Corporate Finance, 8th Canadian Edition by Stephen A. Ross – Test Bank

 

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Sample Test

Chapter 03

Financial Planning and Growth

 

 

 

Multiple Choice Questions

 

1.   Financial planning is concerned with the basic policy elements of:

2.   investment decision, decisions on the amount of cash payments to shareholders, and the decision of which investment banker to choose.

3.   the method of raising capital, investment decisions, and the level of growth to attain.

4.   investment decisions, degree of financial leverage, and the decision on the amount of cash payments to shareholders.

5.   degree of financial leverage, level of growth to attain, and investment decisions.

 

 

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Blooms: Understand

Difficulty: Medium

Topic: 03-01 What Is Financial Planning?

 

2.   One key reason a long term financial plan is developed is because:

3.   the plan determines your financial policy.

4.   the plan determines your investment policy.

5.   there are direct connections between achievable corporate growth and the financial plan.

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

 

 

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Blooms: Understand

Difficulty: Easy

Topic: 03-01 What Is Financial Planning?

 

 

3.   The process of combining smaller projects into a large budget for planning purposes is called:

4.   aggregation.

5.   consolidation.

6.   accumulation.

7.   capital allocation.

 

 

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Blooms: Remember

Difficulty: Easy

Topic: 03-01 What Is Financial Planning?

 

4.   Projected future financial statements are called:

5.   plug statements.

6.   pro forma statements.

7.   reconciled statements.

8.   aggregated statements.

 

 

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Blooms: Remember

Difficulty: Easy

Topic: 03-02 A Financial Planning Model: The Ingredients

 

5.   An example of an economic assumption would be:

6.   growth in sales.

7.   growth in the capital spending requirement.

8.   a plug variable.

9.   change in interest rates.

10.                growth in dividends.

 

 

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Blooms: Understand

Difficulty: Easy

Topic: 03-02 A Financial Planning Model: The Ingredients

 

6.   If accounts receivable are $45,000 and are directly proportional to total sales, the forecast accounts receivable for next year’s 5% increase in sales to $125,000 would be:

7.   $47,250.

8.   $40,500.

9.   $49,950.

10.                impossible to calculate without last year’s credit sales.

 

 

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Blooms: Analyze

Difficulty: Easy

Topic: 03-03 The Percentage of Sales Method

 

7.   Financial planning models frequently assume that many variables are proportional to:

8.   economic growth.

9.   industry growth.

10.                interest rates.

11.                company sales.

 

 

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Blooms: Remember

Difficulty: Easy

Topic: 03-02 A Financial Planning Model: The Ingredients

 

8.   The addition to retained earnings for the financial planning period is equal to:

9.   Net Income + Taxes – Dividends.

10.                Net Income – Dividends.

11.                Net income + Depreciation – Dividends.

12.                Sales – Dividend.

 

 

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Blooms: Remember

Difficulty: Medium

Topic: 03-03 The Percentage of Sales Method

 

9.   If forecasted net income is $3,600.00 and the expected dividend is $1,098 and the tax rate is 34%, what is the retention ratio?

10.                0.30.

11.                0.198.

12.                0.802.

13.                0.70.

 

 

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Difficulty: Medium

Topic: 03-03 The Percentage of Sales Method

 

10.                If a firm holds the dividend payout, the debt to equity ratio and outstanding shares constant while maintaining income and assets proportional to sales, the plug variable is:

11.                short term debt.

12.                retained earnings.

13.                sustainable growth.

14.                long term debt.

15.                accounts receivable.

 

 

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Blooms: Remember

Difficulty: Hard

Topic: 03-03 The Percentage of Sales Method

 

11.                The external funds needed (EFN) equation projects the addition to retained earnings as:

12.                Net Profit Margin ´ D Sales.

13.                Net Profit Margin ´ D Sales ´ (1 – d).

14.                Net Profit Margin ´ Projected sales ´ (1 – d).

15.                Projected sales ´ (1 – d).

16.                Net Profit Margin ´ Projected sales.

 

 

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Difficulty: Medium

Topic: 03-03 The Percentage of Sales Method

 

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

13.                because greater growth always adds to value.

