000
If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur? A) a surge in conversion of dollars to yen in Tokyo B) a surge in conversion of euros to yen in Tokyo C) a surge in conversion of euros to dollars in Paris D) a surge in conversion of euros to yen in Paris
D) a surge in conversion of euros to yen in Paris
Which of the following computes the growth in purchasing power?
D) growth of money / growth of prices
A U.S.-based manufacturer of sunscreen is contemplating using funds to purchase courtside advertising at major tennis matches such as the French Open and the Australian Open. Advertising at such well viewed international events will then raise the domestic sales of the manufacturers products. Which of the following factors is the most relevant when analyzing this decision? A) the cost of the machine used to produce the sunscreen B) the manufacturing process of the sunscreen C) the cost of the existing advertising campaign D) the cost of the courtside advertising at the tennis matches
D) the cost of the courtside advertising at the tennis matches
Consider the above statement of cash flows. Which of the following is true of AOS Industriesʹ operating cash flows? A) It collected more cash from its customers than it charged. B) It sold more inventory than it bought. C) It charged more on its accounts payable back than it paid back. D) All of the above are true.
D.
Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned? A) It includes entries for the depreciation of assets. B) It does not include entries for expenditures on inventory. C) It does not include entries for collection of money from account receivables. D) It includes cash inflows from services rendered.
D.
*16. Consider the following timeline: Date 0---------1-------2 $500----?----(-)$500 Cash flow If the current market rate of interest is 7%, then the value as of year 1 is closest to ________. A) $0 B) $1000 C) $570 D) $68
D. Two-part problem: FV = PV (1 + r)n = 500* (1+.07)1 = $535 PV = FV / (1 + r)n = -500 / (1+07)1 = -$467 So, the answer is $535 + -$467 = $68.
What is the future value (FV) of $50,000 in thirty years, assuming the interest rate is 6% per year? A) $32,500.00 B) $244,098.38 C) $258,457.10 D) $287,174.56
D. $287,174.56
3. A tenant leases a building she will pay $24,000 every 6 months for the next 5 years. Which of the following is the timeline for her rental payments, assuming she makes the rental payment at the beginning of each six-month period? a. Date (years) Cash Flows ('000) b. Date (years) Cash Flows ('000) Date(years) Cash Flows ('000) Date(years) -$48 -$48 -$48 -$48 -$48 -$48 $48 $48 $48 $48 0 1/2 1 11/2 2 21/2 3 31/2 4 41/2 5 $24 $24 $24 $24 $24 $24 $24 $24 $24 $24 $24 0 1/2 1 11/2 2 21/2 3 31/2 4 41/2 5 for $48,000 per year. She signs a 5-year rental agreement that states that 0 1 2 3 4 5 0 1 2 3 4 5 c. d. $48 $48 Cash Flows('000) -$24 -$24 -$24 -$24 -$24 -$24 -$24 -$24 -$24 -$24 0
D. -24, -24, -24, -24, -24, -24, -24, -24, -24, -24, 0
Luther Corporation Consolidated Balance Sheet December 31, 2006 and 2005 (in $ millions) Assets 2006 2005 Liabilities and Stockholders' Equity 2006 2005 Current Assets Current Liabilities Cash 53.6 58.5 Accounts payable 89.2 73.5 Accounts receivable 55.8 39.6 Notes payable / short-term debt 10.3 9.6 Inventories 45.5 42.9 Current maturities of long-term debt 38.6 36.9 Other current assets 5.4 3.0 Other current liabilities 6.0 12.0 Total current assets 160.3 144.0 Total current liabilities 144.1 132.0 Long-Term Assets Long-Term Liabilities Land 66.2 62.1 Long-term debt 228.7 168.9 Buildings 107.7 91.5 Capital lease obligations Equipment 120.6 99.6 Less accumulated depreciation (57.1) (52.5) Deferred taxes 22.8 22.2 Net property, plant, and equipment 237.4 200.7 Other long-term liabilities --- --- Goodwill 60.0 -- Total long-term liabilities 251.5 191.1 Other long-term assets 63.0 42.0 Total liabilities 395.6 323.1 Total long-term assets 360.4 242.7 Stockholders' Equity 125.1 63.6 Total Assets 520.7 386.7 Total liabilities and Stockholders' Equity 520.7 386.7 Refer to the balance sheet above. Luther's current ratio for 2006 is closest to ________. A. 1.67 B. 2.22 C. 0.56 D. 1.11
D. 1.11 Current Ratio = Curr. Assets/Curr. Liab. = 160.3/144.1 =1.11
Treasury bill returns are 4%, 3%, 2%, and 5% over four years. The standard deviation of returns of Treasury bills is ________. A. 1.55% B. 1.03% C. 0.90% D. 1.29%
D. 1.29%
Luther Corporation Consolidated Income Statement Year ended December 31 (in $millions) 2006 2005 Total sales 610.1 553.6 Cost of sales -500.2 -357.1 Gross profit 109.9 196.5 Selling, general, and administrative expenses -40.5 -38.8 Research and development -24.6 -21.8 Depreciation and amortization -3.6 -3.4 Operating income 41.2 132.5 Other income -- -- Earnings before interest and taxes (EBIT) 41.2 132.5 Interest income (expense) -25.1 -15.9 Pretax income 16.1 116.6 Taxes -5.5 -40.81 Net income 10.6 75.79 Price per share $16 $15 Sharing outstanding (millions) 10.2 8.0 Stock options outstanding (millions) 0.3 0.2 Stockholders' Equity 126.6 63.6 Total Liabilities and Stockholders' Equity 533.1 386.7 Refer to the income statement above. Luther's earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________. A. $271.8 million B. $108.7 million C. $163.1 million D. $135.9 million
D. 135.9 EBITDA = EBIT + Dep & Amort. = $ 132.5 + $3.4 = $135.9 M
C
Drew receives an inheritance that pays him $54,000 every three months for the next two years. Which of the following is closest to the present value (PV) of this inheritance if the interest rate is 8.9% (EAR)? A) $314,366 B) $471,549 C) $392,957 D) $432,000
B
Elinore is asked to invest $5100 in a friendʹs business with the promise that the friend will repay $5610 in one year. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5508 in one year. U.S. securities of similar term offer a rate of return of 7%. What is the opportunity cost of capital in this case? A) 7% B) 8% C) 9% D) 10%
Balance Sheet Assets Liabilities Current Assets Current Liabilities Cash 46 Accounts payable 39 Accounts receivable 23 Notes payable/short-term debt 5 Inventories 20 Total current assets 89 Total current liabilities 44 Long-Term Assets Long-Term Liabilities Net property, plant, and equipment 121 Long-term debt 133 Total long-term assets 121 Total long-term liabilities 133 Total Liabilities 177 Stockholders' Equity 33 Total Assets 210 Total Liabilities and Stockholders' Equity 210 The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. What is the company's net working capital? A. $133 million B. $2 million C. $89 million D. $45 million
D. 45 million Net working capital = total current assets - total current liabilities, 89 - 44 = 45 million , as all quantities are expressed in millions of dollars on the table.
The probability mass between two standard deviations around the mean for a normal distribution is ________. You Answered A. 66% B. 90% C. 75% D. 95%
D. 95%
Which of the following statements is FALSE about valuing cash at different points in time? A) The process of moving forward along the timeline to determine a cash flow's value in the future is known as compounding. B) The effect of earning interest on interest is known as compound interest. C) It is only possible to compare or combine values at the same point in time. D) A dollar in the future is worth more than a dollar today.
D. A dollar in the future is worth less than a dollar today
What is a firm's net income? A. the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period B. the last or "bottom" line of the income statement C. a measure of the firm's profitability over a given period D. all of the above
D. All of the above
AOS Industries Statement of Cash Flows for 2008 Operating activities Net Income 3.2 Depreciation and amortization 1.4 Cash effect of changes in Accounts receivable -2.1 Accounts payable 1.1 Inventory -0.8 Cash from operating activities 2.8 Investment activities Capital expenditures -2.2 Acquisitions and other investing activity -0.4 Cash from investing activities -2.6 Financing activities Dividends paid -1.5 Sale or purchase of stock 2.1 Increase in short-term borrowing 1.4 Increase in long-term borrowing 3.2 Cash from financing activities 5.2 Change in Cash and Cash Equivalents 5.4 Consider the above statement of cash flows. Which of the following is true of AOS Industries' operating cash flows? A. It collected more cash from its customers than it charged. B. It sold more inventory than it bought. C. It charged more on its accounts payable back than it paid back. D. All of the above are true.
D. All of the above are true.
Which of the following statements is FALSE? A. The variance increases with the magnitude of the deviations from the mean. B. The variance is the expected squared deviation from the mean. C. Two common measures of the risk of a probability distribution are its variance and standard deviation. D. If the return is riskless and never deviates from its mean, the variance is equal to one.
D. If the return is riskless and never deviates from its mean, the variance is equal to one. Why false? Because If the return is riskless (i.e. the return is certain) and never deviates from its mean, the variance is equal to zero.
Which of the following statements is FALSE? A. If two stocks move in opposite directions, one will tend to be above average when to other is below average, and the covariance will be negative. B. The correlation between two stocks has the same sign as their covariance, so it has a similar interpretation. C. The covariance of a stock with itself is simply its variance. D. The covariance allows us to gauge the strength of the relationship between stocks.
D. The covariance allows us to gauge the strength of the relationship between stocks.
What is a firm's gross profit? A. the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by a firm in a given period B. the difference between sales revenues and the costs C. the difference between sales revenues and cash expenditures associated with those sales D. all of the above
D. all of the above
The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________. A. NYSE Enforcement Board B. Accounting Standards Board C. Securities and Exchange Commission (SEC) D. auditor
D. auditor
AOS Industries Statement of Cash Flows for 2008 Operating activities Net Income 3.2 Depreciation and amortization 1.4 Cash effect of changes in Accounts receivable -2.1 Accounts payable 1.1 Inventory -0.8 Cash from operating activities 2.8 Investment activities Capital expenditures -2.2 Acquisitions and other investing activity -0.4 Cash from investing activities -2.6 Financing activities Dividends paid -1.5 Sale or purchase of stock 2.1 Increase in short-term borrowing 1.4 Increase in long-term borrowing 3.2 Cash from financing activities 5.2 Change in Cash and Cash Equivalents 5.4 Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2008? A. from investment activities B. by sale of stock C. from its operations D. by issuing debt
D. by issuing debt
If the above balance sheet is for a retail company, how has the companyʹs leverage changed between 2007 and 2008? A) The company has experienced a very significant decrease in its leverage. B) The company has experienced a significant decrease in its leverage. C) The company has experienced no significant change in its leverage. D) The company has experienced a significant increase in its leverage.
D>
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008? A) The company has eliminated the risk that it will experience a cash shortfall in the near future. B) The company has reduced the risk that it will experience a cash shortfall in the near future. C) The risk that the company will experience a cash shortfall in the near future is unchanged. D) The company has increased the risk that it will experience a cash shortfall in the near future.
D>
Refer to the balance sheet above. Lutherʹs current ratio for 2006 is closest to ________. A) 1.67 B) 2.22 C) 0.56 D) 1.11
D> Current ratio = Current assets / Current liabilities = $160.3 / $144.1 = 1.11
Which of the following is the overarching principle that a financial manager should follow when making decisions?
Decisions should increase the value of the firm to its investors
D
Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $180,000 up front, or she can lease it for five years for $4,200 per month. She can borrow at 7% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven or should she lease it? A) Lease, since the present value (PV) of the lease is $12,224 less than the cost of the oven. B) Lease, since the present value (PV) of the lease is $8,642 less than the cost of the oven. C) Lease, since the present value (PV) of the lease is $2,212 less than the cost of the oven. D) Buy, since the present value (PV) of the lease is $32,108 more than the cost of the oven.
Refer to the balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's enterprise value?
Enterprise value = Market value of equity + Debt - Cash Market value of equity = 8 million × $15 = $120 million Debt = Notes payable + Current maturities of long-term debt + Long-term debt Debt = $9.6 + $36.9 + $168.9 = $215.4 Cash = $58.5 So, enterprise value = $120 + 215.4 - 58.5 = $276.90.
If a few intermediate cash flows in valuing a stream of cash flows are zero can we delete those points on the timeline and squeeze the timeline to show only nonzero cash flows?
Every cash flow contains two pieces of information - the nominal value and the time stamp. If we decide to eliminate the zero cash flows from the timeline and concentrate only on the nonzero ones, we will be distorting the time stamp of some nonzero cash flows. Hence, we need to show the timeline in full, including all cash flows zero as well as nonzero.
State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements.
Examples of some firms that had practiced inaccurate reporting are Enron and WorldCom.
State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements.
Examples of some firms that had practiced inaccurate reporting are Enron and WorldCom.
Enron; WorldCom
Examples of some firms that had practiced inaccurate reporting are _____ and ___________.
To calculate a cash flowʹs present value (PV), you must compound it.
F
Which of the following comparison statements is (are) true? I. An annuity has equal payments, a perpetuity does not. II. Both an annuity and a perpetuity are streams of cash flows. III. An annuity covers a longer period of time than a perpetuity. IV. Whereas annuity payments are comprised of interest only, perpetuity payments cover some principal and some interest. V. An annuity may be viewed as the difference between two perpetuities. a. II only b. III only c. I & II only d. II & III only e. II & IV only f. II & V only g. III & IV only h. II, IV, & V z. none of these are correct.
F. II & V only. Both and annuity and perpetuity are streams of cash flows & An annuity may be viewed as the difference between two cash flows.
For a free-risk investment, the opportunity cost of capital will generally be more than the interest rate offered by U.S. Treasury securities with a similar term. True or False
FALSE
Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. Joe has taken out an amortizing loan.
FALSE
Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. Joe has taken out an amortizing loan. True or False
FALSE
T/F: A dollar today and a dollar in one year may be considered to be equivalent
FALSE
T/F: Cash flows from an annuity occur every year in the future
FALSE
T/F: For a free-risk investment, the opportunity cost of capital will generally be more than the interest rate offered by the U.S. treasury securities with a similar term
FALSE
T/F: In order to distinguish between flows and outflows, different colors are assigned to each pf these cash flows when constructing a timeline
FALSE
T/F: Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of 3 years. Joe has taken out an amortizing loan.
FALSE
T/F: The annual percentage rate indicates the amount of interest, including the effect of any compounding
FALSE
T/F: Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods
FALSE
T/F: When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interests rates to be high
FALSE
The annual percentage rate indicates the amount of interest, including the effect of any compounding.
FALSE
The real interest rate is the rate of growth of oneʹs purchasing power due to money invested.
FALSE
The real interest rate is the rate of growth of oneʹs purchasing power due to money invested. True or False
FALSE
The term opportunity in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested.
FALSE
The term ʺopportunityʺ in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested. True or False
FALSE
Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods. True or False
FALSE
You want to endow the prestigious YourNameHere scholarship at Western; it will pay $5,000 per year forever, starting one year from now. If the university can earn 5% on its endowment, what amount must you donate to endow the scholarship? How much must you donate now, assuming the first scholarship is awarded to a student 20 years from today?
Find PV (perpetuity) = CF/r PV=5,000/0.05=100,000 1. Calc value of perpetuity in yr 19. Done above = 100,000 (FV = 100000, I=5, N=19, solve for PV) 2. Discount that value back to the present. (deferred perpetuity) PV = 100,000 /(1.05^19)=$39,573.40
Which of the following statements is FALSE about valuing cash at different points in time?
Finding the present value (PV) and compounding are the same
Firm A Firm B Firm C Firm D Net Income $34.1 million $5.7 million $31.1 million $13.2 million Market Capitalization $310 million $53 million $280 million $112 million Earnings per share $4.10 $4.05 $6.75 $12.70 The above data is for four regional trucking firms. Based on price-earnings ratios, which firm's stock is the best value?
Firm A
B
Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by? A) The monthly payment will increase by $104.79. B) The monthly payment will decrease by $104.79 C) The monthly payment will increase by $343.12. D) The monthly payment will decrease by $343.12.
Above are portions of the balance sheet and income statement for two companies in 2008. Based upon this information, which of the following statements is most likely to be true?
Fixed asset turnover ratios indicate that firm A generating fewer sales for the assets it employs than firm B.
Which of the following statements is FALSE? A) The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.
For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.
1.35
GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio?
D
GenCorp. has a total debt of $140 million and stockholdersʹ equity of $50 million. It also has 26 million shares outstanding, with a market price of $4.00 per share. What is GenCorpʹs market debt-equity ratio? A) 0.67 B) 1.08 C) 2.80 D) 1.35
C
Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct? A) The purchasing power of investors in these bonds grew over the course of the year. B) The real interest rate for investors in these bonds was greater than the rate of inflation. C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. D) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.
A
Given the above term structure of interest rates, which of the following is most likely in the future? Option I: Interest rates will fall. Option II: Economic growth will slow. Option III: Long-term rates will rise relative to short term rates. A) Option I only B) Option II only C) Option III only D) Options I and II
C
Gross profit is calculated as ________. A) total sales - cost of sales - selling, general, and administrative expenses - depreciation and amortization B) total sales - cost of sales - selling, general, and administrative expenses C) total sales - cost of sales D) none of the above
Let's say you manage an annual volleyball tournament. The tournament generates a profit of $20,000 per year before paying you a salary. You figure a reasonable salary is $10,000, leaving cash-flows after all expenses of $10,000 per year. You expect the $10,000 cash flow to grow at the rate of inflation (3.5%) every year and that the tournament will continue forever. Someone has just offered $75,000 to buy the tournament from you. If your discount rate is 12%, should you take the offer?
Growing perpetuity. CF=10,000 r=12% g=3.5% PV = 10,000/.12-.035 = 117,647.06 More than the offer, don't take the offer.
Which of the following comparison statements is (are) true? I. A perpetuity covers a longer period of time than an annuity. II. Both an annuity and a perpetuity are streams of cash flows. III. A perpetuity can have equal payments, but annuities generally do not have equal payments. IV. Whereas annuity payments are comprised of interest only, perpetuity payments cover some principal and some interest. V. An annuity may be viewed as the difference between two perpetuities. a. II & III only b. I, II, & III only c. I, II & IV only d. II & IV only e. III & IV only f. II & V only g. III & V only h. I, II, & V only z. none of these are correct.
