BA 360 midterm 1

Which one of the following statements related to annuities and perpetuities is correct?

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.

effective annual

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

A loan that calls for periodic interest payments and a lump sum principal payment is referred to as a(n) ____ loan. a. Multiple Choice b. amortized c. modified d. balloon e. pure discount f. interest-only

f. interest-only

compound interest

interest earned on both the principal amount and any interest already earned

Goal of Financial Management

maximize the current value per share of the existing stock

An amortized loan:

may have equal or increasing amounts applied to the principal from each loan payment.

Effective Annual Rate (EAR)

The rate of interest actually earned on an investment or paid on a loan as a result of compounding the interest over a given period of time.

Sole Proprietorship

A business owned by one person. unlimited liability

Which one of the following is a cash flow from a corporation into the financial markets?

Payment of loan interest

Working Capital

current assets - current liabilities. How much inventory should be on hand for immediate sale.

annuity due

An annuity that pays at the beginning of each period.

Most important cash flow patterns.

Annuity

amortization table

Displays the interest and principal amounts for each payment of an installment loan.

Amortized loans must have which one of these characteristics over its life?

Either equal or unequal principal payments

Which of the following parties are considered stakeholders of a firm?

Employees and the government

Capital Structure

How much debt should be assumed to fund a project.

Chang Lee is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from now. Which one of the following statements is correct if both individuals apply a discount rate of 7 percent?

In today's dollars, Chang Lee's money is worth more than Soo Lee's.

Your Grandmother has promised to give you $5000 when you graduate from college in 3 years. Suppose you put that money in an account that pays 6%, compounded semi-annually. How much will you have in 10 years?

N = 14 compounding periods I/Y = 3 percent interest per compounding period PV = -5000 investment expressed as negative cash flow CPT>FV = $7562.95 return expressed as positive cash flow

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

Pure discount

Which one of the following is a primary market transaction?

Sale of a new share of stock to an individual investor

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant.

Amortized Loan

a loan that is repaid in equal payments over its life

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

A(n) ____ loan has regular payments that include both principal and interest but these payments are insufficient to pay off the loan.

ballon loan

Which one of the following statements concerning interest rates is correct? Multiple Choice a. Savers would prefer annual compounding over monthly compounding given the same annual percentage rate. b. The effective annual rate decreases as the number of compounding periods per year increases. c. The effective annual rate equals the annual percentage rate when interest is compounded annually. d. Borrowers would prefer monthly compounding over annual compounding given the same annual percentage rate. e. For any positive rate of interest, the annual percentage rate will always exceed the effective annual rate.

c. The effective annual rate equals the annual percentage rate when interest is compounded annually.

Steve just computed the present value of a $10,000 bonus he will receive next year. The interest rate he used in his computation is referred to as the:

discount rate.

Capital Budgeting

the process of analyzing the needs of the business and selecting the assets that will maximize its value in the long term.

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

Annuity

◦Series of uninterrupted equal cash flows ◦Payments come at end of each period