Finance Exam 1
You recently sold an antique car you owned and valued greatly. However, you needed money and agreed to sell the car at a price of $58,000, to be paid in monthly payments of $1,500 each for 48 months. What annual interest rate did you charge for financing the sale? 10.33 percent 10.44 percent 10.60 percent 11.03 percent 11.33 percent
11.03 percent
Bob bought some land costing $15,990. Today, that same land is valued at $46,017. How long has Bob owned this land if the price of land has been increasing at 5 percent per year? 22.71 years 13.70 years 14.39 years 21.67 years 23.85 years
21.67 years
Your friend claims that he invested $5,000 seven years ago and that this investment is worth $38,700 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounds annually. 28.87 percent 31.39 percent 33.96 percent 36.01 percent 37.87 percent
33.96 percent
Beginning three months from now, you want to be able to withdraw $4,100 each quarter from your bank account to cover college expenses over the next four years. Required: If the account pays .81 percent interest per quarter, how much do you need to have in your bank account today to meet your expense needs over the next four years? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Amount needed
61294.77
Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value? 5 percent simple interest 5 percent interest, compounded annually 6 percent interest, compounded annually 7 percent simple interest 7 percent interest, compounded annually
7 percent interest, compounded annually
Three years ago, you invested $3,050.00. Today, it is worth $3,800.00. What rate of interest did you earn? 7.60 percent 3.80 percent 4.07 percent 5.07 percent 0.63 percent
7.60 percent
Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms? Perpetuity Annuity Consol Lump sum Factor
Annuity
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments? Ordinary annuity Annuity due Consol Ordinary perpetuity Perpetuity due
Annuity due
The following function is within GE's finance organization Global Innovation Growth None of these answers are correct because all functions listed are within Finance. Development and Investment Business Transformation
Business Transformation
Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the: annual percentage rate. compounded rate. quoted rate. stated rate. effective annual rate.
effective annual rate.
A limited liability company: is a hybrid between a sole proprietorship and a partnership. prefers its profits be taxed as personal income to its owners. that meets the IRS criteria to be an LLC will be taxed like a corporation. provides limited liability for some, but not all, of its owners. cannot be created for professional service firms, such as accountants and attorneys.
prefers its profits be taxed as personal income to its owners.
Limited liability companies are primarily designed to: allow a portion of their owners to enjoy limited liability while granting the other portion of their owners control over the entity. provide the benefits of the corporate structure to foreign-based entities. spin off a wholly owned subsidiary. allow companies to reorganize themselves through the bankruptcy process. provide limited liability while avoiding double taxation.
provide limited liability while avoiding double taxation.
Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the: annual percentage rate. compounded rate. effective annual rate. perpetual rate. simple rate.
annual percentage rate.
Tim has been promoted and is now in charge of all fixed asset purchases. In other words, Tim is in charge of: capital structure management. asset allocation. risk management. capital budgeting. working capital management.
capital budgeting.
Stadford, Inc. is financed with 40 percent debt and 60 percent equity. This mixture of debt and equity is referred to as the firm's: capital structure. capital budget. asset allocation. working capital. risk structure.
capital structure.
