FIN 540 Week 2 Homework Problems Strayer

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Week 2Basic Financial Tools: A Review Homework Problems Chapter 18 and 19

Chapter 181. Which of the following statements is CORRECT?a. Time lines cannot be constructed where some of the payments constitute an annuity butothers are unequal and thus are not part of the annuity.b. A time line is not meaningful unless all cash flows occur annually.c. Time lines are not useful for visualizing complex problems prior to doing actual calculations.d. Time lines can be constructed to deal with situations where some of the cash flows occur annually but others occur quarterly.e. Time lines can only be constructed for annuities where the payments occur at the end of the periods, i.e., for ordinary annuities.

2. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of theinvestment?a. The discount rate decreases.b. The cash flows are in the form of a deferred annuity, and they total to $100,000. Youlearn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for$20,000 rather than for $10,000.c. The discount rate increases.d. The riskiness of the investments cash flows decreases.e. The total amount of cash flows remains the same, but more of the cash flows arereceived in the earlier years and less are received in the later years.

3. Which of the following statements is CORRECT?a. If some cash flows occur at the beginning of the periods while others occur at the ends,then we have what the textbook defines as a variable annuity.b. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of theperiods.c. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.d. The cash flows for an annuity due must all occur at the ends of the periods.e. The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

4. Your bank account pays a 5% nominal rate of interest. The interest is compounded quarterly.Which of the following statements is CORRECT?a. The periodic rate of interest is 5% and the effective rate of interest is also 5%.b. The periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.c. The periodic rate of interest is 5% and the effective rate of interest is greater than 5%.d. The periodic rate of interest is 1.25% and the effective rate of interest is greater than 5%.e. The periodic rate of interest is 2.5% and the effective rate of interest is 5%.

5. A $250,000 loan is to be amortized over 8 years, with annual end-of-year payments. Which of these statements is CORRECT?a. The proportion of interest versus principal repayment would be the same for each of the 8 payments.b. The annual payments would be larger if the interest rate were lower.c. If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan.d. The proportion of each payment that represents interest as opposed to repayment ofPrincipal would be lower if the interest rate were lower.e. The last payment would have a higher proportion of interest than the first payment.

Chapter 19Homework

1.Operating leases often have terms that includea. full amortization over the life of the lease.b. very high penalties if the lease is canceled.c. restrictions on how much the leased property can be used.d. much longer lease periods than for most financial leases.e. maintenance of the equipment by the lessor.

2.Which of the following statements is most CORRECT?a. Capitalizing a lease means that the firm issues equity capital in proportion to its currentcapital structure, in an amount sufficient to support the lease payment obligation.b. The fixed charges associated with a lease can be as high as, but never greater than, thefixed payments associated with a loan.c. Capital, or financial, leases generally provide for maintenance by the lessor.d. A key difference between a capital lease and an operating lease is that with a capitallease, the lease payments provide the lessor with a return of the funds invested in theasset plus a return on the invested funds, whereas with an operating lease the lessordepends on the residual value to realize a full return of and on the investment.e. Firms that use "off balance sheet" financing, such as leasing, would show lower debtratios if the effects of their leases were reflected in their financial statements.

3.Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting thea. residual value as a liability.b. present value of future lease payments as an asset and also showing this same amountas an offsetting liability.c. undiscounted sum of future lease payments as an asset and as an offsetting liability.d. undiscounted sum of future lease payments, less the residual value, as an asset and asan offsetting liability.e. residual value as a fixed asset.

4.Heavy use of off-balance sheet lease financing will tend toa. make a company appear less risky than it actually is because its stated debt ratio willappear lower.b. affect a company's cash flows but not its degree of risk.c. have no effect on either cash flows or risk because the cash flows are already reflected inthe income statement.d. affect the lessee's cash flows but only due to tax effects.e. make a company appear more risky than it actually is because its stated debt ratio will beincreased.

5.In the lease versus buy decision, leasing is often preferablea. because, generally, no down payment is required, and there are no indirect interestcosts.b. because lease obligations do not affect the firm's risk as seen by investors.c. because the lessee owns the property at the end of the least term.d. because the lessee may have greater flexibility in abandoning the project in which theleased property is used than if the lessee bought and owned the asset.e. because it has no effect on the firm's ability to borrow to make other investments.