FNCE 121 Final
Your father invested a lump sum 33 years ago at 5.25% annual interest rate. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?
$9,512.96
You are planning to buy a house in a few years, and would like to put money in an account today to save for a down payment in future. Assuming the interest rate offered for a 10 year investment plan is same as for a 4 year investment plan. Which of these two plans would require a smaller savings amount to be deposited today>
10 year investment
A company has a borrowing rate of 15% and a tax rate of 21%. What is its aftertax cost of debt?
11.85%
If an all-equity firm's beta is 2, the risk-free rate is 3%, and the historical market risk premium is 7%, what is the firm's cost of capital?
17% (3%+ 2 * 7% = 17%)
Which one of the following terms is defined as the mixture of a firm's debt and equity financing?
Capital structure
Which corporate officer is responsible for accurate financial reporting of the firm's activities?
Controller
The CAPM formula is:
E(Re) = Rf + B(E(Rm)-Rf)
Which one of the following best states the primary goal of financial management?
Maximize the current value per share
basic present value equation is
PV = FV/(1+r)^t
You are considering an investment that will earn the following cash flows over the next three years. You expect to earn 6% return on the investment. Match each cash flow with its present value Year 1: $5,000 Year 2: $6,000 Year 3: $5,500
Year 1: $4,716.98 Year 2: $5,339.98 Year 3: $4,617.91 Amount you should pay for the investment: $14,674.87
Which of the following is true?
a company can deduct interest paid on debt when computing taxable income
Which term applies to the mixture of debt and equity maintained by a firm?
capital structure
Future value is the ___ value of an investment at some time in the future
cash
WACC is used to discount ___ ___
cash flows
Which of the following should be valued using a perpetuity formula?
cash flows from a product whose sales are expected to remain constant forever, a consol (bond that pays interest only and does not mature), and preferred stock
The idea behind ___ is that interest is earned on interest
compounding
In financial markets, debt and ___ securities are bought and sold
equity
Which of the following are included in a firm's capital structure?
equity and long-term debt
A treasurer's responsibilities typically include:
handling cash flows, managing capital expenditure decisions, and making financial plans
Which of the following are true?
ideally, we should use market value in the WACC, book values are often similar to market values for debt
A good financial decision will do which of the following?
increase the value of a firm's existing stock and increase market value of shareholders' equity
Finding a firm's overall cost of equity is difficult because
it cannot be observed directly
Corporations in other countries are called
joint stock companies or public limited companies
The CAPM can be used to estimate the ___
required return on equity
To estimate a firm's equity cost of capital using the CAPM, we need to know the ___
risk-free rate, market risk premium, and stock's beta
The owners of a corporation are called
shareholders
Which of the following positions generally report to the chief financial officer (CFO)?
treasurer and controller
True or False: The formula for a present value factor is 1/((1+r)^t)
true
True or false: Discounting is the opposite of compounding
true
True or false: Given the same rate of interest, more money can be earned with compound interest than with simple interest
true
A partnership must have at least ___
two
Semi-annual compounding means that interest is paid ___ per year
two times
What does WACC stand for?
weighted average cost of capital
Which of the following are among the most important questions to be asked when a business is started?
what long-term investments should be made? How will everyday financial activities be handled? Where will long-term financing be obtained to pay for investments?
One of the disadvantages of using historical returns to estimate the market risk premium is that the past may not be a good guide to the future
when economic conditions change quickly
The possible goal of profit maximization ___
would probably be the most commonly sighted goal for a business and can be achieved by cost-cutting
What is the future value of $1,000 invested for 8 years at 6%?
$1593.85
Which of the following investment would result in a higher future value? Investment A: 12% APR for 10 years Investment B: 12% APR for 12 years
Investment B
The market risk premium is defined as:
Rm - Rf
Which is greater, the APY or the EAR?
