final exam fin 599

FIN 599FINAL EXAMYou will have 3 hours from the time you begin your exam to complete it. GOOD LUCK!

Net Present Value and Other Investment Rules

Multiple Choice Questions1.The difference between the present value of an investment and its cost is the:

A.net present value.

B.internal rate of return.

C.payback period.

D.profitability index.

E.discounted payback period.

2.Which one of the following statements concerning net present value (NPV) is correct?

A.An investment should be accepted if, and only if, the NPV is exactly equal to zero.

B.An investment should be accepted only if the NPV is equal to the initial cash flow.

C.An investment should be accepted if the NPV is positive and rejected if it is negative.

D.An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.

E.Any project that has positive cash flows for every time period after the initial investment should be accepted.

3.The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:



C.payback period.


E.discounted cash period.

4.Which one of the following statements is correct concerning the payback period?

A.An investment is acceptable if its calculated payback period is less than some pre-specified period of time.

B.An investment should be accepted if the payback is positive and rejected if it is negative.

C.An investment should be rejected if the payback is positive and accepted if it is negative.

D.An investment is acceptable if its calculated payback period is greater than some pre-specified period of time.

E.An investment should be accepted any time the payback period is less than the discounted payback period, given a positive discount rate.

5.The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the:



C.payback period.

D.discounted profitability index.

E.discounted payback period.

6.The discounted payback rule states that you should accept projects:

A.which have a discounted payback period that is greater than some pre-specified period of time.

B.if the discounted payback is positive and rejected if it is negative.

C.only if the discounted payback period equals some pre-specified period of time.

D.if the discounted payback period is less than some pre-specified period of time.

E.only if the discounted payback period is equal to zero.

7.The discount rate that makes the net present value of an investment exactly equal to zero is called the:

A.external rate of return.


C.average accounting return.


E.equalizer.

8.An investment is acceptable if its IRR:

A.is exactly equal to its net present value (NPV).

B.is exactly equal to zero.

C.is less than the required return.

D.exceeds the required return.

E.is exactly equal to 100%.

9.The possibility that more than one discount rate will make the NPV of an investment equal to zero is called the _______ problem.

A.net present value profiling

B.operational ambiguity

C.mutually exclusive investment decision

D.issues of scale

E.multiple rates of return

10.A situation in which accepting one investment prevents the acceptance of another investment is called the:

A.net present value profile.

B.operational ambiguity decision.

C.mutually exclusive investment decision.

D.issues of scale problem.

E.multiple choices of operations decision.

11.The present value of an investment's future cash flows divided by the initial cost of the investment is called the:





E.profile period.

12.An investment is acceptable if the profitability index (PI) of the investment is:

A.greater than one.

B.less than one.

C.greater than the internal rate of return (IRR).

D.less than the net present value (NPV).

E.greater than a pre-specified rate of return.

13.All else constant, the net present value of a typical investment project increases when:

A.the discount rate increases.

B.each cash inflow is delayed by one year.

C.the initial cost of a project increases.

D.the rate of return decreases.

E.all cash inflows occur during the last year of a project's life instead of periodically throughout the life of the project.

14.The primary reason that company projects with positive net present values are considered acceptable is that:

A.they create value for the owners of the firm.

B.the project's rate of return exceeds the rate of inflation.

C.they return the initial cash outlay within three years or less.

D.the required cash inflows exceed the actual cash inflows.

E.the investment's cost exceeds the present value of the cash inflows.

15.If a project has a net present value equal to zero, then:

I. the present value of the cash inflows exceeds the initial cost of the project.II. the project produces a rate of return that just equals the rate required to accept the project.III. the project is expected to produce only the minimally required cash inflows.IV. any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

A.II and III only

B.II and IV only

C.I, II, and IV only

D.II, III, and IV only

E.I, II, and III only

16.Net present value:

A.cannot be used when deciding between two mutually exclusive projects.

B.is more useful to decision makers than the internal rate of return when comparing different sized projects.

C.is easy to explain to non-financial managers and thus is the primary method of analysis used by the lowest levels of management.

D.is not an as widely used tool as payback and discounted payback.

E.is very similar in its methodology to the average accounting return.

17.Payback is frequently used to analyze independent projects because:

A.it considers the time value of money.

B.all relevant cash flows are included in the analysis.

C.it is easy and quick to calculate.

D.it is the most desirable of all the available analytical methods from a financial perspective.

E.it produces better decisions than those made using either NPV or IRR.

18.The advantages of the payback method of project analysis include the:

I. application of a discount rate to each separate cash flow.II. bias towards liquidity.III. ease of use.IV. arbitrary cutoff point.

A.I and II only

B.I and III only

C.II and III only

D.II and IV only

E.II, III, and IV only

19.All else equal, the payback period for a project will decrease whenever the:

A.initial cost increases.

