Finance exam 1

You have won the lottery and will receive 20 annual payments of $10,000 starting today. If you can invest these payments at 8.5%, what is the present value of your winnings? (Round the final answer to the nearest dollar.) $94,633 $102,677 $524,891 $200,000

$102,677

Ransport Company has made an investment in another company that will guarantee it a cash flow of $37,250 each year for the next five years. If the company uses a discount rate of 15 percent on its investments, what is the present value of this investment? (Round to the nearest dollar.) $251,154 $186,250 $101,766 $124,868

$124,868

James Perkins wants to have a million dollars at retirement, which is 15 years away. He already has $200,000 in an IRA earning 8 percent annually. How much does he need to save each year, beginning at the end of this year, to reach his target? Assume he could earn 8 percent annually on any investment he makes. (Round to the nearest dollar.) $10,900 $13,464 $14,273 $16,110

$13,464

You are purchasing a used car and will make 5 annual payments of $3,500 starting one year from today. If your funds could be invested at 9%, what is the present value of the car? (Round the final answer to the nearest dollar. $14,839 $20,946 $13,614 $17,500

$13,614

Joseph Harris is considering an investment that pays 6.5 percent annually. How much does he need to invest today so that he will have $25,000 in seven years? (Round to the nearest dollar.) $16,088 $18,850 $17,474 $16,625

$16,088

Tim Dodson has borrowed $8,600 to pay for his new car. The annual interest rate on the loan is 9.4 percent, and the loan needs to be repaid in four payments. What will be his annual payment if he begins his payment beginning now? (Round to the nearest dollar.) $2,850 $2,448 $2,304 $2,229

$2,448

Barbara Lakey is saving to buy a new car in four years. She will save $5,500 at the end of each of the next four years. If she invests her savings at 7.75 percent annually, how much will she have after four years? (Round to the nearest dollar.) $22,000 $23,345 $27,556 $24,692

$24,692

Ann Chang is investing $2,500 today and will do so at the beginning of each of the next six years for a total of seven payments. If her investment can earn 12 percent annually, how much will she have at the end of seven years? (Round to the nearest dollar.) $29,460 $25,223 $31,127 $28,249

$28,249

Bovic Inc. is a growing company with sales of $1.25 million this year. The company expects to grow at an annual rate of 25 percent for the next three years, followed by 20 percent per year for the next two years. What will be Bovic's sales at the end of five years? (Round to the nearest dollar.) $1,875,000 $2,929,688 $2,160,000 $3,515,625

$3,515,625

Shaun Barringer has started on his first job. He plans to start saving for retirement. He will invest $5,000 at the end of each year for the next 45 years in a fund that will earn an annual return of 10 percent. How much will Shaun have at the end of 45 years? (Round to the nearest dollar.) $2,667,904 $3,594,524 $1,745,600 $5,233,442

$3,594,524

Damien McCoy has loaned money to his brother at an interest rate of 5.85 percent. He expects to receive $987, $1,012, $1,062, and $1,162 at the end of the next four years as complete repayment of the loan with interest. How much did he loan out to his brother? (Round to the nearest dollar.) $3,685 $3,657 $3,785 $3,757

$3,657

A perpetuity bond pays a coupon of $136 per year and has a required rate of return of 3.5%. What is the market value of the bond? (Round the final answer to the nearest two decimals). $3,872.76 $3,885.71 $3,863.55 $3,817.34

$3,885.71

A lottery winner was given a perpetual payment of $25,362. She could invest the cash flows at 7.5 percent annually. What is the present value of this perpetuity? (Round to the nearest dollar.) $338,160 $201,356 $390,215 $238,160

$338,160

Brandon Ramirez wants to set up a scholarship at his alma mater. He is willing to invest $320,000 in an account earning 11 percent annually. What will be the annual scholarship that can be given from this investment? (Round to the nearest dollar.) $35,200 $32,600 $40,300 $50,000

$35,200

Congratulations! You just bought a new car for $18,000 and plan to take out a loan for the full amount. The local credit union will lend you the money at 2.75% interest for four years, and you will make monthly payments, beginning next month. How much is each monthly payment? $396.43 $401.13 $375.00 $6000