H I, II, & V only. A perpetuity covers a longer period of time than an annuity. Both and annuity and a perpetuity are streams of cash flows An annuity may be viewed as the difference between two perpetuities
Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. what is stoves major error in reasoning when making this decision?
He ignores the fact that the costs and benefits of the investment are not stated in the same terms
B
If the current rate of interest is 7%, then the future value (FV) of an investment that pays $1200 per year and lasts 18 years is closest to ________. A) $24,479 B) $40,799 C) $48,959 D) $57,119
C
If the current rate of interest is 8%, then the present value (PV) of an investment that pays $1200 per year and lasts 24 years is closest to ________. A) $7581 B) $15,162 C) $12,635 D) $17,689
true
true or false: A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV).
A vintner is deciding when to release a vintage of Sauvignon Blanc. If it is bottled and released now, the wine will be worth $2.2 million. If it is barrel aged for a further year, it will be worth 15% more, though there will be additional costs of $528,000 incurred at the end of the year. If the interest rate is 7%, what is the difference in the benefit the vintner will realize if he releases the wine after barrel aging it for one year or if he releases the wine now? A) He will earn $1,980,000 less if he releases the wine now. B) He will earn $328,972 more if he releases the wine now. C) He will earn $328,972 less if he releases the wine now. D) He will earn $356,400 more if he releases the wine now.
He will earn $328,972 more if he releases the wine now.
B
Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutyʹs marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one? A) No, since costs are $7,800,000 more than benefits. B) No, since costs are $6,800,000 more than benefits. C) Yes, since the benefits are $3,400,000 more than the costs. D) Yes, since the benefits are $7,300,000 more than the costs.
D
Historically, why were high inflation rates associated with high nominal interest rates? A) Individuals will spend more when they expect their investments to increase in value. B) Growth in investment and savings is encouraged when consumers are judged to be overspending. C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
D
How can we convert the value of money from one point in time to another? A) using the current exchange rate B) using a cost-benefit analysis C) using the valuation principle D) using the current interest rate
The last item in the statement of cash flows should equal the difference in cash balances between two adjacent balance sheets
How can we cross check the statement of cash flows?
true
How can we perform a cost-benefit analysis in case they are occurring in different currencies? true or false: We need to convert costs and benefits occurring in different currencies to one base currency before performing any analysis.
B
How do the shareholders of most corporations exercise their control of that corporation? A) by voting on issues that concern them B) by electing members of a board of directors C) by vetting the decisions of the board of directors D) by providing oversight of the day-to-day running of the corporation
The balance sheet is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st.
How does a firm select the date for preparation of its balance sheet?
The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. Typically the income statement spans the flow between two adjacent balance sheets.
How does a firm select the dates for preparation of its income statement?
A
How long will it take $50,000 placed in a savings account at 10% interest to grow into $75,000 ? A) 4.25 years B) 3.25 years C) 5.25 years D) 6.25 years
A
How much money would a stock exchange make from buying and selling 500 shares of the stock under the conditions shown above? A) $250 B) $3,000 C) $5,875 D) $210,375
C
Howard is saving for a holiday. He deposits a fixed amount every month in a bank account with an EAR of 14.7%. If this account pays interest every month then how much should he save from each monthly paycheck in order to have $14,000 in the account in four yearsʹ time? A) $176 B) $308 C) $220 D) $352
B
If equivalent investment opportunities trade simultaneously in different competitive markets, then they must trade for the same price in both markets. What do we call the above statement? A) The Net Present Value rule B) The Law of One Price C) The Valuation Principle D) The Time Value of Money
C
If money is invested at 8% per year, after approximately how many years will the interest earned be equal to the original investment? A) 7 years B) 8 years C) 9 years D) 11 years
D
If the above balance sheet is for a retail company, how has the companyʹs leverage changed between 2007 and 2008? A) The company has experienced a very significant decrease in its leverage. B) The company has experienced a significant decrease in its leverage. C) The company has experienced no significant change in its leverage. D) The company has experienced a significant increase in its leverage.
D
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in quick ratio between 2007 and 2008? A) The company has eliminated the risk that it will experience a cash shortfall in the near future. B) The company has reduced the risk that it will experience a cash shortfall in the near future. C) The risk that the company will experience a cash shortfall in the near future is unchanged. D) The company has increased the risk that it will experience a cash shortfall in the near future.
C
If the above balance sheet is for a retail company, what indications about this company would best be drawn from the changes in stockholdersʹ equity between 2007 and 2008? A) The company is very profitable because it is obviously collecting receivables faster. B) The company is selling its property, plant and equipment, which may result in a long-term deficiency in production capacity. C) The companyʹs net income in 2008 was negative. D) No conclusions can be drawn regarding stockholdersʹ equity without additional information.
true
true or false: The Valuation Principle shows how to make the costs and benefits of a decision comparable so that we can evaluate them properly.
D
If the exchange rates, after fees, in Tokyo are ¥1,000 = €6 = $9 and the exchange rates in Paris are €1 = $1.5 = ¥171, which of the following is most likely to occur? A) a surge in conversion of dollars to yen in Tokyo B) a surge in conversion of euros to yen in Tokyo C) a surge in conversion of euros to dollars in Paris D) a surge in conversion of euros to yen in Paris
C
If the interest rate is 9%, the one-year discount factor is equal to ________. A) 0.090 B) 1.090 C) 0.917 D) 0.981
D
If the one-year discount factor is equal to 0.94340, the interest must be equal to ________, A) 3.0% B) 4.8% C) 5.5% D) 6.0%
C
If the rate of interest (r) is 8%, then you should be indifferent about receiving $500.00 today or ________. A) $462.96 in one year B) $500.00 in one year C) $540.00 in one year D) None of the above
A
If the rate of interest (r) is 9%, then you should be indifferent about receiving $750 in one year or ________. A) $688.07 today B) $750 today C) $825.68 today D) None of the above
D
In 2007, interest rates were about 4.5% and inflation was about 2.8%. What was the real interest rate in 2007? A) 1.58% B) 1.61% C) 1.62% D) 1.65%
A
In 2009, U.S. Treasury yielded 0.1%, while inflation was 2.7%. What was the real rate in 2009? A) -2.6% B) 2.6% C) -2.8% D) 2.8%
$330,000
In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced?
A
In 2009, an agricultural company introduced a new cropping process which reduced the cost of growing some of its crops. If sales in 2008 and 2009 were steady at $30 million, but the gross margin increased from 2.8% to 3.9% between those years, by what amount was the cost of sales reduced? A) $330,000 B) $660,000 C) $264,000 D) $462,000
B
In a trade with the government of an oil producing nation, a manufacturer will deliver 13 Caterpillar D9 tractors, with a value of $320,000 per tractor, and receive 45,000 barrels of oil, valued at $120 per barrel. What is the net benefit of this trade to the manufacturer? A) $744,000 B) $1,240,000 C) $992,000 D) $1,488,000
A
In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe? A) Long-term interest rates will tend to be higher than short-term interest rates. B) Long-term interest rates will be about the same as short-term interest rates. C) Both long- and short-term interest rates would be expected to fall sharply. D) No relative change in short and long term interest rates could be predicted.
true
In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.
C
In most corporations, to whom does the chief financial officer report? A) shareholders B) the board of directors C) the chief executive officer D) the controller
What care, if any, should be taken when cash flows occur in periodicities that are shorter than a year (e.g., quarterly or monthly cash flows)?
In the real world, cash flows can occur with any periodicity but interest rates are generally quoted in annual terms. As such, when cash flows occur at a shorter than annual time interval the interest rates have to be modified to correspond to the cash flow interval. One way to do that is to match the compounding period equal to cash flow interval.
D
In which of the following relationships is an agency conflict problem LEAST likely to arise? A) the relationship between a hire-car company and the persons who hire that companyʹs cars regarding the treatment of those cars B) the relationship between high-level military officers and the soldiers who serve under them regarding the willingness of the soldiery to take risks C) the relationship between a restaurateur and the suppliers of produce to that restaurant regarding the freshness of the produce supplied D) the relationship between a driver and the passengers in a car regarding the safe driving of that car
B
In which of the following situations would it not be appropriate to use the following formula: A) when yield curves are flat B) when short-term and long-term interest rates vary widely C) when the inflation rate is high D) when the discount rate is high
C
In which of the following ways is a limited liability company like a corporation? A) It was created and developed first in the United States. B) It can choose to be considered a partnership for tax purposes. C) Its ownersʹ liability is restricted to their investment. D) It is directly managed by the owners.
false
International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty -first century.
The table above shows the rate of return (APR) for four investment alternatives. Which offers the highest EAR? Investment: Rate of Return: Compounding: A, B, C, D 6% 5.9% 5.8% 5.7% Yearly Semiannually Monthly Weekly
Investment A Explanation: A) Calculate the EAR for each; A = 6.0%; B = 5.99%; C = 5.96%; D = 5.86%.
A
Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true? A) Investment X has a higher growth rate than Investment Y. B) Investment X has a lower growth rate than Investment Y. C) The answer cannot be determined without knowing the interest rate for both investments. D) With the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value.
Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true?
Investment X has a higher growth rate than Investment Y.
The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. If the company has 5 million shares outstanding, and these shares are trading at a price of $6.39 per share, what does this tell you about how investors view this firm's book value?
Investors consider that the firm's market value and its book value are roughly equivalent.
Given that the inflation rate in 2006 was about 3.24% while a short term municipal bond offered a rate of 2.9%, which of the following statements is correct?
Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year
Given that the inflation rate in 2006 was about 3.24%, while a short-term municipal bond offered a rate of 2.9%, which of the following statements is correct? A) The purchasing power of investors in these bonds grew over the course of the year. B) The real interest rate for investors in these bonds was greater than the rate of inflation. C) Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year. D) The nominal interest rate offered by these bonds gave the true increase in purchasing power that resulted from investing in these bonds.
Investors in these bonds were able to buy less at the end of the year than they could have purchased at the start of the year.
yes
Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?
Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?
It adds all non-cash entries related to a firm's operating activities.
Consider the above statement of cash flows. Which of the following is true of AOS Industries' operating cash flows?
It collected more cash from its customers than it charged. It sold more inventory than it bought. It charged more on its accounts payable back than it paid back. -->D) All of the above are true
What is the effective annual rate (EAR)?
It is the interest rate that would earn the same interest with annual compounding
What is the effective annual rate (EAR)? A) It is the interest rate that would earn the same interest with annual compounding. B) It is the ratio of the number of the annual percentage rate to the number of compounding periods per year. C) It is the interest rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction). D) It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.
It is the interest rate that would earn the same interest with annual compounding.
What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?
It makes it easier to compare the financial results of different firms.
What are the requirements of section 404 of SOX?
It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.
The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company?
It takes on average about 4 weeks to collect payment from its customers.
A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded?
It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows.
You are scheduled to receive 10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow?
It will have no effect on the future value
When the costs of an investment come before that investment's benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors?
It will make it less attractive, since it will decrease the investment's net present value (NPV)
When the costs of an investment come before that investmentʹs benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors? A) It will make it more attractive, since it will increase the investmentʹs net present value (NPV). B) It will make it more attractive, since it will decrease the investmentʹs net present value (NPV). C) It will make it less attractive, since it will increase the investmentʹs net present value (NPV). D) It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).
It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).
Consider the above statement of cash flows. In 2008, AOS Industries had contemplated buying a new warehouse for $3 million, the cost of which would be depreciated over 10 years. If AOS Industries has a tax rate of 25%, what would be the impact for the amount of cash held by AOS at the end of the 2008?
It would have $2,925,000 less cash at the end of 2008. -$3,000,000 + 300,000 × 25% = -$2,925,000
C
Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year? A) one that pays $900 now B) one that pays $1080 in two years C) one that pays $1350 in five years D) one that pays $1620 in ten years
C
Joe is a general partner in a limited partnership firm, while Jane is a limited partner in the same firm. Which of the following statements regarding their respective relationships to the firm is correct? A) Joe has no management authority within the partnership. B) Jane is legally involved in the managerial decision making of the firm. C) Janeʹs liability for the firmʹs debts consists solely of her investment in the firm. D) Withdrawal of Jane from the partnership will dissolve the partnership.
Each exchange has its own listing standards which require that a company have enough shares outstanding for shareholders to have a liquid market and to be of interest to a broad set of investors. The (NYSE/NASDAQ) standards are more stringent than those of (NYSE/NASDAQ).
NYSE NASDAQ
$254,641
Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value (PV), how much will Joe receive for selling the family business? IGNORE THIS
B
Joseph buys a Hummer for $59,000 , financing it with a five-year 7.60% APR loan paid monthly. He decides to pay an extra $50 per month in addition to his monthly payments. Approximately how long will he take to pay off the loan under these conditions? A) 59.57 months B) 57.07 months C) 54.57 months D) 60.57 months
An animator needs a laptop for audio/video editing, and notices that he can pay $2600 for a Dell XPS laptop, or lease from the manufacturer for monthly payments of $75 each for four years. The designer can borrow at an interest rate of 14% APR compounded monthly. What is the cost of leasing the laptop over buying it outright? A) Leasing costs $116 more than buying. B) Leasing costs $174 more than buying. C) Leasing costs $145 more than buying. D) Leasing costs $289 more than buying.
Leasing costs $145 more than buying.
A
Liam had an extension built onto his home. He financed it for 48 months with a loan at 5.00% APR. His monthly payments were $770 . How much was the loan amount for this extension? A) $33,436 B) $40,123 C) $46,810 D) $53,497
D
Like other metals, uranium 308 is traded in competitive markets like the New York Metals Exchange. Which of the following would value a given weight of uranium 308 the most? A) a power station that uses uranium 308 to produce electrical energy B) a metals trader who stockpiles and sells actual physical quantities of uranium 308 C) a speculator who buys and sells uranium 308 on the market without ever using the metal D) All buyers and sellers would have the same value for 250 pounds of uranium 308.
In an effort to maintain price stability, it is expected that the European Central Bank will raise interest rates in the future. Which of the following is the most likely effect of such an action on short-term and long-term interest rates in Europe? A) Long-term interest rates will tend to be higher than short-term interest rates. B) Long-term interest rates will be about the same as short-term interest rates. C) Both long- and short-term interest rates would be expected to fall sharply. D) No relative change in short and long term interest rates could be predicted.
Long-term interest rates will tend to be higher than short-term interest rates.
1.59%
Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0 . Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7 . How much asset turnover should manufacturer B have to match manufacturer Aʹs ROE?
A
Manufacturer A has a profit margin of 2.2%, an asset turnover of 1.7 and an equity multiplier of 5.0. Manufacturer B has a profit margin of 2.5%, an asset turnover of 1.2 and an equity multiplier of 4.7. How much asset turnover should manufacturer B have to match manufacturer Aʹs ROE? A) 1.59% B) 3.18% C) 2.23% D) 1.27%
According to the text, did Enron and WorldCom follow Generally Accepted Accounting Principles (GAAP) in their financial reporting process?
Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company.
Refer to the partial balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Luther's market-to-book ratio?
Market-to-book = Market value of equity / Book value of equity Market-to-book = 8 million × $15 / $63.6 = 1.89
C
Martin wants to provide money in his will for an annual bequest to whichever of his living relatives is oldest. That bequest will provide $4000 in the first year, and will grow by 7% per year, forever. If the interest rate is 9%, how much must Martin provide to fund this bequest? A) $100,000.00 B) $160,000.00 C) $200,000.00 D) $240,000.00
A
Matthew wants to take out a loan to buy a car. He calculates that he can make repayments of $5000 per year. If he can get a four-year loan with an interest rate of 7.9%, what is the maximum price he can pay for the car? A) $16,598 B) $19,918 C) $23,237 D) $26,557
Identify and justify the goal of the financial manager.
Maximize shareholder wealth. Why: Shareholders own the company - their wealth most at risk. Financial manager is the agent/caretaker of he shareholders money, their job to make decisions in the best interest of the owners.
The objective of a financial manager is to maximize the wealth of the shareholders (also known as maximizing the market value of the assets). Why is this a better objective than maximizing earnings? Why is it better than maximizing market share?
Maximizing earnings is an imprecise and misdirected goal. Earnings are the yearly accounting numbers created for tax purposes. They differ from cash flows due to things like depreciation expense. Shareholders care about cash flows, not earnings, so earnings are not the right numbers to maximize. Further, which earnings do we maximize? This year's or next year's? The value of the assets will appropriately reflect all of the future cash flows generated by those assets, not simply near-term earnings. Maximizing market share is only rarely the same as maximizing shareholders' wealth. I can maximize market share by giving the product away, but that won't make my shareholders any better off.
D
Michael has a credit card debt of $75,000 that has a 12% APR, compounded monthly. The minimum monthly payment only requires him to pay the interest on his debt. He receives an offer for a credit card with an APR of 4% compounded monthly. If he rolls over his debt onto this card and makes the same monthly payment as before, how long will it take him to pay off his credit card debt? A) 112 months B) 113 months C) 120 months D) 122 months
On the (NYSE/NASDAQ) each stock has only one market maker.
NYSE
The (NYSE/NASDAQ) is an example of a physical market and offers an auction market through licensed traders.
NYSE
The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year?
Net property, plant, and equipment would fall to $116 million, and total assets and stockholders' equity would be adjusted accordingly.
You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity? A) No, because the market fora used XBOX 360 is not the same as the market for a new XBOX 360. B) No, because the market for a used XBOX 360 is a competitive market. C) Yes, because the market for a used XBOX 360 is a competitive market. D) Yes, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.
No, because the market fora used XBOX 360 is not the same as the market for a new XBOX 360.
What is the need for the notes to the financial statements when a firm's operations are already documented in the financial statements?
Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements
What is the need for the notes to the financial statements when a firm's operations are already documented in the financial statements?
Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements.
notes
Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements. This is known as ______ to financial statements when a firms operations are already documented.
You see on craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity?