The manager of Gloria's Boutique has approved Carla's application for credit. The maximum payment that has been approved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carla can make given this credit approval? $1,288.90 $1,300.00 $1,331.42 $1,350.00 $1,428.46
$1,331.42
What is the present value of $12,200 to be received 4 years from today if the discount rate is 5 percent? $10,538.82 $10,036.97 $10,459.53 $10,027.51 $7,320.00
$10,036.97
Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account? $129,411.20 $132,827.88 $134,616.56 $141,919.67 $142,003.12
$132,827.88
Thomas invests $110 in an account that pays 4 percent simple interest. How much money will Thomas have at the end of 6 years? $140.80 $136.40 $139.19 $133.83 $132.00
$136.40
What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the end of this week. $14,239.14 $14,361.08 $14,727.15 $15,003.14 $15,221.80
$14,239.14
How much money does Suzie need to have in her retirement savings account today if she wishes to withdraw $25,000 a year for 30 years? She expects to earn an average rate of return of 13 percent. $176,800.16 $180,419.81 $181,533.33 $185,160.98 $187,391.34
$187,391.34
Doris's Fashions has just signed a $2.2 million contract. The contract calls for a payment of $0.6 million today, $0.8 million one year from today, and $0.8 million two years from today. What is this contract worth today if the firm can earn 8.2 percent on its money? $2,038,616.67 $2,022,709.37 $2,108,001.32 $2,124,339.07 $2,202,840.91
$2,022,709.37
Rick is planning to invest the following amounts at 6 percent interest. How much money will he have saved at the end of year 3? Picture year 1:500 year:800 Year 3: 900 $2,200.00 $2,238.47 $2,309.80 $2,309.16 $2,402.19
$2,309.80
You have $5,000 you want to invest for the next 45 years. You are offered an investment plan that will pay you 6 percent per year for the next 15 years and 10 percent per year for the last 30 years. How much will you have at the end of the 45 years? How much will you have if the investment plan pays you 10 percent per year for the first 15 years and 6 percent per year for the next 30 years? $201,516.38; $201,516.38 $209,092.54; $201,516.38 $209,092.54; $119,959.94 $209,092.54; $209,092.52 $221,408.97; $119,949.94
$209,092.54; $119,959.94
Eric is considering an investment that will pay $5,000 a year for seven years, starting one year from today. How much should she pay for this investment if she wishes to earn a 13 percent rate of return? $17,899.08 $18,023.88 $20,186.75 $22,113.05 $23,749.24
$22,113.05
Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent. PV = $600 (1 + 6)7 PV = $600 (1 + 0.07)6 PV = $600 × (0.07 × 6) PV = $600/(1 + 0.07)6 PV = $600/(1 + 6)0.07
PV = $600/(1 + 0.07)6
If you do nothing, except start to do business with your friend, you have formed the following type of entity: Sole Proprietorship None of these choices are correct LLC Corporation Partnership
Partnership
The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms? Ordinary annuity Annuity due Amortized payment Perpetuity Continuation
Perpetuity
Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626? Present value Compound value Future value Complex value Factor value
Present Value
A corporation: is ultimately controlled by its board of directors. is a legal entity separate from its owners. is prohibited from entering into contractual agreements. has its identity defined by its bylaws. has its existence regulated by the rules set forth in its charter.
is a legal entity separate from its owners.
You have just made your first $5,000 contribution to your individual retirement account. Assuming you earn a 5 percent rate of return and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing? $26,335.37; $23,011.60 $27,311.20; $29,803.04 $27,311.20; $22,614.08 $27,580.08; 21,609.71 $31,241.90; $32,614.08
$27,580.08; 21,609.71
George Jefferson established a trust fund that provides $168,500 in scholarships each year for worthy students. The trust fund earns a 4 percent rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed? $2,973,351 $4,044,000 $5,055,000 $4,212,500 $6,740,000
$4,212,500
Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months? $425.15 $428.67 $431.09 $443.13 $462.25
$443.13
What is the future value of $3,068 invested for 9 years at 5.9 percent compounded annually? $8,609.59 $8,372.05 $3,970.88 $5,139.48 $3,985.59
$5,139.48
Which one of the following statements is true concerning annuities? All else equal, an ordinary annuity is more valuable than an annuity due. All else equal, a decrease in the number of payments increases the future value of an annuity due. An annuity with payments at the beginning of each period is called an ordinary annuity. All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity. All else equal, an increase in the number of annuity payments decreases the present value and increases the future value of an annuity.
All else equal, an increase in the discount rate decreases the present value and increases the future value of an annuity.
Which one of the following statements is correct? All secondary markets are dealer markets. All secondary markets are broker markets. All stock trades between existing shareholders are secondary market transactions. All stock transactions are secondary market transactions. All Dutch auction sales are secondary market transactions.
