Financial Exam #1
If you want to have $1,700 in seven years, how much money must you put in a savings account today? Assume that the savings account pays 6% and it is compounded quarterly (round to the nearest $10).
$1,120
What is the present value of $150 received at the beginning of each year for 16 years? The first payment is received today. Use a discount rate of 9%, and round your answer to the nearest $10.
$1,360
Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's gross profit?
$15,225,000
How much money must be put into a bank account yielding 5.5% (compounded annually) in order to have $250 at the end of five years (round to nearest $1)?
$191
If you invest $750 every six months at 8% compounded semiminus−annually, how much would you accumulate at the end of 10 years?
$22,334
Which basic principle of finance correctly describes the following statement: "We won't take on additional risk unless we expect to be compensated with additional return"?
. Principle 2: There is a risk-return tradeoff.
Limited partnerships have two classes of partners. The ___1_____ partner actually runs the business and faces unlimited liability for the firm's debt, while the ___2.___ partner is only liable up to the amount the ___3.___partner invested.
1. general 2. limited 3. limited
You have just purchased a share of preferred stock for $50.00. The preferred stock pays an annual dividend of $5.50 per share forever. What is the rate of return on your investment?
11.0 %
Your company has received a $50,000 loan from an industrial finance company. The annual payments are $6,202.70. If the company is paying 9% interest per year, how many loan payments must the company make?
15
The Sarbanesminus−Oxley was passed in
2002 after the ENRON bankruptcy exposed unethical behavior by the company's executives and accountants.
Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for fiveyears?
500 (1 + .02) 20
At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?
6%
Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $15,000. Today, the average cost is $60,000. What is the growth rate in tuition cost over this 20−year period?
7.18%
Shorty Jones wants to buy a one−way bus ticket to Mule−Snort, Pennsylvania. The ticket costs $142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?
77 months
SellUCars, Inc. offers you a car loan at an annual interest rate of 8% compounded monthly. What is the annual percentage yield of the loan?
8.30%
At 8% compounded annually, how long will it take $750 to double?
9 years
What is a series of equal payments for an infinite period of time called?
A perpetuity
What is a series of equal payments for a finite period of time called?
An annuity
What is a series of equal payments to be received at the beginning of each period, for a finite period of time, called?
An annuity due
Which of the basic financial statements is best used to answer the questions "What does the company own and how is it financed?"
Balance sheet
Which of the basic financial statements is best used to answer the questions "Where did the company's money come from and how was it spent over the preceding year?"
Cash flow statement
In a large corporation the primary responsibility for overseeing the firm's finance-related activities falls to the:
Chief Financial Officer (CFO).
Who owns the retained earnings of a public firm?
Common stockholders
Which of the following is most likely to motivate executives to maximize shareholder wealth?
Compensating them with stock options that can only be exercised after five years.
Assume that you are starting a business. Further assume that the business is expected to grow very quickly and a great deal of capital will be needed soon. What type of business organization would you choose?
Corporation
The major sources of financing for corporations are
Debt and equity.
Which of the following is NOT included in computing EBT (earnings before taxes)?
Dividends
T or F: Holding all other variables constant, payment per period for an annuity due will be higher than an ordinary annuity.
False
T or F: Rewarding executives for increasing quarterly earnings will motivate them to act in the long−term best interests of shareholders.
False
T or F: The goal of the firm should be the maximization of profit.
False
T or F: the goal of profit maximization is equivalent to the goal of maximization of share value.
False
Which one of the following categories of owners enjoys limited liability?
General partners in a limited partnership or limited liability company.
There are three basic questions that are addressed by the study of finance. They are:
How can the firm best manage its cash flows as they arise in its day-to-day operations (working capital management decisions)? What long-term investments should the firm undertake (capital budgeting decisions)? How should the firm raise money to fund new investments (capital structure decisions)?
Which of the basic financial statements is best used to answer the question, "How profitable is the business?"
Income statement.