Np, because the market for a used XBOX 360 is not the same as the market for a new xbox 360
A
On August 19, 2004 Google IPO offered 19,605,052 shares at a price of U.S. $85 per share, which were sold in an online auction in a bid to make the shares more widely available. Which of the following statements best describes why these are considered a primary market transaction? A) The transaction was between the corporation and investors. B) Shares of Google from this time onward could be traded between investors on a stock exchange. C) The shares were the first to be privately issued by Google. D) Google was at the time a recently founded company seeking capital with which to expand.
A
On Commodity Exchange A, it is possible to buy and sell crude oil at $116 per barrel, while on Commodity Exchange B crude oil can be bought and sold at $117 per barrel. If there are transaction costs of 1% when buying or selling on either exchange, what is the net effect of buying a barrel of oil on Exchange A and selling it on Exchange B? A) -$1.33 B) -$0.67 C) $1.06 D) $1.60
B
On the day Harry was born, his parents put $1200 into an investment account that promises to pay a fixed interest rate of 6 percent per year. How much money will Harry have in this account when he turns 21? A) $3263 B) $4079 C) $8158 D) $3766
cost benefit analysis
One of the main obstacles in the ________________________ is that not all benefits that are expected to occur in the future can be stated in dollar terms.
What is one of the main obstacles in cost-benefit analysis?
One of the main obstacles in the cost-benefit analysis is that not all benefits that are expected to occur in the future can be stated in dollar terms.
The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement
One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?
D
One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive? A) The assets should have been listed on the balance sheet as long-term assets. B) Cash raised by selling assets should not be recorded as revenue. C) The cash raised should have been recorded as short-term loans. D) The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.
D
Over four-fifths of all U.S. business revenue is generated by which type of firms? A) sole proprietorships B) partnerships C) limited partnerships D) corporations
C
Owen expects to receive $30,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 8.2%, how much money can he borrow from the bank on the basis of this information? A) $2460 B) $13,863 C) $27,726 D) $32,460
Joe just inherited the family business, and having no desire to run the family business, he has decided to sell it to an entrepreneur. In exchange for the family business, Joe has been offered an immediate payment of $100,000. Joe will also receive payments of $50,000 in one year, $50,000 in two years, and $75,000 in three years. The current market rate of interest for Joe is 6%. In terms of present value (PV), how much will Joe receive for selling the family business?
PV = CF1/(1+r)^1 + CF2/(1+r)^2 + CF3/(1+r)^3 + CF4/(1+r)^4..+....N PV = 100,000 + 50,000/1.06^1 + 50,000/1.06^2 + 75,000/1.06^3 = $254,641
Which is incorrect?
PV of a growing annuity + C x 1/r-g
Which of the following formulas is INCORRECT?
PV of a growing annuity=
Which of the following statements regarding perpetuities is FALSE?
PV of a perpetuity = r/C
Which of the following statements regarding perpetuities is FALSE?
PV of a perpetuity = r/c
You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer you a lower rate of 6.25% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $3,250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points?
Pay the points! Points (6.25% APR) First we need the monthly interest rate = APR / m = 0.0625 / 12 = 0.00520833 or 0.5208%. Now: PV = $328,250 ($325,000 + 1 point) I = 0.5208 FV = 0 N = 360 (30 years × 12 months) Compute PMT = $2,021.01 No Points (6.5% APR) First we need the monthly interest rate = APR / m = 0.065 / 12 = 0.005417 or 0.5417%. Now: PV = $325,000 (no points) I = 0.5417 FV = 0 N = 360 (30 years × 12 months) Compute PMT = $2,054.22 Since $2,021.01 < $2,054.22, pay the points!
Suppose Elon Musk has decided to give WWU $200 million to fund scholarships. If WWU believes it can reliably earn 4.5% on its invested endowment funds, and assuming it wants the scholarships to keep up with 3% expected inflation (i.e., grow at 3% per year) for the foreseeable future, what amount could it disburse in scholarships next year?
Perpetuity w/ growth. PV = $200 million. growth rate (g) = 3%, discount rate (r) = 4.5% PV=CF1/r-g $200 m = CF1/.045-.03 CF1 = $200m *.015 = $3m
Explanation: Chapter 1 Corporate Finance and the Financial Manager 7 19) A C corporation earns $8.30 per share before taxes and the company pays a dividend of $4.00 per share. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the after-tax amount an individual would receive from the dividend? A) $2.72 B) $4.08 C) $4.76 D) $3.40
Personal tax = $4 × 15% = $0.60 ; Total = $4.00 - $0.60 = $3.40
You have $100 and a bank is offering 5% interest on the deposits. If you deposit the money in the bank how much will you have in one year?
Plan: Need to compute future value (FV) Execute: 5 = I/YR, $100=PV, 1=N, FV=> Evaluate: $100 today and $105 in one year have equivalent values to you bc w $100 today, you could deposit it and have $105 in one year
You expect to receive $1000 in one year. A bank is offering loans at 6% interest per year. How much can you borrow today?
Plan: need to compute PV of $1000 based on 6% discount rate Execute: 1000=FV, 1=N, 6=I/YR, PV=> Evaluate: you could borrow (PV=)$943.40 today and in one year have exactly enough to pay off the loan w/ 6% interest.
B
Put the following steps of the financial cycle in the correct order. I. Money flows to companies who use it to fund growth through new products. II. People invest and save their money. III. Money flows back to savers and investors. A) I, II, and III B) II, I, and III C) III, II, and I D) II, III, and I
Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?
Readers of even fraudulent financial statements can spot signs of a firm's financial health, if those statements are read fully and with care.
A firm that provides tax services to the public intends to offer a premium tax return service at a higher price than their current services, which of the following points about the role of financial managers does this ex. illustrate?
Real-world decisions are complex and require information from many sources if the decisions are to be valid
C
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then Lutherʹs market-to-book ratio would be closest to ________. A) 2.58 B) 0.64 C) 1.29 D) 1.80
B
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then using the market value of equity, the debt -equity ratio for Luther in 2006 is closest to ________. A) 3.45 B) 1.72 C) 0.86 D) 2.41
C
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Lutherʹs enterprise value? A) -$540.0 million B) $771.4 million C) $385.7 million D) $521.4 million
$276.90
Refer to the balance sheet above. If on December 31, 2005 Luther has 8 million shares outstanding trading at $15 per share, then what is Lutherʹs enterprise value?
A
Refer to the balance sheet above. What is Lutherʹs net working capital in 2006? A) $16.8 million B) $296.0 million C) $33.6 million D) $8.4 million
B
Refer to the balance sheet above. When using the book value of equity, the debt-equity ratio for Luther in 2006 is closest to ________. A) 4.51 B) 2.25 C) 1.13 D) 3.16
A
Refer to the income statement above. Assuming that Luther has no convertible bonds outstanding, then for the year ending December 31, 2006 Lutherʹs diluted earnings per share are closest to ________. A) $1.03 B) $0.51 C) $0.82 D) $1.23
B
Refer to the income statement above. For the year ending December 31, 2006 Lutherʹs earnings per share is closest to ________. A) $0.51 B) $1.03 C) $0.82 D) $1.23
D
Refer to the income statement above. Lutherʹs earnings before interest, taxes, depreciation, and amortization (EBITDA) for the year ending December 31, 2005 is closest to ________. A) $271.8 million B) $108.7 million C) $163.1 million D) $135.9 million
A
Refer to the income statement above. Lutherʹs net profit margin for the year ending December 31, 2005 is closest to ________. A) 11.61 % B) 5.80% C) 9.28% D) 13.93 %
C
Refer to the income statement above. Lutherʹs operating margin for the year ending December 31, 2005 is closest to ________. A) 10.18 % B) 16.29 % C) 20.36% D) 24.43 %
A
Refer to the income statement above. Lutherʹs return on assets (ROA) for the year ending December 31, 2005 is closest to ________. A) 17.43 % B) 34.86 % C) 13.94% D) 1.99%
D
Refer to the table above. An international seafood supplier is offered 9.52 million yen today for 1000 pounds of abalone frozen in the shell. One thousand pounds of abalone can be sourced from various countries at the prices shown above. The current market exchange rates between the United States and the other relevant currencies are also shown. In addition, $1 U.S. = 102 yen. What is the value, in U.S. dollars, of the best deal the international seafood supplier can make? A) $12,333 B) $14,333 C) $14,833 D) $13,333
C
Samantha enters a rent-to-own agreement for living room furniture. She will pay $60 per month for one year. Which of the following shows the timeline for her payments if the first payment is one month from now?
B
Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today? A) Yes, as the difference between the present value of selling now and selling in one year is $12,300 dollars today. B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today. C) Yes, as the difference between the present value of selling now and selling in one year is $9840 dollars today. D) No, as the difference between the present value of selling now and selling in one year is - $8786 dollars today.
A
Sara wants to have $600,000 in her savings account when she retires. How much must she put in the account now, if the account pays a fixed interest rate of 8%, to ensure that she has $600,000 in 20 years? A) $128,729 B) $180,221 C) $231,712 D) $139,541
Which of the following is true about perpetuities?
Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate.
Which of the following is true about perpetuities?
Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate
inverted yield curve
Since each of the last six recessions in the United States were preceded by a period with an _______________________ it could be a leading indicator of a future recession.
A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true?
Since net working capital is negative, the company will not have enough funds to meet its obligations.
B
Since your first birthday, your grandparents have been depositing $100 into a savings account every month. The account pays 9% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $32,181 B) $53,635 C) $64,362 D) $75,089
A
Since your first birthday, your grandparents have been depositing $1200 into a savings account on every one of your birthdays. The account pays 6% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to ________. A) $37,086.78 B) $22,252.07 C) $44,504.14 D) $51,921.49
Examples of some firms that had practiced inaccurate reporting are Enron and WorldCom
State the names of some of the firms discussed in the chapter that had inaccurate reporting in their financial statements
C
Stella deposits $4500 in a savings account at a bank that offers interest of 4.7% on such accounts. What is the value of the money in her savings account in one yearʹs time? A) $4298 B) $212 C) $4712 D) $6597
D
Stella places a market order with her broker to buy 1,000 shares of OneWorld Corp. The broker buys 1,000 shares at $15.80 each, and sells them to Stella at $15.95 each. He also charges a commission of $12.00. What is bid-ask spread in this case? A) $162 B) $120 C) $210.00 D) $150
A
Steve is offered an investment where for every $1.00 invested today, he will receive $1.10 at the end of each of the next five years. Steve concludes that in five years he will have $1.10 for every $1.00 invested and that this investment will increase his personal value. What is Steveʹs major error in reasoning when making this decision? A) He ignores the fact that the costs and benefits of the investment are not stated in the same terms. B) He ignores the benefits of consuming the $1.00 today against the benefits of consuming the $1.00 five years from now. C) He fails to consider the costs of not consuming the $1.00 today. D) He considers that the value of the cash he may have in the future is the same as the value of cash he has today.
true
Stockholdersʹ equity is the difference between a firmʹs assets and liabilities, as shown on the balance sheet
A
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,000 per year. On average, tuition and other costs have historically increased at a rate of 5% per year. Assuming that college costs continue to increase an average of 5% per year and that all her college savings are invested in an account paying 8% interest, then the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education is closest to ________. A) $110,793 B) $55,397 C) $77,555 D) $132,952
$97,110.01
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest, then what is the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education?
B
Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their childʹs college education. They decide to make deposits into an educational savings account on each of their daughterʹs birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 9%. The parents deposit $2400 on their daughterʹs first birthday and plan to increase the size of their deposits by 7% each year. Assuming that the parents have already made the deposit for their daughterʹs 18th birthday, then the amount available for the daughterʹs college expenses on her 18th birthday is closest to ________. A) $80,232 B) $160,463 C) $112,324 D) $176,509
C
Suppose the term structure of interest rates is shown below: What is the shape of the yield curve and what expectations are investors likely to have about future interest rates? A) inverted; higher B) normal; higher C) inverted; lower D) normal; lower
D
Suppose the term structure of interest rates is shown below: The net present value (NPV) of an investment that costs $4320 and pays $1600 certain at the end of one, three, and five years is closest to ________. A) $91.37 B) $137.05 C) $114.21 D) -$114.21
A
Suppose the term structure of interest rates is shown below: The present value (PV) of receiving $1100 per year with certainty at the end of the next three years is closest to ________. A) $3010 B) $2408 C) $3612 D) $4214
C
Suppose you invest $1000 into a mutual fund that is expected to earn a rate of return of 11%. The amount of money will you have in ten years is closest to which of the following? The amount you will have in 50 years is closest to which of the following? A) $1420 ; $110,739 B) $2271 ; $166,109 C) $2839 ; $184,565 D) $3123 ; $221,478
A firmʹs statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.
T
In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.
T
A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV). True or False.
TRUE
Dollar amounts received at different points in time cannot be compared in absolute terms. t/f
TRUE
If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit. T/F
TRUE
Market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend.
TRUE
Market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend. True or False
TRUE
Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it.
TRUE
Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it. True or False
TRUE
T/F: A growing perpetuity, where the rate of growth is greater than the discount rate, will have an infinitely large present value (PV)
TRUE
T/F: If an arbitrage opportunity exists, an investor can act quickly in hope of making a risk free profit.
TRUE
T/F: In general, if an action increases a firm's value by providing benefits with a value greater than any costs involved, then that action is good for the firms investors.
TRUE
T/F: Market force determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend
TRUE
T/F: Quality adjustments to changes in CPI most often result in reductions to the inflation rate calculated from it
TRUE
T/F: The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero
TRUE
T/F: The law of one price states that if equivalent goods or securities are traded simultaneously in the different competitive markets, they will trade for the same price in each market.
TRUE
T/F: The one-year discount factor is the discount at which we can purchase money in the future, one year from now
TRUE
T/F: The opportunity cost of capital is the best available expected return offered int he market on an investment of comparable risk and term to the cash flow being discounted
TRUE
T/F: The present value(PV) of a stream of cash flows is just the sum of the present value of each individual cash flow
TRUE
T/F: The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value
TRUE
T/F: When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today
TRUE
T/F: Whenever a good trades in a competitive market, the price determines the value of the good .
TRUE
main differences between the NYSE and NASDAQ stock markets
The NYSE has a physical location, a geographical address where traders gather to trade, but NASDAQ is an electronic market. Moreover, while the NYSE has one specialist in each stock, NASDAQ has multiple market makers serving the functions of both matching buyers and sellers and trading on their own account. IGNORE THIS
real
The ___________ rate, however, can be negative anytime that the inflation rate exceeds the nominal rate.
balance sheet
The ______________ is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st.
income statement
The _______________ is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st.
income statement
The ___________________ reports the firmʹs revenues and expenses, and it computes the firmʹs bottom line of net income, or earnings.
agency conflict problem
The _____________________ arises out of the principal-agent relationship existing between the shareholders and managers of a corporation. Although managers are required to put the shareholders interest ahead of their own, in practice they tend to put their own interest ahead of the shareholdersʹ interests.
agency conflict problem
The _____________________ can be reduced by taking measures that align the managers interests with those of the shareholders. For example, incentive-based compensation, such as employee stock options, helps align the interests of these two constituents.
nominal
The _______interest rate can never be negative since by just holding your money you are earning a 0% return (no negative) on your money.
Consider the above Income Statement for Xenon Manufacturing. All values are in millions of dollars. Calculate the gross margin for 2008 and 2009. What does the change in the gross margin between these two years imply about the company?
The ability of Xenon Manufacturing to sell its goods and services for more than the costs of producing them fell between 2008 and 2009.
How are interest and return of principal handled in an amortizing loan payment?
The amount of periodic payments, generally monthly, for most amortizing loans is held constant such that a part goes toward paying interest on the outstanding balance and the rest toward return of principal. Thus this ratio keeps changing over the life of the loan. Initially, when the principal is highest, a major part of the loan goes toward paying interest and a smaller part toward returning the principal. However, as the loan progresses the interest component of the payment increases and the principal component decreases till the loan is fully paid off.
How are interest and return of principal handled in an amortizing loan payment?
The amount of periodic payments, generally monthly, for most amortizing loans is held constant such that a part goes toward paying interest on the outstanding balance and the rest toward return of principal. Thus this ratio keeps changing over the life of the loan. Initially, when the principal is highest, a major part of the loan goes toward paying interest and a smaller part toward returning the principal. However, as the loan progresses the interest component of the payment increases and the principal component decreases till the loan is fully paid off.
Which of the following statements is FALSE about interest rates? A) As interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of cash flows. C) The annual percentage rate indicates the amount of simple interest earned in one year. D) The annual percentage rate indicates the amount of interest including the effect of compounding.
The annual percentage rate indicates the amount of interest including the effect of compounding.
Which of the following best describes why the left and right sides of a balance sheet are equal?
The assets must equal liabilities plus stockholders' equity because stockholders' equity is the difference between the assets and the liabilities.
What is one of the prerequisite conditions for the Valuation Principle to work?
The availability of competitive market prices is a prerequisite for the Valuation Principle to be effective and efficient.
valuation principle
The availability of competitive market prices is a prerequisite for the _______ to be effective and efficient.
A
The balance sheet and income statement of a particular firm are shown above. What does the account receivable days ratio tell you about this company? A) It takes on average about 4 weeks to collect payment from its customers. B) It takes on average about 6 weeks to collect payment from its customers. C) It takes on average about 7 weeks to collect payment from its customers. D) It takes on average about 11 weeks to collect payment from its customers
How does a firm select the date for preparation of its balance sheet?
The balance sheet is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st.
Which of the following statements regarding the balance sheet is INCORRECT?
The balance sheet reports liabilities on the left-hand side.
false
The balance sheet shows the assets, liabilities, and stockholdersʹ equity of a firm over a given length of time
What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV) of an annuity?
The built-in functions for present value of ordinary annuity in a financial calculator assume that interest rates are the same for every maturity on the yield curve.
What is the implied assumption about interest rates when using the built-in functions of a financial calculator to calculate the present value (PV) of an annuity?
The built-in functions for present value of ordinary annuity in a financial calculator assume that interest rates are the same for every maturity on the yield curve.