All stock trades between existing shareholders are secondary market transactions.
Which one of the following statements concerning annuities is correct? The present value of an annuity is equal to the cash flow amount divided by the discount rate. An annuity due has payments that occur at the beginning of each time period. The future value of an annuity decreases as the interest rate increases. If unspecified, you should assume an annuity is an annuity due. An annuity is an unending stream of equal payments occurring at equal intervals of time.
An annuity due has payments that occur at the beginning of each time period.
Which one of the following applies to a general partnership? The firm's operations must be controlled by a single partner. Any one of the partners can be held solely liable for all of the partnership's debt. The profits of the firm are taxed as a separate entity. Each partner's liability for the firm's debts is limited to each partner's investment in the firm. The profits of a general partnership are taxed the same as those of a corporation.
Any one of the partners can be held solely liable for all of the partnership's debt.
Which one of the following qualifies as an annuity? Weekly grocery bill Clothing purchases Car repairs Auto loan payment Medical bills
Auto loan payment
Which one of the following is the annuity present value formula? C × {{1 - [1/(1 + r)t]}/r} C × {1 - [1/(1 + r)t]} - r C × {1 - [r/(1 + r)t]}/r C × {{1 - [1/(1 × r)t]} × r} C × {1 - [r/(1 × r)t]} × r
C × {{1 - [1/(1 + r)t]}/r}
Which one of the following functions should be assigned to the treasurer rather than the controller? Data processing Cost accounting Tax management Cash management Financial accounting
Cash management
GE's highest ranking finance executive reports to the the following person(s) within the organization None of these are correct Chief Financial Officer Chief Executive Officer Development and Investment Investor Relations
Chief Executive Officer The CFO or highest ranking finance official in the organization reports to the CEO and Chairman
Which one of the following is most apt to align management's priorities with shareholders' interests? Increasing employee retirement benefits Compensating managers with shares of stock that must be held for three years before the shares can be sold Allowing a manager to decorate his or her own office once he or she has been in that office for a period of three years or more Increasing the number of paid holidays that long-term employees are entitled to receive Allowing employees to retire early with full retirement benefits
Compensating managers with shares of stock that must be held for three years before the shares can be sold
A perpetuity in Canada is frequently referred to as which one of the following? Consul Infinity Forever cash Dowry Forevermore
Consul
The most complex to set up (form) is the following type of entity: Partnership Corporation Sole Proprietorship None of these choices are correct LLC
Corporation
Which one of the following occupations best fits into the international area of finance? Bank teller Treasury bill analyst Currency trader Insurance risk manager Local bank manager
Currency trader
Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested. Increase in the time period Increase in the interest rate Decrease in the future value Decrease in the interest rate None of these
Decrease in the interest rate
Working capital management includes which one of the following? Deciding which new projects to accept Deciding whether to purchase a new machine or fix a current machine Determining which customers will be granted credit Determining how many new shares of stock should be issued Establishing the target debt-equity ratio
Determining which customers will be granted credit
Which one of the following can be classified as an annuity but not as a perpetuity? Increasing monthly payments forever Increasing quarterly payments for six years Unequal payments each year for nine years Equal annual payments for life Equal weekly payments forever
Equal annual payments for life
Which one of the following is a capital structure decision? Determining the optimal inventory level Establishing the preferred debt-equity level Selecting new equipment to purchase Setting the terms of sale for credit sales Determining when suppliers should be paid
Establishing the preferred debt-equity level
Will and Bill both enjoy sunshine, water, and surfboards. Thus, the two friends decided to create a business together renting surfboards, paddle boats, and inflatable devices in California. Will and Bill will equally share in the decision making and in the profits or losses. Which type of business did they create if they both have full personal liability for the firm's debts? Sole proprietorship Limited partnership Corporation Joint stock company General partnership
General partnership
Which one of the following is a working capital decision? How should the firm raise additional capital to fund its expansion? What debt-equity ratio is best suited to the firm? What is the cost of debt financing? Which type of debt is best suited to finance the inventory? How much cash should the firm keep in reserve?
