Finance Test 1
My uncle wishes to give my daugther $3000 for college (in 7 years). If the educational account pay 0.5% interest per month for that time, how much must be put in the account today?
$1,973.20
If $2000 is invested at 10%, simple interest, then the account will grow by $200 each year. Five years of this growth and investment is worth $3000. What is the total interest
$1000
Consider an investment of $100 that gains 5% in value over a quarter. How much is the investment worth at the end of the quarter?
$105
$1000 is borrowed at 7%, with interest compounded annually, to be paid in full in two years. How much will need to be repaid?
$1144.90
Ms.Wood is saving up $20000 for a house. If she can get 8% interest each year and is willing to wait six years, how much must she set aside today?
$12603.40
I have $75,000 in an account I have had for 20 years. If it has been grow by 9% per year, how much did I put in the account 20 years ago?
$13,382.32
how much interest is earned in the fifth year if the account begins with $350 and earns 6% interest every year?
$26.51
interest will be earned on a $2000 investment at a rate of 10% per year for five years. How much will the investment be worth?
$3221.02
my uncle put $3000 away for my oldest daughter's education. I has been earning 0.5% interest per month for 7 years. How much is in the account now?
$4,561.11
what is the present value, with a 9% discount rate, of $100 to be received next year and $400 to be received in three years?
$400.62
i have $75000 and i am going to let it grow in an account that pays 9% interest annually for 20 years. How much will I have after 20 years?
$420,330.81
Houston Harris is willing to lend money at 10% interest to George Williamson. George figures he will be able to repay $5,000, how much can he borrow?
$4545.45
Marco Hays is willing to lend George Williamson one point less than 10% interest. George figures he will be able to repay $5,000, how much can he borrow?
$4587.16
5 years from now you wish to have $600 into an account that pays 4% interest per year, you wish to know how much you need to put away. How large must your investment be?
$493.16
suppose three borrowers all receive $6000 and agree to pay off the loan in three years and to pay 5% interest on the principal every year. This will require them to pay a total of
$6900 each
5 years after investing $600 into an account that pays 4% interest per year, you wish to know the current value. What is the current value?
$729.99
If an investor began with $1000, how much would he have after five years? Suppose the returns are 20%, 0%, -10%, 5%, and 10%. How much would investor have if he had earned 5% (average) or 4.52% (geometric)?
- $1247.40 - $1276.28 - $1247.37
suppose an account is opened with $20000. The account will receive 8% interest, annual compounding. Five years later, $3000 is added to the account. Another three years later $10000 is withdrawn from the account. Finally, $6000 is added to the account after a period of four more years - twelve years after the initial investment. How much is in the account after the final addition is made? How much is in the account fourteen years after the account is opened?
- $47899.99 - $55870.54
what is the standard deviation of the following five years of annual returns: +20%, 0%, -10%, +5%, and 10%
11.18%
What is the difference in the effective annual rate of 12% with monthly compounding and quarterly compounding?
112.68 - 112.55 = .13
Portia is expecting $100,000 in four years when she turns 21. What is her discount rate if she would rather have $60000 today?
13.62%
Mrs. brown is looking to become a millionaire out of her inheritance of $75000. What rate of return does she need to earn to reach her target in 15 years?
18.85%
what is the internal rate of return of an investment of $5000 made today to receive $3000 in one year and $3500 in two years.
18.88%
Chevron's stock price was $94.02 per share when the stock market opened on March 2, 2020, and it was $96.59 when the stock market closes that day. what was chevron's rate of return during trading on March 2, 2020?
2.73% (net) or 1.0273 (gross)
bryan is a procrastinator. he is not willing to repay the 4.75% annual compounding, loan he made to his parents until the balance reaches $25000. How many years will that take if Bryan borrowed $9000?
22.02 years
chevron has a bond that matures in 2021 that offers $10.5 in coupons every six months. Suppose the price of this bond began 2019 selling for $977 and finished the year selling for $988. What rate of return would an investor in this bond have earned in 2019?
3.28%
procter and gambles stock price rose from $91.92 to $124.90 in 2019. Procter and Gamble paid a total of $2.9549 in dividends in 2019. what rate of return did its stock have in 2019?
39.09%
what is the internal rate of return of an investment of $17000 that will bring in $4000 for each of the next five years?