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

15.                because growth and wealth maximization are the same.

16.                because growth of any type cannot decrease value.

 

 

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Blooms: Understand

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

13.                Sustainable growth is defined as the level of growth than an entity can:

14.                maintain if it stays in the same business.

15.                maintain if it does not change the accounting relationships or capital structure.

16.                maintain if the net working capital is increased.

17.                maintain if the sales force grows at the rate of inflation.

 

 

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Blooms: Understand

Difficulty: Easy

Topic: 03-04 The Statement of Comprehensive Income

 

14.                The most recent financial statements for REM Co. are shown below.

 

 

Statement of Financial Position          Income Statement with Statement of Comprehensive Income

Sales    $400    Assets  $1200  Debt    $600

Costs   200                             Equity 600

Taxes   50        Total    1200    Total    $1200

Net income      $150

 

 

 

Assets and costs are proportional to sales. Debt is not. A dividend of $90 was paid, and REM wishes to maintain a constant payout to net income. Next year’s sales are projected to be $480. What is external funds needed (EFN)?

240.             $240.00

241.             $132.00

242.             $60.00

243.             $168.00

 

 

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Blooms: Analyze

Difficulty: Medium

Topic: 03-03 The Percentage of Sales Method

 

15.                A firm has a fixed debt-to-equity ratio and dividend policy. Assets and net income are proportional to sales, and new equity will not be issued. Which of the following statements is most correct?

16.                Almost any growth rate is theoretically possible.

17.                Only one growth rate is possible.

18.                The firm cannot grow.

19.                The firm’s growth rate must be less than some maximum.

 

 

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Blooms: Understand

Difficulty: Easy

Topic: 03-04 The Statement of Comprehensive Income

 

16.                In estimating pro-forma statement of financial position, projected retained earnings are computed as present retained earnings plus:

17.                projected retained earnings and cash dividends.

18.                projected retained earnings plus debt.

19.                projected retained earnings plus assets.

20.                projected net income minus cash dividends.

21.                projected net income earnings minus debt.

 

 

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Difficulty: Easy

Topic: 03-03 The Percentage of Sales Method

 

17.                In the financial planning model, external funds needed (EFN) is equal to:

18.                assets less (liabilities – equity).

19.                assets less (liabilities + equity).

20.                (assets + liabilities) less equity.

21.                (assets + equity) less liabilities.

22.                assets less equity.

 

 

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Difficulty: Easy

Topic: 03-03 The Percentage of Sales Method

 

18.                The most recent financial statements for Matrix Chip are shown below.

 

 

Statement of Comprehensive Income

Sales    $880

Costs   626

Taxes   51

Net income      $204

 

 

 

Statement of Financial Position

Current assets  $200    Current liabilities         $400

Fixed assets     2000    Long-term dept           700

Equity 1100

$2200             $2200

 

 

 

Assets, costs, and current liabilities are proportional to sales. Matrix Chip maintains a constant 50% dividend payout. No external financing is possible. What is the maximum percentage increase in sales that can be sustained?

5.   5.55%

6.   8.14%

7.   10.22%

8.   22.72%

 

 

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Blooms: Analyze

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

19.                The sustainable growth rate will be equivalent to the internal growth rate when:

20.                a firm has no debt.

21.                the growth rate is positive.

22.                the plowback ratio is positive but less than 1.

23.                a firm has a debt-equity ratio exactly equal to 1.

24.                net income is greater than zero.

 

 

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Blooms: Understand

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

20.                A firm’s planning model has assets and cash proportional to sales. The firm maintains a constant dividend payout ratio and a constant debt to equity ratio. Keying in on the asset to sales ratio, the firm’s sustainable growth is _________ and ________ the asset to sales ratio.