How much cash should the firm keep in reserve?
According to our guest speaker, things to consider when starting a business and selecting an entity type, include the following, EXCEPT: How many owners do you plan to have? What type of business will the entity be engaged in? Will you have investors? How much will you charge for your product or service? What is the compensation structure and will you be paid a salary?
How much will you charge for your product or service? Not related to entity type
Which of the following will increase the present value of an annuity, all else held constant? I. Increase in the number of payments II. Increase in the interest rate III. Decrease in the interest rate IV. Decrease in the payment amount I and II only I and III only II and IV only I, II, and IV only I, III, and IV only
I and III only
Maria is the sole proprietor of an antique store that she has operated at the same location for the past 16 years. The store rents the space in which it is located but does own all of the inventory and fixtures. The store has an outstanding loan with the local bank but no other debt obligations. There are no specific loan covenants or assets pledged as security for the loan. Due to a sudden and unexpected downturn in the economy, the store is unable to generate sufficient funds to pay the loan payments due to the bank. Which of the following options does the bank have to collect the money it is owed? I. Sell the inventory and use the cash raised to apply to the debt II. Sell the store fixtures and use the cash raised to apply to the debt III. Take funds from Maria's personal account at the bank to pay the store's debt IV. Sell any assets Maria personally owns and apply the proceeds to the store's debt I only III only I and II only I, II, and III only I, II, III, and IV
I, II, III, and IV
Which of the following individuals commonly use finance in the course of their job? I. Chief financial officers II. Accountants III. Security analysts IV. Strategic managers I and II only III and IV only I and III only I, II, and III only I, II, III, and IV
I, II, III, and IV
Which of the following are advantages of the corporate form of organization? I. Ability to raise large sums of equity capital II. Ease of ownership transfer III. Profits taxed at the corporate level IV. Limited liability for all owners I and II only III and IV only II, III, and IV only I, II, and IV only I, II, III, and IV
I, II, and IV only
Which one of the following best matches the primary goal of financial management? Increasing the dollar amount of each sale Increasing traffic flow within the firm's stores Transforming fixed costs into variable costs Increasing the firm's liquidity Increasing the market value of the firm
Increasing the market value of the firm
Which one of the following is an advantage of being a limited partner? Nontaxable share of any profits Control over the daily operations of the firm Losses limited to capital invested Unlimited profits without risk of incurring a loss Active market for ownership interest
Losses limited to capital invested
The primary goal of financial management is to maximize which one of the following for a corporation? Current profits Market share Number of shares outstanding Market value of existing stock Revenue growth
Market value of existing stock
Valerie bought 200 shares of Able stock today. Able stock has been trading for some time on the NYSE. Valerie's purchase occurred in which market? Dealer market Over-the-counter market Secondary market Primary market Tertiary market
Secondary market
Capital budgeting includes the evaluation of which of the following? Size of future cash flows only Size and timing of future cash flows only Timing and risk of future cash flows only Risk and size of future cash flows only Size, timing, and risk of future cash flows
Size, timing, and risk of future cash flows
If you do nothing, except start to do business by yourself, you have formed the following type of entity: Partnership LLC Sole Proprietorship Corporation None of these choices are correct
Sole Proprietorship
Margie opened a used bookstore and is both the 100 percent owner and the store's manager. Which type of business entity does Margie own if she is personally liable for all the store's debts? Sole proprietorship Limited partnership Corporation Joint stock company General partnership
Sole proprietorship
Which one of the following transactions occurred in the primary market? Maria gave 100 shares of Alto stock to her best friend. Gene purchased 300 shares of Alto stock from Ted. South Wind Products sold 1,000 shares of newly issued stock to Mike. Terry sold 3,000 shares of Uno stock to his brother. The president of Trecco, Inc. sold 500 shares of Trecco stock to his son.