B.required return for a project increases.

C.assigned discount rate decreases.

D.cash inflows are moved earlier in time.

E.duration of a project is lengthened.

20.The discounted payback period of a project will decrease whenever the:

A.discount rate applied to the project is increased.

B.initial cash outlay of the project is increased.

C.time period of the project is increased.

D.amount of each project cash inflow is increased.

E.costs of the fixed assets utilized in the project increase.

21.The discounted payback rule may cause:

A.some positive net present value projects to be rejected.

B.the most liquid projects to be rejected in favor of less liquid projects.

C.projects to be incorrectly accepted due to ignoring the time value of money.

D.some projects with negative net present values to be accepted.

E.Both some positive net present value projects to be rejected; and some projects with negative net present values to be accepted.

22.The internal rate of return (IRR):

I. rule states that a typical investment project with an IRR that is less than the required rate should be accepted.II. is the rate generated solely by the cash flows of an investment.III. is the rate that causes the net present value of a project to exactly equal zero.IV. can effectively be used to analyze all investment scenarios.

A.I and IV only

B.II and III only

C.I, II, and III only


E.I, II, III, and IV

23.The internal rate of return for a project will increase if:

A.the initial cost of the project can be reduced.

B.the total amount of the cash inflows is reduced.

C.each cash inflow is moved such that it occurs one year later than originally projected.

D.the required rate of return is reduced.

E.the salvage value of the project is omitted from the analysis.

24.The internal rate of return is:

A.more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projects.

B.equivalent to the discount rate that makes the net present value equal to one.

C.difficult to compute without the use of either a financial calculator or a computer.

D.dependent upon the interest rates offered in the marketplace.

E.a better methodology than net present value when dealing with unconventional cash flows.

25.The internal rate of return tends to be:

A.easier for managers to comprehend than the net present value.

B.extremely accurate even when cash flow estimates are faulty.

C.ignored by most financial analysts.

D.used primarily to differentiate between mutually exclusive projects.

E.utilized in project analysis only when multiple net present values apply.

26.You are trying to determine whether to accept project A or project B. These projects are mutually exclusive. As part of your analysis, you should compute the incremental IRR by determining:

A.the internal rate of return for the cash flows of each project.

B.the net present value of each project using the internal rate of return as the discount rate.

C.the discount rate that equates the discounted payback periods for each project.

D.the discount rate that makes the net present value of each project equal to 1.

E.the internal rate of return for the differences in the cash flows of the two projects.

27.Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

A.how the incremental IRR varies with changes in the discount rate.

B.how decisions concerning mutually exclusive projects are derived.

C.how the duration of a project affects the decision as to which project to accept.

D.how the payback period and the initial cash outflow of a project are related.

E.how the profitability index and the net present value are related.

28.The profitability index is closely related to:

A.payback.

B.discounted payback.


D.net present value.

E.internal rate of return.

29.Analysis using the profitability index:

A.frequently conflicts with the accept and reject decisions generated by the application of the net present value rule.

B.is useful as a decision tool when investment funds are limited.

C.cannot be used to aid capital rationing.

D.utilizes the same basic variables as those used in the average accounting return.

E.produces results which typically are difficult to comprehend or apply.

30.If you want to review a project from a benefit-cost perspective, you should use the _______ method of analysis.

A.net present value

B.payback

C.internal rate of return

D.average accounting return

E.profitability index

31.When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

A.accepted because the internal rate of return is positive.

B.accepted because the profitability index is greater than 1.

C.accepted because the profitability index is negative.

D.rejected because the internal rate of return is negative.

E.rejected because the net present value is negative.

32.Which one of the following is the best example of two mutually exclusive projects?

A.Planning to build a warehouse and a retail outlet side by side.

B.Buying sufficient equipment to manufacture both desks and chairs simultaneously.

C.Using an empty warehouse for storage or renting it entirely out to another firm.

D.Using the company sales force to promote sales of both shoes and socks.

E.Buying both inventory and fixed assets using funds from the same bond issue.

33.The Liberty Co. is considering two projects. Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail Center. Project B consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center. When trying to decide whether to build the book outlet or the restaurant, management should rely most heavily on the analysis results from the _______ method of analysis.

A.profitability index

B.internal rate of return

C.payback

D.net present value

E.accounting rate of return

34.When two projects both require the total use of the same limited economic resource, the projects are generally considered to be:

A.independent.

B.marginally profitable.

C.mutually exclusive.

D.acceptable.

E.internally profitable.

35.Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives.

Matt has been asked for his best recommendation given this information. His recommendation should be to accept:

A.project B because it has the shortest payback period.

B.both projects as they both have positive net present values.

C.project A and reject project B based on their net present values.

D.project B and reject project A based on other criteria not mentioned in the problem.

E.project B and reject project A based on both the payback period and the average accounting return.

36.Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods?