D
What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one yearʹs time? A) 37% B) 44% C) 43% D) 40%
B
The financial manager of a well-regarded book publishing firm wishes to buy a small Internet publishing company to provide an avenue for sale of its materials online. In order to raise the funds to make this purchase, the financial manager decides to sell more stock in the company. How is the financial manager raising funds in this case? A) by increasing the debt burden carried by the company B) by raising the companyʹs equity by encouraging new owners to take a stake in the company C) by decreasing the ratio of equity to debt held by the company D) by increasing the value of shares held by the existing owners of the company
Which of the following is the LEAST likely explanation for a firm's high ROE?
The firm is growing.
Which of the following statements is false
The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities
Which of the following statements is FALSE? A) The actual return kept by an investor will depend on how the interest is taxed. B) The equivalent after-tax interest rate is r(1 - τ). C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities. D) It is important to use a discount rate that matches both the horizon and the risk of the cash
The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities.
How does a firm select the dates for preparation of its income statement?
The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. Typically the income statement spans the flow between two adjacent balance sheets.
How does a firm select the dates for preparation of its income statement?
The income statement is prepared on the fiscal closing date for the accounts of a firm that may or may not coincide with the calendar year-end of December 31st. Typically the income statement spans the flow between two adjacent balance sheets.
Which of the following reasons for considering long term loans inherently more risky than short term loans is most accurate
The loan values are very sensitive to changes in market interest rates
Which of the following would be least likely to lower the interest rate that a bank offers a borrower?
The loan will be for a long period of time
A
The lowest effective rate of return you could earn on any of these investments is closest to ________. A) 6.3830 % B) 6.4080 % C) 6.4330 % D) 6.4580 %
common stock, paid in surplus, and retained earnings
The major components of stockholdersʹ equity are ________.
C
The major components of stockholdersʹ equity are ________. A) cash, common stock, and paid-in surplus B) common stock, paid-in surplus, and net income C) common stock, paid-in surplus, and retained earnings D) common stock, liabilities, and retained earnings
false
The management of public companies is not legally required to disclose any off-balance sheet transactions.
Five years ago you took out a 30-year mortgage with an APR of 6.5% for $200,000. If you were to refinance the mortgage today for 20 years at an APR of 4.25%, how much would your monthly payment change by? A) The monthly payment will increase by $104.79. B) The monthly payment will decrease by $104.79 C) The monthly payment will increase by $343.12. D) The monthly payment will decrease by $343.12.
The monthly payment will DECREASE by $104.79
Assume your current mortgage payment is $900 per month. If you begin to pay $1,000 per month (with the extra $100 per month going to principal), which of the following will be TRUE? A) The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments. B) The total amount paid (principal and interest) will increase with $1,000 monthly payment compared to $900 monthly payments. C) The total interest expense will increase with $1,000 monthly payment compared to $900 monthly payments. D) The total principal paid will decrease with $1,000 monthly payment compared to $900 monthly payments.
The mortgage balance will decrease faster with $1,000 monthly payment compared to $900 monthly payments.
cash inflow; cash outflow
The new loan entry should show as a ___________ for the firm, while the payment for the new processing plant will be entered as a ________.
What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?
The new loan entry should show as a cash inflow for the firm, while the payment for the new processing plant will be entered as a cash outflow.
Can the nominal interest rate ever be negative? Can the real interest rate ever be negative? Explain.
The nominal interest rate can never be negative since by just holding your money you are earning a 0% return (no negative) on your money. The real rate, however, can be negative anytime that the inflation rate exceeds the nominal rate.
to disclose the financial implications of any off-balance sheet transactions
The notes to the financial statements would LEAST likely be used for which of the following purposes?
One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?
The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.
What does a "present value" represent? That is, when we say that $1000 to be received 10 years from today has a present value of $558.39, what does that mean?
The present value is what it would cost you today to replicate the future cash flow yourself given your discount rate (or opportunity cost of capital). That is what the future cash flow is worth to us today--what it would cost us to replicate it ourselves and not a penny more.
2) You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?
The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true?
The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. B) The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. C) The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. D) No comparison can be madewe need to know the cash flows to calculate the present
The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B.
Historically, why were high inflation rates associated with high nominal interest rates?
The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present
Historically, why were high inflation rates associated with high nominal interest rates? A) Individuals will spend more when they expect their investments to increase in value. B) Growth in investment and savings is encouraged when consumers are judged to be overspending. C) High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term. D) The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.
A printing company prints a brochure for a client and then bills them for this service. At the time the printing company's financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded?
The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows.
A
The table above shows the interest rates available from investing in risk-free U.S. Treasury securities with different investment terms. What is the present value (PV) of cash flows from an investment that yields $6000 at the end of each year for the next four years? A) $18,111 B) $27,167 C) $31,695 D) $22,639
auditor
The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________.
D
The third party who checks annual financial statements to ensure that they are prepared according to Generally Accepted Accounting Principles (GAAP) and verifies that the information reported is reliable is the ________. A) NYSE Enforcement Board B) Accounting Standards Board C) Securities and Exchange Commission (SEC) D) auditor
general relation of the two types of prices quoted for a stock on a exchange
The two prices are bid price and ask price. The ask price is higher than the bid price to deter a buyer from buying a stock and selling it back immediately, assuming everything else remains unchanged. IGNORE THIS
terms for the two types of prices quoted for a stock on an exchange
The two quotes associated with a stock quoted on the exchange are bid price and ask price. IGNORE THIS
Which of the following best describes the valuation principle? A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.
The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm.
B
The yield curve is typically ________. A) downward sloping B) upward sloping C) flat D) inverted
A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%?
There is no solution to this problem.
A perpetuity will pay $1000 per year, starting five years after the perpetuity is purchased. What is the future value (FV) of this perpetuity, given that the interest rate is 3%?
There is no solution to this problem. The future value of a perpetuity cannot be calculated, since there is no ending date.
You will probably want to give something back to the WWU at some point in your lifetime. Assuming that this is money and not a less-than-flattering hand gesture, you could endow a scholarship when you retire. Assume that, 40 years from now, in-state tuition for the WWU will be $90,000. How much would it cost today to endow a scholarship that paid $90,000 per year forever starting 40 years from now? Assume a discount rate of 8% per year, compounded annually.
This is a deferred perpetuity question: In year 39, when the perpetuity is one year away from starting, it will be worth: 90000/.08=$1,125,000. However it is not year 39; it is today, so the present value today of that $1,125,000 in 39 years is $1,125,000/(1.08)^39=55,927.60.
Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet
What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity?
true
true or false: A firmʹs statement of cash flows uses the balance sheet and the income statement to determine the amount of cash a firm has generated and how it has used that cash during a given period.
Suppose that a young couple has just had their first baby and they wish to ensure that enough money will be available to pay for their childʹs college education. Currently, college tuition, books, fees, and other costs average $12,500 per year. On average, tuition and other costs have historically increased at a rate of 4% per year. Assuming that college costs continue to increase an average of 4% per year and that all her college savings are invested in an account paying 7% interest, then what is the amount of money she will need to have available at age 18 to pay for all four years of her undergraduate education?
This is a two-step problem. Step 1. Determine the cost of the first year of college. Step 2. Figure out the value for four years of college. $97,110.01
B
To compute the future value of a cash flow, you must ________. A) discount it B) compound it C) double it D) arbitrage it
A company that manufactures copper piping is offering to trade you 5,925 tons of low -grade copper ore for 4,000 tons of high-grade copper ore. Assuming you currently have 4,000 tons of high-grade ore, what are the total benefits and added benefits of taking the trade?
Total Benefits No trade and refine high-grade ore (base case): 4,000 tons × $940 of copper/ton = $3,760,000 Trade high-grade for low-grade: 5,925 tons × $640 of copper/ton = $3,792,000 (total benefits) Added Benefits = Total Benefits - Base Case = $3,792,000 - $3,760,000 = $32,000
Costs and benefits must be put in common terms if they are to be compared.
True
income statement
Typically the ____________ spans the flow between two adjacent balance sheets.
B
U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form? A) 10-A B) 10-K C) 10-Q D) 10-SEC
The exchanges in which of the following countries or regions do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board?
United States
D
Ursula wants to buy a $19,000 used car. She has savings of $2,000 plus an $800 trade-in. She wants her monthly payments to be about $282 . Which of the following loans offers monthly payments closest to $282 ? A) 7.8% APR for 36 months B) 7.8% APR for 48 months C) 7.8% APR for 60 months D) 7.8% APR for 72 months
A friend who owns a perpetuity that promises to pay $1,000 at the end of each year, forever, comes to you and offers to sell you all of the payments to be received after the 25th year for a price of $1,000. At an interest rate of 10%, should you pay the $1,000 today to receive payment numbers 26 and onwards? What does this suggest to you about the value of perpetual payments?
Use annuity formula to find PV of the perpetuity =1,000/0.10 = $10,000 and and the present value of the first 25 payments is $9,077.04 (use annuity formula), thus you should be willing to pay only $922.96 for payments 26 and onwards. This suggests that the value of a perpetuity is derived primarily from the payments received early in its life, and the payments to be received later have little worth today. Note that you could also find the PV using the two steps for valuing a deferred (or displaced) annuity (see above & below).
B
Using the above information, how much would you receive if you sold a share of Washington Post stock? A) $683.00 B) $677.62 C) $678.50 D) $677.64
b
Using the above information, how much would you receive if you sold a share of Washington Post stock? A) $683.00 B) $677.62 C) $678.50 D) $677.64
A
Valiant Corp. is a C corporation that earned $3.4 per share before it paid any taxes. Valiant Corp. retained $1 of after-tax earnings for reinvestment and distributed what remained in dividend payments. If the corporate tax rate was 35% and dividend earnings were taxed at 12.5%, what was the value of the dividend earnings received after-tax by a holder of 100,000 shares of Valiant Corp.? A) $105,875 B) $127,050 C) $148,225 D) $84,700
What is the main problem in using a balance sheet to provide an accurate assessment of the value of a company's equity?
Valuable assets such as the company's reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet.
Your brother-in-law borrowed $3,360 from you 4 years ago and then disappeared. Yesterday he returned and expressed a desire to pay back the loan, including the interest accrued. Assuming that you had agreed to charge him 12% per year, and assuming that he wishes to make 5 equal annual payments beginning in one year, how much would your brother-in-law have to pay you annually in order to pay off the debt? (Assume that the loan continues to accrue interest at 12% per year.)
Value today is the FV of your loan to your brother, which you made 4 years ago. So, FV = PV (1+r)t = 3360 (1.12)4 = 5287.03—he now owes you this amount. To pay it off over 5 years beginning next year, we solve for the annuity payment on a loan with PV of $5287.03: PV=CF[1/r-1/(r(1+r)^n )]⇒CF=PV/[1/r-1/(r(1+r)^t )] =5287.03/[1/.12-1/(.12(1+.12)^5 )] =1,466.67 Thus, in order to pay off his debt, he must pay you $1,466.67 each year for 5 years. With your calculator, the steps look like: i.) N=4, I=12, PV=3360, (PMT=0), FV=?...-5287.03; then, using this result as a PV, ii.) N=5, I=12, PV= 5287.03, (FV=0), PMT=?...-1466.67.
B
Walgreens Company (NYSE: WAG) is currently trading at $48.75 on the NYSE. Walgreens Company is also listed on NASDAQ and assume it is currently trading on NASDAQ at $48.50. Does an arbitrage opportunity exist and, if so, how would you exploit it and how much would you make on a block trade of 100 shares? A) No, no arbitrage opportunity exists. B) Yes, buy on NASDAQ and sell on NYSE, make $25. C) Yes, buy on NYSE and sell on NASDAQ, make $25. D) Yes, buy on NASDAQ and sell on NYSE, make $250.
Which of the following statements regarding growing perpetuities is FALSE?
We assume that r < g for a growing perpetuity.
Which of the following statements regarding growing perpetuities is FALSE?
We assume that r>g for growing perpetuities
Why must we convert accounting data (earnings and book values) when performing financial analysis? Explain.
We convert to cash flows bc that's what investors care about. Earnings can be manipulated ( both illegally and legally). Investments are made w/ cash, therefore investors want cash in return. Book values are historical costs (backward looking). Market values (forward looking) represent true value of the asset to the firm
How can we perform a cost-benefit analysis in case they are occurring in different currencies?
We need to convert costs and benefits occurring in different currencies to one base currency before performing any analysis.
cash flows
We need to transform the _________ to a single point in time either through present value (PV) computations or through future value (FV) computations, therefore bringing all of them at the same point in time to perform simple algebraic computation.
How can we make a financial decision with cash flows occurring at different points in time?
We need to transform the cash flows to a single point in time either through using present value (PV) tools (i.e., using exponential computations) or through future value (FV) computations, therefore bringing all of them to the same point in time; then, we can combine them by performing the simple algebraic computation of adding or subtracting.
How do we decide on opportunity cost when we have several opportunities that need to be foregone?
We rank all the foregone opportunities, and opportunity cost is the second best opportunity that we forego. Thus we select the best opportunity and rank all the alternative opportunities and use the cost of the second best opportunity as opportunity cost.
1. balance sheet 2. income statement 3. statement of cash flows 4. statement of stockholdersʹ equity
What are the four financial statements that all public companies must produce?
It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process
What are the requirements of section 404 of SOX?
D
What are the requirements of section 404 of SOX? A) It requires that senior management return any profits or bonuses resulting from stock sales during any period covered by financial statements that must later be restated. B) It requires that auditors do not perform any non-auditing tasks for the companies they audit. C) It requires that audit partners rotate every five years. D) It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.
B
What is a competitive market? A) a market in which goods have a different ask price and bid price B) a market in which a good can be bought and sold at the same price C) a market in which a good is sold at a lower price than that for which it can be bought D) a market in which a good is bought for a lower price than that for which it can be sold
B
What is a firmʹs gross profit? A) the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by a firm in a given period B) the difference between sales revenues and the costs C) the difference between sales revenues and cash expenditures associated with those sales D) all of the above
D
What is a firmʹs net income? A) the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period B) the last or "bottom" line of the income statement C) a measure of the firmʹs profitability over a given period D) all of the above
B
What is the bid-ask spread on the stock shown above? A) 1 cent B) 3 cents C) 6 cents D) 12 cents
A
What is the bid-ask spread? A) the difference in price available for an immediate sale of a stock and the immediate purchase of the stock B) all of the costs and fees that a stock exchange charges in order to process a transaction C) the rise or fall in the value of a stock between the time it is acquired by an investor and sold by that investor D) the difference in the selling price of a stock between different exchanges
A
What is the effective annual rate (EAR)? A) It is the interest rate that would earn the same interest with annual compounding. B) It is the ratio of the number of the annual percentage rate to the number of compounding periods per year. C) It is the interest rate for an n-year time interval, where n may be more than one year or less than or equal to one year (a fraction). D) It refers to the cash flows from an investment over a one-year period divided by the number of times that interest is compounded during the year.
A
What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity? A) Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet. B) The balance sheet does not accurately represent the book value of assets held by the company. C) The equity shown on the balance sheet does not reflect the market capitalization of the company. D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.
It makes it easier to compare the financial results of different firms
What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements?
D
What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements? A) It ensures that the market value of assets and debt are reported accurately. B) It ensures that information on the performance of public companies is reported on cash-basis accounting. C) It ensures that important budgetary information is not omitted. D) It makes it easier to compare the financial results of different firms.
D
What is the major advantage corporations have over other business entities? A) It is easier for a corporation to raise capital than other forms of businesses. B) A corporation is treated as a separate legal entity for tax and legal purposes. C) A corporationʹs shares can be freely traded among its shareholders. D) All of the above are advantages that a corporation has over other business forms.
D
What is the major way in which the roles and obligations of the owners of a limited liability company differ from the roles and obligations of limited partners in a limited partnership? A) The owners of a limited liability company have personal obligation for debts incurred by the company. B) There is no separation between the company and its owners in a limited liability company. C) The owners of a limited liability company can withdraw from the company without the company being dissolved. D) The owners of a limited liability company can take an active role in running the company.
D
What is the most common type of firms in the United States and the world? A) sole proprietorships B) partnerships C) limited partnerships D) corporations
A
What is the most common way that agency conflict problems are addressed in most corporations? A) by minimizing the number of decisions that a manager makes where there is a conflict between the managers interests and those of the shareholders B) by terminating the employment of employees who are found to have put their own interests above those of the company C) by using disinterested outside bodies to adjudicate between managers and shareholders when such conflicts arise D) by prosecuting managers who have been found to have illegally used company moneys for their own benefit
D
What is the most important duty of a firmʹs financial officer? A) to ensure that the firm has enough cash on hand to meet its commitments at any given time B) to decide how to pay for investments C) to manage working capital D) to make investment decisions
Not all actions of the firm can be directly converted to an entry on the financial statements. For example, the firm may be involved in off balance sheet transactions, which have to be reported through notes to the financial statements
What is the need for the notes to the financial statements when a firmʹs operations are already documented in the financial statements?
$128.62
What is the net present value (NPV) of an investment that costs $2,500 and pays $1,000 at the end of one, three, and five years?
B
What is the present value (PV) of $100,000 received six years from now, assuming the interest rate is 8% per year? A) $60,000.00 B) $63,016.96 C) $78,771.20 D) $110,279.68
C
What is the present value (PV) of $50,000 received twenty years from now, assuming the interest rate is 6% per year? A) $32,500.00 B) $13,251.70 C) $15,590.24 D) $27,282.92
C
What is the present value (PV) of $90,000 received six years from now, assuming the interest rate is 5% per year? A) $58,500.00 B) $57,085.48 C) $67,159.39 D) $117,528.93
D
What is the present value (PV) of an investment that will pay $500 in one yearʹs time, and $500 every year after that, when the interest rate is 10%? A) $2500 B) $4000 C) $3000 D) $5000
B
What is the process of double taxation for the stockholders in a C corporation? A) Their shares are taxed when they are both bought and sold. B) The corporation is taxed on the profits it makes, and the owners are taxed when this profit is distributed to them. C) The owners of a corporation are taxed when they receive dividend payments and when they make a profit from the sale of shares. D) The corporation must pay taxes on any profits it makes, and the capital raised by the sale of shares is also subject to taxation.
bid price
What is the term for the applicable price that the seller gets when he sells a stock on the exchange?
