Financial Management
At an interest rate of 10% per year, what is the present value of a perpetuity growing at 4% per year with next year's cash flow of $5?
$5/.10-.04)=$83.33
Your 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 stated interest rate is 10 percent, what is the EAR if interest is compounded monthly?
10.47%
Find the future value of an annuity of 100 per year for 10 years at 10 percent per year.
100*[1/.1-1/.1x(1.1)^10]=614.46, 614.46*(1.1)^10=1593.75
Which one of the following is a real asset?
A factory
In a shareholder-manager relationship, who is the agent?
Managers
What is the NPV of a project with an initial investment of $95, a cash flow in one year of $107, and a discount rate of 6%? (Be sure to record the initial investment as a negative number.)
NPV= -$95+(107/1.06)=$5.94
How is net present value (NPV) computed?
NPV=PV-Investment
Which of the following is true about a growing annuity?
The cash flows grow at a constant rate, the cash flows grow for a finite period
The general formula for the effective interest rate is:
[1+(r/m)]^m-1
When trying to find the total present value of a stream of cash flows over a number of years, you should ______the present values of the individual cash flows.
add
The costs incurred due to a conflict of interest between stockholders and management are called _________ costs.
agency
The annual percentage rate is the annual interest rate without consideration of
compounding
The effective annual rate (EAR) takes into account the ________ of interest that occurs within a year.
compounding
The idea behind _________ is that interest is earned on interest
compounding
Which compounding interval will result in the lowest future value assuming everything else is held constant?
continuous
the federal government taxes which of the following?
corporate earnings and shareholder dividends
is a legal entity owned by its shareholders
corporation
The goal of a for-profit business is to ______ the value of existing owners' equity.
maximize
Shareholders agree on the financial objective of
maximizing the market value of the company's shares
The return that can be earned on investment opportunities available to investors in financial markets is called the ________ cost of capital
opportunity
C/r is the formula for the present value of a(n) _______.
perpetuity
The __________annual interest rate is usually calculated as the total annual payment divided by the number of payments in the year.
quoted
According to the basic investment rule for NPV, a firm should
reject a project if NPV is less than zero, accept a project if the NPV is great than zero
If you earn 8 percent a year compounded annually for 7 years on a $1,000 present value, your future value will be
$1,000(1.08)^7=$1,713.82
What is the future value of $100 compounded continuously at a stated annual rate of 10 percent for 10 years?
$100 x e ^.10x10= $271.83
What is the present value of a perpetuity of $100 per year if the annual interest rate is 10% and the growth rate is 6% per year?
$100/(.10-.06)=$2500
How much is $100 at the end of each year forever at 10% interest worth today?
$1000
Assume $100 earns a stated 10 percent rate compounded quarterly. What will the value of the $100 be after one year?
$110.38
If you invest $100 at 10 percent per year for 3 years, your future value with annual compounding will be
$133.10
What is the present value of an ordinary annuity that pays $100 per year for three years if the interest rate is 10% per year?
$248.69
What is the present value of $100 in 10 years at a continuously compounded rate of 10 percent?
36.79
The future value of $100 at 10 percent compounded semi annually is ____________ the future value of $100 at 10 percent compounded annually.
greater than
A stream of cash flows that grows at a constant rate for a finite period is called a(n)
growing annuity
PV=C/(r-g) is the formula for the present value of a:
growing perpetuity
A positive NPV will _________ wealth
increase
The life of a corporation
is unlimited
If you invest $1,000 and the present value of the expected cash inflows is $1,300, then the NPV is __________
-$1,000 + $1,300= $300
Which of the situations below will increase wealth?
An initial cost of $1000 and a PV of future cash flows of $1,101, An initial cost $1,000 and a PV of future cash flows of $1,001
Which of the following is the multi-period formula for compounding a present value into a future value?
FV= C(little 0 below C)x(1+r)^t
What is the future value of $100 compounded for 50 years at 10 percent annual interest? Use formula $100x(1+r)^t where r is the annual interest and t is the number of years
FV=$100 X 1.10 ^50=$11,739.09
A good financial decision will do which of the following?
Increase market value of shareholders' equity, Increase the value of the firm's existing stock
A firm's capital structure decision involves the choice between financing with:
debt or equity
A growing annuity has a(n)
finite number of growing cash flows
A traditional (non-growing) annuity consists of a(n) __________ stream of cash flows for a fixed period of time.
fixed
If you increase the risk level of a project, the discount rate should ______ which will ______ the project's present value.
increase; decrease
A perpetuity is a constant stream of cash flows for a(n) ______period of time
infinite
Present value represents what an amount of money promised or expected in the future is worth
today
Why is a dollar received today worth more than a dollar received in the future?
today's dollar can be invested, yielding a greater amount in the future.
The opportunity cost of capital reflects:
the risk of the investment, the opportunity cost to the investor
What is the main goal of financial management?
to maximize current market value
If the future value is $500 in 1 year and the interest rate is 12 percent per year, what is the present value?
$500/1.12=$446.43
With ________, shareholders cannot be held personally responsible for a corporation's debt.
Limited Liability
Which of the following will result in a lower present value for a give future cash flow?
More risk, more time, a higher interest rate
Which of the following is the correct formula for the 1-period present value?
PV=FV/(1+r)
What are some of the implications of the time value of money concept?
a dollar tomorrow is worth less than a dollar today, a dollar today is worth more than a dollar tomorrow
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 of the following are annuitities?
annual installment loan payments, yearly lease payments
A series of level payments that begins immediately for a specified period of time is called a(n)
annuity due
A corporation must write ______ that set out the purpose of the business and how it is to be governed.
articles of incorporation
When a corporation is formed, it is granted which of the following rights?
borrow and lend money form contracts legal powers to sue
_________budgeting is the process of making and managing expenditures on long-term assets
capital