$396.43

Viviana Carroll needs to have $25,000 in five years. If she can earn 8 percent annually on any investment, what is the amount that she will have to invest every year at the end of each year for the next five years? (Round to the nearest dollar.) $4,640 $4,261 $5,000 $4,445

$4,261

Krysel Inc. is expecting a new project to begin producing cash flows at the end of this year. They expect cash flows to be as follows: $663,547 $698,214 $795,908 $798,326 $755,444 If they can reinvest these cash flows to earn a return of 9.2 percent, what is the future value of this cash flow stream at the end of five years? (Round to the nearest dollar.) $4,429,046 $4,468,692 $4,368,692 $4,529,046

$4,429,046

if Norman invested $100,000 for 3 years at 12%, how much interest on interest will he earn? (Do not round intermediate calculations. Round the final answer to two decimal places.) $4,303.36 $4,492.80 $4,856.32 $4,585.32

$4,492.80

Dawson Electricals has borrowed $27,850 from its bank at an annual rate of 8.5 percent. It plans to repay the loan in eight equal installments, beginning in a year. What is its annual loan payment? (Round to the nearest dollar.) $5,134 $4,748 $4,708 $4,939

$4,939

You are starting college this month, and your favorite aunt has agreed to give you $4,000 at the end of each of your four years and you can save $8,000 at the end of each year for the first two years after you graduate. If all of these amounts are invested at 14%, how much will you have to start graduate school, six years from now? (Round the final answer to the nearest dollar.) $42,167 $42,927 $42,702 $42,160

$42,702

You plan to begin saving for retirement by putting $6000 per year into an account earning 8% interest for the next 30 years, beginning next year. How much will you have in the account at the end of year 30? $679,699 $180,000 $60,375 $734,075

$679,699

Stowell earns 20% interest compounded annually on his savings. He will deposit $1,500 today, $1,650 one year from today, and $1,820 two years from today. What will be the account balance three years from today? (Round intermediate calculations to nearest four decimals.) $7,140 $7,889 $7,152 $7,268

$7,152

Phosfranc Inc., is expecting the following cash flows starting at the end of the year—$133,245, $152,709, $161,554, and $200,760. If their opportunity cost of capital is 9.4 percent, find the future value of these cash flows. (Round to the nearest dollar.) $776,252 $756,525 $734,231 $734,731

$734,731

Albend Holmes wants to deposit $4,500 in a bank account that pays 8.25 percent annually. How many years will it take for his investment to grow to $10,000? (Round off to the nearest year.) 12 years 11 years 8 years 10 years

10 years

Beautinator Cosmetics borrowed $152,300 from a bank for three years. If the quoted rate (APR) is 11.75 percent, and the compounding is daily, what is the effective annual rate (EAR)? (Round to one decimal place.) 11.6% 11.7% 12.5% 14.3%

12.5%

At what rate must $4,000 be compounded annually for it to increase to $40,000 in 15 years? (Do not round the intermediate calculations. Round the final answer to the nearest two decimals.) 16.59% 25.82% 35.82% 14.98%

16.59%

Hesterberg is a weightlifter whose maximum lift is 220 pounds. He believes he can increase his maximum by 5% per month for the next four months. If Hesterberg achieves his goal, his maximum lift will increase to approximately: (Round to the nearest whole pounds.) 243 pounds. 250 pounds. 267 pounds. 242 pounds.

267 pounds.

GlobalShippers Inc. has forecasted earnings of $1,233,600, $1,345,900, and $1,455,650 for the next three years. What is the future value of these earnings if the firm's opportunity cost is 13 percent? (Round to the nearest dollar.) $4,551,701 $4,214,360 $3,900,865 $4,362,428

4,551,701

Which of the following statements about the time value of money concept is true? a. It assumes that inflation rate remains constant for the foreseeable future. b. It assumes that people prefer to consume things at some time in the future rather than today. c. It refers to the fact that higher cash flows in earlier years are less desirable. d.It means a dollar received today is worth more than a dollar received tomorrow.

