FINANCE EXAM MULTIPLE CHOICE

3. Your local pawn shop lends money at an annual rate of 24 percent compounded weekly. What is the effective annual rate being charged on these loans? A. 25.16% B. 27.05% C. 26.49% D. 27.56% E. 28.64%

B. 27.05%

2. On this date last year, you borrowed $3,900. You have to repay the loan with a lump sum payment of $6,000 six years from now. What is the interest rate? A. 6.01% B. 6.35% C. 6.78% D. 5.47% E. 5.38%

B. 6.35%

1. This morning, Clayton deposited $2,500 into an account that pays 5 percent interest, compounded annually. Also this morning, Jayda deposited $2,500 at 5 percent interest, compounded annually. Clayton will withdraw his interest earnings and spend it as soon as possible. Jayda will reinvest her interest earnings into her account. Given this information, which one of the following statements is true? A. Jayda will earn more interest in Year 1 than Clayton will earn. B. Clayton will earn more interest in Year 3 than Jayda will earn. C. Jayda will earn more interest in Year 2 than Clayton will earn. D. After five years, Clayton and Jayda will both have earned the same amount of interest. E. Clayton will earn compound interest.

C. Jayda will earn more interest in Year 2 than Clayton will earn.

1. You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.) A. Both options are of equal value since they both provide $12,000 of income. B. Option A has the higher future value at the end of Year 3. C. Option B has a higher present value at Time 0. D. Option B is a perpetuity. E. Option A is an annuity.

C. Option B has a higher present value at Time 0.

2. 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: A. will earn the same amount of interest each year for four years. B. will earn simple interest on his savings every year for four years. C. could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest. D. has an account currently valued at $5,000. E. could earn more interest on this account if the interest earnings were withdrawn annually.

C. could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

3. Claire's coin collection contains fifty 1948 silver dollars. Her grandparents purchased them at their face value in 1948. These coins have appreciated by 7.6 percent annually. How much is the collection expected to be worth in 2025? A. $13,611.18 B. $18,987.56 C. $14,122.01 D. $11,218.27 E. $14,077.16

E. $14,077.16

4. Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? A. Net present value B. Discounted payback C. Internal rate of return D. Profitability index E. Payback

a

11. When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: A. accepted because the payback period is less than the required time period. B. accepted because the profitability index is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative. E. rejected because the net present value is positive.

b

2. The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? A. Underlying value principle B. Stand-alone principle C. Equivalent cost principle D. Salvage principle E. Fundamental principle

b

3. Six years ago, Hendershot Stables paid $84,000 in cash for equipment. Last year, the company spent $7,600 on equipment upgrades. The company no longer uses this equipment and has received a cash offer of $39,600 from a buyer. The current book value of the equipment, including all updates, is $32,200. If the company decides to keep the equipment and use it for a new project, what value, if any, should the company assign to the equipment? A. $0 B. $39,600 C. $39,800 D. $84,000 E. $91,600

b

3. The length of time a firm must wait to recoup the money it has invested in a project is called the: A. internal return period. B. payback period. C. profitability period. D. discounted cash period. E. valuation period.

b

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

b

7. Which one of the following is an example of a sunk cost? A. $2,000 in lost sales because an item was out of stock B. $2,000 paid last year to rent equipment C. $2,000 project that must be forfeited if another project is accepted D. $2,000 reduction in Product A revenue if a firm commences selling Product B E. $2,000 increase in comic book sales if a store ceases selling puzzles

b

1. Which one of the following types of costs was incurred in the past and cannot be recouped? A. Incremental B. Side C. Sunk D. Opportunity E. Erosion

c

5. In actual practice, managers most frequently use which two types of investment criteria? A. Net present value and payback B. Average accounting return and internal rate of return C. Internal rate of return and net present value D. Internal rate of return and payback E. Net present value and profitability index

c

5. Which one of the following best illustrates erosion as it relates to a snack stand located on the beach? A. Providing free ice and condiments for customers B. Repairing the canopy over the snack stand because of wind damage C. Selling fewer cookies because ice cream was added to the menu D. Offering french fries but not onion rings E. Losing sales due to bad weather

c

6. Which one of the following statements related to the internal rate of return (IRR) is correct? A. The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. B. A project with an IRR equal to the required return would reduce the value of a firm if accepted. C. The IRR is equal to the required return when the net present value is equal to zero. D. Financing type projects should be accepted if the IRR exceeds the required return. E. The average accounting return is a better method of analysis than the IRR from a financial point of view.

