Finance 300 exam 1 UKY
What is the future value of $1,000 invested for 8 year at 6%?
$1,593.85
Galaxy Interiors income statement shows depreciation of $1,611, sales of $21,415, interest paid of $1,282, net income of $1,374, and costs of goods sold of $16,408. What is the amount of the noncash expenses?
$1,611
Assume $100 earns a stated 10 percent rate compounded quarterly. What will the value of the $100 be after one year?
$110.38
Teddy's Pillows had beginning net fixed assets of $469 and ending net fixed assets of $546. Assets valued at $317 were sold during the year. Depreciation was $38. What is the amount of net capital spending?
$115
If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?
$133.10 FV=$100 X 1.10^3 =$133.10
Suppose we invest $100 now and get back $236.74 in 10 years. What rate of interest will we achieve?
9.0% (236.74/100)^1/10-1=9%
Twelve years ago, your parents set aside $8,000 to help fund your college education. Today, that fund is valued at $23,902. What rate of interest is being earned on this account?
9.55 percent
Which of the following investments would result in a higher future value? Investment A -12% APR for 10 years Investment B-12% APR for 12 years
Investment B
Capital Budgeting is concerned with planning and managing a firm's ________.
Long-term investments
A partnership must have at least ______ owners.
Two
One example of perpetuity is a British _______.
consol
Net working capital is defined as:
current assets minus current liabilities
Net capital spending is equal to the change in net fixed assets plus:
depreciation
The articles of incorporation:
describe the purpose of the firm and set forth the number of shares of stock that can be issued.
An APR of 9% with continuous compounding gives an EAR of:
e^0.09-1=0.0942=9.42%
In almost all multiple cash flow calculations, it is implicitly assumed that cash flows occur at the _________ of each period.
end
How frequently does continuous compounding occur?
every instant
Assets are listed on a balance sheet in which order?
in order of decreasing liquidity
Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:
increase
Since ________ and ownership are separated, a corporation's life is unlimited.
management
The goal of a for-profit business is to _______ existing owners' equity.
maximize
Amortization is the process of paying off loans by regularly reducing the _________.
principal
The original loan amount is called the:
principal
Suppose present value is $100, future value is $1,000, and N is 10 years. Which formula below is used to find the (decimal) interest rate?
r=(1000/100)(^1/10)-1
With interest-only loans that are not perpetuities, the entire principal is:
repaid at some point in the future
The difference between ________ interest and compound interest is that the amount of compound interest earned gets ___________ every year.
simple; bigger
Because of ___ and ___, interest rates are often quoted in many different ways
tradition, legislation
The first cash flow at the end of Week 1 is $100, the second cash flow at the end of Month 2 is $100, and the third cash flow at the end of Year 3 is $100. This cash flow pattern is a(n) ______ type of cash flow.
uneven
An example of a capital budgeting decision is deciding:
whether or not to purchase a new machine for the product line
The daily news has projected annual net income of $272,600, of which 28 percent will be distributed as dividends. Assume the company will have net sales of $75,000 worth of common stock. What will be the cash flow to stockholders if the tax rate is 21 percent?
$1,328
Which of these questions can be answered by reviewing a firm's balance sheet?
- How much debt is used to finance the firm - What is the total amount of assets the firm owns
The use of financial leverage can:
- Increase the chance of financial distress and business failure - Greatly magnify both gains and losses - Increase the potential reward for investors
Inventory is a:
- part of working capital - current asset
Which of the following are period costs?
-Administrative expenses -General expenses -Selling costs
what are two ways to calculate a balloon payment?
-Amortize the loan over the loan life to find the ending balance -Find the present value of the payments remaining after the loan term
Which of the following can be used to encourage managers to act in the best interests of shareholders?
-Better prospects of promotion -Managerial compensation tied to performance
The cash flow identity reflects the fact that
-Cash flow from the firm's assets equals the total of cash flow to creditors and cash flow to stockholders. -A firm generates cash through its various activities -Cash is either used to produce the product or service, pay creditors or pay out to the owners of the firm.
What should you keep in mind when examining income statement
-Cash versus non-cash items -Time and costs -GAAP
Which of the following processes can be used to calculate future value for multiple cash flows?