5.67%
A lender is preparing for an inflation rate of 3.50% and wishes to have a real rate of interest of 6.00%. What should the stated rate of interest be?
9.71%
Sole Proprietorship
A business owned by one person
financial manager
Makes decisions for the stockholders of the firm
largest auction market
NYSE, which accounts for more than 85 percent of all the shares traded in auction markets
Corporation
a legal "person" separate and distinct from the owners, and it has many of the rights, duties, and privileges of an actual person
dealer market
a market where dealers buy and sell for their own accounts
over the counter market
a network of dealers who buy and sell the stocks of corporations that are not listed on a securities exchange and no central location
Cash Flows Between the Firm and the Financial Markets
a. cash flows to the firm from the finanical markets b. the firm invests the cash in current and fixed (or long-term) assets c. these assets generate some cash d. some of which goes to pay corporate taxes e. after taxes are paid, some of this cash flow is reinvested in the firm f. the rest goes to the financial markets as cash paid to creditors and shareholders
Accounting and Finance
accountants often are required to make financial decisions as well as preform traditional accounting duties
General Partnership
all the partners share in the gains and losses, and all have unlimited liability for all partnership debts
secondary market
are those in which these securities are bought and sold after the original sale
what are the arithmetic and geometric means for these five years of returns: +20%, 0%, -10%, 5%, +10%?
arithmetic = 5.00% geometric = 4.52%
there are two kinds of secondary markets
auction markets and dealer markets
public offerings of debt and equity must
be registered with the securities and exchange commission (SEC). Registration requires the firm to disclose a great deal of information before selling an securities
financial institutions
business that deal primarily in financial matters. ex: banks and insurance companies
another way that management can be replaced is
by takeover. firms that are poorly managed are more attractive as acquistions that well-managed firms because a greater profit potential exists
double taxation
corporate profits are taxed twice: at the corporate level when they are earned and again at the personal level when they are paid out
In order to be listed
firms must meet certain minimum criteria concerning, for example, asset size and number or shareholders.
Controller's Office
handles cost and financial accounting, tax payments, and management information systems
Agency Costs
if management does not take the investment, then the stockholders may lose a valuable opportunity
Is the investing opportunity worth more to the firm than the cost to acquire?
if the value of the cash flow generated by an asset exceeds the cost of that asset
compound interest
interest is calculated on the principal and all pervious interest
simple interest
interest is only calculated on the principal
secondary market transaction
involves one owner or creditor selling to another
public offering
involves selling securities to the general public
Sarbanes-Oxley Act of 2002
is intented to strengthen protection against corporate accounting fraud and financial malpractice.
Stakeholder
is someone other than a stockholder or creditor who potentially has a claim on the cash flow of the firm.
the goal of financial management
is to maximize the current value per share of the existing stock
Future Value
its value after a period of time in which it grows at a particuluar rate of return
advantanges of corporations
limited liability for business debts, and unlimited life of the business
Portfolio Manager
manage money for investors
sarbox makes
management personally responsible for the accuracy of a company's financial statements
management and finance
management strategists must have a very clear understanding of the financial implications of business plans
Marketing and Finance
marketers constantly work with budgets, and they need to understand how to get the greatest payoff from marketing expenditures and programs
general way of stating our goal is:
maximize the market vlue of the existing owners' equity
articles of incorporation
must contain a number of things, including the corporations name, its intented life, its business purpose, and the number of shares that can be issued.
private placement
negotiated sale involving a specific buyer
consider an investment that begins the quarter at $100 and finishes the quarter at $105. What rate of return did the investment achieve?
net rate of return = 5% gross rate of return = $1.05
advantage of OTC market
no physical location means that national borders do not present a great barrier
limited partnership
one or more general partners will run the business and have unlimited liability, but there will be one or more limited partners who will not actively participate in the business
Advantages of Partnership
partnerships based on a relatively informal agreement are easy and inexpensive to form
what is the net present value of an investment of $5000 made today to receive $3000 in one year and $3500 in two years? the appropriate discount rate is 4%
present value = $6120.56 net present value = 1120.56
simple interest =
principal x interest rate x periods
corporations engage in two types of primary market transactions
public offerings and private placements
Working Capital
refers to a firm's short-term assets, such as inventory, and its short-term liabilities, such as money owed to suppliers
primary market
refers to the original sale of securities by governments and corporations
Agency Relationship
relationship between stockholders and management
security analyst
researches individual investments, such as stock in a particular company, and makes a determination as to whether the price is right
Treasurer's Office
responsible for managing the firm's cash and credit, its financial planning, and its capital expenditures
Partnership
similar to a proprietorship, except that there are two or more owners
Listed stock
stocks that trade on an organized exchange.