Assume that two investments have a three-year life and generate the cash flows shown below. Which of the two would you prefer? Year Inv. A Inv. B 1 $5,000 $8,000 2 $5,000 $5,000 3 $5,000 $2,000
Investment B, since it gives you the largest cash flows in earlier years
What are the characteristics of a limited partnership?
It prohibits the limited partners from participating in the management of the partnership. It requires one or more of the partners to be a general partner to whom the privilege of limited liability does not apply. It allows one or more partners to have limited liability.
In 2016, shares of Chipotle Mexican Grill lost more than half their value after widely reported incidents of customers suffering from food poisoning after eating at he restaurants. The change in stock price illustrates which principle?
Market prices reflect information.
Which of the following goals of the firm is equivalent to the maximization of shareholder wealth?
Maximization of the total market value of the firm's common stock
Why do investors prefer receiving cash sooner rather than later, according to finance theory?
Money received earlier can be reinvested and returns can be increased.
When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?
N=16, i=.5, PV=minus−200, PMT=0, solve for FV
When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?
N=16, i=.5, PV=minus−200, PMT=0, solve for FV
Which is true for limited partnerships?
Only the name of general partners can appear in the name of the firm. Limited partners may sell their interest in the company. One general partner must exist who has unlimited liability.
What is the chief disadvantage of the sole proprietorship as a form of business organization when compared to the corporate form?
Owners have unlimited liability.
There are four basic principles of finance. Which principle correctly describes the following statement: "A dollar today is worth more than a dollar received in the future. Conversely, a dollar received in the future is worth less than a dollar received today"?
Principle 1: Money has a time value.
What are four basic principles of finance.
Principle 1: Money has a time value. Principle 2: There is a risk-return tradeoff. Principle 3: Cash flows are the source of value. Principle 4: Market prices reflect information.
Which basic principle of finance correctly describes the following statement: "Profit is an accounting concept designed to measure a business's performance over an interval of time. Cash flow is the amount of cash that can actually be taken out of the business over this same interval"?
Principle 3: Cash flows are the source of value.
Which basic principle of finance correctly describes the following statement: "Investors respond to new information by buying and selling their investments. The speed with which investors act and the way that prices respond to the information determine the efficiency of the market"?
Principle 4: Market prices reflect information.
Consider the timing of the profits of the following certain investment projects: Profit L S Year 1 $ 0 $ 3000 Year 2 $ 3000 $ 0
Project S is preferred to Project L.
Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12 years?
The answer depends on the time value of money.
Which of the following factors is most important in investment decisions?
The change in after−tax cash flow.
Which of the following are legal forms of business organization?
The corporation. The partnership. The sole proprietorship.
Which of the following best describes the goal of the firm?
The maximization of the total market value of the firm's common stock
What does the agency problem refer to?
The problem that results from potential conflicts of interest between the manager of a business and the stockholders.
The Sarbanes-Oxley Act of 2002 (SOX) was passed to directly confront concerns about both agency and ethical issues. Select all of the following statements that correctly describe this act.
The purpose of SOX is to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the security laws. SOX holds corporate advisors who have access to or influence on company decisions, legally accountable for any instances of misconduct. While the goal of SOX is to provide greater protection against accounting fraud and financial misconduct, the demanding reporting requirements of SOX are quite costly and may inhibit firms from listing on U.S. stock markets.
What finance is about?
The study of how people and businesses make investment decisions and how to finance those decisions.
If one security has a greater risk than another security, how will investors respond?
They will require a higher rate of return for the investment that has greater risk.
The typical business organization for large companies is the corporation. Advantages of the corporate form of business organization include:
The owners' liability is limited to the amount of their investment in the company. Corporations have a greater ease in raising large sums of money than other forms of business organization. The life of the business is not tied to the status of the corporate owners.
T or F: Assuming equal annual rates, the more frequent the compounding periods in a year, the higher the future value.
True
T or F: In an efficient market, prices will quickly adjust to new information.
True
T or F: One characteristic of an annuity is that an equal sum of money is deposited or withdrawn each period.