-Compound the accumulated balance forward one year at a time -Calculate the future value of each cash flow first and then add them up
Which of the following processes can be used to calculate future value for multiple cash flows?
-Compound the accumulated balance forward one year at a time -Calculate the future value of each cash flow first then add them up
What are the two basic classifications under which most potential financial goals fall?
-Earning or increasing profits -Controlling risk
Which of these items do NOT appear on a balance sheet?
-Favorable economic conditions -Knowledge that has no patent -Good management
The controller is responsible for which of the following tasks?
-Financial accounting -Tax payments
Which of the following are important when considering a partnership?
-Fund raising limitations - Taxation of partnership income -Personal liability for firm debts
Which of the following are among the most important questions to be asked when a business is started?
-How will everyday financial activities be handled? -Where will long-term financing be obtained to pay for investments? -What long-term investments should be made?
A general partnership has which of the following characteristics?
-It is difficult to transfer ownership. -Each owner has unlimited liability for all firm debts.
In a large corporation, the financial manager is primarily responsible for:
-Long-term investment decisions -Financial aspects of operations, such as collections of accounts receivables -Financing decisions
Which of the following, according to the textbook , are possible financial goals for a company?
-Minimize costs -Maximize profits -Survival
Which of the following are ways to amortize a loan?
-Pay principal and interest every period in a fixed payment -Pay the interest each period plus some fixed amount of the principal
In the excel setup of a loan amortization problem, which of the following occurs?
-The payment is found using PTM( rate, nper, -pv, fv) -to find the principal payment each month, you subtract the interest payment from the total payment.
Which of the following should be valued using perpetuity formula?
-preferred stock -cash flow from a product whose sales are expected to remain constant formula (come back too)
which of the following is true about growing annuity?
-the cash flows grow for a finite period -The cash flows grow at a constant rate
Which of the following is true about partial amortization loan?
-the monthly payments do not fully pay off the loan by the end of the loan period. -The monthly payment is based on a longer amortization period than the maturity of the loan. -The borrower makes a large balloon payment at the end of the loan period. -The amortization period is longer than the loan period.
Which of the following are true about amortization of a fixed payment loan?
-the principal amount paid increases each period -The amount of interest paid decreases each period
Rank the ease (from easiest to hardest) of turning the following assets into cash.
1. cash equivalents 2. accounts receivable 3. inventory 4. plant and equipment
you bank quotes a 9% APR on your car loan (.75 percent interest each month) what is the EAR?
1.0075^12-1=9.38
If the interest rate is 10 percent per week, what is the EAR?
1.10^52-1=14104
Using a time money table, what is the future value interest factor for 10 percent for 2 years.
1.21
The present value interest factor for $1 at 5% compounded annually for 5 years [PVIF(5%, 5)] is:
1/(1.05)^5=0.7835
For the past year, Kayla, Inc., has sales of $44,822 interest expense of $3,230, cost of goods sold of $15,259, selling and administrative expense of $11,006, and depreciation of $5,255. If the tax rate is 38 percent, what is the operating cash flow?
14,730
How long will it take $40 to grow to $240 at an interest rate of 6.53% compound annually?
28.33 years enter -40 for PV, 240 for FV, and 6.53 for I/Y. Solve for N ******40 is negative
Assume the average vehicle selling price in the United States last year was $36,420. The average price five years earlier was $31,208. What was the annual increase in the selling price over this time period?
3.14 percent
You owe $1200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, how many months will it take to pay off your credit card?
30 months
You borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2-week period. What is your stated annual interest rate?
365/14(10%)=260.71
Use your financial calculator to find the future value of an annuity of $400 per year for 10 years at 5%.
5031.16
Which one of the following will produce the lowest present value interest factor?
8 percent interest for 10 years
What is depreciation?
A systematic expensing of an asset based on the asset's estimated life
You are paying an EAR of 16.78 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on this account?
APR = 12(1.1678^(1/12)) − 1) APR = .1561, or 15.61%
Another common term for the effective annual rate is the:
Annual percentage yield (APY)
A company's __________tax rate is its tax bill divided by its total taxable income, and its _________ tax rate is the tax rate it pays on the next dollar of income.
