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