Finance 341 quiz 1

3. Explain the determinants of a required rate of return

- Real (risk-free) rate of interest: the basic time value of money: the price you charge, or compensation you require, even if you are sure to get your money back. - Expected inflation: You have to include a component to cover the expected increase in prices (loss in value of your currency) over time. - Risk: The riskier is the loan/investment, the higher the return you will require.

Which of the following is considered one of the basic questions of corporate finance?

- What long-term investments should the firm choose. - What mixture of debt and equity should the firm use to fund its operations. - How should the firm manage its working capital, i.e., its everyday financial activities.

Which of the following statements concerning the effective annual rate are correct?

- When making financial decisions, you should compare effective annual rates rather than annual percentage rates. - The more frequently interest is compounded, the higher the effective annual rate. - When borrowing money, you should select the offer with the lower effective annual rate.

What does the discount rate "r" represent? Explain why we use it to price money across time.

- r represents our opportunity cost of money (what could we earn on our money in equivalent investments). -

The fundamental goal of financial management should be:

Maximize the market value of the existing stock.

Which of the following comparison statements is (are) true?

True: Both an annuity and a perpetuity are streams of cash flows. An annuity may be viewed as the difference between two perpetuities.

capital structure

how to finance those investments

2. Why must we convert accounting data (earnings and book values) when performing financial analysis

investors care about cash flows. Earnings can be manipulated (both legally and illegally). - Investments are made with cash, and therefore investors want cash in return. - Book values are historical costs, which are backward-looking. - Market values are forward looking and represent the true value of the asset to the firm.

Limited liability is a big advantage of the corporate form of business but...

the corporation's income is double taxed

capital budgeting decision (More Important)

what to invest in --> what projects to pick fundamentally determines what the firm does and what its cash flows will be

The monthly mortgage payment on your house is $821.69. It is a 30 year mortgage at 6.5% compounded monthly. How much did you borrow?

$130,000.00 N = t * m I = R / m PV = ? PMT = 821.69

You have $800 that you would like to invest. You have 2 choices: Savings account A which offers an 8% APR compounded annually, or savings account B which offers a 7.70% APR compounded monthly. Which would you choose and why?

A since it has higher Effective Annual rate of 864

You want to pool your resources with your best friend and start your own telecommunications firm. However, you are concerned about the risk this business poses to your accumulated personal wealth. To limit your exposure, you and your friend should organize the business:

As a corporation

Which of the following is NOT considered one of the basic questions of corporate finance?

At what rate of interest should a firm borrow.

Name two primary differences between a partnership and a corporation.

Corporate shareholders have limited liability and are double taxed

Why cash flows?

Determine the value of the firm. Accounts manipulate everything. Market values are forward looking

The goal of a financial manager is to maximize earnings.

FALSE. The goal of the financial manager is to increase the value of the company

How much would you have to invest today at 9% compounded annually to have $35,000 available for the purchase of a car five years from now?

PV = $22,747.60

Which of the following statements is false?

With monthly compounding, the APR will be larger than the effective annual rate.

The mixture of debt and equity used by the firm to finance its operations is called: a. working capital management.

capital structure.

Identify the goal of a financial manager and justify that goal (why is it the correct goal?).

maximize the wealth of the shareholders (they implement this by maximizing the value of the company's assets).