The Assets side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the Liabilities side will correspondingly show the new debt that was incurred in paying for the plant.
What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan?
assets; liabilities
What will be the effect on the balance sheet if a firm buys a new processing plant through a new loan? The ___________ side will increase under Net property, plant, and equipment with the net effect of the new processing plant, while the _____________ side will correspondingly show the new debt that was incurred in paying for the plant.
The effect on the income statement will be in the form of a depreciation expense for the first year on the new processing plant.
What will be the effect on the income statement if a firm buys a new processing plant through a new loan?
The new loan entry should show as a cash inflow for the firm, while the payment for the new processing plant will be entered as a cash outflow
What will be the effect on the statement of cash flows if a firm buys a new processing plant through a new loan?
B
What, typically, is used to calculate the opportunity cost of capital on a risk-free investment? A) the best expected return offered in any investment available in the market B) the interest rate on U.S. Treasury securities with the same term C) the interest rate of any investments alternatives that are available D) the best rate of return offered by U.S. Treasury securities
A
When computing a present value, which of the following is TRUE? A) You should adjust the discount rate to match the interval between cash flows. B) You should adjust the future value to match the present value. C) You should adjust the time period to match the present value. D) You should adjust the cash flows to match the time period of the discount rate.
D
When the costs of an investment come before that investmentʹs benefits, what will be the effect of a rise in interest rates on the attractiveness of that investment to potential investors? A) It will make it more attractive, since it will increase the investmentʹs net present value (NPV). B) It will make it more attractive, since it will decrease the investmentʹs net present value (NPV). C) It will make it less attractive, since it will increase the investmentʹs net present value (NPV). D) It will make it less attractive, since it will decrease the investmentʹs net present value (NPV).
the amount of deferred tax liability held by the company
Which of the following amounts would be included on the right side of a balance sheet?
C
Which of the following amounts would be included on the right side of a balance sheet? A) the value of government bonds held by the company B) the cash held by the company C) the amount of deferred tax liability held by the company D) the amount of money owed to the company by customers who have not yet paid for goods and services they have received
Assets - Current liabilities = Long-term liabilities
Which of the following balance sheet equations is INCORRECT?
C
Which of the following balance sheet equations is INCORRECT? A) Assets - Liabilities = Shareholdersʹ equity B) Assets = Liabilities + Shareholdersʹ equity C) Assets - Current liabilities = Long-term liabilities D) Assets - Current liabilities = Long-term liabilities + Shareholdersʹ equity
A
Which of the following best describes the annual percentage rate? A) the quoted interest rate which, considered with the compounding period, gives the effective interest rate B) the effective annual rate, after compounding is taken into account C) the discount rate, when compounded more than once a year or less than once a year D) the discount rate, when effective annual rate is divided by the number of times it is compounded in a year
B
Which of the following best describes the valuation principle? A) It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks. B) The value of a commodity or an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, the decision will increase the market value of the firm. C) The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks. D) If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.
to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business
Which of the following best describes why a firm produces financial statements?
D
Which of the following best describes why the Valuation Principle is a key concept in making financial decisions? A) It shows how to assign monetary value to intangibles such as good health and well -being. B) It allows fixed assets and liquid assets to be valued correctly. C) It gives a good indication of the net worth of a person, item, or company and can be used to estimate any changes in that net worth. D) It shows how to make the costs and benefits of a decision comparable so that we can weigh them properly.
The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities
Which of the following best describes why the left and right sides of a balance sheet are equal?
C
Which of the following best describes why the left and right sides of a balance sheet are equal? A) In a properly run business, the value of liabilities will not exceed the assets held by the company. B) By definition, the assets plus the liabilities will be the same as the stockholdersʹ equity. C) The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities. D) By accounting convention, the assets of a company must be equal to the liabilities of that company.
B
Which of the following best explains why market prices are useful to a financial manager when performing a cost-benefit analysis? A) They can be used to determine how much an asset can be sold for. B) They can be used to convert different services and commodities into equivalent cash values which can be compared. C) They allow all commodities and services to be assigned a fixed and unchanging value. D) They can be evaluated to determine whether the market in which the manager exchanges goods and services offers true value.
A
Which of the following best explains why you cannot use the price of rolled oats at a local supermarket as the competitive market value of rolled oats? A) You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price. B) The posted prices of oats can vary widely between grocery stores, even within the same local area. C) Grocery stores mark up the prices of their oats up to make a profit. D) Grocery stores typically sell oats in different packaging, which results in different prices within the same store.
D
Which of the following computes the growth in purchasing power? A) growth of money + growth of prices B) (1 + real rate) / (1 + nominal rate) C) (1 + inflation rate) / (1 + nominal rate) D) growth of money / growth of prices
D
Which of the following features of a corporation is LEAST accurate? A) The ownersʹ identity is separate from a corporation. B) The owners of a corporation are not liable for any obligations the corporation enters into. C) Changes in ownership do not result in the dissolution of the corporation. D) Earnings from a corporation are taxed only once.
A
Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a low-end retailer that has a low mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year
a grocery store chain that has very high turnover, selling many multiples of its assets per year
Which of the following firms would be expected to have a high ROE?
D
Which of the following firms would be expected to have a high ROE? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a high-end fashion retailer that has a very high mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year
B
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? year 1: investment X: $5000 investment Y: $11,000 year 2: investment X: $7000 investment Y: $9000 year 3: investment X: $9000 investment Y: $7000 year 4: investment X: $11,000 investment Y: $5000 A) Investment X has a higher present value. B) Investment Y has a higher present value. C) Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. D) No comparison can be madewe need to know the interest rate to calculate the present value.
statement of sources and uses of cash
Which of the following is NOT a financial statement that every public company is required to produce?
B
Which of the following is NOT a financial statement that every public company is required to produce? A) income statement B) statement of sources and uses of cash C) balance sheet D) statement of stockholdersʹ equity
D
Which of the following is NOT a function of the board of directors? A) determining how top executives should be compensated B) monitoring the performance of the company C) answering to shareholders of the company D) day-to-day running of the company
It includes cash inflows from services rendered
Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned?
D
Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned? A) It includes entries for the depreciation of assets. B) It does not include entries for expenditures on inventory. C) It does not include entries for collection of money from account receivables. D) It includes cash inflows from services rendered.
C
Which of the following is NOT a reason why a firmʹs financial managers must take great care when making investment decisions? A) These investment decisions determine whether the firm will add value for its owners. B) These investments determine the long-term directions in which the company may move. C) These investment decisions determine the corporationʹs mix of debt and equity. D) These investment decisions typically involve substantial costs which must be carefully weighed against their potential benefits.
C
Which of the following is NOT a role of financial institutions? A) moving funds from savers to borrowers B) spreading out risk-bearing C) printing money for borrowers D) moving funds though time
d
Which of the following is NOT an advantage of a sole proprietorship? A) single taxation B) ease of setup C) unlimited liability D) no separation of ownership and control
B
Which of the following is NOT considered to be an operating expense on the income statement? A) administrative expenses and overhead B) corporate taxes C) salaries D) depreciation and amortization
the statement of activities
Which of the following is NOT one of the financial statements that must be produced by a public company?
D
Which of the following is NOT one of the financial statements that must be produced by a public company? A) the balance sheet B) the income statement C) the statement of cash flows D) the statement of activities
by forcing companies to audit financial statements they release
Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?
D
Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders? A) by increasing the penalties to firms for providing false information B) by increasing the independence of auditors and clients C) by decreasing the non-audit fees that an auditor can receive from a client D) by forcing companies to audit financial statements they release
D
Which of the following is a major duty of a financial manager? I. To make investment decisions II. To make financing decisions III. To manage cash flow from operating activities A) I only B) I and II only C) I and III only D) all of the above
B
Which of the following is a measure of the aggregate price level of collections of pre-selected stocks? A) NASDAQ B) S&P 500 C) NYSE D) Euronext
It adds all non-cash entries related to a firmʹs operating activities
Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet?
B
Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet? A) It subtracts all expenses and costs related to a firmʹs operating activities. B) It adds all non-cash entries related to a firmʹs operating activities. C) It adds the cash that flows from investors to a firm. D) It removes the cash used for investment purposes.
Which of the following is not one of the financial statements that must be produced by a public company? a) the balance sheet b) the income statement c) the statement of cash flows d) the statement of activities
d
C
Which of the following is an example of arbitrage? A) An inventor of a new hydrocarbon cracking technology based on palladium buys this metal knowing that its price will rise when the technology is adopted. B) A metals merchant is offered $108,000 in one year for $100,000 of palladium today, when the interest rate is 10%. C) An investor, seeing that the price of palladium on the metals exchange in two different countries is slightly different, buys on one and sells on the other to make a profit. D) A firm buys $250,000 of palladium today, with an option to sell it at $275,000 in one year if interest rates rise above 10%.
the firm is growing
Which of the following is the LEAST likely explanation for a firmʹs high ROE?
A
Which of the following is the LEAST likely explanation for a firmʹs high ROE? A) The firm is growing. B) The firm is able to find investment opportunities that are very profitable. C) The firm has very efficient use of its assets. D) The firm enjoys high sales margins.
Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care
Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom?
D
Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom? A) The usefulness of financial statements to investors is entirely dependent on the ethics of those constructing them. B) It is not possible to effectively evaluate a company unless all the financial statements are fully and correctly prepared. C) The information in financial statements should be viewed extremely critically. D) Readers of even fraudulent financial statements can spot signs of a firmʹs financial health,
D
Which of the following is the overarching principle that a financial manager should follow when making decisions? A) Decisions should generate the greatest benefits for the firm. B) Decisions should provide benefit to the firm without incurring costs. C) Decisions should be on behalf of the firmʹs owners that give the greatest benefit to those owners, the firmʹs employees and the firmʹs other stakeholders. D) Decisions should increase the value of the firm to its investors.
D
Which of the following is true about perpetuities? A) All else equal, the present value of a perpetuity is higher when the periodic cash flow is higher. B) All else equal, the present value of a perpetuity is higher when the interest rate is lower. C) If two perpetuities have the same present value and the same interest rate, they must have the same cash flows. D) All of the above are true statements.
A
Which of the following is true about perpetuities? A) Since a perpetuity generates cash flows every period infinitely, the cash flow generated equals the PV times the interest rate. B) Since a perpetuity generates cash flows every period infinitely, initial cash outflow must be discounted to calculate the present value. C) Since a perpetuity generates cash flows every period infinitely, there is no way to solve for the cash flow using the present value and the interest rate. D) Since a perpetuity generates cash flows every period infinitely, its FV is the same as its PV.
C
Which of the following is typically the major factor in limiting the growth of sole proprietorships? A) The organizational structure of such firms tends to become extremely complicated over time. B) It is extremely difficult to transfer control of such firms to a new owner if the present owner dies or wishes to sell the firm. C) The amount of money that can be raised by such firms is limited by the fact that the single owner must make good on all debts. D) Investors have a great deal of control over the day-to-day running of such firms, leading to confusion when conflicts in direction arise.
D
Which of the following is unique for an S corporation? A) The profits and losses of an S corporation are not taxed at the corporate level, but shareholders must include these profits and losses on their individual tax returns. B) The shareholders of an S corporation must include the firmʹs profit and losses in their individual income taxes even if no money is distributed to them. C) There is a maximum limit on the number of shareholders for an S corporation. D) None of the above statements is unique.
c
Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership
D
Which of the following reasons for considering long-term loans inherently more risky than short-term loans is most accurate? A) There is a greater chance that inflation may fall in a longer time-frame. B) The penalties for closing out a long term loan early make them unattractive to many investors. C) Long-term loans typically have ongoing costs that accumulate over the life of the loan. D) The loan values are very sensitive to changes in market interest rates.
D
Which of the following should be true for an asset to be considered liquid? A) It pays regular dividends. B) It can be bought and sold at an organized stock market or bourse. C) It is offered for sale on both primary and secondary markets. D) It can be easily bought and sold and the selling price is very close to the buying price at a given point in time.
A
Which of the following situations is best described by the timeline shown below? year 0: -$250 year 1: -$250 year 2: -$250 year 3: -$250 year 4: -$250 year 5: -$250 A) You make payments of $250 per month for six months. B) You receive payments of $250 per month for six months. C) You make payments of $250 per month for five months. D) You receive payments of $250 per month for five months.
D
Which of the following statements is FALSE about interest rates? A) As interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of cash flows. B) The effective annual rate indicates the amount of interest that will be earned at the end of one year. C) The annual percentage rate indicates the amount of simple interest earned in one year. D) The annual percentage rate indicates the amount of interest including the effect of compounding.
B
You are interested in purchasing a new automobile that costs $33,000 . The dealership offers you a special financing rate of 9% APR (0.75% per month) for 60 months. Assuming that you do not make a down payment on the auto and you take the dealerʹs financing deal, then your monthly car payments would be closest to ________. A) $548 B) $685 C) $959 D) $1096
A
Which of the following statements is FALSE about valuing cash at different points in time? A) Finding the present value (PV) and compounding are the same. B) A dollar today and a dollar in one year are not equivalent. C) If you want to compare or combine cash flows that occur at different points in time, you first need to convert the cash flows into the same units or move them to the same point in time. D) The equivalent value of two cash flows at two different points in time is sometimes referred to as the time value of money.
D
Which of the following statements is FALSE about valuing cash at different points in time? A) The process of moving forward along the timeline to determine a cash flowʹs value in the future is known as compounding. B) The effect of earning interest on interest is known as compound interest. C) It is only possible to compare or combine values at the same point in time. D) A dollar in the future is worth more than a dollar today.
C
Which of the following statements is FALSE? A) The actual return kept by an investor will depend on how the interest is taxed. B) The equivalent after-tax interest rate is r(1 - ). C) The highest interest rate for a given horizon is the rate paid on U.S. Treasury securities. D) It is important to use a discount rate that matches both the horizon and the risk of the cash flows.
D
Which of the following statements is FALSE? A) The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted. B) Interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk. C) The opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment. D) For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term.
B
Which of the following statements regarding annuities is FALSE? A)PV of an annuity = C * (1/r)[ 1 - 1/(1 +r)^N] B) The difference between an annuity and a perpetuity is that a perpetuity ends after some fixed number of payments. C) An annuity is a stream of N equal cash flows paid at regular intervals. D) Most car loans, mortgages, and some bonds are annuities.
C
Which of the following statements regarding arbitrage and security prices is INCORRECT? A) We call the price of a security in a normal market the no-arbitrage price for the security. B) In financial markets it is possible to sell a security you do not own by doing a short sale. C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. D) The general formula for the no-arbitrage price of a security is Price(security) = PV (all cash flows paid by the security).
A
Which of the following statements regarding growing perpetuities is FALSE? A) We assume that r < g for a growing perpetuity. B) PV of a growing perpetuity = C/ r-g C) To find the value of a growing perpetuity one cash flow at a time would take forever. D) A growing perpetuity is a cash flow stream that occurs at regular intervals and grows at a constant rate forever
C
Which of the following statements regarding perpetuities is FALSE? A) To find the value of a perpetuity by discounting one cash flow at a time would take forever. B) A perpetuity is a stream of equal cash flows that occurs at regular intervals and lasts forever. C) PV of a perpetuity = (r/C) D) One example of a perpetuity is the British government bond called a consol.
D
Which of the following statements regarding the Law of One Price is INCORRECT? A) At any point in time, the price of two equivalent goods trading in different competitive markets will be the same. B) One useful consequence of the Law of One Price is that when evaluating costs and benefits to compute a net present value (NPV), we can use any competitive price to determine a cash value, without checking the price in all possible markets. C) If equivalent goods or securities trade simultaneously in different competitive markets, then they will trade for the same price in both markets. D) An important property of the Law of One Price is that it holds even in markets where arbitrage is possible.
The balance sheet reports liabilities on the left-hand side
Which of the following statements regarding the balance sheet is INCORRECT?
D
Which of the following statements regarding the balance sheet is INCORRECT? A) The balance sheet provides a snapshot of a firmʹs financial position at a given point in time. B) The balance sheet lists a firmʹs assets and liabilities. C) The balance sheet reports stockholdersʹ equity on the right-hand side. D) The balance sheet reports liabilities on the left-hand side.
B
Which of the following statements regarding the cost-benefit analysis is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.
A
Which of the following statements regarding the income statement is INCORRECT? A) The income statement shows the cash flows and expenses at a given point in time. B) The income statement shows the flow of revenues and expenses generated by a firm between two dates. C) The last or "bottom" line of the income statement shows a firmʹs net income. D) The first line of an income statement lists the revenues from the sales of products or services.
A
Which of the following types of firms does NOT have limited liability? A) sole proprietorships B) limited partnerships C) corporations D) none of the above
D
Which of the following would be LEAST likely to lower the interest rate that a bank offers a borrower? A) The number of borrowers seeking funds is low. B) The expected inflation rate is expected to be low. C) The borrower is judged to have a low degree of risk. D) The loan will be for a long period of time.
B
You are offered an investment opportunity that costs you $28,000, has a net present value (NPV) of $2278, lasts for three years, has interest rate of 10%, and produces the following cash flows: year 0: -$28,000 year 1: $10,000 year 2: ? year 3: $15,000 The missing cash flow from year 2 is closest to ________. A) $12,500 B) $12,000 C) $13,000 D) $10,000
A
Which of the following would be best considered to be an agency conflict problem in the behavior of the following financial managers? A) Bill chooses to pursue a risky investment for the companyʹs funds because his compensation will substantially rise if it succeeds. B) Sue instructs her staff to skip safety inspections in one of the companyʹs factories, knowing that it will likely fail the inspection and incur significant costs to fix. C) James ignores an opportunity for his company to invest in a new drug to fight Alzheimerʹs disease, judging the drugʹs chances of succeeding as low. D) Michael chooses to enhance his firmʹs reputation at some cost to its shareholders by sponsoring a team of athletes for the Olympics.