21.                higher; higher

22.                higher; lower

23.                lower; lower

24.                constant; higher

25.                constant; lower

 

 

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Blooms: Remember

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

21.                Altering the inputs to a financial plan by changing one of the assumptions is called:

22.                a redundancy check.

23.                a pro forma evaluation.

24.                goal seeking.

25.                sensitivity analysis.

 

 

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Blooms: Understand

Difficulty: Easy

Topic: 03-01 What Is Financial Planning?

 

22.                The maximum rate at which a firm can grow while maintaining a constant debt-equity ratio is best defined by its:

23.                rate of return on assets.

24.                internal rate of growth.

25.                average historical rate of growth.

26.                rate of return on equity.

27.                sustainable rate of growth.

 

 

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Blooms: Remember

Difficulty: Easy

Topic: 03-04 The Statement of Comprehensive Income

 

23.                It is easier to evaluate a firm using its financial statements when the firm:

24.                is a conglomerate.

25.                is global in nature.

26.                uses the same accounting procedures as other firms in its industry.

27.                has a different fiscal year than other firms in its industry.

28.                tends to have one-time events such as asset sales and property acquisitions.

 

 

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Blooms: Understand

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

24.                Which of the following will increase sustainable growth?

25.                Buy back existing stock.

26.                Decrease debt.

27.                Increase profit margin.

28.                Increase dividend payout ratio.

 

 

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Blooms: Understand

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

25.                Assuming the following ratios are constant, what is the sustainable growth rate?

 

 

Total assets/sales         1.0

Net income/sales         0.1

Debt/equity     0.3

Dividends/net income 0.4

 

6.   6.67%

7.   5.13%

8.   4.06%

9.   8.46%

 

 

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Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

26.                A firm wishes to maintain a growth rate of 10% per year and a debt-to-equity ratio of 1/2. The dividend payout is.2, and the ratio of total assets to sales is constant at 1.2. What must the profit margin be?

27.                10.00%

28.                9.09%

29.                11.11%

30.                8.00%

 

 

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Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

27.                A firm wishes to maintain a growth rate of 12% per year and a dividend payout of 10%. The ratio of total assets to sales is constant at 1.5, and profit margin is 10%. What must be the debt-to-equity ratio?

28.                0.52

29.                0.67

30.                0.79

31.                0.84

 

 

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Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

28.                If a firm bases its growth projection on the rate of sustainable growth, and shows positive net income, then the:

29.                fixed assets will have to increase at the same rate, regardless of the current capacity level.

30.                number of common shares outstanding will increase at the same rate of growth.

31.                debt-equity ratio will have to increase.

32.                debt-equity ratio will remain constant while retained earnings increase.

33.                fixed assets, debt-equity ratio, and number of common shares outstanding will all increase.

 

 

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Difficulty: Hard

Topic: 03-04 The Statement of Comprehensive Income

 

29.                Marcie’s Mercantile wants to maintain its current dividend policy, which is a payout ratio of 40%. The firm does not want to increase its equity financing but is willing to maintain its current debt-equity ratio. Given these requirements, the maximum rate at which Marcie’s can grow is equal to:

30.                40% of the internal rate of growth.

31.                60% of the internal rate of growth.

32.                the internal rate of growth.

33.                the sustainable rate of growth.

34.                60% of the sustainable rate of growth.

 

 

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Difficulty: Hard

Topic: 03-04 The Statement of Comprehensive Income

 

 

 

Short Answer Questions

 

30.                Why is it important for managers to understand the importance of both the internal and the sustainable rates of growth?

One reason that causes firms to go out of business is the lack of external funding to support the growth of the firm. Understanding the implications of both the internal and sustainable growth rates can help management know when to limit firm growth such that the growth does not exceed the availability of the necessary financing to fund that growth.

 

 

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Blooms: Understand

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

31.                State the assumptions that underlie the sustainable growth rate and interpret what the sustainable growth rate means.

The usual assumptions are: Costs and assets increase proportionately with sales, the dividend payout ratio is fixed (or is given), the current debt-equity ratio is optimal, and no new equity sales are possible. The sustainable growth rate is the maximum rate at which sales can increase with the restriction that no new equity sales are possible and long-term debt increases only in an amount that keeps the debt-equity ratio fixed.

