Finance Mid Term

Waldo expects to save the following amounts: Year 1 = $50,000; Year 2 = $28,000; Year 3 = $12,000. If he can earn an average annual return of 10.5 percent, how much will he have saved in this account exactly 25 years from the time of the first deposit? $1,172,373 $935,334 $806,311 $947,509 $1,033,545

$1,033,545

Sue plans to save $4,500, $0, and $5,500 at the end of Years 1 to 3, respectively. What will her investment account be worth at the end of the Year 3 if she earns an annual rate of 4.15 percent? $10,583.82 $10,381.25 $10,609.50 $11,526.50 $10,812.07

$10,381.25

Friendly Companies has an unfunded pension liability of $327 million that must be paid in 16 years. What is the present value of this liability at a discount rate of 6.24 percent? $129,803,162.22 $111,438,907.11 $124,147,723.50 $134,519,484.14 $121,511,366.67

$124,147,723.50

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? $59,818.92 $98,509.16 $140,423.33 $155,986.70 $138,342.91

$155,986.70

You would like to give your child $100,000 to start a career 25 years from now. How much money must you set aside today for this purpose if you can earn 7.5 percent on your investments? $15,388.19 $16,397.91 $16,817.67 $15,911.13 $17,488.37

$16,397.91

When you retire 45 years from now, you want to have $1.25 million saved. You think you can earn an average of 7.6 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum five years from today to fund this goal. How much more will you have to deposit if you wait for five years before making the deposit? $17,414.14 $21,319.47 $19,891.11 $20,468.85 $13,406.78

$20,468.85

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? $38,536.36 $37,414.06 $38,235.24 $37,122.08 $36,736.00

$38,536.36

What is the future value of $8,500 a year for 40 years at 10.8 percent interest, compounded annually? $3,278,406.16 $4,681,062.12 $2,711,414.14 $3,989,476.67 $4,021,223.33

$4,681,062.12

What is the EAR if a bank charges you an APR of 7.65 percent, compounded quarterly? 7.91 percent 8.38 percent 8.02 percent 7.87 percent 8.11 percent

7.87 percent

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? 7.81 percent 8.02 percent 7.94 percent 8.13 percent 7.98 percent

7.98 percent

Ten years ago, Jackson Supply set aside $125,000 in case of a financial emergency. Today, that account has increased in value to $278,592. What rate of interest is the firm earning on this money? 8.80 percent 8.34 percent 7.75 percent 8.01 percent 7.87 percent

8.34 percent

What is the APR on a loan with a stated rate of 2.35 percent per quarter? 9.40 percent 8.69 percent 8.38 percent 8.90 percent 9.74 percent

9.40 percent

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? 8.99 percent 9.42 percent 9.67 percent 9.55 percent 9.06 percent

9.55 percent

Relationships determined from a company's financial information and used for comparison purposes are known as: A. financial ratios. B. identities. C. dimensional analysis. D. scenario analysis. E. solvency analysis

A. Financial Ratios

Which one of the following questions is least likely to be addressed by financial managers? A. How should a product be marketed? B. Should customers be given 30 or 45 days to pay for their credit purchases? C. Should the firm borrow more money? D. Should the firm acquire new equipment? E. How much cash should the firm keep on hand?

A. How should a product be marketed?

Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time? A. Income statement B. Balance sheet C. Statement of cash flows D. Tax reconciliation statement E. Market value report

A. Income statement

You are considering two savings options. Both options offer a rate of return of 7.6 percent. The first option is to save $2,500, $2,500, and $3,000 at the end of each year for the next three years, respectively. The other option is to save one lump sum amount today. You want to have the same balance in your savings account at the end of the three years, regardless of the savings method you select. If you select the lump sum method, how much do you need to save today? $7,414.59 $6,289.74 $6,660.00 $6,890.89 $6,784.20