A.The other methods help validate whether or not the results from the net present value analysis are reliable.

B.You need to use the other methods since conventional practice dictates that you only accept projects after you have generated three accept indicators.

C.You need to use other methods because the net present value method is unreliable when a project has unconventional cash flows.

D.The internal rate of return must always indicate acceptance since this is the best method from a financial perspective.

E.The discounted payback method must always be computed to determine if a project returns a positive cash flow since NPV does not measure this aspect of a project.

37.In actual practice, managers may use the:

I. IRR because the results are easy to communicate and understand.II. payback because of its simplicity.III. net present value because it is considered by many to be the best method of analysis.

A.I and II only

B.II and III only

C.I and III only

D.I, II, and III

E.None of these

38.No matter how many forms of investment analysis you do:

A.the actual results from a project may vary significantly from the expected results.

B.the internal rate of return will always produce the most reliable results.

C.a project will never be accepted unless the payback period is met.

D.the initial costs will generally vary considerably from the estimated costs.

E.only the first three years of a project ever affect its final outcome.

39.Which of the following methods of project analysis are biased towards short-term projects?

I. Internal rate of returnII. Net present valueIII. PaybackIV. Discounted payback

A.I and II only

B.III and IV only

C.II and III only

D.I and IV only

E.II and IV only

40.If a project is assigned a required rate of return equal to zero, then:

A.the timing of the project's cash flows has no bearing on the value of the project.

B.the project will always be accepted.

C.the project will always be rejected.

D.whether the project is accepted or rejected will depend on the timing of the cash flows.

E.the project can never add value for the shareholders.

41.You are considering a project with the following data:

Internal rate of return 8.7%Profitability ratio .98Net present value -$393Payback period 2.44 yearsRequired return 9.5%

Which one of the following is correct given this information?

A.The discount rate used in computing the net present value must have been less than 8.7%.

B.The discounted payback period will have to be less than 2.44 years.

C.The discount rate used to compute the profitability ratio was equal to the internal rate of return.

D.This project should be accepted based on the profitability ratio.

E.This project should be rejected based on the internal rate of return.

42.Accepting positive NPV projects benefits the stockholders because:

A.it is the most easily understood valuation process.

B.the present value of the expected cash flows are equal to the cost.

C.the present value of the expected cash flows are greater than the cost.

D.it is the most easily calculated.

E.None of these.

43.Which of the following does not characterize NPV?

A.NPV does not explicitly incorporate risk into the analysis.

B.NPV incorporates all relevant cash flow information.

C.NPV uses all of the project's cash flows.

D.NPV discounts all future cash flows.

E.Using NPV will lead to decisions that maximize shareholder wealth.

44.The payback period rule:

A.discounts cash flows.

B.ignores initial cost.

C.always uses all possible cash flows in its calculation.

D.Both discounts cash flows; and always uses all possible cash flows in its calculation.

E.None of these.

45.The payback period rule accepts all investment projects in which the payback period for the cash flows is:

A.greater than one.

B.greater than the cutoff point.

C.less than the cutoff point.

D.positive.

E.None of these.

46.The payback period rule is a convenient and useful tool because:

A.it provides a quick estimate of how rapidly the initial investment will be recouped.

B.results of a short payback rule decision will be quickly seen.

C.it does not have to take into account time value of money.

D.All of these.

E.None of these.

47.The discounted payback period rule:

A.considers the time value of money.

B.discounts the cutoff point.

C.ignores uncertain cash flows.

D.is preferred to the NPV rule.

E.None of these.

48.The payback period rule:

A.determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule.

B.determines a cutoff point so that depreciation is just equal to positive cash flows in the payback year.

C.requires an arbitrary choice of a cutoff point.

D.varies the cutoff point with the interest rate.

E.Both determines a cutoff point so that all projects accepted by the NPV rule will be accepted by the payback period rule; and varies the cutoff point with the interest rate.

49.Modified internal rate of return:

A.handles the multiple IRR problem by combining cash flows until only one change in sign change remains.

B.requires the use of a discount rate.

C.does not require the use of a discount rate.

D.Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and requires the use of a discount rate.

E.Both handles the multiple IRR problem by combining cash flows until only one change in sign change remains; and does not require the use of a discount rate.

50.A mutually exclusive project is a project whose:

A.acceptance or rejection has no effect on other projects.

B.NPV is always negative.

C.IRR is always negative.

D.acceptance or rejection affects other projects.

E.cash flow pattern exhibits more than one sign change.

Discounted Cash Flow Valuation

Multiple Choice Questions51.An annuity stream of cash flow payments is a set of:

A.level cash flows occurring each time period for a fixed length of time.

B.level cash flows occurring each time period forever.

C.increasing cash flows occurring each time period for a fixed length of time.

D.increasing cash flows occurring each time period forever.