A
Which of the stock markets listed below is the smallest, as judged by trading volume? A) Deutsche Börse B) London Stock Exchange C) NASDAQ D) NYSE Euronext (US)
debt-equity or equity multiplier ratio
Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage?
A
Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage? A) debt-equity or equity multiplier ratio B) market-to-book ratio C) market debt-equity ratio D) current or quick ratio
What are the main differences between a partnership and a sole proprietorship?
While a sole proprietor has the same identity as its single owner, a partnership of general partners has the same identity as its partners. Each general partner is responsible for the decisions taken by that partner as well as any other general partner.
main differences between partnership and sole proprietorship
While a sole proprietor has the same identity as its single owner, a partnership of general partners has the same identity as its partners. Each general partner is responsible for the decisions taken by that partner as well as any other general partner.
C
Whose cash flow is best described by the timeline shown below? year 0: -$3500 year 1: $1000 year 2: $1000 year 3: $1000 year 4: $1000 A) Joe, who puts down $3,500 to buy a car, and then makes annual payments of $1,000 B) Harry, who borrows $3,500, and then receives an annual payment of $1,000 C) Karen, who loans a friend $3,500, which friend then pays back the loan in four annual installments of $1,000 D) Leo, who borrows $3,500, and then pays back the loan in four annual payments of $1,000
A
Whose interests should a financial manager consider paramount when making a decision? A) the stockholders who have risked their money to become owners of the company B) the employees and associated stakeholders who are employed by the company C) the public who consume the companyʹs goods and services D) the senior management and associated colleagues at the executive level within the company
C
Why are arbitrage opportunities short-lived? A) Federal regulations will kick in to restrict trade and effectively shut the opportunity down. B) Prices will fluctuate up and down as traders take advantage of the opportunity, resulting in the net present value (NPV) fluctuating between positive and negative values. C) Once investors take advantage of the opportunity, prices will respond so that the buying and selling price become equal. D) Arbitrage opportunities need a lot of information processing, which is very slow to arrive.
D
Why in general do financial managers make financial decisions in a corporation, rather than the owners making these decisions themselves? A) It is best for the control of the finances of a corporation to be in the hands of a disinterested third party. B) The interests of the various owners may conflict with each other. C) The owners may not be U.S. citizens or residents. D) There are often many owners, and they can often change as they buy and sell stock.
B
Why is a stock exchange like NASDAQ considered a secondary market? A) It trades the second largest volume of shares in the world. B) Shares sold on it are exchanged between investors without any involvement of the issuing corporation. C) The exchange has rules that attempt to ensure that bid and ask prices do not get too far apart. D) NASDAQ is called a secondary market because NYSE is considered a primary market.
D
Why is it difficult to determine the market price of a private corporationʹs shares at any point in time? A) It is difficult to obtain enough information to accurately value such a company. B) The price of its shares is fixed by the owners. C) It has a limited number of owners. D) There is no organized market for its shares.
D
Why is it possible for a corporation to enter into contracts, acquire assets, incur obligations, and enjoy protection against the seizure of its property? A) The number of owners, and hence the spread of risk among these owners, is not limited. B) Its owners are liable for any obligations it enters into. C) The state in which a corporation is incorporated provides safeguards against any wrongdoing by the corporation. D) It is a legally defined, artificial entity that is separate from its owners.
B
Why is it usually necessary to use the time value of money when performing a cost-benefit analysis? A) For an investment project to be considered, costs must have a higher dollar value than benefits. B) In most investment projects, costs are incurred up front, but benefits are received in the future. C) For practical purposes, a dollar today may be considered to be equal to a dollar at some future time. D) Although costs and benefits generally occur concurrently, the benefits will accrue value over time, due to interest.
D
Why is the personal decision a financial manager makes as to whether to buy or to rent an apartment as a personal residence most like the professional decision that manager makes as to whether her firm should try to acquire a stake in a fast growing new Internet-based company? A) Both decisions involve the purchase of assets that are essential for the existence of the investor B) Both decisions involve the rental of a useful asset. C) Both decisions have the potential to affect the firm. D) Both decisions should be made based upon the tradeoff benefits and costs across time.
B
Why is the stock price of a company an indication of the performance of the companyʹs senior managers? A) Well-run companies are invariably highly profitable, which leads to a higher share price. B) In general, people want to invest in a well-managed corporation, which will drive up the price of shares. C) Investors who can see that a company is well-run will hold on to their shares, even if the company faces setbacks, since they know that the stock price will likely rise again. D) Larger companies tend to be better run and so have higher stock prices.
D
Why must care be taken when comparing a firmʹs share price to its operating income? A) Both share price and operating income are related to the whole firm. B) Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders. C) Both share price and operating income are related solely to equity holders. D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
D
Why should you approach every problem by drawing a timeline? A) A timeline allows you to quickly sum cash flows over time. B) A timeline eliminates the majority of flawed financial decisions. C) A timeline can be used to schedule events which are yet to occur. D) A timeline identifies events in a transaction or investment which might otherwise be easily overlooked.
A
Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon? A) Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities. B) The return from U.S. Treasury securities generally attracts less tax than the returns from other investments. C) The opportunity cost of capital for a given horizon is generally based on U.S. Treasury securities with that same horizon. D) U.S. Treasury securities are generally considered to be the best alternative to most investments.
by raising its reported earnings
WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors?
C
WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldComʹs financial statements more attractive to investors? A) by decreasing depreciation B) by reducing capital expenditures C) by raising its reported earnings D) by boosting its cash flows
Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?
Yes, in real world cash flows may be between any intervals. They may be shorter than a year or longer than a year. Additional care needs to be taken in both cases. For cash flows that have an interval longer than one year, one should be careful to show the years with zero cash flows. Alternately, for those with shorter than a year, one should be careful about modifying the interest rate to match the time interval.
Is it possible to analyze cash flows that occur in time intervals that are not exactly equal to a year?
Yes, in real world cash flows may be between any intervals. They may be shorter than a year or longer than a year. Additional care needs to be taken in both cases. For cash flows that have an interval longer than one year, one should be careful to show the years with zero cash flows. Alternately, for those with shorter than a year, one should be careful about modifying the interest rate to match the time interval.
Can we apply the growing perpetuity equation for negative growth as well?
Yes, it is perfectly in order to apply the growth perpetuity for negative growth. A negative growth gives two negatives in the denominator making it larger than a positive growth thus reducing the valuation compared to a positive growth of similar magnitude.
C
You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $1 for reinvestment and distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share? A) $0 B) $2.10 C) $1.75 D) $2.52
D
You are borrowing money to buy a car. If you can make payments of $320 per month starting one month from now at an interest rate of 12%, how much will you be able to borrow for the car today if you finance the amount over 4 years? A) $7291.00 B) $14,582.00 C) $17,012.34 D) $12,151.67
C
You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97 , then the internal rate of return (IRR) for investing in this bond is closest to ________. A) 5.0% B) 7.1% C) 6.0% D) 8.2%
B
You are considering purchasing a new automobile with the upfront cost of $25,000 or leasing it from the dealer for a period of 60 months. The dealer offers you 4.00% APR financing for 60 months (with payments made at the end of the month). Assuming you finance the entire $25,000 through the dealer, your monthly payments will be closest to ________. A) $368 B) $460 C) $552 D) $645
C
You are considering purchasing a new automobile with the upfront cost of $26,000 or leasing it from the dealer for a period of 48 months. The dealer offers you 2.80% APR financing for 48 months (with payments made at the end of the month). Assuming you finance the entire $26,000 through the dealer, your monthly payments will be closest to ________. A) $459 B) $688 C) $573 D) $802
C
You are considering purchasing a new home. You will need to borrow $290,000 to purchase the home. A mortgage company offers you a 20-year fixed rate mortgage (240 months) at 12% APR (1% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to ________. A) $2554 B) $4470 C) $3193 D) $5109
A
You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 4%, and Investment B has a discount rate of 5%. Which of the following is true? A) The present value of cash flows in Investment A is higher than the present value of cash flows in Investment B. B) The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B. C) The present value of cash flows in Investment A is equal to the present value of cash flows in Investment B. D) No comparison can be madewe need to know the cash flows to calculate the present value.
Since 459.29 < 480.91, go with the dealership financing and forgo the rebate.
You are in the process of purchasing a new automobile that will cost you $25,000. The dealership is offering you either a $1,000 rebate (applied toward the purchase price) or 3.9% financing for 60 months (with payments made at the end of the month). You have been pre-approved for an auto loan through your local credit union at an interest rate of 7.5% for 60 months. Should you take the $1,000 rebate and finance through your credit union or forgo the rebate and finance through the dealership at the lower 3.9% APR? IGNORE THIS
total sales - cost of sales
gross profit is calculates as ________.
B
You are purchasing a new home and need to borrow $260,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.80% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 6.50% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $5200 to cover points you are paying the lender. Assuming you pay the points and borrow from the mortgage lender at 6.50%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________. A) $1844 B) $1676 C) $2011 D) $2347
Since $2,021.01 < $2,054.22, pay the points!
You are purchasing a new home and need to borrow $325,000 from a mortgage lender. The mortgage lender quotes you a rate of 6.5% APR for a 30-year fixed rate mortgage (with payments made at the end of each month). The mortgage lender also tells you that if you are willing to pay one point, they can offer you a lower rate of 6.25% APR for a 30 -year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $3,250 to cover points you are paying the lender. Assuming that you do not intend to prepay your mortgage (pay off your mortgage early), are you better off paying the one point and borrowing at 6.25% APR or just taking out the loan at 6.5% without any points? IGNORE THIS
C
You are purchasing a new home and need to borrow $380,000 from a mortgage lender. The mortgage lender quotes you a rate of 5.75% APR for a 30-year fixed rate mortgage. The mortgage lender also tells you that if you are willing to pay two points, they can offer you a lower rate of 5.45% APR for a 30-year fixed rate mortgage. One point is equal to 1% of the loan value. So if you take the lower rate and pay the points, you will need to borrow an additional $7600 to cover points you are paying the lender. Assuming you do not pay the points and borrow from the mortgage lender at 5.75%, then your monthly mortgage payment (with payments made at the end of the month) will be closest to ________. A) $2439 B) $2661 C) $2218 D) $3105
C
You are saving money to buy a car. If you save $310 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years? A) $10,062.20 B) $20,124.40 C) $16,770.33 D) $23,478.46
C
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow? A) It will cause the future value to fall. B) It will cause the future value to rise. C) It will have no effect on the future value. D) The effect cannot be determined with the information provided.
A
You are thinking about investing in a mine that will produce $10,000 worth of ore in the first year. As the ore closest to the surface is removed it will become more difficult to extract the ore. Therefore, the value of the ore that you mine will decline at a rate of 7% per year forever. If the appropriate interest rate is 3%, then the value of this mining operation is closest to ________. A) $100,000 B) $500,000 C) $250,000 D) This problem cannot be solved.
$48.85
You are watching TV late one night and see an ad from Ronco for the Dial-o-matic food slicer. You learn that the Dial-o-matic sells for $29.95. Ronco also includes a set of Ginsu steak knives worth $10.95 and another free gift worth $7.95 in this deal. Assuming that there is a competitive market for Ronco items, at what price must Ronco offer this three item Dial-o-matic deal to ensure the absence of an arbitrage opportunity and uphold the Law of One Price?
Which of the following best explains why you cannot use the price of rolled oats at a local supermarket last the competitive market value of rolled oats?
You can buy the oats at the price posted by the store, but the store will not buy oats from you for the same price
If you want to buy a house that costs $179,000 and you only have $5,000 saved for a down payment, how much will your monthly P&I payment be if you take out a 15-year mortgage at a quoted interest rate of 3.75% APR? If after doing a budget you discover that you can only afford a monthly P&I payment of $875, how much can you spend on a house with the 3.75%, 15-year mortgage?
You need to use a monthly rate and the number of months in this problem. N= 15*12 = 180 months I = 3.75/12 = 0.3125 monthly rate PV = 179,000 - 5,000 = 174,000 (ensure FV = 0) Solve for PMT = $1,265.37 If you can afford $875 each month, then the amount you can afford to borrow is the PV of those payments: N=15*12 = 180 months I = 3.75/12 = 0.3125 monthly rate PMT = 875 (ensure FV = 0) Solve for PV = 120,321 Add savings +5,000 Total =$125,321
C
You own 1000 shares of Newstar Financial stock, currently trading for $57 per share. You are offered a deal where you can exchange these stocks for 900 shares of Amback Financial Group stock, currently trading at $63 per share. What is the value of this trade, if you choose to make it? A) -$320 B) -$340 C) -$300 D) $300
A
You see on Craigslist that a used XBOX 360 sells for $100 and a new XBOX 360 sells for $300. Is this an arbitrage opportunity? A) No, because the market fora used XBOX 360 is not the same as the market for a new XBOX 360. B) No, because the market for a used XBOX 360 is a competitive market. C) Yes, because the market for a used XBOX 360 is a competitive market. D) Yes, because the market for a used XBOX 360 is not the same as the market for a new XBOX 360.
When computing a present value, which of the following is TRUE?
You should adjust the discount rate to match the interval between cash flows
B
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $240,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4800 (paid at the end of each month). Your firm can borrow at 7.80% APR with quarterly compounding. The present value (PV) of the lease payments for the delivery truck is closest to ________. A) $190,506 B) $238,132 C) $285,758 D) $333,385
C
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $300,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $6000 (paid at the end of each month). Your firm can borrow at 8.00% APR with quarterly compounding. The monthly discount rate that you should use to evaluate the truck lease is closest to ________. A) 0.5298 % B) 0.7947 % C) 0.6623 % D) 0.6667 %
D
Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $350,000 , or you can lease a truck from the manufacturer for five years for a monthly lease payment of $7000 (paid at the end of each month). Your firm can borrow at 9.00% APR with quarterly compounding. The effective annual rate on your firmʹs borrowings is closest to ________. A) 9.00% B) 7.45% C) 11.17% D) 9.31%
Your friend notices that $1000 invested in small stocks in 1926 would have grown to over $1 million by 1990. He says, "Hey, wait a minute--the annual return on small stocks has averaged only 18% per year over that period. 18% of $1000 is $180, so over those 64 years, the $1000 could have only grown to $12,520 [=1000+(64*180)]. Is this one of those investment scams?!" While you're floored by your friend's knowledge of historical returns, you feel obligated to explain where he's gone wrong in his analysis. Do so in the space below
Your friend is only looking at the return on the original $1000 investment. He's ignoring the fact that after a year of 18% return, your investment will have grown to $1180. The next year, if you remain fully invested and continue to earn 18%, you will earn 18% on the full $1180, leaving you with $1392.40 and so on. In other words, you friend has focused on simple interest, and forgotten about the effect of compounding or earning interest on interest (or return on return).
inverted yield curve
___________ yield curve implies that interest rates should be falling in the future
A 30-year mortgage loan is a ________. A) long-term liability B) current liability C) current asset D) long-term asset
a
A manufacturer of plastic bottles for the medical trade purchases a new compression blow molder for its bottle production plant. How will the cost to the company of this piece of equipment be recorded? A) It will be depreciated over time on the income statement and subtracted as a capital expenditure on the statement of cash flows. B) It will be depreciated over time on the income statement and subtracted as Inventory on the statement of cash flows. C) It will be depreciated over time on the income statement and therefore not be recorded separately on the statement of cash flows. D) It will be subtracted from Gross Profit on the income statement and therefore, not be recorded separately on the statement of cash flows.
a
A small company has current assets of $112,000 and current liabilities of $117,000. Which of the following statements about that company is most likely to be true? A) Since net working capital is negative, the company will not have enough funds to meet its obligations. B) Since net working capital is high, the company will likely have little difficulty meeting its obligations. C) Since net working capital is very high, the company will have ample money to invest after it meets its obligations. D) Since net working capital is nearly zero, the company is well run and will have little difficulty attracting investors.
a
Company A has current assets of $42 billion and current liabilities of $41 billion. Company B has current assets of $2.7 billion and current liabilities of $1.8 billion. Which of the following statements is correct, based on this information? A) Company A is less likely than Company B to have sufficient working capital to meet its short-term needs. B) Company A has greater leverage than Company B. C) Company A has less leverage than Company B. D) Company A and Company B have roughly equivalent enterprise values
a
What is the main problem in using a balance sheet to provide an accurate assessment of the value of a companyʹs equity? A) Valuable assets such as the companyʹs reputation, the quality of its work force, and the strength of its management are not captured on the balance sheet. B) The balance sheet does not accurately represent the book value of assets held by the company. C) The equity shown on the balance sheet does not reflect the market capitalization of the company. D) Knowing at a single point in time what assets a firm possesses and the liabilities a firm owes does not give any indication of what those assets can produce in the future.
a
Which of the following firms would be expected to have a high ROE based on that firmʹs high profitability? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a low-end retailer that has a low mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year
a
Which of the following is NOT an operating expense? A) interest expense B) depreciation and amortization C) selling, general, and administrative expenses D) research and development
a
Which of the following is the LEAST likely explanation for a firmʹs high ROE? A) The firm is growing. B) The firm is able to find investment opportunities that are very profitable. C) The firm has very efficient use of its assets. D) The firm enjoys high sales margins.
a
Which of the following statements regarding the income statement is INCORRECT? A) The income statement shows the cash flows and expenses at a given point in time. B) The income statement shows the flow of revenues and expenses generated by a firm between two dates. C) The last or ȈbottomȈ line of the income statement shows a firmʹs net income. D) The first line of an income statement lists the revenues from the sales of products or services.
a
Which ratio would you use to measure the financial health of a firm by assessing that firmʹs leverage? A) debt-equity or equity multiplier ratio B) market-to-book ratio C) market debt-equity ratio D) current or quick ratio
a
9. Which of the following statements is NOT CORRECT? a. A time line is meaningful only if all cash flows occur annually. b. Timelines are useful for visualizing complex problems prior to doing actual calculations. c. Timelines can be constructed even in situations where some of the cash flows occur annually but others occur quarterly. d. Timelines can be constructed for annuities where the payments occur at either the beginning or the end of periods. e. The cash flows shown on a time line can be in the form of annuity payments, but they can also be uneven amounts.
a. A time line is meaningful only if all cash flows occur annually.