They are the same
___ budgeting is the process of making and managing expenditures on long-term assets
capital
to apply the dividend growth model to a particular stock, you need to assume that the firm's ___ will grow at a constant rate
dividend
In almost all multiple cash flow calculations, it is implicitly assumed that the cash flows occur at the ___ of each period
end
A single cash flow is also known as a
lump sum
Assume $100 earns a stated 10% rate compounded quarterly. What will the value of the $100 be after one year?
$110.38
If you invest $100 at 10 percent compounded annually, how much money will you have at the end of 3 years?
$133.10
You just signed a consulting contract that will pay you $38,000, $52,000, and $85,000 annually at the end of the next three years, respectively. What is the present value of these cash flows given an annual discount rate of 11%?
$138,590
Alex invested $11,500 in an account that pays 6% annual interest. How much money will he have at the end of four years?
$14,518
If the market value of debt is $45 million and the market value of equity is $105 million, the total firm value is ___ million
$150
If you invest $100 at 10% simple interest, how much will you have in 10 years?
$200
Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 5 if the annual interest rate is 10%?
$34,622.50
Today, you earn a salary of $30,000. What will be your annual salary twelve years from now if you earn annual raises of 2.6%?
$40,821.56
You just received $25,000 from an insurance settlement and have decided to invest it for your retirement. Currently, your goal is to retire 40 years from today. How much more will you have in your account on the day you retire if you can earn an average annual return of 8.3% rather than just 8%?
$63,732.66
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
What are the after-tax earnings for HIJ Corporation if it reports $200 in revenue, $90 in operating expenses, has a tax rate of 21%, and pays $20 in interest on its bonds
$71.10
Your grandmother is gifting you $200 a month for four years while you attend college to earn your bachelor's degree. At a 4.8% annual discount rate, what are these payments worth to you on the day you enter college?
$8,718.85
If you invest for a single period at an interest rate of r, your money will grow to ___ per dollar invested
(1+r)
A firm's capital structure consists of 40% debt and 60% equity. The aftertax yield on debt is 2.5% and the cost of equity is 15%. The project is about as risky as the overall firm. What discount rate should be used to estimate the project's net present value?
10%
You agree to replay $1,200 in 2 weeks for a $1,000 payday loan. What is your EAR assuming that there are 52 weeks in a year?
11,347.55%
Three years from now you are to receive $25,000 in inheritance. Immediately upon receipt, you intend to invest the entire sum in a stock portfolio earning 12% annual return. How long will it take from now to triple your money ($75,000)?
12.69 years
Suppose the risk-free rate is 5%, the market rate of return is 10%, and beta is 2. Find the required rate of return using the CAPM
15%
You borrow $100 and agree to pay back your payday loan in 2 weeks for 10% interest over that 2-week period. What is your APR?
260.71%
How long will it take $40 to grow to $240 at an interest rate of 6.53% compounded annually?
28.33 years
At the end of 5 days, you repay your $1,000 loan plus $50 in interest. What is the EAR?
3,422.24%
You're trying to save to buy a new $72,000 sports car You have $35,000 today that can be invested at your bank. The bank pays 1.26% 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?
57.61 years
Suppose we invest $100 now and get back $236.74 in 10 years. What rate of interest will we achieve?
9%
Your bank quotes a 9% APR on your car loan (0.75% interest each month). What is the EAR?
9.38%
Two years ago,you invested %1,600. Today it is worth $1,924.62. What rate of interest (annual) did you earn?
9.66%
Suppose you want to save $10,000 to buy a car. You have $6,000 to deposit today and you can earn 6% on your investments. You want to know when you'll have enough to buy the car. Which of the following spreadsheet functions will solve the problem?
=NPER(0.06,0,-6000,10000)
True of false: The correct mathematical formula for finding the future value of a $68 present value in 12 years at 9 percent annual interest is: FV = $68(1.12^9)
False
True or false: Small changes in the interest rate do not really matter when dealing with millions or billions of dollars over 30 or 40 years
False
Sally and Alicia currently are general partners in a business located in Atlanta, Georgia. They are content with their current tax situation but are both very uncomfortable with the unlimited liability to which they are each subjects. Which form of business entity should they consider to replace their general partnership assuming they wish to remain only two owners of their business? Whichever organization they select, they wish to be treated equally
Limited liability company
Suppose you need $5,000 in one year, $4,300 in two years, and $5,000 in three years. Match each present value amount to the corresponding cash flow assuming a discount rate of 17%
PV Year 1: $4,273.50 PV Year 2: $3,141.21 PV Year 3: $3,121.85
Shareholder A sold shares of Maplewood Cabinets stock to Shareholder B. The stock is listed on the NYSE. This trade occurred in which one of the following?