It means a dollar received today is worth more than a dollar received tomorrow.

According to the Fisher equation, if the real rate of interest is 2.5% and the nominal rate of interest is 5.3%, the rate of inflation is forecast to be approximately a. 2.8%. b. 7.8%. c. 5.3%. d. 2.7%.

a. 2.8%.

If your investment increased 12% this year and inflation for that period was 4%, what was your real rate of return? Please use the simplified (or approximate) Fisher equation for this question. a. 7.7% b. 12.0% c. 8.0% d. 9.3%

a. 7.7%

Which of the following theories states that security prices reflect all public information, but not all private information? a. Semistrong-form efficiency. b. Nominal-form efficiency. c. Weak-form efficiency. d. Strong-form efficiency.

a. Semistrong-form efficiency. *KNOW THESE*

An example of a capital budgeting decision is: a. deciding whether or not to purchase an expensive piece of equipment. b. deciding whether or not to hire a new CEO. c. deciding whether or not to buy supplies for the company. d. deciding whether or not to give the employees a raise.

a. deciding whether or not to purchase an expensive piece of equipment.

Interest rates tend to go up when this happens: a. the demand for capital goes up b.the demand for capital goes down c.the supply of capital goes up d.during periods of an economic contraction

a. the demand for capital goes up

Interest rates increase when a. the demand for money increases. b. the supply of money increases. c.the inflation rate decreases. d.the supply and demand for money are equal.

a. the demand for money increases.

An example of a primary market transaction is: a. the first offering of an company's stock to the public b. An investor sells some previously issued IBM stock c. Also called the "used car lot" for securities. d. An investor purchases some previously issued GE stock.

a. the first offering of an company's stock to the public

The most common reason that corporate firms use the futures and options markets is: a. to hedge risk. b. to take risk. c. to make deposits. d. none of the above.

a. to hedge risk.

Secondary financial markets are similar to: a. used-car markets. b. direct auction markets. c.new-car markets. d.direct financial market.

a. used-car markets.

You plan to put $1,000 into a CD at the bank. If you earn 2.5% interest, compounded quarterly, how much will you have in three years? a.$1,077.63 b.$1,076.89 c.$1,025.00 d.$1,000.00

a.$1,077.63

In a public corporation, which of the following reports directly to the owners of a firm? a.Board of directors b.Audit committee c.CFO d.CEO

a.Board of directors

Which of the following alternatives involve calculating the future value of multiple cash flows? a.Calculating income after retirement b.Amortizing a home mortgage c.Calculating the price of a bond d.Choosing between alternative capital budgeting proposals

a.Calculating income after retirement

Which of the following transactions is a secondary market transaction? a.Johnny Appleseed buying 1,000 shares of Dell through NYSE b.IBM issuing 100,000 shares on the NYSE for the first time c.Mary receiving dividends from IBM d.MicroChip Computers selling $1,000,000 worth of bonds directly to AIG Corp.

a.Johnny Appleseed buying 1,000 shares of Dell through NYSE

Which of the following is considered a hybrid organizational form? a.Limited liability partnership b.Partnership c.Sole proprietorship d.Corporation

a.Limited liability partnership

Financial markets in which equity and debt instruments with maturities less than one year are traded are called: a.Money markets. b.Capital markets. c.over-the-counter exchange. d.None of the above.

a.Money markets.

Which of the following organizational forms is subject to the Securities and Exchange Commission (SEC) regulations? a.Public corporation b.Sole proprietorship c.Partnership d.Private corporation

a.Public corporation

If a firm has had an agency conflict which is reflected by a poor performing stock for a long period of time, then the firm may become a target of: a.a corporate raider. b.an IRS investigation. c.a bankruptcy lawyer. d.an SEC investigation.

a.a corporate raider.

Capital budgeting involves a.determining which productive assets a firm should buy. b.determining how a firm should finance its assets. c.determining how much money should be paid as dividends. d.making decisions about how much debt a firm should have in its capital structure.

a.determining which productive assets a firm should buy.