Suppose $200 is invested for 3 years at 10%, with simple interest.
the account will earn $60 and finish with a total of $260
principal
the amount an account begins with
Balance
the amount that is in an account
proxy
the authority to vote someone else's stock
interest on interest
the interest that is earned on interest that was previously received
proxy fight
the mechanism by which unhappy stockholders can act to replace existing management
negative of sole proprietorship
the owner has unlimited liability for business debts
Benefit of Sole Proprietorship
the owner keeps all the profits
Agency Problem
the possibility of conflict of interest between the stockholders and management of a firm
Capital Budgeting
the process of planning and managing a firm's long-term investments
Capital Structure
the specific mixture of long-term debt and equity the firm uses to finance its operations
disadvantage of partnership
unliimited liability for partnership debts, and the partnership terminates when a general partner wishes to sell out or dies. All income is taxed as personal income to the partners and the amount of equity that can be raised is limited to the partners conombined wealth.
discount rate
when the dollar amount in one period is to ber equated to a dollar amount in another period the term discount rate is used
what rate of return with monthly compounding is necessary to equal an 8% return with weekly compounding?
0.67% weekly, 8.02% APR
what annual percentage rate is required for an account to grow by 10% in one year with daily compounding?
0.03% daily interest rate, 9.53% yearly interest rate
what is the difference between the geometic and arithmetic means of the followinf two years of returns: +5% and -5%? What if the two years of returns were -5% and the +5%? What about the difference between the geometric and arithmetic means for two years of returns: +20% and -20%?
- arithmetic =: 0%, geometric = -0.13% - arithmetic =: 0%, geometric = -0.13% - arithmetic =: 0%, geometric = -2.02%
what is the net present value of an investment of $17000 that will bring in $4000 each of the next five years? the discount rate for the future cash flows is 7%.
-$599.21
Chevron's stock price was $96.79 per share when the stock market opened on March 3, 2020, and it was $94.39 when the stock market closes that day. what was chevron's rate of return during trading on March 3, 2020?
-2.48% (net) or .9752 (gross)
auction markets differ from dealer markers in two ways
1. an auction market has a physical location 2. in a dealer market most of the buying and selling is done by the dealer
financial topics are grouped into four main areas
1. corporate finance 2. investments 3. financial institutions 4. international finance
Best interests of stockholders depends on two factors
1. how closely are management goals aligned with stockholder goals? 2. can management be replaced if they do not pursue stockholder goals?
questions about working capital that must be answered?
1. how much cash and inventory should we keep on hand? 2. Should we sell on credit to our customers? 3. How will we obtain any needed short-term financing? 4. if we borrow in the short term, how and where should we do it.
management will have incentive to increase share value for two reasons
1. managerial compensation, particularly at the top, is usually tied to financial performance in general and oftentimes to share value in particular 2. job prospects- better performers within the firm will tend to get promoted
three different legal forms of business organization
1. sole proprietorship 2. partnership 3. corporation
Disadvantages of Sole Proprietorship and partnerships
1. unlimited liability for business debts on the part of the owners 2. limited life of the business 3. difficulty of transferring ownership
Questions to ask when you start a business
1. what long-term investments should you take on? 2. where will you get the long-term financing to pay for your investments? 3. How will you manage you everyday financial activities, such as collecting from customer and paying suppliers?
The first sale on March 4, 2020 of chevrons stock was at a price of $96.37 per share. the last sale of chevron's stock that day was 2.24% higher. What was chevron's gross rate of return. What was chevrons stock price at the close of the day?
1.0224 (gross) and $98.53
the inflation rate last year was 0.90% and the return for a bond was 2.25%. What was the real interest rate for the bond?
1.34%
The bank pays 0.15% in interest for a savings account every month. What is the effective annual rate?
1.81%
partnership agreement
The way partnership gains (and losses) are divided