E.arbitrary cash flows occurring each time period for no more than 10 years.

52.Annuities where the payments occur at the end of each time period are called _____, whereas _____ refer to annuity streams with payments occurring at the beginning of each time period.

A.ordinary annuities; early annuities

B.late annuities; straight annuities

C.straight annuities; late annuities

D.annuities due; ordinary annuities

E.ordinary annuities; annuities due

53.An annuity stream where the payments occur forever is called a(n):

A.annuity due.

B.indemnity.

C.perpetuity.

D.amortized cash flow stream.

E.amortization table.

54.The interest rate expressed in terms of the interest payment made each period is called the _____ rate.

A.stated annual interest

B.compound annual interest

C.effective annual interest

D.periodic interest

E.daily interest

55.The interest rate expressed as if it were compounded once per year is called the _____ rate.

A.stated interest

B.compound interest

C.effective annual

D.periodic interest

E.daily interest

56.The interest rate charged per period multiplied by the number of periods per year is called the _____ rate.

A.effective annual

B.annual percentage

C.periodic interest

D.compound interest

E.daily interest

57.Paying off long-term debt by making installment payments is called:

A.foreclosing on the debt.

B.amortizing the debt.

C.funding the debt.

D.calling the debt.

E.None of these.

58.You are comparing two annuities which offer monthly payments for ten years. Both annuities are identical with the exception of the payment dates. Annuity A pays on the first of each month while annuity B pays on the last day of each month. Which one of the following statements is correct concerning these two annuities?

A.Both annuities are of equal value today.

B.Annuity B is an annuity due.

C.Annuity A has a higher future value than annuity B.

D.Annuity B has a higher present value than annuity A.

E.Both annuities have the same future value as of ten years from today.

59.You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide you with $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options?

A.Both options are of equal value given that they both provide $20,000 of income.

B.Option A is the better choice of the two given any positive rate of return.

C.Option B has a higher present value than option A given a positive rate of return.

D.Option B has a lower future value at year 5 than option A given a zero rate of return.

E.Option A is preferable because it is an annuity due.

60.You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects?

I. Both projects have the same future value at the end of year 4, given a positive rate of return.II. Both projects have the same future value given a zero rate of return.III. Both projects have the same future value at any point in time, given a positive rate of return.IV. Project A has a higher future value than project B, given a positive rate of return.

A.II only

B.IV only

C.I and III only

D.II and IV only

E.I, II, and III only

61.A perpetuity differs from an annuity because:

A.perpetuity payments vary with the rate of inflation.

B.perpetuity payments vary with the market rate of interest.

C.perpetuity payments are variable while annuity payments are constant.

D.perpetuity payments never cease.

E.annuity payments never cease.

62.Which one of the following statements concerning the annual percentage rate is correct?

A.The annual percentage rate considers interest on interest.

B.The rate of interest you actually pay on a loan is called the annual percentage rate.

C.The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly.

D.When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.

E.The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

63.Which one of the following statements concerning interest rates is correct?

A.The stated rate is the same as the effective annual rate.

B.An effective annual rate is the rate that applies if interest were charged annually.

C.The annual percentage rate increases as the number of compounding periods per year increases.

D.Banks prefer more frequent compounding on their savings accounts.

E.For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.

64.Which of the following statements concerning the effective annual rate are correct?

I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates.II. The more frequently interest is compounded, the higher the effective annual rate.III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded daily.IV. When borrowing and choosing which loan to accept, you should select the offer with the highest effective annual rate.

A.I and II only

B.I and IV only

C.I, II, and III only



65.The highest effective annual rate that can be derived from an annual percentage rate of 9% is computed as:

A..09e - 1.

B.e.09 q.

C.e (1 + .09).

D.e.09 - 1.

E.(1 + .09)q.

66.The time value of money concept can be defined as:

A.the relationship between the supply and demand of money.

B.the relationship between money spent versus money received.

C.the relationship between a dollar to be received in the future and a dollar today.

D.the relationship between interest rate stated and amount paid.

E.None of these.

67.Discounting cash flows involves:

A.discounting only those cash flows that occur at least 10 years in the future.

B.estimating only the cash flows that occur in the first 4 years of a project.

C.multiplying expected future cash flows by the cost of capital.

D.discounting all expected future cash flows to reflect the time value of money.

E.taking the cash discount offered on trade merchandise.

68.Compound interest:

A.allows for the reinvestment of interest payments.

B.does not allow for the reinvestment of interest payments.

C.is the same as simple interest.

D.provides a value that is less than simple interest.

E.Both allows for the reinvestment of interest payments and provides a value that is less than simple interest.

69.An annuity:

A.is a debt instrument that pays no interest.

B.is a stream of payments that varies with current market interest rates.

C.is a level stream of equal payments through time.

D.has no value.

E.None of these.