Average, marginal
The rule used by a corporation to regulate its existence are known as______.
Bylaws
Which term applies to the mixture of debt and equity maintained by a firm?
Capital Structure
Which one of the following terms is defined as the management of a firm's long-term investment?
Capital budgeting
The idea behind ________ is that interest is earned on interest.
Compounding
The federal government taxes which of the following?
Corporate earnings and shareholder dividends
Net working capital plus current liabilities equal______
Current assets
A bad financial decision is defined as a decision that ___________owner's equity.
Decreases
The more debt a firm has, the greatest it's:
Degree of financial leverage
The need to monitor management actions is an example of an _________ agency cost.
Direct
Which of the following companies were involved in corporate scandals that led to Sarbanes-Oxley?
Enron, Worldcom, Tyco
In financial markets, debt and _________ securities are bought and sold.
Equity
The matching principle of GAAP requires revenues be matched with_________
Expenses
present value of an annuity due is equal to the present value of an __________ annuity multiplied by (1+r)
ordinary
Payments in a partial amortization loan are based on the amortization period, not the loan period. The remaining balance is then ____.
paid off in lump sum bullet payments
The present value formula for a(n) _________ is PV+C/r, where C is the constant and regularly timed cash flow to infinity, r is the interest rate.
perpetuity
Assume that in January 2017, the average house price in a particular area was $308,700. In January 2000, the average price was $198,300.
r = (FV/PV)^(1/t) - 1 r = ($308,700/$198,300)^(1/17)- 1 r = .0264, or 2.64%
How is income defined?
revenue minus expenses
Interest paid twice a year is known as _____ compounding.
semi-annual
An effective annual rate of 7.12 percent is equal to 7 percent compounded _________.
semiannually (1+0.07/2)^2 -1 =7.12
The short run for a firm is the period of time during which ________.
-Some costs are fixed -Output can vary
On your tenth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?
$756 = $300(1.045^t) t = 21 years Age today = 10 + 21 Age today = 31 years
Which of the following are true about a partial amortization loan?
-The borrower makes a large balloon payment at the end of the load period. -The monthly payments do not fully pay off the loan by the end of the loan period -The monthly payments is based on a longer amortization period than the maturity of the loan. -The amortization period is longer than the loan period.
Which of the following is true about a growing annuity?
-The cash flows grow for finite period -The cashflow grows at a constant rate
A treasurer's responsibilities typically include:
-managing capital expenditure decision -handling cash flows -making financial plans
Suppose you want to save $10000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem?
=NPER(0.06,0,-6,000,10000)
Which of the following spreadsheet functions will calculate the $614.46 present value of an ordinary annuity of $100 per year for 10 years at 10 percent per year?
=PV(.10,10,-100, 0)
Why is a dollar received today worth more than a dollar received in the future?
A dollar received today is worth more than a dollar to be received in the future because funds received today can be invested to earn a return.
What does stockholders' equity represent?
A residual claim against the book value of the firm's assets. (The book value of the firm's assets less the book value of its liabilities.)
At 6.2 percent interest, how long does it take to double your money? At 6.2 percent interest, how long does it take to quadruple it?
FV = $2 = $1(1.062)^t t = ln(2)/ln(1.062) t = 11.52 years FV = $4 = $1(1.062)^t t = ln(4)/ln(1.062) t = 23.05 years
At 7.1 percent interest, how long does it take to double your money? At 7.1 percent interest, how long does it take to quadruple it?
FV = $2 = $1(1.071)^t t = ln(2)/ln(1.071) t = 10.11 years FV = $4 = $1(1.071)^t t = ln(4)/ln(1.071) t = 20.21 years
Today, you earn a salary of $31,000. What will be your annual salary ten years from now if you receive annual raises of 2.2 percent?
FV = $31,000(1.022^10) FV = $38,536.36
You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?
Offer A: PV = $89,500 Offer B:PV = $35,000 + $70,000/1.1152 PV = $91,305.17 You should accept the second offer because it has a larger net present value.
A sole proprietorship is a business owned by _________ person(s).
