MOS 3310A Finance Quiz 1
True / False Questions (one mark per question)
1. The present value of an annuity due equals the present value of an ordinary annuity times the discount rate.
_________
Correct Answer – False
2. You should never compare cash flows occurring at different times without first discounting them to a common date.
_________
Correct Answer – True
3. Nominal dollars refer to the amount of purchasing power.
_________
Correct Answer – False
4. Ethical decision making in business can be viewed as a long-term investment in reputation
___________
Correct Answer – True
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5. Like public companies, private companies can also use their stock price as a measure of performance.
___________
6. Maximizing profits is the same as maximizing the value of the firm.
________
7. Managers are spurred on by incentive schemes that provide big returns if shareholders gain but are valueless if they do not.
_________
8. The reinvestment of cash back into the firm’s operations is an example of a flow of savings to investment.
_________
9. Financing for public corporations must flow through financial markets.
_________
10. The cost of capital is the minimum acceptable rate of return for capital investment.
_________
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Multiple Choice Questions (1-11 1 mark / 12-20 2 marks)
1. A capital investment that generates a 10% rate of return is worthwhile if:
__________
A. corporate bonds of similar risk offer 8% rates of return.
B. corporate bonds of similar risk offer 11% rates of return.
C. top-quality corporate bonds offer 10% rates of return.
D. the expected rate of return on the stock market is 12%.
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2. Agency problems can best be characterized as a:
__________
A. dislike of firm’s bondholders by its equity holders.
B. differing incentives between managers and owners.
C. spending corporate resources.
D. friction between the primary and secondary markets.
3. Which one of these is a money market security?
__________
A. commercial paper
B. common stock
C. 2-year bond
D. 20-year bond
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4. Which of the following financial assets is least likely to have an active secondary market?
__________
A. common stock of a large public firm
B. bank loans made to smaller firms
C. bonds of a major, multinational corporation
D. debt issued by the federal government
5. The cost of capital:
__________
A. is the interest rate that the firm pays on a loan from a financial institution.
B. is the maximum acceptable rate of return on a project.
C. is the minimum acceptable rate of return on a project.
D. is always less than 10%.
6. Excess cash held by a firm should be:
__________
A. reinvested by the firm in projects offering the lowest rate of return.
B. reinvested by the firm in projects offering rates of return higher than the cost of capital.
C. reinvested by the firm in the financial markets.
D. distributed to bondholders in the form of extra coupon payments
7. Which of the following represents a financing decision?
__________
A. a decision to borrow $10 million through a bank loan.
B. a decision to invest in the common stock of another corporation.
C. a decision to buy a new mainframe computer.
D. a decision to pay $1 million of accounts payable.
8. Which of the following is least likely to represent an agency problem?
__________
A. lavish spending on expense accounts.
B. plush remodeling of the executive suite.
C. excessive investment in “safe” projects.
D. executive incentive compensation plans.
9. A corporation’s board of directors:
__________
A. is selected by and can be removed by management.
B. can be voted out of power by the shareholders.
C. has a lifetime appointment to the board.
D. is selected by a vote of all corporate stakeholders.
10. Which of the following appears to be the most appropriate goal for corporate management?
____________
A. maximizing market value of the company’s shares.
B. maximizing the company’s market share.
C. maximizing the current profits of the company.
D. minimizing the company’s liabilities.
11. Firms can alter their capital structure by:
_____________
A. Not accepting any capital budgeting projects
B. Investing in non-tangible assets
C. Issuing shares to repay debt
D. Becoming a limited liability company
For Questions 12-20 (2 marks each)
Please show calculations to support your answers.
12. Eighteen years from now, 4 years of college are expected to cost $150,000. How much more must be deposited into an account today to fund this expense if you could only earn 8% rather than the 11% you had hoped to earn on your savings?
_________
A. $12,211.18
B. $13,609.21
C. $14,006.41
D. $14,614.03
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13. Prizes are often not “worth” as much as claimed. Place a value on a prize of $5,000,000 that is to be received in equal payments over 20 years, with the first payment beginning today. Assume an interest rate of 7%.
__________
A. $2,833,898.81
B. $2,911,015.68
C. $2,609,144.14
D. $2,738,304.13
14. How much can be accumulated for retirement if $2,000 is deposited annually, beginning 1 year from today, and the account earns 9% interest compounded annually for 40 years?
_________
A. $87,200.00
B. $675,764.89
C. $736,583.73
D. $802,876.27
15. A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _____ and an APR of ____.
__________
A. 16.08%; 15.00%
B. 14.55%; 16.08%
C. 12.68%; 15.00%
D. 15.00%; 14.55%
6. What is the expected real rate of interest for an account that offers a 12% nominal rate of return when the rate of inflation is 6% annually?
__________
A. 5.00%
B. 5.66%
C. 6.00%
D. 9.46%
17. Approximately how much must be saved for retirement in order to withdraw $100,000 per year for the next 25 years if the balance earns 8% annually, and the first payment occurs one year from now?
__________
A. $1,067,477.62
B. $1,128,433.33
C. $1,487,320.09
D. $1,250,000.00
18. Assume the total expense for your current year in college equals $20,000. How much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?
__________
A. $952.46
B. $1,600.00
C. $1,728.08
D. $3,973.11
19. You will be receiving cash flows of: $1,000 today, $2,000 at end of year 1, $4,000 at end of year 3, and $6,000 at end of year 5. What is the present value of these cash flows at an interest rate of 7%?
_________
A. $9,731.13
B. $10,412.27
C. $10,524.08
D. $11,524.91
20. What is the present value of a five-period annuity of $3,000 if the interest rate per period is 12% and the first payment is made today?
_________
A. $9,655.65
B. $10,814.33
C. $12,112.05
D. $13,200.00
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