$6,890.89

Assume a 1-year loan for $6,000 has an interest rate of 4.5 percent, compounded annually. How much additional interest would be charged if the rate had compounded continuously rather than annually? $5.84 $6.17 $6.10 $5.93 $6.28

$6.17

A credit card company quotes you an APR of 18.9 percent. What is the actual rate of interest you are paying if interest is computed monthly? 18.90 percent 19.21 percent 20.63 percent 19.57 percent 20.72 percent

20.63 percent

What is the EAR of 18.9 percent compounded continuously? 19.06 percent 20.80 percent 19.43 percent 19.89 percent 21.38 percent

20.80 percent

At 5 percent interest, how long would it take to triple your money? 26.55 years 25.64 years 24.87 years 22.52 years 20.01 years

22.52 years

Your local pawn shop loans money at an annual rate of 24 percent and compounds interest weekly. What is the actual rate being charged on these loans? 25.16 percent 27.05 percent 26.49 percent 27.56 percent 28.64 percent

27.05 percent

Travis invested $8,000 in an account that pays 4 percent simple interest. How much more could he have earned over a 7-year period if the interest had compounded annually? $291.41 $287.45 $302.16 $266.67 $258.09

287.45

You will receive $4,000 at graduation 3 years from now. You plan on investing this money at 5 percent annual interest until you have accumulated $50,000. How many years from today will it be when this occurs? 51.42 years 49.08 years 54.77 years 48.42 years 51.77 years

54.77 years

Mr. Rich arranged for a mortgage loan for 65 percent of the $2.5 million purchase price of a home. The monthly payment will be $10,400 and the mortgage term is 30 years. What is the EAR on this loan? 6.82 percent 6.25 percent 6.46 percent 6.91 percent 6.62 percent

6.82 percent

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule? A. Project A only B. Project B only C. Both A and B D. Neither A nor B E. Either, but not both projects

A. Project A only

A firm's short-term assets and its short-term liabilities are referred to as the firm's: A. Working capital. B. Debt. C. Investment capital. D. Net capital. E. Capital structure.

A. Working Capital

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

A. payback period.

A firm has $680 in inventory, $2,140 in fixed assets, $210 in accounts receivables, $250 in accounts payable, and $80 in cash. What is the amount of the net working capital? A. $970 B. $720 C. $640 D. $3,110 E. $2,860

B. $720

The book value of a firm is: A. equivalent to the firm's market value provided that the firm has some fixed assets. B. based on historical cost. C. generally greater than the market value when fixed assets are included. D. more of a financial than an accounting valuation. E. adjusted to the market value whenever the market value exceeds the stated book value.

B. Based on historical costs

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows? A. Constant dividend growth model B. Discounted cash flow valuation C. Average accounting return D. Expected earnings model E. Internal rate of return

B. Discounted cash flow valuation

One disadvantage of the corporate form of business ownership is the: A. Limited liability of its shareholders for the firm's debts. B. Double taxation of distributed profits. C. Firm's greater ability to raise capital than other forms of ownership. D. Firm's potential for an unlimited life. E. Firm's ability to issue additional shares of stock.

B. Double taxation of distributed profits.

Which one of the following best states the primary goal of financial management? A. Maximize current dividends per share B. Maximize the current value per share C. Increase cash flow and avoid financial distress D. Minimize operational costs while maximizing firm efficiency E. Maintain steady growth while increasing current profits

B. Maximize the current value per share

An example of a capital budgeting decision is deciding: A. How many shares of stock to issue. B. Whether or not to purchase a new machine for the production line. C. How to refinance a debt issue that is maturing. D. How much inventory to keep on hand. E. How much money should be kept in the checking account.

