Spring 2009 Exam 1 - FIN 221 Spring 2009 Exam 1 Multiple...

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FIN 221 Spring 2009 Exam 1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which of the following factors could explain why last year Cleaver Energy had negative net cash flow, but the cash on its balance sheet increased? A. The company paid a large dividend. B. The company had high amortization expenses. C. The company repurchased 20% of its common stock. D. The company sold a new issue of bonds. E. The company made a large investment in new plant and equipment. 2. Other things held constant, which of the following actions would increase the amount of cash on a company's balance sheet? A. The company issues new common stock. B. The company repurchases common stock. C. The company pays a dividend. D. The company purchases a new piece of equipment. E. The company gives customers more time to pay their bills. 3. It is now January 1, 2005. Tom and Jerry are cousins who were both born on January 1, 1975. Both turned 30 today. Their grandfather gave Tom $4,000 on his 25th birthday, January 1, 2000, putting the funds into a trust that will be paid to Tom on his 70th birthday, January 1, 2045. Each year since 2000, the grandfather put an additional $4,000 in the account on Tom's birthday, and the grandfather's own trustee will continue making the $4,000 payments until January 1, 2045, when a 46th and final $4,000 contribution will be made on Tom's 70th birthday. The grandfather wants Tom to work, not be a "trust fund baby," but he also wants to insure that Tom is well provided for in his old age. The grandfather has until now has been disappointed with Jerry, hence has not given him anything, but they recently reconciled, and the grandfather has decided to make an equivalent provision for Jerry. He will make the first payment to a trust for Jerry today, and he has instructed his trustee to make additional annual payments each year until January 1, 2045, when the 41st and final payment will be made. If both trusts earn an annual return of 10%, how much must the grandfather put into Jerry's trust to enable him to receive the same amount as Tom on January 1, 2045, when they reach age 70? A. $5,976 B. $6,492 C. $6,110 D. $7,513 E. $8,349 4. Your father is about to retire, and he wants to buy an annuity that will provide him with $50,000 of income a year for 20 years, with the first payment coming immediately . The going rate on such annuities is 6%. How much would it cost him to buy the annuity today? A. $488,349.15 B. $416,110.34
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C. $607,905.82 D. $615,976.84 E. $517,513.68 5. Suppose a U.S. government bond will pay $1,000 three years from now. If the going interest rate on 3-year government bonds is 4%, how much is the bond worth today? A.
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Spring 2009 Exam 1 - FIN 221 Spring 2009 Exam 1 Multiple...

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