One
The following equation results in the ________ value interest factor for a single deposit : 1/(1+r)^t
Present
APR
The interest rate per period multiplied by the number of periods in a year.
EAR
The interest rate stated as though it were compounded once per year.
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.
Which of the positions generally report to the chief financial officer?
Treasurer and Controller
According to GAAP, when is income reported?
When it is earned or accrued
True or false: the correct future value interest factor in a time value of money table for $1 in 10 years at 10 percent per year is 2.5937
True
What is the present value of an ordinary annuity that pays $100 per year for 20 years if the interest rate is 10 percent per year?
$100{[1-(1/(1.10)^20)]/0.10}=$851.36
What is the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10 percent per year?
$100{[1-(1/(1.10)^3)]/0.10}=$248.69
You just invested $49,000 that you received as an insurance settlement. How much more will this account be worth in 40 years if you earn an average return of 7.6 percent rather than just 7.1 percent?
$155,986.70
Griffin's Goat Farm, Inc., has sales of $574,000, costs of $285,000, depreciation expense of $45,000, interest expense of $16,000, and a tax rate of 22 percent. What is the net income for this firm?
$177,840
If you invest $100 at 10 percent simple interest, how much will you have at the end of 10 years?
$200
What is the present value of an annuity that makes payments of $100 per year for ten years if the first payment is made immediately and the discount rate is 10 percent per year?
$675.90
If you plan to put a $10,000 down payment on a house in five years and you can earn 6% per year, how much will you need to deposit today?
$7,472.58
Rousey, Inc., had a cash flow to creditors of $16,560 and a cash flow to stockholders of $6,992 over the past year. The company also had net fixed assets of $49,480 at the beginning of the year and $56,860 at the end of the year. Additionally, the company had a depreciation expense of $12,036 and an operating cash flow of $50,533. What was the change in net working capital during the year?
$7,565
You have just received notification that you have won the $1.25 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday, 79 years from now. The appropriate discount rate is 6.4 percent. What is the present value of your winnings?
$9,300.82
Which of the following is equal to an effective annual rate of 12.36 percent?
(1+0.12/2)^2-1=12.36%
the formula for the present value of annuity is due:
(1+r)x (PV of an ordinary annuity)
A credit card charges 18 percent per year (APR)(1.5 percent per month) what is the EAR?
(1.015)^12-1=19.56
You agree to pay back 1,100 in 4 weeks for a 1,000 payday loan. Your annual percentage rate (APR) to two decimal places is ___%
(1100/1000-1) x 52/4=130.00
Suppose you paid off a $1200 loan by paying $400 in principal year plus 10 percent annual interest over a 3-year period. What is the total payment in year 3?
(1200-(400 x2))=400. 400 x .1=40. 400+40=440
Suppose you paid off a $1200 loan by paying $400 in principal year plus 10 percent annual interest. How much is the interest payment in the second year of the loan?
(1200-400)=800 800 x .1=80
Which of the following show why a corporation is the most important form of business?
- Corporations can enter into contracts. - Corporations can sue and be sued. - A corporation is a separate legal entity with the ability to acquire and exchange property.
Solve for the unknown number of years in each of the following PV: 660 IR: 8 FV: 1,604 PV: 910 IR: 12 FV: 2,671 PV: 19,400 IR: 18 FV: 418,534 PV: 22,500 IR: 14 FV: 425,658
FV = $1,604 = $660(1.08)^t t = ln($1,604/$660)/ln(1.08) t = 11.54 years FV = $2,671 = $910(1.12)^t t = ln($2,671/$910)/ln(1.12) t = 9.50 years FV = $418,534 = $19,400(1.18)t t = ln($418,534/$19,400)/ln(1.18) t = 18.56 years FV = $425,658 = $22,500(1.14)t t = ln($425,658/$22,500)/ln(1.14) t = 22.44 years
For each of the following, compute the future value: PV: 2,350 Years: 12 IR: 12 PV: 8,952 Years: 6 IR: 10 PV: 78,355 Years: 13 IR: 11 PV: 185,796 Years: 7 IR:7
FV = $2,350(1.12)^12 = $9,155.54 FV = $8,952(1.10)6 = $15,859.01 FV = $78,355(1.11)13 = $304,274.42 FV = $185,796(1.07)7 = $298,347.78
For each of the following, compute the future value: PV: 2,450 Years: 10 IR: 14 PV: 9,152 Years: 8 IR: 8 PV: 80,355 Years: 15 IR: 13 PV: 187,796 Years: 6 IR: 5
FV = $2,450(1.14)^10 = $9,082.69 FV = $9,152(1.08)^8 = $16,939.71 FV = $80,355(1.13)^15 = $502,561.90 FV = $187,796(1.05)^6 = $251,664.60
Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent?
