Business FINA3313-031 Finance, Spring 2006 Homework 1 Due by February 10, 2006. I Instructor: Bing Y. Du Please mark your answers on the SCANTRON (form 882) correspondingly and only submit the scantron. P Please write your name, last 4 digits of SSN, and Homework1 on your scantorn. Late submission will not be accepted.
Homework 1
CH1 Firm and Financial Manager (Question 1-19) 1. The liability of general partner is limited to the amount of their investment in the company. A. True B. False. 2. Agency problem in corporate business organization is generated by the separation of management and ownership. A. True B. False. 3. A successful investment is worth more than its cost. A. True B. False. 4. General Motors new opening of an assembly line in Arlington is a financing decision. A. True B. False. 5. A partnership business is a legal entity, thus it is double taxed. A. True B. False. 6. Agency problems will be an obstacle to achieving a firms goal. A. True B. False.
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7. Lenders such as banks or insurance companies are involved in monitoring and controlling the risk associated with investment projects and financing decisions. A. True B. False.
8. Both Patents and trade marks are financial assets. A. True B. False. 9. The goal of the firm is to maximize the profits. A. True B. False. 10. One common reason for partnerships to convert to a corporate form of organization is that the partnership: A) faces rapidly growing financing requirements. B) wishes to avoid double taxation of profits. C) has issued all of its allotted shares. D) agreement expires after ten years of use. 11. When a sole proprietorship business fails, the maximum that can lost by an investor is: A) the amount of the initial investment. B) the amount of the profit on the investment. C) the amount necessary to pay the corporation's debts. D) the amount of the investor's personal wealth.
12. The legal life of a corporation is: A) coincident with that of its CEO. B) equal to the life of the Board of Directors. C) permanent, as long as shareholders don't change. D) permanent, regardless of current ownership. 13. Which of the following would not be considered a financial asset? A) A 10 years corporation bond issued by GM B) A promissory note C) A patent D) Your savings deposits in Bank of America 14. A financial manager facing a financing decision must decide whether to: A) Keep an assembly line idle for another three months. B) use the money market or capital market. C) Build a new plant in Mexico. D) buy new machinery or repair the old. 15. The term capital structure refers to: A) the manner in which a firm obtains its long-term sources of funding. B) the length of time needed to repay debt. C) whether the firm invests in capital budgeting projects. D) which specific assets the firm should invest in. .
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16. Which of the following represents a capital budgeting decision? A) A decision to borrow $10 million through a bank loan. B) A decision to issue new stocks. C) A decision to buy a new mainframe computer. D) A decision to pay dividend this year. 17. In a firm having both a treasurer and a controller, which of the following would most likely be handled by the treasurer? A) Internal auditing B) Financial statement preparation C) Banking relationships D) Taxes 18. The primary goal of corporate management should be to: A) maximize the number of shareholders. B) maximize the firm's profit. C) minimize the firm's costs. D) maximize the shareholders' wealth. 19. The best criterion for success in a capital budgeting decision would be to: A) minimize the cost of the investment. B) maximize the number of capital budgeting projects. C) maximize the difference between cash inflows and cost. D) finance all capital budgeting projects with debt. CH2 Financial Environment (Question 20-34)
20. Corporate financing comes ultimately from the financial markets and financial intermediaries. A) True B) False 21. A company can pay for its expansion by which of the following ways: A) By using the earnings generated from its sale of obsolete equipment. B) By persuading the director's mother to make a personal loan to the company. C) By selling stock certificates for a new subsidiary D) All of the above 22. Financing for public corporations flow through: A) the financial markets. B) financial intermediaries. C) either the financial markets or financial intermediaries. D) the financial markets, financial intermediaries, or both.
23. A secondary market would be utilized when: A) investors buy or sell existing securities. B) shares of common stock are new issued. C) XYZ companys 10 year corporation bond are initially issued. D) ABC company is going to be listed in London Stock Exchanges.
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24. Which of the following financial markets is located in one, centralized location? A) NYSE. B) NASDAQ. C) the over-the-counter market. D) the European Monetary Union. 25. Short-term financing decisions commonly occur in the: A) primary markets. B) secondary markets. C) capital markets. D) money markets. 26. Commodity and derivative markets are sources of financing A) True B) False 27. A financial intermediary provides financing for: A) individuals. B) companies. C) other organizations. D) all of the above. 28. Which of the following funds have a tax advantage? A) Balanced funds. B) Pension funds. C) Bond funds. D) Funds that invest in foreign countries.