True
T or F: The agency problem arises due to the separation of ownership and control in a corporation.
True
T or F: The life of a corporation is not dependent upon the status of the investors.
True
T or F: The owners of a corporation are liable for the corporation's obligations up to the amount of their investment.
True
When managers have little or no ownership in the firm, they are less likely to work energetically for the company's shareholders. We call this type of conflict a(n) __________.
agency problem
Profit maximization is not an adequate goal of the firm when making financial decisions because
all of the above are correct
From a financial point of view, a company that decides to develop new product is making
an investment decision.
Ordinary annuities assume that cash flows occur
at the end of a period.
In finance, we assume that investors are generally
averse to risk.
A & K Co. expects to have earnings before taxes of $250,000 to $300,000. The company's marginal tax rate is 39% and its average tax rate about 33%. For every additional dollar A & K's pays out in common dividends, it's income tax liability will
be unaffected.
The area of finance that deals with long−term investment decisions is known as
capital budgeting.
A & K Co. expects to have earnings before taxes of $250,000 to $300,000. The company's marginal tax rate is 39% and its average tax rate about 33%. For every additional dollar of interest expense, A & K's taxes will
fall by 39 cents.
The Sarbanesminus−Oxley Act of 2002
holds those who influence corporate decisions legally accountable for unethical conduct.
If managers are making decisions to maximize shareholder wealth, then they are primarily concerned with making decisions that should
increase the market value of the firm's common stock.
One attractive alternative to the corporation for a small business is the__________ because it combines the tax benefits of a partnership with the limited liability of a corporation.
limited liability company
A limited partner is liable
only up to the amount invested by that partner.
The term stockholder is equivalent to
shareholder.
In regard to the agency problem, ________ are the principal owners of a corporation.
shareholders
If you plotted the future value of $1,000 growing at any interest rate greater than 0 with dollars on the vertical axis and time on the horizontal axis, the resulting curve would
slope upward at an increasing rate.
Working capital management refers to
the management of cash flows.
A corporation is owned by
the shareholders who hold the company's stock.
Stock that is repurchased by the issuing company is called
treasury stock.
If an investor had a choice of receiving $1,000 today, or $1,000 in five years, which would the average investor prefer?
$1,000 today because it will be worth more than $1,000 received in five years.
Gina Dare, who wants to be a millionaire, plans to retire at the end of 40 years. Gina's plan is to invest her money by depositing into an IRA at the end of every year. What is the amount that she needs to deposit annually in order to accumulate $1,000,000? Assume that the account will earn an annual rate of 11.5%. Round off to the nearest $1.
$1,497
A friend plans to buy a bigminus−screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on thepurchase? Round off to the nearest $1.
$1,604
Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's income before tax?
$4,360,000
Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $8,750,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's net income?
$4,731,000
What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).
$429
If you have $20,000 in an account earning 8% annually, what constant amount could you withdraw each year and have nothing remaining at the end of five years?
$5,008.76
Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm's EBIT?
$5,110,000
If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?
$71
What is the present value of an investment that pays $400 at the end of three years and $700 at the end of 10 years if the discount rate is 5%?
$775.40
If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)?
$833
You have been offered a credit card with an interest rate of 1.5% per month. This is equivalent to and effective annual rate (EAR) of
19.56%.
You wish to borrow $2,000 to be repaid in 12 monthly installments of $170.30. The annual interest rate is
4%.
To find the present value of $1000 discounted for 20 years at 8%, when using a financial calculator, the correct entry is
N=20, i=8,PMT=0, FV=1000 solve for PV.
What is the present value of an annuity of $100 received at the end of each year for seven years? The first payment will be received one year from today (round to nearest $10). The discount rate is 13%. To solve this problem with a financial calculator, the correct choice is
N=7, i=13, PMT= 100, FV=0, solve for PV.
As the number of monthly payments on a loan increases, the size of each payment ________ and the total interest paid over the life of the loan ________.
decreases, increases
An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year. Her cash flow at time period 0 is
−$1,000