Secondary, auction market
What is the main goal of financial management?
To maximize current value per share of existing stock
You expect to receive bonuses with your job at the end of each year for the next five years. Assume you can invest all of your bonuses at 4.5%, and the bonuses are as shown below, match each amount to its future value at the end of the five years Year 1:$500 Year 2:$1,200 Year 3:$1,000 Year 4:$2,400 Year 5:$2,200
Year 1: $596.26 Year 2: $1,369.40 Year 3: $1,092.03 Year 4: $2,508.00 Year 5: $2,200 Total: $7,765.68
As the beneficiary of a life insurance policy, you have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000 today or receive payments of $1,400 a month for 20 years. If you can earn 6% annual rate on your money, which option should you take and why?
You should accept the $200,000 because the payments are only worth $195,413 to you today
Which of the following are true of a sole proprietorship?
a proprietorship has a limited life and it is the simplest type of business to form
Which of the following methods can be used to calculate present value?
a time value of money table, an algebraic formula, a financial calculator
the relationship between stockholders and management can best be described as a(n) ___ relationship
agency
which on of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?
agency problem
Which of the following processes can be used to calculate future value for multiple cash flows?
calculate the future value of each cash flow first and then add them up and compound the accumulated balance forward one year at a time
What are two basic classifications under which most potential financial goals fall?
controlling risk and earning or increasing profits
Which of the following are components used in the construction of the WACC?
cost of common stock, cost of preferred stock, and cost of debt
What can we say about the dividends paid to common and preferred stockholders?
dividends to common stockholders are not fixed and dividends to preferred stockholders are fixed
When a corporation is formed, it is granted which of the following rights?
legal powers to sue, the ability to issue stock, state citizenship for jurisdictional purposes
A dollar received one year from today has ___ value than a dollar received today
less
In a large corporation, the financial manager is primarily responsible for:
long-term investment decisions, financing decisions, financial aspects of operations, such as collections of accounts receivables
Since ___________ and ownership are separated, a corporation's life is unlimited.
management
The goal of a for-profit business is to ___ existing owners' equity
maximize
Which of the following are real-world examples of annuities?
mortgages and pensions
Most investments involve
multiple cash flows
How is ownership transferred in a corporation?
ownership is transferred by gifting or selling shares of stock
Inventory is a:
part of working capital, current asset
If you want to know how much you to invest today at 12% compounded annually in order to have $4,000 in five years, you will need to find a ___ value
present
The formula for the ___ value interest factor of an annuity is {(1-[1/(1+r)^t])/r}
present
Which of the following can be determined using the future value approach to compound growth developed in this chapter?
sales, dividend, and population growth
When one owner or creditor sells to another, the transaction takes place in the ___ market
secondary
An effective annual rate of 7.12% is equal to 7% compounded ___
semiannually (for semiannual compounding, EAR = (1+0.07/2)^2 - 1 = 7.12%)
A ___ is someone other than an owner or a creditor who potentially has a claim of the cash flows of a firm
stakeholder
A corporation receives cash from financial markets by selling ___ and ___
stocks and bonds
Which of the following are considered stakeholders in a company?
suppliers, employees, and government
Corporate dividends are
taxable as personal income when received by shareholders even though that income was taxed at the corporate level
Which of the following is true about a growing annuity?
the cash flows grow for a finite period at a constant rate
Which of the following methods for calculating the cost of equity ignores risk?
the dividend growth model
The primary responsibility of financial managers is to increase the value of
the existing shares of stock
The SML approach requires estimates of
the market risk premium and the beta coefficient