c

9. Mutually exclusive projects are best defined as competing projects that: A. would need to commence on the same day. B. have the same initial start-up costs. C. both require the total use of the same limited resource. D. both have negative cash outflows at time zero. E. have the same life span.

c

2. Which one of the following will decrease the net present value of a project? A. Increasing the value of each of the project's discounted cash inflows B. Moving each cash inflow forward one time period, such as from Year 3 to Year 2 C. Decreasing the required discount rate D. Increasing the project's initial cost at Time 0 E. Increasing the amount of the final cash inflow

d

2. 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? A. You should accept the $89,500 today because it has the higher net present value. B. You should accept the $89,500 today because it has the lower future value. C. You should accept the first offer as it is a lump sum payment. D. You should accept the second offer because it has the larger net present value. E. It does not matter which offer you accept as they are equally valuable.

d

3. The net present value of a project will increase if: A. the required rate of return increases. B. the initial capital requirement increases. C. some of the cash inflows are deferred until a later year. D. the aftertax salvage value of the fixed assets increases. E. the final cash inflow decreases.

d

7. The internal rate of return is defined as the: A. maximum rate of return a firm expects to earn on a project. B. rate of return a project will generate if the project is financed solely with internal funds. C. discount rate that equates the net cash inflows of a project to zero. D. discount rate which causes the net present value of a project to equal zero. E. discount rate that causes the profitability index for a project to equal zero.

d

8. Which one of these statements related to discounted payback is correct? A. Payback is a better method of analysis than discounted payback. B. Discounted payback is used more frequently in business than payback. C. Discounted payback does not require a cutoff point. D. Discounted payback is biased towards short-term projects. E. The discounted payback period increases as the discount rate decreases.

d

1. A project has a net present value of zero. Given this information: A. the project has a zero percent rate of return. B. the project requires no initial cash investment. C. the project has no cash flows. D. the summation of all of the project's cash flows is zero. E. the project's cash inflows equal its cash outflows in current dollar terms.

e

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

e

10. Which one of the following methods of analysis provides the best information on the benefits to be received from a project per dollar invested? A. Net present value B. Payback C. Internal rate of return D. Average accounting return E. Profitability index

e

12. The internal rate of return: A. may produce multiple rates of return when cash flows are conventional. B. is best used when comparing mutually exclusive projects. C. is rarely used in the business world today. D. is principally used to evaluate small dollar projects. E. is easy to understand.

e

4. Cerda Diagnostics spent $5,000 last week repairing equipment. This week the company is trying to decide whether the equipment could be better utilized by assigning it to a proposed project. When analyzing the proposed project, the $5,000 should be treated as which type of cost? A. Opportunity B. Fixed C. Incremental D. Erosion E. Sunk

e

4. The internal rate of return: A. may produce multiple rates of return when cash flows are conventional. B. is best used when comparing mutually exclusive projects. C. is rarely used in the business world today. D. is principally used to evaluate small dollar projects. E. is easy to understand.

e

8. A new sports coupe costs $41,750 and the finance office has quoted you an APR of 7.7 compounded monthly for 36 months. What is the EAR? A. 7.81% B. 8.02% C. 7.94% D. 8.13% E. 7.98%

e

An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and −$11,200 for Years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not? Yes; The IRR exceeds the required return. Yes; The IRR is less than the required return. No; The IRR exceeds the required return. No; The IRR is less than the required return. You should not apply the IRR rule in this case.

e