70.The stated rate of interest is 10%. Which form of compounding will give the highest effective rate of interest?

A.annual compounding

B.monthly compounding

C.daily compounding

D.continuous compounding

E.It is impossible to tell without knowing the term of the loan.

71.The present value of future cash flows minus initial cost is called:

A.the future value of the project.

B.the net present value of the project.

C.the equivalent sum of the investment.

D.the initial investment risk equivalent value.

E.None of these.

72.Find the present value of $5,325 to be received in one period if the rate is 6.5%.

A.$5,000.00

B.$5,023.58

C.$5,644.50

D.$5,671.13

E.None of these.

73.If you have a choice to earn simple interest on $10,000 for three years at 8% or annually compounded interest at 7.5% for three years which one will pay more and by how much?

A.Simple interest by $50.00

B.Compound interest by $22.97

C.Compound interest by $150.75

D.Compound interest by $150.00

E.None of these.

74.Bradley Snapp has deposited $6,000 in a guaranteed investment account with a promised rate of 6% compounded annually. He plans to leave it there for 4 full years when he will make a down payment on a car after graduation. How much of a down payment will he be able to make?

A.$2,397.00

B.$3,288.00

C.$6,321.32

D.$7,574.86

E.$8,857.59

75.Your parents are giving you $100 a month for four years while you are in college. At a 6% discount rate, what are these payments worth to you when you first start college?

A.$3,797.40

B.$4,167.09

C.$4,198.79

D.$4,258.03

E.$4,279.32

76.You just won the lottery! As your prize you will receive $1,200 a month for 100 months. If you can earn 8% on your money, what is this prize worth to you today?

A.$87,003.69

B.$87,380.23

C.$87,962.77

D.$88,104.26

E.$90,723.76

77.Todd is able to pay $160 a month for five years for a car. If the interest rate is 4.9%, how much can Todd afford to borrow to buy a car?

A.$6,961.36

B.$8,499.13

C.$8,533.84

D.$8,686.82

E.$9,588.05

78.You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why?

A.You should accept the payments because they are worth $56,451.91 today.

B.You should accept the payments because they are worth $56,523.74 today.

C.You should accept the payments because they are worth $56,737.08 today.

D.You should accept the $50,000 because the payments are only worth $47,757.69 today.

E.You should accept the $50,000 because the payments are only worth $47,808.17 today.

79.Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5%. Given these assumptions, what is this employee benefit worth to you today?

A.$13,144.43

B.$15,920.55

C.$16,430.54

D.$16,446.34

E.$16,519.02

80.You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of $50,000 for the next five years. At a discount rate of 12%, what is this job worth to you today?

A.$180,238.81

B.$201,867.47

C.$210,618.19

D.$223,162.58

E.$224,267.10

81.The Ajax Co. just decided to save $1,500 a month for the next five years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 3.25% interest compounded monthly. It deposits the first $1,500 today. If the company had wanted to deposit an equivalent lump sum today, how much would it have had to deposit?

A.$82,964.59

B.$83,189.29

C.$83,428.87

D.$83,687.23

E.$84,998.01

82.You need some money today and the only friend you have that has any is your miserly' friend. He agrees to loan you the money you need, if you make payments of $20 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 1.5% interest per month. How much money are you borrowing?

A.$113.94

B.$115.65

C.$119.34

D.$119.63

E.$119.96

83.You buy an annuity which will pay you $12,000 a year for ten years. The payments are paid on the first day of each year. What is the value of this annuity today at a 7% discount rate?

A.$84,282.98

B.$87,138.04

C.$90,182.79

D.$96,191.91

E.$116,916.21

84.You are scheduled to receive annual payments of $10,000 for each of the next 25 years. Your discount rate is 8.5%. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?

A.$8,699

B.$9,217

C.$9,706

D.$10,000

E.$10,850

85.You are comparing two annuities with equal present values. The applicable discount rate is 7.5%. One annuity pays $5,000 on the first day of each year for twenty years. How much does the second annuity pay each year for twenty years if it pays at the end of each year?

A.$4,651

B.$5,075

C.$5,000

D.$5,375

E.$5,405

86.Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both Martha and Stewart will receive payments for five years. At an 8% discount rate, what is the difference in the present value of these two sets of payments?

A.$32.88

B.$40.00

C.$99.01

D.$108.00

E.$112.50

87.What is the future value of $1,000 a year for five years at a 6% rate of interest?

A.$4,212.36

B.$5,075.69

C.$5,637.09

D.$6,001.38

E.$6,801.91

88.What is the future value of $2,400 a year for three years at an 8% rate of interest?

A.$6,185.03

B.$6,847.26

C.$7,134.16

D.$7,791.36

E.$8,414.67

89.Janet plans on saving $3,000 a year and expects to earn 8.5%. How much will Janet have at the end of twenty-five years if she earns what she expects?

