Finance 3140 Ch. 1, 5, 6

Your coin collection contains 51 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2061, assuming they appreciate at an annual rate of 4.2 percent?

$4,520.14

Ralph has $1,000 in an account that pays 10 percent per year. Ralph wants to give this money to his favourite charity by making three equal donations at the end of the next 3 years. How much will Ralph give to the charity each year?

$402.11

If you plan to put a $10,000 down payment on a house in five years and you can earn 6% per year, how much will you need to deposit today?

$7,472.58

Suppose you are committed to owning a $196,000 Ferrari. If you believe your mutual fund can achieve a 12 percent annual rate of return and you want to buy the car in 9 years on the day you turn 30, how much must you invest today?

$70,679.56

For each of the following, compute the future value: 2,400 11 13 % 9,052 7 9 79,355 14 12 186,796 8 6

$9,206.07 $16,547.41 $387,816.80 $297,724.44

You owe $1,200 on your credit card, which charges 1.5% per month. If you pay $50 per month starting at the end of this month, how many months will it take to pay off your credit card?

30 months

A coin that was featured in a famous novel sold at auction in 2014 for $6,930,000. The coin had a face value of $10 when it was issued in 1786 and had previously been sold for $230,000 in 1974. At what annual rate did the coin appreciate from its first minting to the 1974 sale? What annual rate did the 1974 buyer earn on his purchase? At what annual rate did the coin appreciate from its first minting to the 2014 sale?

5.49% 8.89% 6.08%

Assume the total cost of a college education will be $200,000 when your child enters college in 16 years. You presently have $70,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

6.78%

In 1895, the first Putting Green Championship was held. The winner's prize money was $220. In 2014, the winner's check was $1,460,000. What was the percentage increase per year in the winner's check over this period? If the winner's prize increases at the same rate, what will it be in 2041?

7.68% $10,752,599.84

Your bank quotes 9% APR on your car loan (.75 percent each month). What is the EAR?

9.38%

The present value interest factor for a 30-year annuity with an interest rate of 10 percent per year is ________.

9.4269

The present value interest factor for an annuity with an interest rate of 8 percent per year over 20 years is __________.

9.8181

Which of the following should be valued using a perpetuity formula? A consol (bond that pays interest only and does not mature) An amortized loan Preferred Stock Cash Flows from a product whose sales are expected to remain constant forever Payments from a retirement account after reitrement

A consol (bond that pays interest only and does not mature) Preferred Stock Cash Flows from a product whose sales are expected to remain constant forever

Which of the following is a perpetuity? A growing stream of cash flows for a fixed period An undulating stream of cash flows forever A constant stream of cash flows for a fixed period A constant stream of cash flows forever

A constant stream of cash flows forever

What is the simplest form of loan?

A pure discount loan.

A sole proprietorship is a business owned by ________ person(s).

One

Most equity shares of large firms in the US trade on:

Organized auction markets

How is ownership transferred in a corporation?

Ownership is transferred by gifting and selling shares of stock.

The payments in a ____________ amortization loan are NOT based on the life of the loan.

Partial

A business without separate legal authority formed by two or more people is known as a _________.

Partnership

How to amortize a loan?

Pay the interest each period plus some fixed amount of the principal. Pay principal and interest every period in a fixed payment.

A corporation receives cash from financial markets by selling __________ and _____________.

Stocks and Bonds

What is true about a partial amortization loan?

The borrower makes a large balloon payment at the end of the loan period The monthly payments do not fully pay off the loan by the end of the loan period. The monthly payment is based on a longer amortization period than the maturity of the loan. The amortization period is longer than the loan period.

What is APR?

The interest rate per period multiplied by the number of periods in the year.

What is EAR?

The interest rate stated as though it were compounded once per year.

Imprudential, Inc., has an unfunded pension liability of $576 million that must be paid in 25 years. To assess the value of the firm's stock, financial analysts want to discount this liability back to the present. If the relevant discount rate is 6.9 percent, what is the present value of this liability?

$108,637,522.58

Assume $100 earns a stated 10 percent rate compounded quarterly. What will the value of the $100 be after one year?

$110.40

At 7 percent interest, how long does it take to double your money? At 7 percent interest, how long does it take to quadruple it?

10.24 years 20.49 years

If the stated interest rate is 10 percent, what is the EAR if the interest is compounded monthly?

10.47%

Which of the following is equal to an effective annual rate of 12.36 percent?

12% compounded semiannually

First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest compounded annually. If you made a $71,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 8 years?

14,976.04

A credit card charges 18 percent interest per year (APR) (1.5 percent each month). What is the EAR?

19.56%

You are considering an investment that will earn the following cash flow over the next three years. You expect to earn 6% return on the investment. Year 1: $5,000 Year 2: $6,000 Year 3: $5,500 Amount you should pay for the investment:

1: $4,716.98 2: $5,339.98 3: $4,617.91 Total: $14,674.87

At the end of 5 days, you repay your $1,000 loan plus $50 interest. What is the EAR?