 

 

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Blooms: Understand

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

32.                The most recent financial statements for Valley View Distributors are:

 

 

Statement of Comprehensive Income Statement of Financial Position

Sales    $3200  Assets  $3600  ST. Debt          $192

1.                                       Debt         $1248

Costs   2600                           Equity 2160

Net income      $600    Total    $3600  Total    $3600

 

 

 

Assets, short term debt and costs are proportional to sales. Long term debt is not. Dividends are 20%. Next year’s sales are projected to be $3,600. What is external funds needed (EFN)?

EFN = [3600/3200(400)] – [192/3200(400) – 600/3200(3600)(1 – .2)] = 450 – 24 – 540 = -114

 

 

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Blooms: Analyze

Difficulty: Medium

Topic: 03-03 The Percentage of Sales Method

 

33.                The most recent financial statements for Nosa Co. are:

 

 

Statement of Comprehensive Income

Sales    $500

Costs   400

Taxes   50

Net income      $50

 

 

 

Statement of Financial Position

Current assets  $200    Current liabilities         $400

Fixed assets     2000    Long-term dept           700

Equity 1100

$2200             $2200

 

 

Assets, costs, and current liabilities are proportional to sales. Long-term debt is not. Nosa maintains a constant 50% dividend payout. Next year’s sales are projected to be $540. What is external funds needed (EFN)?

Given the sales projection, Equity needs are up $144, plus a dividend of $27 must be paid. The new net income will cover $54 of their needed funds, leaving $117 as EFN.

EFN = (2200/500)(40) – (400/500)(40) – (.5)(.1)(540) = 117.

 

 

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Blooms: Analyze

Difficulty: Medium

Topic: 03-03 The Percentage of Sales Method

 

34.                The most recent financial statements for Quik-chip Co. are:

 

 

Statement of Comprehensive Income

Sales    $320

Costs   260

Taxes   20

Net income      $40

 

 

 

Statement of Financial Position

Working Capital          $400    Long-term dept           $820

Fixed assets     1650    Equity 1230

$2050             $2050

 

 

Assets and costs are proportional to sales. Quik-chip maintains a constant 30% dividend payout and a constant debt-to-equity ratio. What is the maximum sustainable increase in sales assuming no new equity?

 

Apply the formula:

2.334312% increase in sales is equivalent to a $7.47 dollar increase in sales.

 

 

Blooms: Analyze

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

35.                Assuming the following ratios are constant, what is the sustainable growth rate?

 

 

Sales/total assets         0.4

Net income/sales         0.1

Debt/Total Assets       0.2

Retained earnings/net income 0.6

 

Growth Rate

 

 

 

 

Blooms: Analyze

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

36.                A firm wishes to maintain a growth rate of 15% per year while maintaining a debt-to-equity ratio of 1.0, a profit margin of 20% and a dividend payout of 60%. What level of asset efficiency must it achieve?

.15 =

.15 = .16/(T – .16)

T = 1.2267

 

Therefore TA turnover is.815 or must generate 81.5 cents worth of sales for each dollar in assets.

 

 

Blooms: Analyze

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

37.                A firm wishes to maintain a growth rate of 4% per year, a debt-to-equity ratio of.26, and a dividend payout of 40%. If the profit margin is 10%, and next year’s sales are projected at $500, what is the total asset projection?

; X = 975.00

 

 

Blooms: Analyze

Difficulty: Medium

Topic: 03-04 The Statement of Comprehensive Income

 

38.                A firm follows the objective of maximizing sales growth. Is maximizing growth always consistent with the shareholders objective and can a firm always achieve this objective if they are at the desired financial relationships for payout, debt to equity and asset structure.

No, goals are not the same–shareholders wealth maximization is achieved through positive NPV investment. Increased sales do not necessarily mean increase value.

 

– Fixed relationships only allow for a set growth rate.