Limited liability is a big advantage of the corporate form of business... a. but the corporation's income is double taxed b. but it is hard to transfer ownership without disrupting the business c. but shareholders can be personally sued if something goes wrong. d. all of the above
a. but the corporation's income is double taxed
The primary goal of a publicly-owned firm interested in serving its stockholders should be to a. Maximize the stock price per share over the long run, which is the stock's intrinsic value. b. Maximize the firm's expected EPS. c. Minimize the chances of losses. d. Maximize the firm's expected total income. e. Maximize the stock price on a specific target date.
a. maximize the stock price per share over the long run, which is the stock's intrinsic value
Refer to the balance sheet above. The change in Luther's quick ratio from 2005 to 2006 is closest to ________.
an increase of 0.01 Quick ratio in 2006 = ($158.9 - $46.5) / $144.1 = 0.78 Quick ratio in 2005 = ($144.0 - $42.9) / 132 = 0.77 So, the quick ratio increased by 0.78 - 0.77 = 0.01.
A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows?
as an outflow under investment activities
A delivery company is creating a balance sheet. Which of the following would most likely be considered a short-term liability on this balance sheet? A) the depreciation over the last year in the value of the vehicles owned by the company B) revenue received for the delivery of items that have not yet been delivered C) a loan which must paid back in two years D) prepaid rent on the offices occupied by the company
b
A printing company prints a brochure for a client and then bills them for this service. At the time the printing companyʹs financial disclosure statements are prepared, the client has not yet paid the bill for this service. How will this transaction be recorded? A) The sale will be added to Net Income on the income statement and retained in Net Income on the statement of cash flows. B) The sale will be added to Net Income on the income statement but deducted from Net Income on the statement of cash flows. C) The sale will not be added to Net Income on the income statement but added to Net Income on the statement of cash flows. D) The sale will neither be added to Net Income on the income statement nor used to adjust Net Income on the statement of cash flows.
b
A public company has a book value of $128 million. They have 20 million shares outstanding, with a market price of $4 per share. Which of the following statements is true regarding this company? A) Investors may consider this firm to be a growth company. B) Investors believe the companyʹs assets are not likely to be profitable since its market value is worth less than its book value. C) The firmʹs market value is more than its book value. D) The value of the firmʹs assets is greater than their liquidation value.
b
A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? A) as an outflow under operating activities B) as an outflow under investment activities C) as an outflow under financial activities D) not recorded on the statement of cash flows
b
Allen Company bought a new copy machine to be depreciated straight line for three years for use by sales personnel. Where would this purchase be reflected on the Statement of Cash Flows? A) It would be an expense on the income statement so it would be reflected in operating cash flows. B) It would be an addition to property, plant and equipment so it would be an investing activity. C) It would be an addition to cash so it would be reflected in the change in cash. D) None of the above answers is correct.
b
The notes to the financial statements would LEAST likely be used for which of the following purposes? A) to provide information regarding the context in which these financial numbers were generated B) to disclose the financial implications of any off-balance sheet transactions C) to show how the value of assets listed in the financial statements were arrived at D) to explain the method of accounting that was used in the preparation of the financial statements
b
U.S. public companies are required to file their annual financial statements with the U.S. Securities and Exchange Commission on which form? a) 10-A b) 10-K c) 10-Q d) 10-SEC
b
What is a firmʹs gross profit? A) the difference between the sales and other income generated by the firm, and all costs, taxes, and expenses incurred by a firm in a given period B) the difference between sales revenues and the costs C) the difference between sales revenues and cash expenditures associated with those sales D) all of the above
b
Which of the following is NOT considered to be an operating expense on the income statement? A) administrative expenses and overhead B) corporate taxes C) salaries D) depreciation and amortization
b
Which of the following is a way that the operating activity section of the statement of cash flows adjusts Net Income from the balance sheet? A) It subtracts all expenses and costs related to a firmʹs operating activities. B) It adds all non-cash entries related to a firmʹs operating activities. C) It adds the cash that flows from investors to a firm. D) It removes the cash used for investment purposes.
b
Consider the following price and dividend data for Quicksilver Inc.: Date Price ($) Dividend ($) December 31, 2004 $14.50 January 26, 2005 $13.78 $0.14 April 28, 2005 $9.14 $0.14 July 29, 2005 $10.74 $0.14 October 28, 2005 $8.02 $0.14 December 30, 2005 $7.72 Assume that you purchased Quicksilver's stock at the closing price on December 31, 2004 and sold it after the dividend had been paid at the closing price on January 26, 2005. Your total return rate (yield) for this period is closest to ________. a. 0.97% b. -4.00% c. -4.97% d. 1.06%
b. -4.0%
Suppose you invested $93 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.53 today and then you sold it for $94. What was your dividend yield and capital gains yield on the investment? a. 0.54%, 1.13% b. 0.57%, 1.08% c. 0.57%, 1.13% d. 1.08%, 1.18%
b. 0.57%, 1.08%
6. Assume both investment X and investment Y have the same risk. Which of the following statements is CORRECT regarding the present value of these investments? Year 1 2 3 4 Investment X $5,000 $7,000 $9,000 $11,000 Investment Y $11,000 $9,000 $7,000 $5,000 a. Investment X has a higher present value. b. Investment Y has a higher present value. c. Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. d. No comparison can be made - we need to know the interest rate to calculate the present value.
b. Investment Y has a higher present value.
Which of the following computes the growth in purchasing power?
growth of money/ growth of prices
Balance Sheet Assets Liabilities Current Assets Current Liabilities Cash 48 Accounts payable 35 Accounts receivable 25 Notes payable/short-term debt 5 Inventories 16 Total current assets 89 Total current liabilities 40 Long-Term Assets Long-Term Liabilities Net property, plant, and equipment 121 Long-term debt 137 Total long-term assets 121 Total long-term liabilities 137 Total Liabilities 177 Stockholders' Equity 33 Total Assets 210 Total Liabilities and Stockholders' Equity 210 The above diagram shows a balance sheet for a certain company. All quantities shown are in millions of dollars. How would the balance sheet change if the company's long-term assets were judged to depreciate at an extra $5 million per year? a. Net property, plant, and equipment would rise to $126 million, and total assets and stockholders' equity would be adjusted accordingly. b. Net property, plant, and equipment would fall to $116 million, and total assets and stockholders' equity would be adjusted accordingly. c. Long-term liabilities would rise to $131 million, and total liabilities and stockholders' equity would be adjusted accordingly. d. Long-term liabilities would fall to $111 million, and total liabilities and stockholders' equity would be adjusted accordingly.
b. Net property, plant, and equipment would fall to $116 million, and total assets and stockholders' equity would be adjusted accordingly.
A software company acquires a smaller company in order to acquire the patents that it holds. Where will the cost of this acquisition be recorded on the statement of cash flows? a. as an outflow under operating activities b. as an outflow under investment activities c. as an outflow under financial activities d. not recorded on the statement of cash flows
b. as an outflow under investment activities
Which of the following is NOT considered one of the basic questions of corporate finance? a. what long-term investments should the firm choose b. at what rate of interest should a firm borrow c. where will the firm get the long-term financing to pay for its investments d. what mixture of debt should the firm use to fund its operations e. how should the firm manage its working capital, i.e., its everyday financial activities
b. at what rate of interest should a firm borrow
Name two primary differences between a partnership and a corporation. a. General partners have limited liability and are only taxed at the personal level b. Corporate shareholders have limited liability and are double taxed c. A partnership is double taxed and has joint and several liability d. A corporation has joint and several liability and is double taxed
b. corporate shareholders have limited liability and are double taxed
Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders?
by forcing companies to audit financial statements they release
Consider the above statement of cash flows. What were AOS Industries' major means of raising money in 2008?
by issuing debt
WorldCom classified $3.85 billion in operating expenses as long-term investments. How would this make WorldCom's financial statements more attractive to investors?
by raising its reported earnings
A company that produces drugs is preparing a balance sheet. Which of the following would be most likely to be considered a long-term asset on this balance sheet? A) commercial paper held by the company B) the inventory of chemicals used to produce the drugs made by the company C) a patent for a drug held by the company D) the cash reserves of the company
c
A firm whose primary business is in a line of regional grocery stores would be most likely to have to include which of the following facts, if true, in the firmʹs management discussion and analysis (MD&A)? A) that a large number of funds were allocated to advertising to increase awareness of the firmʹs brand in new areas it had expanded into this year B) that some senior members of the management team have retired in this financial year C) that the company has lost a class action suit brought against the firm by its employees and is expected to have to pay a large amount of damages D) that the firm has plans to expand into the organic food business in the next financial year by purchasing several small organic food retailers
c
Gross profit is calculated as ________. A) total sales - cost of sales - selling, general, and administrative expenses - depreciation and amortization B) total sales - cost of sales - selling, general, and administrative expenses C) total sales - cost of sales D) none of the above
c
The exchanges in which of the following do NOT accept the International Financial Reporting Standards set out by the International Accounting Standards Board? a) Germany b) France c) United States d) United Kingdom
c
The major components of stockholdersʹ equity are ________. A) cash, common stock, and paid-in surplus B) common stock, paid-in surplus, and net income C) common stock, paid-in surplus, and retained earnings D) common stock, liabilities, and retained earnings
c
Which of the following amounts would be included on the right side of a balance sheet? A) the value of government bonds held by the company B) the cash held by the company C) the amount of deferred tax liability held by the company D) the amount of money owed to the company by customers who have not yet paid for goods and services they have received
c
Which of the following balance sheet equations is INCORRECT? A) Assets - Liabilities = Shareholdersʹ equity B) Assets = Liabilities + Shareholdersʹ equity C) Assets - Current liabilities = Long-term liabilities D) Assets - Current liabilities = Long-term liabilities + Shareholdersʹ equity
c
Which of the following best describes why a firm produces financial statements? a) to use as a tool when planning future investments within the firm b) to increase the intrinsic value of the firm c) to provide a means for interested outside parties such as creditors to obtain info about a firm, with an overview of the short and long term financial condition of a business d) to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future.
c
Which of the following is NOT one of the ways that the Sarbanes-Oxley Act sought to improve the accuracy of information given to both boards and shareholders? A) by increasing the penalties to firms for providing false information B) by increasing the independence of auditors and clients C) by decreasing the non-audit fees that an auditor can receive from a client D) by forcing companies to audit financial statements they release
d
Which of the following best describes why the left and right sides of a balance sheet are equal? A) In a properly run business, the value of liabilities will not exceed the assets held by the company. B) By definition, the assets plus the liabilities will be the same as the stockholdersʹ equity. C) The assets must equal liabilities plus stockholdersʹ equity because stockholdersʹ equity is the difference between the assets and the liabilities. D) By accounting convention, the assets of a company must be equal to the liabilities of that company
c
Which of the following people may not manage the operations of a firm in which they are part or full owners? A) stockholders in S corporations B) stockholders in C corporations C) limited partners in a limited partnership D) general partners in a limited partnership
c
Which of the following would be included on the right side of a balance sheet? a) the value of government bonds held by the company b) the cash held by the company c) the amount of deferred tax liability held by the company d) the amount of money owed to the company by customers who have not yet paid for goods and services they have received
c
Refer to the balance sheet above. If in 2006 Luther has 10.2 million shares outstanding and these shares are trading at $16 per share, then what is Lutherʹs enterprise value? A) -$540.0 million B) $771.4 million C) $385.7 million D) $521.4 million
c. Enterprise value = Market Value of Equity + Debt - Cash = (10.2 × $16) + $278.6 - $56.1 = $385.7
8. The timeline shown below best describes the cash flow of which of the following people? Date (years) 0 1 2 3 4 Cash Flows -$3500 $1000 $1000 $1000 $1000 a. Joe, who puts down $3500 to buy a car, and then makes annual payments of $1000 b. Harry, who borrows $3500, and then receives an annual payment of $1000 c. Karen loans a friend $3500. The friend then pays back the loan in four annual installments of $1000 d. Leo, who borrows $3500, and then pays back the loan in four annual payments of $1000
c. Karen loans a friend $3500. The friend then pays back the loan in four annual installments of $1000
Which of the following could explain why a business might choose to operate as a corporation rather than as a sole proprietorship or a partnership? a. Corporations generally find it relatively difficult to raise large amounts of capital. b. Less of a corporation's income is generally subjected to taxes than would be true if the firm were a partnership. c. Corporate shareholders escape liability for the firm's debts, although this factor may be somewhat offset by the tax disadvantages of the corporate form of organization. d. Corporate investors are exposed to unlimited liability. e. Corporations generally face relatively few regulations.
c. corporate shareholders escape liability for the firm's debts, although this factor may be somewhat offset by the tax disadvantages of the corporate form of organization
Which of the following investments offered the highest overall return over the past eighty years? a. Treasury bills b. S&P 500 c. small stocks d. corporate bonds
c. small stocks
The major components of stockholders' equity are ________.
common stock, paid-in surplus, and retained earnings
To compute the future value of cash flow, you must ______________
compound it
) Which of the following firms would be expected to have a high ROE? A) a medical supply company that provides very precise instruments at a high price to large medical establishments such as hospitals B) a high-end fashion retailer that has a very high mark-up on all items it sells C) a brokerage firm that has high levels of leverage D) a grocery store chain that has very high turnover, selling many multiples of its assets per year
d
Accounts payable is a ________. A) long-term liability B) current asset C) long-term asset D) current liability
d
One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive? A) The assets should have been listed on the balance sheet as long-term assets. B) Cash raised by selling assets should not be recorded as revenue. C) The cash raised should have been recorded as short-term loans. D) The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.
d
The third party who checks annual financial statements to ensure they are prepared according to GAAP and verifies that the info reported is reliable is the _________________. a) NYSE Enforcement Board b) Accounting Standards Board c) Securities and Exchange Commission (SEC) d) auditor
d
What are the requirements of section 404 of SOX? A) It requires that senior management return any profits or bonuses resulting from stock sales during any period covered by financial statements that must later be restated. B) It requires that auditors do not perform any non-auditing tasks for the companies they audit. C) It requires that audit partners rotate every five years. D) It requires that senior management and the boards of public companies attest to the effectiveness and validity of their financial control process.
d
What is a firmʹs net income? A) the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period B) the last or ȈbottomȈ line of the income statement C) a measure of the firmʹs profitability over a given period D) all of the above
d
What is the main reason that it is necessary for public companies to follow the rules and format set out in the Generally Accepted Accounting Principles (GAAP) when creating financial statements? a) it ensures that the market value of assets and debt are reported accurately. b) it ensures that info on the performance of public companies is reported on cash-basis accounting. c) it ensures that important budgetary info is not omitted. d) it makes it easier to compare the financial results of different firms.
d
Which of the following is NOT a reason that the income statement does not accurately indicate how much cash a firm has earned? A) It includes entries for the depreciation of assets. B) It does not include entries for expenditures on inventory. C) It does not include entries for collection of money from account receivables. D) It includes cash inflows from services rendered.
d
Which of the following is the main lesson that analysts and investors should take from the cases of Enron and WorldCom? A) The usefulness of financial statements to investors is entirely dependent on the ethics of those constructing them. B) It is not possible to effectively evaluate a company unless all the financial statements are fully and correctly prepared. C) The information in financial statements should be viewed extremely critically. D) Readers of even fraudulent financial statements can spot signs of a firmʹs financial health, if those statements are read fully and with care
d
Which of the following statements regarding the balance sheet is INCORRECT? A) The balance sheet provides a snapshot of a firmʹs financial position at a given point in time. B) The balance sheet lists a firmʹs assets and liabilities. C) The balance sheet reports stockholdersʹ equity on the right-hand side. D) The balance sheet reports liabilities on the left-hand side
d
Why must care be taken when comparing a firmʹs share price to its operating income? A) Both share price and operating income are related to the whole firm. B) Share price is a quantity related to the entire firm, while operating income is an amount that is related solely to equity holders. C) Both share price and operating income are related solely to equity holders. D) Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
d
The future value of a single lump sum invested today will increase more rapidly when: I. The interest rate increases. III. The frequency of compounding increases. II. The interest rate decreases. IV. The frequency of compounding decreases. a. I only. b. III only. c. I & IV only. d. I & III only. e. II & III only. f. None of these.
d. I & III
You want to pool your resources with your best friend and start your own telecommunications firm. however, you are concerned about the risk this business poses to your accumulated personal wealth. to limit your exposure, you and your friend should organize the business: a. as a general partnership b. as a limited partnership c. as a sole proprietorship d. as a corporation or PLC e. as a real estate investment trust f. none of these
d. as a corporation or PLC
Which of the following statements is CORRECT? a. The financial manager's proper goal should be to attempt to maximize the firm's market share, since that will add the most to the individual shareholders' wealth. b. The financial manager should seek that combination of assets that will generate the largest expected projected after-tax income over the relevant time horizon, generally the coming year. c. One example of financial managers maximizing value is when they delay a large investment in a project so that the firm may maximize its near-term earnings per share (EPS). d. Potential agency problems can arise between managers and stockholders, because managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stockholders.
d. potential agency problems can arise between managers and stockholders, bc managers hired as agents to act on behalf of the owners may instead make decisions favorable to themselves rather than the stock holders
operating expense
depreciation and amortization, selling, general, and administrative expenses, research and development
You are planning to borrow money to buy a Porsche. Which of the following is a core determinant of the interest rate the bank might charge you? I.Whether the bank has a branch in your home town. II.Expected inflation. III.The real, risk-free rate of interest. IV.The lender's assessment of your risk as a borrower. V.Your cousin recently missed a payment to the bank. a. I & III only b. II & III only c. I, II, & III only d. II & IV only e. II, III, & IV only f. IV & V only g. I, II & IV only h. I, IV, & V only k. I, II, & V only
e. II, III, IV only
Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firm's assets and the financing of those assets, and a prediction of the firm's future performance.
false
In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.
false
International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty-first century.
false
The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.
false
The management of public companies is not legally required to disclose any off-balance sheet transactions.