29. Which of the following financial intermediaries can loan money directly to businesses? A) Mutual funds B) Banks C) Pension funds D) All of the above
30. An example of how financial intermediaries can assist in shifting an individual's consumption to the future is: A) lending money to the individual. B) providing a checking account. C) opening a savings account. D) requiring purchases to be in cash. 31. Which of the following is most liquid? A) Cash. B) U.S. Treasury bonds. C) Rare coins. D) Savings deposit. 32. Financial markets and intermediaries: A) channel savings to real investment. B) enable investors and businesses to reduce risk. C) provide liquidity. D) All of the above.
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33. What are the advantages of investing in a mutual fund? A) Efficient diversification. B) Professional management. C) A and B. D) None of above. 34. Which one of the following is true A) Stocks pay dividends, with no maturity; B) Bonds usually pay fixed or floating interests, with a maturity C) A and B. D) None of above. CH3 Accounting and Finance (Question 35-46) 35. An asset's liquidity is determined by how readily the asset can be converted to an appropriate amount of cash. A. True B. False 36. The difference between the market values of assets and liabilities is the market value of the shareholders' equity claim. A. True B. False 37. If the market value of assets is high, then the market value of liabilities must be high also. A. True B. False
38. In general, what is changing as you read down the left hand side of a balance sheet? A) The assets are more fully depreciated. B) The assets are growing in value. C) The assets are increasing in maturity. D) The assets are becoming less liquid. 39. Which of the following items should not be included in a listing of current assets? A) Marketable securities B) Accounts payable C) Accounts receivable D) Inventories 40. If a payment of principal is due in seven months on a long-term liability, that payment will now appear as: A) a current liability. B) long-term debt. C) cash. D) interest expense. 41. An increase in depreciation expense will (other things equal): A) increase net income. B) decrease net income. C) increase cash flow. D) decrease the market value of assets.
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42. Which one of the following is true? A) Market value can be higher than book values. B) Market value can be lower than book values. C) Market value reflects the investors expectation of a company. D) All of the above 43. What occurs the when value of a firm's debt exceeds the value of shareholders' equity? A) The firm is bankrupt. B) The firm is very risky. C) A high rate of interest is being paid on the debt. D) The firm is financed more through debt than through equity.
44. Which of the following expense categories is subtracted from total revenues to arrive at a firm's EBIT? A) Cash dividends B) Depreciation expense C) Interest expense D) Tax liability 45. Which one of following is correct? A) Cash dividends paid to stockholders is tax deductible. B) Interest expenses for corporation is tax deductible C) A and B D) None of above
46. Which one of following is correct? A) Stockholders are concerned about the cash flows more than profits. B) Usually noncash expense such as depreciation expense should be added back to profit to estimate cash flows C) A and B D) None of above CH4 Time Value of Money ( Question 47-77) 47. Compound interest pays interest for each time period on the original investment plus the accumulated interest. A. True B. False 48. For a given amount, the lower the discount rate, the less the present value. A. True B. False 49. The more frequent the compounding, the higher the future value, other things equal. A. True B. False 50. The concept of compound interest refers to: A) earning interest on the original investment. B) payment of interest on previously earned interest. C) investing for a multi-year period of time. D) determining the APR of the investment. Present Value
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51. Assume the total expense for your current year in college equals $15,000. Approximately how much would your parents have needed to invest 20 years ago in an account paying 8% compounded annually to cover this amount? A) $ 952 B) $1,600 C) $3,218 D) $1,728 Future value 52. How much will accumulate in an account with an initial deposit of $50, and which earns 12% interest compounded monthly for two years? A) $62.72 B) $63.49 C) $133.10 D) $134.49 53. Given a set future value, which of the following will contribute to a lower present value? A) Higher discount rate B) Fewer time periods C) Less frequent discounting D) Lower discount factor Present value of Annuity: 54. How much must be invested today in order to generate a 10-year annuity of $100 per year, with the first payment one year from today, at an interest rate of 12%? A) $304.78 B) $565.02 C) $437.35 D) $404.78
Present Value of unequal cash flows 55. What is the present value of the following payment stream, discounted at 10% annually: $100 at the end of year 1, $200 at the end of year 2, and $300 at the end of year 3? A) $522.11 B) $481.59 C) $423.87 D) $520.00