A.$219,317.82

B.$230,702.57

C.$236,003.38

D.$244,868.92

E.$256,063.66

90.Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the last day of each year. They both earn a 9% rate of return. What is the difference in their savings account balances at the end of thirty years?

A.$35,822.73

B.$36,803.03

C.$38,911.21

D.$39,803.04

E.$40,115.31

91.You borrow $5,600 to buy a car. The terms of the loan call for monthly payments for four years at a 5.9% rate of interest. What is the amount of each payment?

A.$103.22

B.$103.73

C.$130.62

D.$131.26

E.$133.04

92.You borrow $149,000 to buy a house. The mortgage rate is 7.5% and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay?

A.$138,086

B.$218,161

C.$226,059

D.$287,086

E.$375,059

93.The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $25 million be paid to the president upon the completion of her first ten years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 6.5% on these funds. How much must the company set aside each year for this purpose?

A.$1,775,042.93

B.$1,798,346.17

C.$1,801,033.67

D.$1,852,617.25

E.$1,938,018.22

94.You retire at age 60 and expect to live another 27 years. On the day you retire, you have $464,900 in your retirement savings account. You are conservative and expect to earn 4.5% on your money during your retirement. How much can you withdraw from your retirement savings each month if you plan to die on the day you spend your last penny?

A.$2,001.96

B.$2,092.05

C.$2,398.17

D.$2,472.00

E.$2,481.27

95.The McDonald Group purchased a piece of property for $1.2 million. It paid a down payment of 20% in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.75% compounded monthly. What is the amount of each mortgage payment?

A.$7,440.01

B.$8,978.26

C.$9,036.25

D.$9,399.18

E.$9,413.67

96.You estimate that you will have $24,500 in student loans by the time you graduate. The interest rate is 6.5%. If you want to have this debt paid in full within five years, how much must you pay each month?

A.$471.30

B.$473.65

C.$476.79

D.$479.37

E.$480.40

97.You are buying a previously owned car today at a price of $6,890. You are paying $500 down in cash and financing the balance for 36 months at 7.9%. What is the amount of each loan payment?

A.$198.64

B.$199.94

C.$202.02

D.$214.78

E.$215.09

98.The Good Life Insurance Co. wants to sell you an annuity which will pay you $500 per quarter for 25 years. You want to earn a minimum rate of return of 5.5%. What is the most you are willing to pay as a lump sum today to buy this annuity?

A.$26,988.16

B.$27,082.94

C.$27,455.33

D.$28,450.67

E.$28,806.30

99.Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.9%, what is the current value of the lease?

A.$15,882.75

B.$15,906.14

C.$15,947.61

D.$16,235.42

E.$16,289.54

100.Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are to receive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What is the value of this inheritance today if the applicable discount rate is 6.35%?

A.$36,811.30

B.$37,557.52

C.$39,204.04

D.$39,942.42

E.$40,006.09

Continue

Onto questions 101-150Below

Questions 101-150

Financial Statements Analysis and Financial Models

Multiple Choice Questions1.One key reason a long-term financial plan is developed is because:

A.the plan determines your financial policy.

B.the plan determines your investment policy.

C.there are direct connections between achievable corporate growth and the financial policy.

D.there is unlimited growth possible in a well-developed financial plan.

E.None of these.

2.Projected future financial statements are called:

A.plug statements.

B.pro forma statements.

C.reconciled statements.

D.aggregated statements.

E.None of these.

3.The percentage of sales method:

A.requires that all accounts grow at the same rate.

B.separates accounts that vary with sales and those that do not vary with sales.

C.allows the analyst to calculate how much financing the firm will need to support the predicted sales level.

D.Both requires that all accounts grow at the same rate; and separates accounts that vary with sales and those that do not vary with sales.

E.Both separates accounts that vary with sales and those that do not vary with sales; and allows the analyst to calculate how much financing the firm will need to support the predicted sales level.

4.A ________ standardizes items on the income statement and balance sheet as a percentage of total sales and total assets, respectively.

A.tax reconciliation statement

B.statement of standardization

C.statement of cash flows

D.common-base year statement

E.common-size statement

5.Relationships determined from a firm's financial information and used for comparison purposes are known as:

A.financial ratios.

B.comparison statements.

C.dimensional analysis.

D.scenario analysis.

E.solvency analysis.

6.Financial ratios that measure a firm's ability to pay its bills over the short run without undue stress are known as _____ ratios.

A.asset management

B.long-term solvency

C.short-term solvency

D.profitability

E.market value

7.The current ratio is measured as:

A.current assets minus current liabilities.

B.current assets divided by current liabilities.

C.current liabilities minus inventory, divided by current assets.

D.cash on hand divided by current liabilities.

E.current liabilities divided by current assets.

8.The quick ratio is measured as:

A.current assets divided by current liabilities.