false
Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.
false
t/f Financial statements are optional accounting reports issued periodically by a firm which present info on the past performance of the firm, a summary of the firm's assets and the financing of those assets, and a prediction of the firm's future performance.
false
t/f In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements
false
t/f International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the 21st century.
false
t/f The balance sheet shows the assets, liabilities, and stockholders' equity of a firm over a given length of time.
false
t/f The management of public companies is not legally required to disclose any off-balance sheet transactions.
false
t/f Use of GAAP and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.
false
Which of the following statements is FALSE?
for a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term
balance sheet, income statement, statement of cash flows, statement of stockholder's equity
four financial statements that all public companies must product
Which of the following is considered one of the basic questions of corporate finance? I.Which projects or assets the firm should choose. II.At what rate of interest should a firm borrow. III.How the firm should structure the payment to its employees. IV.What mixture of debt and equity should the firm use to fund its operations. V.How should the firm manage its day-to-day cash levels. a.I & III only b.II & III only c.I, II, & III only d.II & IV only e.II, III, & IV only f. IV & V only g.I, II & IV only h.I, IV, & V only k. I, II, & V only
h. I, IV, & V only
Which of the following best describes the annual percentage rate? A) the quoted interest rate which, considered with the compounding period, gives the effective interest rate B) the effective annual rate, after compounding is taken into account C) the discount rate, when compounded more than once a year or less than once a year D) the discount rate, when effective annual rate is divided by the number of times it is compounded in a year
he quoted interest rate which, considered with the compounding period, gives the effective interest rate
Which of the following statements regarding the cost-benefit analysis is NOT correct? A) The first step in evaluating a project is to identify its costs and benefits. B) In the absence of competitive markets, we can use one-sided prices to determine exact cash values. C) Competitive market prices allow us to calculate the value of a decision without worrying about the tastes or opinions of the decision maker. D) Because competitive markets exist for most commodities and financial assets, we can use them to determine cash values and evaluate decisions in most situations.
in the absence of competitive markets, we can use one-sided prices to determine exact cash values
Investment X and Investment Y are both growing perpetuities with initial cash flow of $100. Both investments have the same interest rate (r) and cash flows. The present value of Investment X is $5,000, while the present value of Investment Y is $4,000. Which of the following is true? A) Investment X has a higher growth rate than Investment Y. B) Investment X has a lower growth rate than Investment Y. C) The answer cannot be determined without knowing the interest rate for both investments. D) With the same initial cash flow and the same interest rate, Investment X and Investment Y should have the same present value.
investment X has a higher growth rate than investment Y
Which of the following investments has a higher present value, assuming the same (strictly positive) interest rate applies to both investments? A) Investment X has a higher present value. B) Investment Y has a higher present value. C) Investment X and Investment Y have the same present value, since the total of the cash flows is the same for both. D) No comparison can be madewe need to know the interest rate to calculate the present value.
investment Y has a higher value
What does the phrase limited liability mean in a corporate context? Owners' liability (is/is not) limited to the amount they invested in the firm. Stockholders (are/are not) responsible for any encumbrances of the firm; in particular, they (can/cannot) be required to pay back any debts incurred by the firm.
is are not cannot
You are scheduled to receive 10,000 in one year. What will be the effect of an increase in the interest rate on the present value of this cash flow?
it will cause the present value to fall
You are scheduled to receive $10,000 in one year. What will be the effect of an increase in the interest rate on the future value of this cash flow? A) It will cause the future value to fall. B) It will cause the future value to rise. C) It will have no effect on the future value. D) The effect cannot be determined with the information provided.
it will have no effect on the future value
Identify the goal of a financial manager and justify that goal (why is it the correct goal?).
maximize shareholder wealth (implemented by maximizing the value of the company's assets). This is correct bc shareholders are the owners of the firm - it's their money at risk.
Why, in general, do investment opportunities offer a rate greater than that offered by U.S. Treasury securities for the same horizon? A) Most investment opportunities bear far greater risk than those offered by U.S. Treasury securities. B) The return from U.S. Treasury securities generally attracts less tax than the returns from other investments. C) The opportunity cost of capital for a given horizon is generally based on U.S. Treasury securities with that same horizon. D) U.S. Treasury securities are generally considered to be the best alternative to most investments.
most investment opportunities bear far greater risk than those offered by US Treasury securities
Heavy Duty Company, a manufacturer of power tools, decides to offer a rebate of $130 on its 16-inch mid-range chain saw, which currently has a retail price $490. Heavy Dutyʹs marketers estimate that, as a result of the rebate, sales of this model will increase from 60,000 to 80,000 units next year. The profit margin for Heavy Duty before the rebate is $180. Based on the given information, is the decision to give the rebate a wise one? A) No, since costs are $7,800,000 more than benefits. B) No, since costs are $6,800,000 more than benefits. C) Yes, since the benefits are $3,400,000 more than the costs. D) Yes, since the benefits are $7,300,000 more than the costs.
no, since the costs are $6,800,000 more than the benefits
Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 4% per year? A) one that pays $900 now B) one that pays $1080 in two years C) one that pays $1350 in five years D) one that pays $1620 in ten years
one that pays $1350 in five years
Which of the following accounts has the highest EAR? A) one that pays 5.4% every six months B) one that pays 1.0% per month C) one that pays 9.6% per year D) one that pays 2.4% every three months
one that pays 1.0% per month
Which of the following is/are TRUE? I. The EAR can never exceed the APR. II. The APR can never exceed the EAR. III. The APR and EAR can never be equal.
only II is true
A bank offers an account with an APR of 5.8% and an EAR of 5.88%. How does the bank compound interest for this account?
semi-annual compounding
You are a shareholder in a corporation which has elected subchapter S tax treatment. The corporation announces a profit of $6 per share, of which it retains $1 for reinvestment and distributes the rest as dividend payments. Given that the personal tax rate is 35%, how much tax must you pay per share? A) $0 B) $2.10 C) $1.75 D) $2.52
shareholder of S corporation = 5 × 0.35 = $1.75
What is a firm's gross profit?
the difference between sales revenues and the costs
firm's gross profit
the difference between sales revenues and the costs
a firm's net income
the difference between the sales and other income generated by a firm, and all costs, taxes, and expenses incurred by the firm in a given period, the last or "bottom" line of the income statement, a measure of the firm's profitability over a given period
Which of the following situations would result in lowering of interest rates by the banking authority of a country
the economy is slowing down
How do you calculate (mathematically) the present value (PV) of a(n): (a) perpetuity (b) annuity (c) growing perpetuity (d) growingannuity
the formulas.... look on page 151 of the test bank; number 14
What, typically, is used to calculate the opportunity cost of capital on a risk-free investment? A) the best expected return offered in any investment available in the market B) the interest rate on U.S. Treasury securities with the same term C) the interest rate of any investments alternatives that are available D) the best rate of return offered by U.S. Treasury securities
the interest rate of US Treasury securities with the same term
What, typically is used to calculate the opportunity cost of capital on a risk-free investment?
the interest rate on U.S. treasury securities with the same term
Which of the following best describes the annual percentage rate?
the quoted interest rate which, considered with the compounding period, gives the effective interest rate
Which of the following best describes why a firm produces financial statements?
to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short- and long-term financial condition of a business
Gross profit is calculated as ________.
total sales - cost of sales
In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.
true
Price-earnings ratios tend to be high for fast-growing firms.
true
Share price is a quantity related to equity holders, while operating income is an amount that is related to the whole firm.
true
Stockholders' equity is the difference between a firm's assets and liabilities, as shown on the balance sheet.
true
The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.
true
t/f The income statement reports the firm's revenues and expenses, and it computes the firm's bottom line of net income, or earnings.
true
true
true or false: Cash flows occurring at different points in time cannot be added because a dollar today is worth more than a dollar tomorrow. In other words, these cash flows are not in the same units. The compounding and discounting effect causes these cash flows to be different across time. However, this is only valid for nonzero interest rates. Hence, the implied assumption in adding cash flows across time is that interest rate is zero.
true
true or false: How do the growth perpetuity results differ with negative and positive growths of similar magnitude assuming everything else remains unchanged? The denominator in the formula for growth perpetuity plays in important role on the results for negative and positive growths of similar magnitude. A positive growth results in a smaller denominator thereby increasing the present value (PV). Contrarily, a negative growth results in a larger denominator giving a smaller present value (PV).
true
true or false: It is perfectly in order to apply the growth perpetuity for negative growth. A negative growth gives two negatives in the denominator making it larger than a positive growth thus reducing the valuation compared to a positive growth of similar magnitude.
true
true or false: The opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term to the cash flow being discounted.
true
true or false: Every cash flow contains two pieces of informationthe nominal value and the time stamp. If we decide to eliminate the zero cash flows from the timeline and concentrate only on the nonzero ones, we will be distorting the time stamp of some nonzero cash flows. Hence, we need to show the timeline in full, including all cash flows zero as well as nonzero.
false
true or false: The term "opportunity" in opportunity cost of capital comes from the fact that any worthwhile opportunity for investment will have a cost: the risk to the capital invested.
false
true or false: A dollar today and a dollar in one year may be considered to be equivalent.
true
true or false: A dollar today can be invested to earn interest, which will make it worth more than a dollar tomorrow.
true
true or false: Additional care should be taken when the compounding period is given to us and it does not equal the cash flow interval. This requires some additional steps in computing the applicable interest rate. The compounding interval has to match the cash flow interval to enable transformation to present value (PV) or future value (FV). In most cases, it should be possible to achieve this by calculating the effective annual rate from the given compounding interval and subsequently calculating the annual percentage rate and periodic interest rate for the cash flow interval.
true
true or false: An APR will equal EAR only with annual compounding assuming everything else remains same.
false
true or false: Cash flows from an annuity occur every year in the future.
true
true or false: Cash inflows and outflows should have opposite signs to give meaningful results that can be used in decision making. One convention that is easier to follow is to assign a positive sign to all cash coming in, i.e., cash inflows, and a negative sign to all cash going out, i.e., cash outflows.
true
true or false: Corporations have come to dominate the business world through their ability to raise large amounts of capital by sale of ownership shares to anonymous outside investors.
true
true or false: Costs and benefits must be put in common terms if they are to be compared.
true
true or false: Dollar amounts received at different points in time cannot be compared in absolute terms.
false
true or false: Financial decisions require that you weigh alternatives in strictly monetary terms.
false
true or false: Financial statements are optional accounting reports issued periodically by a firm which present information on the past performance of the firm, a summary of the firmʹs assets and the financing of those assets, and a prediction of the firmʹs future performance.
false
true or false: For a free-risk investment, the opportunity cost of capital will generally be more than the interest rate offered by U.S. Treasury securities with a similar term.
true
true or false: If an arbitrage opportunity exists, an investor can act quickly in the hope of making a risk-free profit.
false
true or false: If broker will buy a share of stock from you at $3.85 and sell it to you at $3.87, the ask price would be $3.85.
true
true or false: In general, a successful firm will have a market-to-book ratio that is substantially greater than 1.
false
true or false: In most corporations, the owners exercise direct control of a corporation.
false
true or false: In order to distinguish between inflows and outflows, different colors are assigned to each of these cash flows when constructing a timeline.
true
true or false: In real world cash flows may be between any intervals. They may be shorter than a year or longer than a year. Additional care needs to be taken in both cases. For cash flows that have an interval longer than one year, one should be careful to show the years with zero cash flows. Alternately, for those with shorter than a year, one should be careful about modifying the interest rate to match the time interval.
false
true or false: In the United States, publicly traded companies can choose whether or not they wish to release periodic financial statements.
true
true or false: In the real world, cash flows can occur with any periodicity but interest rates are generally quoted in annual terms. As such, when cash flows occur at a shorter than annual time interval the interest rates have to be modified to correspond to the cash flow interval. One way to do that is to match the compounding period equal to cash flow interval.
false
true or false: International Financial Reporting Standards are taking root throughout the world. However, it is unlikely that the U.S. will report according to IFRS before the second half of the twenty -first century.
false
true or false: It is generally not the duty of financial managers to ensure that a firm has the cash it needs for day-to-day transactions.
false
true or false: Joe borrows $100,000 and agrees to repay the principal, plus 7% APR interest compounded monthly, at the end of three years. Joe has taken out an amortizing loan.
true
true or false: Many of the problems of Enron and WorldCom were kept hidden from boards and shareholders, until it was too late. People felt that the accounting statements of these companies, while often remaining true to the letter of GAAP, did not present an accurate picture of the financial health of the company.
true
true or false: Market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend.
false
true or false: Partnerships are the most common type of business firms in the world.
true
true or false: Price-earnings ratios tend to be high for fast-growing firms.
true
true or false: Quality adjustments to changes in the CPI most often result in reductions to the inflation rate calculated from it.
false
true or false: Raising new capital by issuing bonds is an example of a commercial banking activity.
true
true or false: Stock markets provide liquidity for a firmʹs shares.
true
true or false: Stockholdersʹ equity is the difference between a firmʹs assets and liabilities, as shown on the balance sheet.
true
true or false: The Law of One Price states that if equivalent goods or securities are traded simultaneously in different competitive markets, they will trade for the same price in each market
true
true or false: The amount of periodic payments, generally monthly, for most amortizing loans is held constant such that a part goes toward paying interest on the outstanding balance and the rest toward return of principal. Thus this ratio keeps changing over the life of the loan. Initially, when the principal is highest, a major part of the loan goes toward paying interest and a smaller part toward returning the principal. However, as the loan progresses the interest component of the payment increases and the principal component decreases till the loan is fully paid off.
false
true or false: The annual percentage rate indicates the amount of interest, including the effect of any compounding.
false
true or false: The balance sheet shows the assets, liabilities, and stockholdersʹ equity of a firm over a given length of time.
true
true or false: The built-in functions for present value of ordinary annuity in a financial calculator assume that interest rates are the same for every maturity on the yield curve.
true
true or false: The equation for computation of present value of perpetuity assumes that the interest rates are the same for every maturity on the yield curve.
false
true or false: The fact that corporationsʹ shares are easily traded within the market has a net effect of acting as a disincentive for managers to favor the interests of shareholders over their own interests.
true
true or false: The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero.
false
true or false: The management of public companies is not legally required to disclose any off -balance sheet transactions.
true
true or false: The one-year discount factor is the discount at which we can purchase money in the future, one year from now.
true
true or false: The present value (PV) of a stream of cash flows is just the sum of the present values of each individual cash flow.
true
true or false: The principal goal of a financial manager is to maximize the wealth of the stockholders.
false
true or false: The real interest rate is the rate of growth of oneʹs purchasing power due to money invested.
true
true or false: The role played by some of the other management disciplines include: Economics: to determine the effect of a price reduction or increase on net income. Marketing: to determine the increase in revenues resulting from an advertising campaign. Strategy: to determine a competitorʹs response to a price decrease or increase.
true
true or false: The rule of 72 tells you approximately how long it takes for money invested at a given rate of compound interest to double in value.
false
true or false: The shares of private corporations are traded on a stock market.
false
true or false: To calculate a cash flowʹs present value (PV), you must compound it.
false
true or false: To enable costs and benefits to be compared, they are typically converted into cash value at the time the benefit is received.
false
true or false: Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.
false
true or false: Use of Generally Accepted Accounting Principles (GAAP) and auditors have eliminated the danger of inadvertent or deliberate fraud in financial statements.
true
true or false: We rank all the foregone opportunities, and opportunity cost is the second best opportunity that we forego. Thus we select the best opportunity and rank all the alternative opportunities and use the cost of the second best opportunity as opportunity cost.
false
true or false: When there are large numbers of people looking to save their money and there is little demand for loans, one would expect interest rates to be high.
true
true or false: When you borrow money, the interest rate on the borrowed money is the price you pay to be able to convert your future loan payments into money today.
true
true or false: Whenever a good trades in a competitive market, the price determines the value of the good.
The yield curve is typically ________.
upward sloping
Which of the following statements regarding arbitrage and security prices is INCORRECT? A) We call the price of a security in a normal market the no-arbitrage price for the security. B) In financial markets it is possible to sell a security you do not own by doing a short sale. C) When a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds. D) The general formula for the no-arbitrage price of a security is Price(security) = PV (all cash flows paid by the security).
when a bond is underpriced, the arbitrage strategy involves selling the bond and investing some of the proceeds
13) In which of the following situations would it not be appropriate to use the following formula: PV = C0 + C1/(1 + r) + C2/(1 + r)2 + . . . . + Cn/(1 + r)n when determining the present value (PV) of a cash flow stream? A) when yield curves are flat B) when short-term and long-term interest rates vary widely C) when the inflation rate is high D) when the discount rate is high
when short term and long term interest rates vary widely
Samantha has holdings of 250 troy ounces of platinum, currently valued at $820 dollars per ounce. She estimates that the price of platinum will rise to $869.20 per ounce in the next year. If the interest rate is 12%, should she sell the platinum today? A) Yes, as the difference between the present value of selling now and selling in one year is $12,300 dollars today. B) Yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today. C) Yes, as the difference between the present value of selling now and selling in one year is $9840 dollars today. D) No, as the difference between the present value of selling now and selling in one year is - $8786 dollars today.
yes, as the difference between the present value of selling now and selling in one year is $10,982 dollars today.
A wholesale food retailer is offered $15.60 per two-layer carton for 5000 cartons of peaches. The wholesaler can buy peaches from their growers at $13.20 per carton. Shipping costs $2.40 per carton, for the first 1000 cartons, and $1.90 per carton for every carton over that. Will taking this opportunity increase the value of the wholesale food retailer? A) No, the costs are $1500 more than the benefits. B) No, the costs and the benefits are the same. C) Yes, the costs are $2500 less than the benefits. D) Yes, the costs are $2000 less than the benefits.
yes, the costs are $2000 less than the benefits
When computing a present value, which of the following is TRUE? A) You should adjust the discount rate to match the interval between cash flows. B) You should adjust the future value to match the present value. C) You should adjust the time period to match the present value. D) You should adjust the cash flows to match the time period of the discount rate.
you should adjust the discount rate to match the interval between cash flows
