Finance 301: Conceptual Questions

29. Island News purchased a piece of property for $1.36 million. The firm paid a down payment of 12 percent in cash and financed the balance. The loan terms require monthly payments for 10 years at an annual percentage rate of 4.75 percent, compounded monthly. What is the amount of each mortgage payment?

$12,548.18

6. Noncash items refer to:

Expenses which do not directly affect cash flows.

8.Shareholders equity

Represents the residual value of a firm.

28. You borrow $230,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 25 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?

$153,524

13. Ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as _____ ratios.

Profitability

20. You invested $6,500 in an account that pays 6 percent simple interest. How much more could you have earned over a 10 year period if the interest had compounded annually?

-$1,240.51

11. Which one of these identifies the relationship between the return on assets and the return on equity?

..DuPont identity

15. A firm has a debt equity ratio of .57. What is the total debt ratio?

.36

19. This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?

The present value of this investment is equal to $1,000.

7. Which one of the following represents the most liquid asset?

$100 of inventory that is sold today for $100 cash

9. The book value of a firm is:

-Based on historical cost.

23. Ten years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today, that account has increased in value to $330,592. What rate of interest is the firm earning on this money?

9.78

2. The decision to issue additional shares of stock is an example of which one of the following?

Capital structure decision

5. Financial managers should primarily focus on the interests of:

Shareholders

10. A firm has common stock of $6,200, paid

in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

30. You estimate that you will owe $39,950 in student loans by the time you graduate. The interest rate is 3.75 percent. If you want to have this debt paid in full within 10 years, how much must you pay each month?

$399.74

26. You just won the grand prize in a national writing contest! As your prize, you will receive $1,000 a month for 10 years. If you can earn 7 percent on your money, what is this prize worth to you today?

$86,126.25

6. Noncash items refer to:

-Expenses which do not directly affect cash flows.

27. Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, how much can he afford to borrow to purchase a car?

11,697.88

1. Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

Agency problem

16. Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?

Compounding

17. Steve just computed the present value of a $10,000 bonus he will receive in the future. The interest rate he used in this process is referred to as which one of the following?

Discount rate

18. The process of determining the present value of future cash flows in order to know their worth today is referred to as?

Discounte

14. Which one of the following accurately describes the three parts of the DuPont identity?

Equity multiplier, profit margin, and total asset turnover.

4. Which one of the following is a primary market transaction?

Sale of a new share of stock to an individual investor.

10. A firm has common stock of $6,200, paid-in surplus of $9,100, total liabilities of $8,400, current assets of $5,900, and fixed assets of $21,200. What is the amount of the shareholders' equity?

$18,700

25. Your grandmother is gifting you $150 a month for four years while you attend college to earn your bachelor's degree. At a 4.8 percent discount rate, what are these payments worth to you on the day you enter college?

$6,539.14

21. You hope to buy your dream car four years from now. Today, that car costs $54,500. You expect the price to increase by an average of 3.1 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?

$61.578.79

22. On your ninth birthday, you received $300 which you invested at 4.5 percent interest, compounded annually. Your investment is now worth $756. How old are you today?

30

24. You're trying to save to buy a new $72,000 sports car You have $38,000 today that can be invested at your bank. The bank pays 1.26 percent annual interest on its accounts. How many years will it be before you have enough to buy the car assuming the price of the car remains constant?

51.04

3. Which one of the following best states the primary goal of financial management?

Maximize the current value per share.