Working capital management decisions help to determine: a.how a firm's day-to-day financial matters should be managed. b.how a firm should finance its assets. c.which productive assets a firm should purchase. d.all of the above.

a.how a firm's day-to-day financial matters should be managed.

The cash remaining with the firm after paying its operating expenses, making payments to creditors, and taxes is called: a.residual cash flow. b.capital contributed in excess of par. c.earnings per share. d.assets.

a.residual cash flow.

Cash dividends are paid out of: a.residual cash flows. b.liquidated assets. c.long-term debt. d.all of the above.

a.residual cash flows.

Capital budgeting decisions generally have the most effect on: a.the asset portion of the balance sheet. b.the short-term portion of the balance sheet. c.the current liability portion of the balance sheet. d.all of the above.

a.the asset portion of the balance sheet.

Investment banking firms provide a.underwriting services. b.insurance. c.overdraft facility. d.auditing services.

a.underwriting services.

The effective annual rate (EAR) will equal the annual percentage rate (APR) if interest is compounded: a. daily. b. monthly. c. quarterly. d. annually.

annually.

Which one of the following processes do we use when calculating the price of an asset? a. Averaging. b. Discounting. c. Compounding. d. Amortizing.

b. Discounting.

Which of the following is true of the future value of an investment? a. The lower the interest rate, the higher the future value of an investment b. The higher the interest rate, the higher the future value of an investment. c.The lower the number of compounding periods, the higher the future value of an investment. d.The lower the present value of an investment, the higher the future value of an investment.

b. The higher the interest rate, the higher the future value of an investment.

Assume that potential projects X, Y and Z will each pay a total of $100,000 over 20 years. X pays $8,000 per year for 10 years and $2,000 per year for 10 years. Y pays $2,000 per year for 10 years and $8,000 per year for 10 years. Z pays $5,000 per year for 20 years. Which project is likely to be most attractive to an investor? a. The project with equal cash flows each year is likely to be most attractive. b. The project with large cash flows early is likely to be most attractive. c. The project with large cash flows later is likely to be most attractive. d.The projects have equal total cash flows and are likely to be equally attractive.

b. The project with large cash flows early is likely to be most attractive.

Which of the following is a process by which investment bankers purchase new securities directly from the issuing company and resell them to the investors? a. Private placement. b. Underwriting. c. Distribution. d. Agency marketing.

b. Underwriting.

If a firm needs to finance a new corporate headquarters building, then it would most likely seek the funds in the: a. futures market. b. capital market. c. money market. d. all of the above.

b. capital market.

Stocks that are traded in the _____ are typically those of smaller and less known firms. a. National Stock Exchange b. over-the-counter market c. American Stock Exchange d. New York Stock Exchange

b. over-the-counter market

Who among the following is the "principal" in the agency relationship of a corporation? a.The board of directors b.A stockholder holding 10% or more of any class of voting stock c,A company engineer d.The CEO of the firm

b.A stockholder holding 10% or more of any class of voting stock

Which of the following alternatives involve calculating the future value of multiple cash flows? a.Amortizing a home mortgage b.Calculating income after retirement c.Choosing between alternative capital budgeting proposals d.Calculating the price of a bond

b.Calculating income after retirement

Financial markets in which equity and debt instruments with maturities greater than one year are traded are called: a.Money markets. b.Capital markets. c.over-the-counter exchange. d.None of the above.

b.Capital markets.

Which of the following is a financial institution involved in indirect financing in a financial system? a.Investment banks b.Commercial banks c.Futures and options markets d.Capital markets

b.Commercial banks

From the owner's perspective, which of the following should be the primary focus of managers? a.Profit maximization b.None of the above should be the primary focus. c.COGS Minimization d.Revenue maximization

b.None of the above should be the primary focus.

If you have loaned capital to a firm, then you could be a.a manager. b.a stakeholder. c.a partner. d.all of the above.

b.a stakeholder.

The major players in the direct financial markets are: a.investment banks. b.both investment banks and money center banks. c.regional banks. d.money center banks.

b.both investment banks and money center banks.

Brokers a.buy and sell securities from their own inventory. b.bring buyers and sellers together, usually for a commission. c.bear the risk of loss from trading securities. d."make markets" for securities.

b.bring buyers and sellers together, usually for a commission.