FV = $7,500(1.08^4) + $9,000(1.08^3) + $12,500(1.08^2) FV = $36,121.08
Which of the following is the correct mathematical formula for calculation of the future value of $100 invested today for 3 years at 10% per year?
FV=100 x (1.10)^3= 133.10
What is the future value of $100 compounded for 50 years at 10 percent annual interest?
FV=100 x 1.10^50= 11,739.09
True or false: The multi-period formula for future value using compounding is FV=(1+r)^t
False
true or false: Small in the interest rate affect the future value of small-term investments more than they would affect the value of long-term investments.
False
Find the EAR in each of the following cases (Use 365 days a year. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.):
For discrete compounding, to find the EAR, we use the equation: EAR = [1 + (.098/4)]^4 − 1 = .1017, or 10.17% EAR = [1 + (.188/12)]^12 − 1 = .2051, or 20.51% EAR = [1 + (.148/365)]^365 − 1 = .1595, or 15.95% To find the EAR with continuous compounding, we use the equation: EAR = eq − 1 EAR = e^(.118) − 1 EAR = .1252, or 12.52%
What does GAAP stand for?
Generally Accepted Accounting Principles
If you put up $27,000 today in exchange for a 6.50 percent, 13-year annuity, what will the annual cash flow be?
Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the PVA equation: PVA = C({1 - [1/(1 + r)^t]} / r ) PVA = $27,000 = $C{[1 - (1/1.0650)^13 ] / .0650} We can now solve this equation for the annuity payment. Doing so, we get: C = $27,000 / 8.59974 =C = $3,139.63
If you put up $44,000 today in exchange for a 6.75 percent, 14-year annuity, what will the annual cash flow be?
Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the PVA equation: PVA = C({1 − [1/(1 + r)^t]}/r)PVA = $44,000 = $C{[1 − (1/1.0675^14)]/.0675} We can now solve this equation for the annuity payment. Doing so, we get: C = $44,000/8.878105C = $4,956.01
If you put up $53,000 today in exchange for a 6.75 percent, 14-year annuity, what will the annual cash flow be?
Here we have the PVA, the length of the annuity, and the interest rate. We want to calculate the annuity payment. Using the PVA equation: PVA = C({1 − [1/(1 + r)^t]}/r)PVA = $53,000 = $C{[1 − (1/1.0675^14)]/.0675} We can now solve this equation for the annuity payment. Doing so, we get: C = $53,000/8.878105C = $5,969.74
Depreciation for a tax-paying firm:
Increases expenses and lowers taxes.
Which one of the following is an expense for accounting purposes but is not an operating cash flow for financial purposes?
Interest expense
A corporation is a distinct _________entity and as such can have a name and take advantage of the legal powers of natural persons.
Legal
Which one of the following best states the primary goal of financial management?
Maximize the current value per share
JJ Enterprises has inventory of $11,600, fixed assets of $22,400, total liabilities of $12,900, cash of $1,900, accounts receivable of $8,700, and long-term debt of $6,500. What is the net working capital?
NWC = $1,900 + 8,700 + 11,600 − ($12,900 − 6,500) NWC = $15,800
Life of a corporation is ________
Not limited as the ownership can be readily transferred
Which of the following are classified as liabilities on a firm's balance sheet?
Notes payable and accounts payable
You are considering a project with cash flows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 7.9 percent?
PV = $16,500/1.079 + $25,700/1.079^2 + $18,000/1.079^3 PV = $51,695.15
Your grandparents would like to establish a trust fund that will pay you and your heirs $160,000 per year forever with the first payment 10 years from today. If the trust fund earns an annual return of 3.1 percent, how much must your grandparents deposit today?