B. Whether or not to purchase a new machine for the production line.

A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value? −$11,748.69 −$10,933.52 −$11,208.62 −$10,457.09 −$12,006.13

−$11,748.69

The Dry Dock is considering a project with an initial cost of $107,400 and cash inflows for Years 1 to 3 of $37,200, $54,600, and $46,900, respectively. What is the IRR? A. 12.62 percent B. 13.41 percent C. 14.48 percent D. 13.22 percent E. 14.56 percent

13.41 percent

Your credit card company charges you 1.15 percent interest per month. What is the APR? 18.92 percent 13.80 percent 15.95 percent 17.25 percent 14.71 percent

13.80 percent

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? 15.61 percent 13.97 percent 14.98 percent 15.75 percent 16.35 percent

15.61 percent

You just won the grand prize in a national writing contest! As your prize, you will receive $500 a month for 50 months. If you can earn 7 percent on your money, what is this prize worth to you today? $21,629.93 $18,411.06 $21,338.40 $20,333.33 $19,450.25

$21,629.93

You will receive $15,000 in two years when you graduate. You plan to invest this at an annual interest rate of 6.5 percent. How much money will you have 8 years from now? $24,824.94 $19,381.16 $21,887.13 $23,209.19 $20,414.73

$21,887.13

A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680, $19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of 12 percent? $186.95 -$108.19 $219.41 $229.09 $311.16

$219.41

You want to start a business that you believe can produce cash flows of $5,600, $48,200, and $125,000 at the end of each of the next three years, respectively. At the end of three years you think you can sell the business for $250,000. At a discount rate of 16 percent, what is this business worth today? $258,803.02 $314,011.33 $280,894.67 $325,837.81 $297,077.17

$280,894.67

You are the recipient of a gift that will pay you $25,000 one year from now and every year thereafter for the following 24 years. The payments will increase in value by 2.5 percent each year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift? $416,667 $316,172 $409,613 $311,406 $386,101

$316,172

It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period? A. 1.82 years B. 1.67 years C. 2.82 years D. 2.67 years E. 1.79 years

2.67 years

You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should: A. accept both projects. B. accept Project A and reject Project B. C. accept Project B and reject Project A. D. reject both projects. E. accept either one of the projects, but not both.

B. accept Project A and reject Project B.

If a project has a net present value equal to zero, then: A. the total of the cash inflows must equal the initial cost of the project. B. the project earns a return exactly equal to the discount rate. C. a decrease in the project's initial cost will cause the project to have a negative NPV. D. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. E. the project's PI must also be equal to zero.

B. the project earns a return exactly equal to the discount rate.

Which one of the following is a current liability? A. Note payable to a supplier in 13 months B. Amount due from a customer in two weeks C. Account payable to a supplier that is due next week D. Loan payable to the bank in 18 months E. Amount due from a customer that is past due

C. Account payable to a supplier that is due next week

According to the Rule of 72, you can do which one of the following? A. Approximately double your money in five years at 7.24 percent interest B. Double your money in 7.2 years at 8 percent interest C. Approximately double your money in 11 years at 6.55 percent interest D. Triple your money in 7.2 years at 7.2 percent interest E. Approximately triple your money in 7.2 years at 10 percent interest

C. Approximately double your money in 11 years at 6.55 percent interest

Which one of the following ratios is a measure of a firm's liquidity? A. Cash coverage ratio B. Profit margin C. Debt-equity ratio D. Quick ratio E. NWC turnover

C. Quick ratio

Which one of the following statements concerning corporate income taxes is correct for 2021? A. All corporations are exempt from federal taxation. B. Corporations pay no tax on their first $50,000 of income. C. The federal income tax on corporations is a flat-rate tax with the same rate applying to all levels of taxable income. D. The marginal tax rate will always be lower than the average tax rate. E. The first 25 percent of corporate income is exempt from taxation.

C. The federal income tax on corporations is a flat-rate tax with the same rate applying to all levels of taxable income.

A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not? A. No; The IRR exceeds the required return. B. No; The IRR is less than the required return. C. Yes; The IRR exceeds the required return. D. Yes; The IRR equals the required return. E. No; The IRR equals the required return.

C. Yes; The IRR exceeds the required return.

A project's average net income divided by its average book value is referred to as the project's average: A. net present value. B. internal rate of return. C. accounting return. D. profitability index. E. payback period.