A financial system's primary function is funneling money from: a.wealthy individuals to non-wealthy individuals. b.lender-savers to borrower-spenders. c.borrower-spenders to lender-savers. d.the government to wealthy individuals.

b.lender-savers to borrower-spenders.

Current liabilities are liabilities that: a.will be converted to cash within a year. b.must be paid within a year. c.will be converted to equity within a year. d.none of the above.

b.must be paid within a year.

Financial markets and financial institutions are both part of: a.the SEC. b.the financial system. c.the U.S. Treasury. d.none of the above.

b.the financial system.

The audit committee reports directly to the: a. chief executive officer. b. external auditor. c. internal auditor. d. board of directors.

board of directors

If inflation is anticipated to be 6 percent during the next year, while the real rate of interest for a one-year loan is 5 percent, then what should the nominal rate of interest be for a risk-free one-year loan? a. 5%. b. 12%. c. 11%. d. 6%.

c. 11%.

What is NOT a characteristic of a shareholder? a. Expects to receive dividends. b. Expects to receive a capital gain on their investment. c. Expects to receive interest. d. Expects to have rights as defined in the corporation's charter and bylaws.

c. Expects to receive interest.

A firm receives a cash flow from an investment that will increase by 10 percent annually for an infinite number of years. This cash flow stream is called: a. an ordinary annuity. b. a growing annuity. c. a growing perpetuity. d. an annuity due.

c. a growing perpetuity.

A mutual fund is an example of: a. a line of credit. b. an endowment fund. c. an investment fund. d. a pension fund.

c. an investment fund.

Which form(s) of business organization generate(s) the majority of business revenues and profits in the United States? a.Sole proprietorship b.Partnership c.Corporation d.Both Sole proprietorship and Partnership

c.Corporation

Which of the following types of owners is protected by limited liability? a.A sole proprietor a.A general partner c.Owner of a corporation d.None of the above

c.Owner of a corporation

Which of the following statements is incorrect? a.Hedge funds are major buyers and sellers of securities in the direct financial markets b.Direct transactions in wholesale markets have a typical minimum transaction size of $1 million c.The retail individual investor is a common direct participant in the direct financial markets d.Life insurance companies are major buyers of securities in the direct financial markets

c.The retail individual investor is a common direct participant in the direct financial markets

Which of the following investments will have the highest future value at the end of three years? Assume that the effective annual rate for all investments is the same. a. You earn $3,000 at the end of three years (a total of one payment). b.You earn $1,000 at the end of every year for the next three years (a total of three payments). c.You earn $1,000 at the beginning of every year for the next three years (a total of three payments).

c.You earn $1,000 at the beginning of every year for the next three years (a total of three payments).

A primary market is a market for a.companies to trade the financial derivatives such as futures and options. b.companies to buy back their own previously issued shares. c.companies to sell new securities directly to investors. d.investors to sell stocks to other investors.

c.companies to sell new securities directly to investors.

The profitability of a firm can be negatively affected by: a.too much inventory. b.too little inventory. c.either too much inventory or too little inventory. d.neither too much inventory nor too little inventory.

c.either too much inventory or too little inventory.

Within a financial system, money flows indirectly through: a.the SEC. b.stock exchanges. c.financial institutions. d.financial markets.

c.financial institutions.

One of the main services offered by investment banks to companies is: a.all of the above. b.taking deposits from companies. c.helping companies sell new debt or equity issues in the security markets. d.making loans to companies.

c.helping companies sell new debt or equity issues in the security markets.

A benefit of the corporate form of business is the a.flow-through taxation. b.tax exemption of dividends. c.limited liability of owners. d.easiness to start.

c.limited liability of owners.

The ease with which a security can be sold and converted into cash is called: a. none of the above. b.convertibility. c.marketability. d.liquidity.

c.marketability.

Money markets are markets where a.foreign currencies are traded. b.futures and options are traded. c.short-term financial instruments are traded. d.stocks are sold for immediate delivery of cash.

c.short-term financial instruments are traded.