PV = $160,000/.031 = $5,161,290.32PV = $5,161,290.32/(1.031)^9 = $3,921,302.09
Your grandparents would like to establish a trust fund that will pay you and your heirs $175,000 per year forever with the first payment 13 years from today. If the trust fund earns an annual return of 3.4 percent, how much must your grandparents deposit today?
PV = $175,000/.034 = $5,147,058.82 PV = $5,147,058.82/(1.034)^12 = $3,445,979.32
You have just leased a car that has monthly payments of $325 for the next 5 years with the first payment due today. If the APR is 5.88 percent compounded monthly, what is the value of the payments today?
PV = $325(1.0049)[(1 −1/1.0049^60) / .0049] = $16,942.04
What is the present value of $45,000 to be received 50 years from today if the discount rate is 8 percent?
PV = $45,000/1.08^50 PV = $959.46
you have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 35 years and the payments will increase by 3.7 percent per year. If the appropriate discount rate is 7.7 percent, what is the present value of your winnings?
PV = C{[1/(r - g)] - [1/(r - g)] × [(1 + g)/(1 + r)]^t} PV = $1,000,000{[1/(.077 - .037)] - [1/(.077 - .037)] × [(1 + .037)/(1 + .077)]^35} PV = $18,352,675.70
You have decided to fund an account that will pay your descendants the inflation-adjusted equivalent of $100 per year forever. You assume inflation will equal 3% per year, and you expect the amount to earn 7% per year. How much do you need to put in the account today to ensure you gift will continue forever.
PV= C/(r-g)=100/(0.07-0.03)=$2500 today
If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you need to find a _______ value.
Present
If you want to know how much you need to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find an _________ value
Present
Suppose you need $5000 in one year, $4300 in two years, and $500 in three years. Match each present value amount to the corresponding cash flows assuming a discount rate of 17%.
Present value of the year 1 cash flow: $5000/1.17=4273.50 Present value of the year 2 cash flow: $4300/(1.17)^2= 3141.21 Present value of the year 3 cash flow: 5000/(1.17)^3= 3121.85
Which one of the following is a primary market transition?
Sale of a new share of stock to an individual investor
Public offering of debt and equity must be registered with the:
Securities and exchange commission
Which one of the following parties would be the last party to receive payment if a form were to close? Assume all parties have legitimate claim on firm's assets.
Shareholders
_______ are frequently used to encourage key managers to maximize the value of the firm's stock.
Stock Options
The last (residual) claimant to be paid by a firm are the _________.
Stockholders
Which of the following are considered stakeholders in a company?
Suppliers, employees, and government
You are planning to make monthly deposits of $190 into a retirement account that pays 9 percent interest compounded monthly. If your first deposit will be made one month from now, how large will your retirement account be in 15 years?
This problem requires us to find the FVA. The equation to find the FVA is: FVA = C{[(1 + r)^t - 1]/r} FVA = $190[{[1 + (0.09/12) ]^180 - 1}/(0.09/12)] FVA = $71,897.1
Imprudential, Inc., has an unfunded pension liability of $566 million that must be paid in 25 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 5.9 percent, what is the present value of this liability?
To find the PV of a lump sum, we use: PV = FV/(1 + r)^t PV = $566,000,000/(1.059)25PV = $135,026,008.13
Your company will generate $65,000 in annual revenue each year for the next seven years from a new information database. If the appropriate interest rate is 8.25 percent, what is the present value?
To find the PVA, we use the equation: PVA = C({1 − [1/(1 + r)^t]}/r) PVA = $65,000{[1 − (1/1.0825^7)]/.0825} PVA = $335,539.75
Your company will generate $76,000 in annual revenue each year for the next seven years from a new information database. If the appropriate interest rate is 7.75 percent, what is the present value?
To find the PVA, we use the equation: PVA = C({1 − [1/(1 + r)^t]}/r) PVA = $76,000{[1 − (1/1.0775^7)]/.0775} PVA = $399,089.97
True or false: Given the same rate of interest, more money can be earned with interest than with simple interest
True
A sole proprietor has ________ personal liability for all business debts and obligations.