3,422.24%

In large firms, financial activity is usually associated with which top officer?

Chief Financial Officer

The life of a corporation last for how long?

It is unlimited

The goal of a for-profit business is to ________ existing owner's equity.

Maximize

Most investments involve:

Multiple Cash Flows

Because shareholders get paid last after all other obligations are satisfied, they are often called:

Residual owners

An effective annual rate of 7.12 percent is equal to 7 percent compounded __________.

Semiannually

What is the main goal of financial management?

To maximize shareholder wealth.

Which positions generally report to the chief financial officer? (CFO)

Treasurer and Controller

Given the same rate of interest, more money can be earned with compound interest than with simple interest.

True

The formula for a present value factor is 1/(1 + r)^t

True

The first cash flow at the end of week 1 is $100, the second cash flow at the end of month 2 is $100, and the third cash flow at the end of year 3 is $100. This cash flow pattern is a(n) __________ type of cash flow.

Uneven

When a corporation is formed, it is granted which of the following rights?

Legal powers to sue State citizenship for jurisdictional purposes The ability to issue stock

A traditional (non-growing) annuity consists of a(n) _________ stream of cash flows for a fixed period of time.

Level

The Sarbanes-Oxley Act requires corporate officers to:

List any deficiencies in internal controls Accept responsibility for material errors in the annual report Confirm the validity of the annual financial report

Capital budgeting is concerned with making and managing expenditures on ______________.

Long-Term Assets

Which of the follow is included in a firm's capital structure? Long-Term Debt Current Assets Equity Net Sales

Long-Term Debt Equity

Which of the following payment methods amortizes a loan? Single lump sum Interest plus fixed amount Fixed payments that result in a zero loan balance Fixed interest payments only

Interest plus fixed amount Fixed payments that result in a zero loan balance

What is true about a sole proprietorship?

It is the simplest type of business to form. A proprietorship has a limited life.

For a positive stated annual interest annual rate and multiple(more than one) compounding periods per year, the EAR is always _______ the APR.

Larger than

A corporation is a distinct ________ entity and as such can have a name and take advantage of the legal powers of natural persons.

Legal

In March 2012, Daniela Motor Financing (DMF), offered some securities for sale to the public. Under the terms of the deal, DMF promised to repay the owner of one of these securities $500 in March 2047, but investors would receive nothing until then. Investors paid DMF $250 for each of these securities; so they gave up $250 in March 2012, for the promise of a $500 payment 35 years later. a. Assuming that you purchased the bond for $250, what rate of return would you earn if you held the bond for 35 years until it matured with a value $500? b. Suppose under the terms of the bond you could redeem the bond in 2022. DMF agreed to pay an annual interest rate of .9 percent until that date. How much would the bond be worth at that time? c. In 2022, instead of cashing in the bond for its then current value, you decide to hold the bond until it matures in 2047. What annual rate of return will you earn over the last 25 years?

A. 2.00% B. $273.43 C. 2.44%

The costs incurred due to a conflict of interest between stockholders and management are called _______

Agency Costs

The conflict of interest between an agent and a principal is called a(n) __________.

Agency problem

The relationship between stockholders and management can best be described as a(n) __________________ relationship.

Agency.

The rules used by a corporation to regulate its existence are known as ____________

Bylaws

The effective annual rate (EAR) takes into account the ________ of interest that occurs within a year.

Compounding

Which corporate officer is responsible for accurate financial reporting of the firm's activities?

Controller

What are the two basic classifications under which most potential financial goals fall?

Controlling Risk Earning or increasing profits

Inventory is a:

Current Asset Part of working capital

Some of the cash flow generated by a firm goes back to the financial markets in the form of _________.

Dividends and debt payments.

Assume interest is compounded monthly. The _______ annual rate will express this rate as though it were compounded annual.

Effective

Which of the following are considered stakeholders in a company?

Employees Suppliers Government

In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the ________ of each period.

End

Which companies were involved in corporate scandals that led to Sarbanes-Oxley?

Enron, Tyco, WorldCom

In a large corporation, the financial manager is primarily responsible for:

Financing decisions Financial aspects of operations, such as collections of accounts receivables Long-term investment decisions

A growing annuity has a(n)

Finite number of cash flows

Which of the following are important when considering a partnership? Fund raising limitations Future Dividend policy Personal Liability for firm debts Taxation of partnership income

Fund raising limitations Personal Liability for firm debts Taxation of partnership income

A treasurer's responsibilities typically include:

Handling cash flows. Managing capital expenditures Making financial plans.

Which of the following are among the most important questions to be asked when a business is started?

How will everyday financial activities be handled? What long-term investments should be made? Where will long-term financing be obtained to pay for investments?

A good financial decision will do?

Increase value of the firm's stock. Increase market value of shareholder's equity.

Why is a dollar today worth more than a dollar received in the future?

Inflation will make a dollar in the future worth less than a dollar today Today's dollar can be reinvested, yielding a greater amount in the future.