example questions exam 3
The retention ratio can be computed as:
1 − (Cash dividends/Net income).
Which one of the following statements related to annuities and perpetuities is correct?
A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.
An example of a perpetuity is ____.
British console
The interest earned on both the initial principal and the interest reinvested from prior periods is called:
compound interest
Andrew just calculated the present value of a $15,000 bonus he will receive next year. The interest rate he used in his calculation is referred to as the:
discount rate
Which of the following is/are an amortized loan?
auto loan, morage
• Which of the following do NOT vary directly with sales?
long term debt, depreciation, interests
Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav:
could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.
Which one of the following is correct in relation to pro forma statements?
The addition to retained earnings is equal to net income less cash dividends.
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.
If interest rate is 10% p.a., $100 today is equivalent to $110 next year. (T/F)
TRUE
The effect of compounding (interest on interest) is equal to the ___
interest on interest
If a firm do not plan to raise debt or equity, what is the maximum growth rate that the firm should stay below? (constant dividend payout ratio)
internal growth rate
Which one of the following actions will increase the present value of an amount to be received sometime in the future?
Decrease in the interest rate
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.
A perpetuity is defined as:
unending equal payments paid at equal time intervals.
Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced?
I, II, III, and IV
Assume you deposited $6,000 into a retirement savings account today. The account will earn 8 percent interest per year, compounded annually. You will not withdraw any principal or interest until you retire in 48 years. Which one of the following statements is correct?
The present value of this investment is equal to $6,000.
Your credit card charges you .85 percent interest per month. This rate when multiplied by 12 is called the ____ rate.
annual percentage
An example of an annuity is ____.
auto loan, mortage
An ordinary annuity is best defined as:
equal payments paid at the end of regular intervals over a stated time period.
Your aunt has promised to give you $5,000 when you graduate from college. You expect to graduate three years from now. If you speed up your plans to enable you to graduate two years from now, the present value of the promised gift will:
increase
The interest earned on the reinvested interest is called ______.
interest on interest
An amortized loan:
may have equal or increasing amounts applied to the principal from each loan payment.
The entire repayment of a(n) _____ loan is calculated by computing one single future value.
pure discount
• If a financial product can be purchased for $93, and it will deliver a onetime payment of $100 in two years, this loan is considered as ____.
purse-discount loan
Which one of the following has the least effect on a firm's sustainable rate of growth?
quick ratio
• What is the driving factor we use for financial planning?
sales growth
Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?
simple interest
The process of discounting is associated with finding the future value (T/F)
FALSE
Four years ago, Lucas invested $500. Three years ago, Matt invested $600. Today, these two investments are each worth $800. Assume each account continues to earn its respective rate of return and interest is compounded annually. Which one of the following statements is correct concerning these investments?
One year ago, Lucas's investment was worth less than Matt's investment.
Sophia and Mallory are the same age. At age 25, Sophia invests $6,000 at 7 percent, compounded annually. At age 30, Mallory invests $6,000 at 7 percent, compounded annually. All else constant, when they both reach age 60:
Sophia will have more money than Mallory.
If a firm can raise debt to maintain a constant capital structure, what is the maximum growth rate that the firm should stay below? (constant dividend payout ratio)
sustainable growth rate
Moreno Refurbishing is currently operating at full-capacity sales. Accordingly, sales are currently being limited by the firm's level of:
fixed assets
Whether a firm reaches its production capacity affects the forecast of which account?
fixed assets
Our deposits in the bank are compounded to compute the _______.
future value
Wei Bridal is a profitable firm with a dividend payout ratio of 25 percent. The firm does not want to issue additional equity shares nor increase its long-term debt. Which one of the following defines the maximum rate at which this firm can currently grow?
internal growth rate
A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:
long-term debt
The internal growth rate of a firm is best described as the ______ growth rate achievable ______.
maximum; excluding external financing of any kind
The financial planning method that uses the projected sales level as the basis for determining changes in balance sheet and income statement account values is referred to as the ______ method.
percentage of sales
Hayley won a lottery and will receive $1,000 each year for the next 30 years. The current value of these winnings is called the:
present value
With an interest-only loan the principal is:
repaid in one lump sum at the end of the loan period.
• External Financing is needed (EFN) when
retained earnings cannot meet asset investment requirement
The portion of net income that a firm reinvests in itself is measured with the:
retention ratio