South Wind Products sold 1,000 shares of newly issued stock to Mike.
The following function is within GE's finance organization None of these answers are correct because all functions listed are within Finance. Development and Investment Growth Tax Content and Brand Marketing
Tax
Ge's Finance Organization
Tax, Audit, Financial Planning and Analysis, Control and Accounting (2 positions), Audit Staff, Investor Relations and Business Transformation.
Which one of the following correctly defines a common chain of command within a corporation? The controller reports directly to the corporate treasurer. The treasurer reports directly to the board of directors. The chief financial officer reports directly to the board of directors. The credit manager reports directly to the controller. The controller reports directly to the chief financial officer.
The controller reports directly to the chief financial officer.
You are comparing three investments, all of which pay $100 a month and have an 8 percent interest rate. One is ordinary annuity, one is an annuity due, and the third investment is a perpetuity. Which one of the following statements is correct given these three investment options? To be the perpetuity, the payments must occur on the first day of each monthly period. The ordinary annuity would be more valuable than the annuity due if both had a life of 10 years. The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due. The future value of all three investments must be equal. The present value of all three investments must be equal.
The present value of the perpetuity has to be higher than the present value of either the ordinary annuity or the annuity due.
Which one of the following statements is correct? All of the major stock exchanges are U.S. based. The NYSE was created by the National Association of Securities Dealers in the early 1970s. The American Stock Exchange is a dealer market. OTC markets have a physical trading floor generally located in either New York City or Chicago. The primary purpose of the NYSE is to match buyers with sellers.
The primary purpose of the NYSE is to match buyers with sellers.
Which one of the following statements about a limited partnership is correct? All partners have their losses limited to their capital investment in the partnership. All partners are treated equally. There must be at least one general partner. Equity financing is easy to obtain and unlimited. Any partner can transfer his or her ownership interest without ending the partnership.
There must be at least one general partner.
Which one of the following features distinguishes an ordinary annuity from an annuity due? Number of equal payments Amount of each payment Frequency of the payments Annuity interest rate Timing of the annuity payments
Timing of the annuity payments
Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? The present value of the car is equal to $500 + (36 × $450). The $500 is the present value of the purchase. The car loan is an annuity due. To compute the initial loan amount, you must use a monthly interest rate. The future value of the loan is equal to 36 × $450.
To compute the initial loan amount, you must use a monthly interest rate.
Which one of the following is an example of a perpetuity? Trust income of $1,200 a year forever Retirement pay of $2,200 a month for 20 years Lottery winnings of $1,000 a month for life Car payment of $260 a month for 60 months Apartment rent payment of $800 a month for one year
Trust income of $1,200 a year forever
Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as: simple interest. interest on interest. discounted interest. complex interest. compound interest.
compound interest.
Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called: discounting. compounding. duplicating. multiplying. indexing.
compounding
Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called: aggregating. discounting. simplifying. compounding. extrapolating.
discounting
A sole proprietorship: provides limited liability for its owner. involves significant legal costs during the formation process. has an unlimited life. has its profits taxed as personal income. can generally raise significant capital from nonowner sources.
has its profits taxed as personal income.
The Sarbanes-Oxley Act of 2002 has: reduced the annual compliance costs of all publicly traded firms in the U.S. decreased senior management's involvement in the corporate annual report. greatly increased the number of U.S. firms that are going public for the first time. decreased the number of U.S. firms going public on foreign exchanges. made officers of publicly traded firms personally responsible for the firm's financial statements.
made officers of publicly traded firms personally responsible for the firm's financial statements.
Lester's BBQ has $121,000 in current assets and $109,000 in current liabilities. These values as referred to as the firm's: capital structure. cash equivalents. working capital. net assets. fixed accounts.
working capital.
The daily financial operations of a firm are primarily controlled by managing the: total debt level. working capital. capital structure. capital budget. long-term liabilities.
working capital.