C. accounting return.

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: A. independent. B. interdependent. C. mutually exclusive. D. economically scaled. E. operationally distinct.

C. mutually exclusive.

Shareholder A sold 500 shares of ABC stock on the New York Stock Exchange. This transaction: A. took place in the primary market. B. occurred in a dealer market. C. was facilitated in the secondary market. D. involved a proxy. E. was a private placement.

C. was facilitated in the secondary market.

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? Reduction in the cash outflow at Time 0 Cash inflow prorated over the life of the project Cash inflow for the year following the final year of the project Cash inflow in the final year of the project Excluded from the net present value calculation

Cash inflow in the final year of the project

Which one of the following represents the most liquid asset? A. $100 account receivable that is discounted and collected for $96 today B. $100 of inventory that is sold today on credit for $103 C. $100 of inventory that is discounted and sold for $97 cash today D. $100 of inventory that is sold today for $100 cash E. $100 of accounts receivable that will be collected in full next week

D. $100 of inventory that is sold today for $100 cash

Agency problems are most associated with: A. sole proprietorships. B. general partnerships. C. limited partnerships. D. corporations. E. limited liability companies.

D. Corporations

Cash flow from assets is also known as the firm's: A. capital structure. B. equity structure. C. hidden cash flow. D. Free cash flow. E. historical cash flow.

D. Free cash flow

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. discount rate which causes the net present value of a project to equal zero.

Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as ________ ratios. A. asset management B. long-term solvency C. short-term solvency D. profitability E. turnover

D. profitability

A project has cash flows of −$152,000, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of ________ percent, you should ________ the project. A. 14.67; accept B. 18.46; reject C. 14.67; reject D. 17.91; reject E. 13.96; accept

E. 13.96; accept

The decision to issue additional shares of stock is an example of: A. Working capital management. B. A net working capital decision. C. Capital budgeting. D. A controller's duties. E. A capital structure decision.

E. A capital structure decision.

Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent? A. Accept A at both discount rates B. Accept A at 11.7 percent and neither at 13.5 percent C. Accept B at both discount rates D. Accept both at 11.7 percent and neither at 13.5 percent E. Answer Accept B at 11.7 percent and neither at 13.5 percent

E. Answer Accept B at 11.7 percent and neither at 13.5 percent

Which one of the following terms is defined as the mixture of a firm's debt and equity financing? A. Working capital management B. Cash management C. Cost analysis D. Capital budgeting E. Capital structure

E. Correct! Capital structure

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. Net present value and profitability index D. Internal rate of return and payback E. Internal rate of return and net present value

E. Internal rate of return and net present value

As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6 percent on your money, which option should you take and why? A. You should accept the payments because they are worth $202,414 to you today. B. You should accept the payments because they are worth $201,846 to you today. C. You should accept the payments because they are worth $201,210 to you today. D. You should accept the $200,000 because the payments are only worth $189,311 to you today. E. You should accept the $200,000 because the payments are only worth $195,413 to you today.

E. You should accept the $200,000 because the payments are only worth $195,413 to you today.

Net working capital is defined as: A. total liabilities minus shareholders' equity. B. current liabilities minus shareholders' equity. C. fixed assets minus long-term liabilities. D. total assets minus total liabilities. E. current assets minus current liabilities.

E. current assets minus current liabilities.

Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why? A. Project A, because it has the higher required rate of return. B. Project A, because it has the larger NPV. C. Project B, because it has the largest cash inflow in Year 1. D. Project B, because it has the higher required rate of return. E. Project B, because it has the larger NPV

Project A, because it has the larger NPV.

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive? A. Accept Project A and reject Project B B. Reject Project A and accept Project B C. Accept both projects D. Reject both projects E. Accept either one, but not both

Reject Project A and accept Project B

A project has a net present value of zero. Which one of the following best describes this project? 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.

The project's cash inflows equal its cash outflows in current dollar terms.