B.cash on hand plus current liabilities, divided by current assets.

C.current liabilities divided by current assets, plus inventory.

D.current assets minus inventory, divided by current liabilities.

E.current assets minus inventory minus current liabilities.

9.The cash ratio is measured as:

A.current assets divided by current liabilities.

B.current assets minus cash on hand, divided by current liabilities.

C.current liabilities plus current assets, divided by cash on hand.

D.cash on hand plus inventory, divided by current liabilities.

E.cash on hand divided by current liabilities.

10.Ratios that measure a firm's financial leverage are known as ________ ratios.

A.asset management



D.profitability

E.market value

11.The financial ratio measured as total assets minus total equity, divided by total assets, is the:

A.total debt ratio.

B.equity multiplier.

C.debt-equity ratio.

D.current ratio.

E.times interest earned ratio.

12.The debt-equity ratio is measured as total:

A.equity minus total debt.

B.equity divided by total debt.

C.debt divided by total equity.

D.debt plus total equity.

E.debt minus total assets, divided by total equity.

13.The equity multiplier ratio is measured as total:

A.equity divided by total assets.

B.equity plus total debt.

C.assets minus total equity, divided by total assets.

D.assets plus total equity, divided by total debt.

E.assets divided by total equity.

14.The financial ratio measured as earnings before interest and taxes, divided by interest expense is the:

A.cash coverage ratio.

B.debt-equity ratio.

C.times interest earned ratio.

D.gross margin.

E.total debt ratio.

15.The financial ratio measured as earnings before interest and taxes, plus depreciation, divided by interest expense, is the:

A.cash coverage ratio.

B.debt-equity ratio.

C.times interest earned ratio.

D.gross margin.

E.total debt ratio.

16.Ratios that measure how efficiently a firm uses its assets to generate sales are known as _______ ratios.

A.asset management



D.profitability

E.market value

17.The inventory turnover ratio is measured as:

A.total sales minus inventory.

B.inventory times total sales.

C.cost of goods sold divided by inventory.

D.inventory times cost of goods sold.

E.inventory plus cost of goods sold.

18.The financial ratio days' sales in inventory is measured as:

A.inventory turnover plus 365 days.

B.inventory times 365 days.

C.inventory plus cost of goods sold, divided by 365 days.

D.365 days divided by the inventory.

E.365 days divided by the inventory turnover.

19.The receivables turnover ratio is measured as:

A.sales plus accounts receivable.

B.sales divided by accounts receivable.

C.sales minus accounts receivable, divided by sales.

D.accounts receivable times sales.

E.accounts receivable divided by sales.

20.The financial ratio days' sales in receivables is measured as:

A.receivables turnover plus 365 days.

B.accounts receivable times 365 days.

C.accounts receivable plus sales, divided by 365 days.

D.365 days divided by the receivables turnover.

E.365 days divided by the accounts receivable.

21.The total asset turnover ratio is measured as:

A.sales minus total assets.

B.sales divided by total assets.

C.sales times total assets.

D.total assets divided by sales.

E.total assets plus sales.

22.Ratios that measure how efficiently a firm's management uses its assets and equity to generate bottom line net income are known as _______ ratios.

A.asset management



D.profitability

E.market value

23.The financial ratio measured as net income divided by sales is known as the firm's:

A.profit margin.

B.return on assets.

C.return on equity.

D.asset turnover.

E.earnings before interest and taxes.

24.The financial ratio measured as net income divided by total assets is known as the firm's:

A.profit margin.

B.return on assets.

C.return on equity.

D.asset turnover.


25.The financial ratio measured as net income divided by total equity is known as the firm's:

A.profit margin.

B.return on assets.

C.return on equity.

D.asset turnover.


26.The financial ratio measured as the price per share of stock divided by earnings per share is known as the:

A.return on assets.

B.return on equity.

C.debt-equity ratio.

D.price-earnings ratio.

E.Du Pont identity.

27.The market-to-book ratio is measured as:

A.total equity divided by total assets.

B.net income times market price per share of stock.

C.net income divided by market price per share of stock.

D.market price per share of stock divided by earnings per share.

E.market value of equity per share divided by book value of equity per share.

28.The _______ breaks down return on equity into three component parts.

A.Du Pont identity

B.return on assets

C.statement of cash flows

D.asset turnover ratio

E.equity multiplier

29.The External Funds Needed (EFN) equation does not measure the:

A.additional asset requirements given a change in sales.

B.additional total liabilities raised given the change in sales.

C.rate of return to shareholders given the change in sales.

D.net income expected to be earned given the change in sales.

E.None of these.

30.To calculate sustainable growth rate without using return on equity, the analyst needs the:

A.profit margin.

B.payout ratio.

C.debt-to-equity ratio.

D.total asset turnover.

E.All of these.