An important function of financial intermediation is: a.for commercial banks to use consumer CD deposits to make deposits to small businesses. b.to direct the money from lenders to borrowers. c.to convert financial securities with one set of characteristics into securities with another set of characteristics. d.to direct the money from borrowers to savers.

c.to convert financial securities with one set of characteristics into securities with another set of characteristics.

The capital budgeting decision process can be described as a.how a firm's day-to-day financial matters should be managed. b.how a firm should finance its assets. c.which productive assets a firm should purchase. d.all of the above.

c.which productive assets a firm should purchase.

Which of the following is a stakeholder? a. An employee b. A lender c. The IRS d. All of the above

d. All of the above

Which of the following statements is true of amortization? a. The amortization schedule represents only the interest portion of the loan. b. Amortization solely refers to the total value to be paid by the borrower at the end of maturity. c. The computation of loan amortization is wholly based on the computation of simple interest. d. The amortization schedule provides principal, interest, and unpaid principal balance for each month.

d. The amortization schedule provides principal, interest, and unpaid principal balance for each month.

If you just purchased a share of IBM through a New York Stock Exchange-based transaction, you participated in: a. none of the above. b. a futures market transaction. c. a primary market transaction. d. a secondary market transaction.

d. a secondary market transaction.

Which of the following matters most to investors when making an investment? a.A firm's previous dividend payments b.A firm's retained earnings c.A firm's current ratio d.A firm's cash flows

d.A firm's cash flows

Which of the following markets has no central trading location? a.A futures exchange. b.None of the above. c.An auction market. d.An over-the-counter market.

d.An over-the-counter market.

Which of the following is a basic source of funds for a firm? a.Debt b.Equity c.Asset liquidations d.Both Debt and Equity

d.Both Debt and Equity

Which of the following business organizational forms create(s) a tax liability on income at the personal income tax rate? a.Sole proprietorship b.Partnership c.Corporation d.Both Sole proprietorship and Partnership

d.Both Sole proprietorship and Partnership

From the owner's perspective, which of the following should be the primary focus of managers? a.Revenue maximization b.Profit maximization c.COGS Minimization d.None of the above should be the primary focus.

d.None of the above should be the primary focus.

Which form of the efficient market hypothesis states that security prices reflect all public information, but not all private information? a.Strong b.Weak c.Very weak d.Semistrong

d.Semistrong

Which of the following statements is true of amortization? a. The computation of loan amortization is wholly based on the computation of simple interest. b. With an amortized loan, a periodic payment of principal portion gradually decreases over a period. c. Amortization schedule represents only the interest portion of the loan. d.With an amortized loan, a larger proportion of each month's payment goes toward interest in the early periods.

d.With an amortized loan, a larger proportion of each month's payment goes toward interest in the early periods.

Direct financing occurs when: a.a lender-saver borrows directly from a borrower-spenders. b.a borrower-spender borrows from the federal government. c.a lender-saver borrows from the federal government. d.a borrower-spender borrows directly from a lender-savers.

d.a borrower-spender borrows directly from a lender-savers.

If your investment pays the same amount at the beginning of each year for a period of 10 years, the cash flow stream is called: a. a perpetuity. b. an ordinary annuity. c.a growing perpetuity. d.an annuity due.

d.an annuity due.

Underwriting is the process by which an investment banker a.provides seed capital to new start-ups. b.markets and resells a company's securities to investors. c.lends funds to new companies. d.helps a company sell its new security issue.

d.helps a company sell its new security issue.

Which of the following is a stakeholder of a firm? a. employees b. central bank c. the firm's competitor d. taxpayers

employees

Which of the following is an example of frivolous agency costs? a. Excessive perks. b. Hiring external auditors to certify accounting statements despite having internal auditors. c. Investment in Land & Buildings. d. Providing lunch for the employees.

excesive perks

A stakeholder is: a. someone geographically close to the firm's headquarters. b. someone who has a claim on the cash flows of the firm. c. some government agency. d. all of the above.

someone who has a claim on the cash flows of the firm.

The future value of an ordinary annuity is less than the future value of an annuity due. True False

true