Finance Quiz ch. 3,5,6

Which one of the following is a source of cash?

Decrease in Inventory

Which one of the following is a use of cash?

Decrease in accounts payable

Which of these will increase the present value of an amount to be received sometime in the future?

Decrease in the interest rate

According to the statement of cash flows, an increase in interest expense will _____ the cash flow from _____ activities.

Decrease; operating

According to the statement of cash flows, an increase in inventory will _____ the cash flow from _____ activities

Decrease; operating

Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

Discount Rate

The process of determining the present value of future cash flows in order to know their worth today is referred to as:

Discounted cash flow valuation

Which one of these identifies the relationship between the return on assets and the return on equity?

DuPont Identity

Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:

Interest on Interest

Which one of the following terms is used to describe a loan that calls for periodic interest payments and a lump sum principal payment?

Interest-only loan

You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You will earn 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire?

Invest in a different account paying a higher rate of interest; retire later

An Amortized Loan:

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

Which one of the following variables is the exponent in the present value formula?

Number of time periods

A common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:

Sales

Samantha opened a savings account this morning. Her money will earn 3.5 percent interest, compounded annually. After four years, her savings account will be worth $5,000. Assume she will not make any withdrawals. Given this, which one of the following statements is true?

Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest.

Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple Interest

The U.S. government coding system that classifies a firm by the nature of its business operations is known as the:

Standard industrial classification codes

The sources and uses of cash over a stated period of time are reflected on the:

Statement of cash flows

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming neither Sue nor Neal withdraw any money from their accounts prior to retiring?

Sue will have more money than Neal when they are 60

Which one of the following statements concerning interest rates is correct?

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

What is the relationship between present value and future value interest factors?

The factors are reciprocals of eachother

Which one of these statements related to growing annuities and perpetuities is correct?

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

This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?

The present value of the investment is equal to $1,000

How is the principal amount of an interest-only loan repaid?

The principal is paid as one lump some at the end of the loan period

Which one of the following statements correctly defines a time value of money relationship?

Time and future values are are inversely related, all else held constant

Which one of the following accurately defines a perpetuity?

Unending equal payments paid at equal time intervals

Activities of a firm that require the spending of cash are known as:

Uses of cash

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates

A Canadian consol is best categorized as:

A perpetuity

Which one of the following statements related to annuities and perpetuities is correct?

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

You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which one of the following loans would be the least expensive? Assume all loans require monthly payments and that interest is compounded on a monthly basis.

Amortized loan with equal principal payments

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at year 5 and an annual percentage rate of 10 percent?

Annual

The interest rate that is most commonly quoted by a lender is referred to as which one of the following?

Annual percentage rate

Your credit card charges you 1.5 percent interest per month. This rate when multiplied by 12 is called the:

Annual percentage rate

You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?

Annuity B has a smaller present value than Annuity A

Which one of the following terms is defined as a loan wherein the regular payments, including both interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid in one lump sum?

Balloon loan

Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?

Barb will earn more interest the second year than Andy

On the statement of cash flows, which of the following are considered operating activities?

Cost in goods sold and decrease in accounts payable

Which one of the following is a source of cash?

Acquisition of Debt

Kurt won a lottery and will receive $1,000 a year for the next 50 years. The value of his winnings today discounted at his discount rate is called which one of the following?

Present Value

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

Pure discount

The entire repayment of which one of the following loans is computed simply by computing one single future value?

Pure discount loan

Which one of the following is a source of cash for a non-tax-paying firm?

Increase in common stock

On the statement of cash flows, which of the following are considered financing activities?

Increase in long-term debt and dividends paid

Standardizes items on the income statement and balance sheet relative to their values as of a chosen point in time?

Common-base year statement

Interest earned on both the initial principal and the interest reinvested from prior periods is called:

Compound Interest

Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

Compounding

An interest rate on a loan that is compounded monthly but expressed as an annual rate would be an example of which one of the following rates?

Effective annual rate

Amortized loans must have which one of these characteristics?

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

An ordinary annuity is best defined by which one of the following?

Equal payments paid at the beginning of intervals for a limited time period

Relationships determined from a firm's financial information and used for comparison purposes are known as:

Financial Ratios

You are investing $100 today in a savings account at your local bank. Which one of the following terms refers to the value of this investment one year from now?

Future Value

Phillippe invested $1,000 10 years ago and expected to have $1,800 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, he only has $1,680 in his account today. Which one of the following must be true?

He earned a lower interest rate than he expected

Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?

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