31.Growth can be reconciled with the goal of maximizing firm value:

A.because greater growth always adds to value.

B.because growth must be an outcome of decisions that maximize NPV.

C.because growth and wealth maximization are the same.

D.because growth of any type cannot decrease value.

E.None of these.

32.Sustainable growth can be determined by the:

A.profit margin, total asset turnover and the price to earnings ratio.

B.profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover ratio.

C.Total growth less capital gains growth.

D.Either profit margin, total asset turnover and the price to earnings ratio or profit margin, the payout ratio, the debt-to-equity ratio, and the asset requirement or asset turnover ratio.

E.None of these.

33.Which of the following will increase sustainable growth?

A.Buy back existing stock

B.Decrease debt

C.Increase profit margin

D.Increase asset requirement or asset turnover ratio

E.Increase dividend payout ratio

34.The main objective of long-term financial planning models is to:

A.determine the asset requirements given the investment activities of the firm.

B.plan for contingencies or uncertain events.

C.determine the external financing needs.

D.All of these.

E.None of these.

35.On a common-size balance sheet, all _______ accounts are shown as a percentage of _______.

A.income; total assets

B.liability; net income

C.asset; sales

D.liability; total assets

E.equity; sales

36.Which one of the following statements is correct concerning ratio analysis?

A.A single ratio is often computed differently by different individuals.

B.Ratios do not address the problem of size differences among firms.

C.Only a very limited number of ratios can be used for analytical purposes.

D.Each ratio has a specific formula that is used consistently by all analysts.

E.Ratios can not be used for comparison purposes over periods of time.

37.Which of the following are liquidity ratios?

I. cash coverage ratioII. current ratioIII. quick ratioIV. inventory turnover

A.II and III only

B.I and II only

C.II, III, and IV only

D.I, III, and IV only


38.An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio?

A.accounts payable

B.cash

C.inventory

D.accounts receivable

E.fixed assets

39.A supplier, who requires payment within ten days, is most concerned with which one of the following ratios when granting credit?

A.current

B.cash

C.debt-equity

D.quick

E.total debt

40.A firm has a total debt ratio of .47. This means that that firm has 47 cents in debt for every:

A.$1 in equity.

B.$1 in total sales.

C.$1 in current assets.

D.$.53 in equity.

E.$.53 in total assets.

41.The long-term debt ratio is probably of most interest to a firm's:

A.credit customers.

B.employees.

C.suppliers.

D.mortgage holder.

E.shareholders.

42.A banker considering loaning a firm money for ten years would most likely prefer the firm have a debt ratio of _______ and a times interest earned ratio of _______.

A..75; .75

B..50; 1.00

C..45; 1.75

D..40; 2.50

E..35; 3.00

43.From a cash flow position, which one of the following ratios best measures a firm's ability to pay the interest on its debts?

A.times interest earned ratio

B.cash coverage ratio

C.cash ratio

D.quick ratio

E.Interval measure

44.The higher the inventory turnover measure, the:

A.faster a firm sells its inventory.

B.faster a firm collects payment on its sales.

C.longer it takes a firm to sell its inventory.

D.greater the amount of inventory held by a firm.

E.lesser the amount of inventory held by a firm.

45.Which one of the following statements is correct if a firm has a receivables turnover measure of 10?

A.It takes a firm 10 days to collect payment from its customers.

B.It takes a firm 36.5 days to sell its inventory and collect the payment from the sale.

C.It takes a firm 36.5 days to pay its creditors.

D.The firm has an average collection period of 36.5 days.

E.The firm has ten times more in accounts receivable than it does in cash.

46.A total asset turnover measure of 1.03 means that a firm has $1.03 in:

A.total assets for every $1 in cash.

B.total assets for every $1 in total debt.

C.total assets for every $1 in equity.

D.sales for every $1 in total assets.

E.long-term assets for every $1 in short-term assets.

47.Puffy's Pastries generates five cents of net income for every $1 in sales. Thus, Puffy's has a _______ of 5%.

A.return on assets

B.return on equity

C.profit margin

D.Du Pont measure

E.total asset turnover

48.If a firm produces a 10% return on assets and also a 10% return on equity, then the firm:

A.has no debt of any kind.

B.is using its assets as efficiently as possible.

C.has no net working capital.

D.also has a current ratio of 10.

E.has an equity multiplier of 2.

49.If shareholders want to know how much profit a firm is making on their entire investment in the firm, the shareholders should look at the:

A.profit margin.

B.return on assets.

C.return on equity.

D.equity multiplier.

E.earnings per share.

50.BGL Enterprises increases its operating efficiency such that costs decrease while sales remain constant. As a result, given all else constant, the:

A.return on equity will increase.

B.return on assets will decrease.

C.profit margin will decline.

D.equity multiplier will decrease.

E.price-earnings ratio will increase.

final exam fin 599

Documents