Unlimited
You have just won the lottery and will receive $1,000,000 in one year. You will receive payments for 25 years and the payments will increase by 2 percent per year. If the appropriate discount rate is 6 percent, what is the present value of your winnings?
We can use the present value of a growing annuity equation to find the value of your winnings today. Doing so, we find: PV = C{[1/(r - g)] - [1/(r - g)] × [(1 + g)/(1 + r)]^t} PV = $1,000,000{[1/(.060 - .020)] - [1/(.060 - .020)] × [(1 + .020)/(1 + .060)]^25} PV = $15,443,526.25
You want to buy a new sports car from Muscle Motors for $57,500. The contract is in the form of a 60-month annuity due at an APR of 5.9 percent. What will your monthly payment be?
We need to use the PVA due equation, that is: PVA due = (1 + r)PVA Using this equation: PVA due = $57,500 = [1 + (.059/12)] × C[{1 - 1/[1 + (.059/12)]^60}/(.059/12)]$57,218.67 = C{1 - [1/(1 + .059/12)60]}/(.059/12) C = $1,103.54 Notice, to find the payment for the PVA due we simply compound the payment for an ordinary annuity forward one period.
You expect to receive bonuses with your job at the end of each year for the next five years. Assume you can invest all of your bonuses at 4.5% and the bonuses are shown below, match each amount to its future value at the end of five years, then match the appropriate box Year 1: $500 Year 2:$1200 Year 3: $1000 Year 4: $2,400 Year 5: $2,200
Year 1: $596.26 Year 2: $1,369.40 Year 3: $1,092.03 Year 4: $2,508.00 Year 5: $ 2,200.00 Total after 5 years: $7,765.68
You are considering an investment that will earn the following cash flows over the next three years. You expect to earn ^% return on the investment. Match each cash flow with its present value, then match the total amount you should pay for the investment today to the appropriate box. Year 1: $5000 Year 2: $6000 year 3: 5500
Year 1: Discount for 1 period: 5000/1.06=$4716.98 Year 2: Discount for 2 periods: 6000/(1.06)^2=$5339.98 Year 3: Discount for 3 periods: 5500/(1.06)^3=$4617.91 You should not pay more that the PV of the cash flows which the sum of discounted cashflows. ADD THEM ALL
the present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is _________.
[1-(1/1.08^20)]/.08=9.8181
The annuity present value factor for a 30-year annuity with an interest rate of 10 percent per year is________.
[1-(1/1.10^30)]/.10]=9.4269
Which of the following payment methods amortize loans?
_fixed payments that result in a zero loan balance -Interest plus fixed amount
A long-term liability represents a ___________
a debt that is not due in the coming year
A customer has yet to pay the bill for products purchased on credit. The seller records this debt in which balance sheet account?
accounts receivable
If you hire a real estate company to sell your house, you are most apt to encounter which one of the following?
agency problem
Which compounding interval will result in the lowest future value assuming everything else is held constant?
annual
The interest rate that is most commonly quoted by a lender is referred to as the:
annual percentage rate.
Liquidity refers to the ease of changing _________.
assets to cash
An annuity due is a series of payments that are made ____.
at the beginning of each period
Financial managers should strive to maximize the current value per share of the existing stock to:
best represent the interests of the current shareholders.
Payday loans allow you to ________.
borrow now and repay later
The decision to issue additional shares of stock is an example of:
capital structure decision
The statement of cash flow explains changes in _______.
cash equivalents
Sally and Alicia are equal general partners in a business. They are content with their current management and tax situation but are uncomfortable with their unlimited liability. Which form of business entity should they consider as a replacement to their current arrangement assuming they wish to remain the only two owners of the business?
limited liability company
Since ownership in a corporation can be dispersed over a huge number of stockholders, it can be argued that ______ effectively controls the firm.
management
What is the main goal of financial management?
maximize the current value per share of the existing stock
The accounting equation shows that stockholders equity equals assets ___________ liabilities.
minus
The concept of time value of money is based on the principle that a dollar today is worth ______________ a dollar promised at some time in the future?
more then
The basic present value equation underlies many of the:
most important ideas in corporate finance