Present value of unequal cash flows 56. What is the present value of the following set of cash flows at an interest rate of 12%; $100 today, $200 at end of year two, $400 at end of year five, and $600 at end of year seven? A) $731.59 B) $757.82 C) $852.43 D) $624.90 57. The present value of a perpetuity can be determined by: A) Multiplying the payment by the interest rate. B) Dividing the interest rate by the payment. C) Multiplying the payment by the number of payments to be made. D) Dividing the payment by the interest rate. Loan Payment
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58. Your car loan requires payments of $100 per month for the first year and payments of $300 per month during the second year. The annual interest rate is 12% and payments begin in one month. What is the present value of this two-year loan? A) $4,246.34 B) $4,389.78 C) $4,122.00 D) $4,753.05 Amortizing Loan 59. An amortizing loan is one in which: A) payments are made monthly. B) accrued interest is paid regularly. C) the maturity of the loan is known. D) the principal balance is reduced with each payment. Amortization 60. $5,000 is deposited into an account paying 12% annually, to provide four annual withdrawals of $1,646.17 beginning in one year. How much remains in the account after the third payment has been withdrawn? A) $1,326.97 B) $1,206.34 C) $1,096.69 D) $1,469.80
Present Value of annuity
61. What is the present value of a three-period annuity of $1,000 per year that begins three years from today if the discount rate is 9%? A) $1,954.62 B) $2,531.29 C) $1,356.85 D) $1,388.97 Loan Amortization 62. If $200,000 is borrowed for a home mortgage, to be repaid at 12% interest over 30 years with monthly payments of $2,057.23, how much interest is paid over the life of the loan? A) $720,000 B) $262,000 C) $540,601 D) $427,598 Loan Amortization: 63. $5,000 is borrowed, to be repaid in five equal, annual payments with 12% interest. Approximately how much principal is amortized with the third payment? A) $201.06 B) $500.00 C) $987.28 D) $399.77 Mortgage Loan payment
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64. What will be the monthly payment on a home mortgage of $100,000 at 12% interest, to be amortized over 20 years? A) $771.46 B) $775.90 C) $1,101.09 D) $1,034.53 Future value of annuity 65. How much must be saved annually, beginning one year from now, in order to accumulate $10,000 over the next 10 years, earning 12% annually? A) $329.14 B) $387.23 C) $450.00 D) $569.84
Future value of Annuity: Retirement 66. Approximately how much should be accumulated by the beginning of retirement to provide a $1,000 monthly check that will last for 20 years, during which time the fund will earn 12% interest with monthly compounding? A) $861,500.26 B) $623,834.23 C) $989,255.37 D) $690,026.59
67. Considering the past economic history of the U.S., high rates of price inflation are typically accompanied by: A) low nominal interest rates. B) high nominal interest rates. C) negative nominal interest rates. D) no correlation with nominal interest rates. Present value of an annuity 68. Approximately how much must be saved for retirement in order to withdraw $10,000 per year for the next 20 years if the balance earns 12% annually, and the first payment occurs one year from now? A) $50,670.49 B) $74,694.44 C) $83,150.00 D) $65,694.44 EAR-APR 69. What is the APR on a loan with an effective annual rate of 23.06 % and weekly compounding of interest? A) 22.00% B) 20.79% C) 19.80% D) 23.00% EAR-APR
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70. What is the annually compounded rate of interest on an account with an APR of 12% and monthly compounding? A) 10.00% B) 10.47% C) 10.52% D) 12.68%
EAR-APR 71. What is the effective annual rate on a loan that charges interest at the rate of 1.6% per month? A) 20.98% B) 19.2% C) 18.16% D) 16.47% Finding Interest: APR 72. What APR is being earned on a deposit of $10,000 made ten years ago today if the deposit is worth $20,000 today? The deposit pays interest semi-annually. A) 3.56% B) 6.76% C) 7.00% D) 7.05% Real interest / Nominal interest
73. Which of the following statements best describes the real interest rate? A) Real interest rates exceed inflation rates. B) Real interest rates can decline only to zero. C) Real interest rates can be negative, zero, or positive. D) Real interest rates traditionally exceed nominal rates. Annuities Due 74. The present value of an annuity stream of $1,000 per year is $8,000 when valued at a 12% rate. By approximately how much would the value change if these were annuities due? A) An increase of $500.00 B) An increase of $959.87. C) An decrease of $500.00 D) Unknown without knowing number of payments. Future Value of Annuity: Retirement: 75. How much can be accumulated for retirement if $1,000 is deposited annually, beginning one year from today, and the account earns 12% interest compounded annually for 20 years? A) $87,200.00 B) $65,764.89 C) $76,583.73 D) $72,052.44
APR-EAR
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76. An APR will be equal to an effective annual rate if: A) simple interest is used. B) compounding occurs continuously. C) compounding occurs annually. D) an error has occurred; these terms cannot be equal. 77. Other things equal, when an annuity turns into annuity due, the present value will increase. A) True B) False