– If desired growth is different than sustainable growth then relationships must change.

– Higher growth means more financing

 

 

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Blooms: Understand

Difficulty: Medium

Topic: 03-03 The Percentage of Sales Method

 

39.                Suppose a firm calculates its external funding needs and finds that it is negative. What are the firm’s options in this case?

With a negative external financing need, the firm has a surplus of funds that it can use to reduce current liabilities, reduce long-term debt, buy back common stock, or increase dividends. If acceptable opportunities exist, firms might also use the extra funds to add assets.

 

 

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Blooms: Understand

Difficulty: Hard

Topic: 03-04 The Statement of Comprehensive Income

 

 

Chapter 05

The Time Value of Money

 

 

Multiple Choice Questions

1.   The time value of money concept can be defined as:
A.the time in your life when you receive an inheritance.
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 of interest rate stated and amount paid.

 

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Blooms: Apply
Difficulty: Easy
Topic: 05-01 The One-Period Case

2.   The compound value is defined as:
A.the value of a dollar received tomorrow.
B. the value of a sum after investing over one or more periods.
C. the value of a sum today to received in the future.
D. the rate of growth in a sum today.

 

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Blooms: Apply
Difficulty: Easy
Topic: 05-01 The One-Period Case

3.   Present value may be defined as:
A.future cash flows discounted to the present.
B. official prescribed price.
C. present cash flows compounded into the future.
D. the average of the bid and asked price.

 

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Blooms: Apply
Difficulty: Easy
Topic: 05-01 The One-Period Case

 

 

4.   Find the present value of $5325.00 to be received in one period if the rate is 6.50%.
A.$5,000.00
B. $5,071.43
C. $5,671.13
D. $5,591.25

 

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Blooms: Apply
Difficulty: Easy
Topic: 05-01 The One-Period Case

5.   The present value of future cash flows minus initial cost is called:
A.the future savings 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.

 

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Blooms: Remember
Difficulty: Easy
Topic: 05-01 The One-Period Case

6.   What is the future value of the following cash flows at the end of year 3 if the interest rate is 6%? The cash flows occur at the end of each year.

Year 1	Year 2	Year 3
$5,180	$9,600	$2,250

 

916.             $15,916.78
B. $18,109.08
C. $18,246.25
D. $19,341.02
E. $19,608.07

 

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Blooms: Analyze
Difficulty: Medium
Topic: 05-02 The Multiperiod Case

7.   Discounting cash flows involves:
A.reducing cash flows that occur beyond 10 years in the future.
B. discounting expected cash flows beyond a certain number of years in the future, which varies with the riskiness of the project.
C. reducing expected cash flows to achieve certainty equivalence.
D. reducing the value of future cash flows to reflect the time value of money.
E. taking the cash discount offered on trade merchandise.

 

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Blooms: Understand
Difficulty: Easy
Topic: 05-02 The Multiperiod Case

8.   Beatrice invests $1,000 in an account that pays 4% simple interest. How much more could she have earned over a five-year period if the interest had compounded annually?
A.$15.45
B. $15.97
C. $16.65
D. $17.09
E. $21.67

 

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Difficulty: Easy
Topic: 05-02 The Multiperiod Case

9.   In the equation, NPV = -Cost + PV, the term Cost is the:
A.current value of the commitment fee today.
B. current value of the terminal cash flow.
C. initial cash outflow.
D. present value of the variable costs.

 

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Blooms: Remember
Difficulty: Easy
Topic: 05-02 The Multiperiod Case

10.                If you have a choice to earn simple interest on $10,000 for three years at 8% or compound interest at 7.5% for three years which one will pay more and by how much?
A.Simple interest by $1,500.
B. Compound interest by $22.97.
C. Compound interest by $150.75.
D. Simple interest by $150.00.

 

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Blooms: Apply
Difficulty: Medium
Topic: 05-02 The Multiperiod Case

11.                The equation [Ct/(1 + r)^t] provides:
A.the compound value of a series of payments with a single interest rate.
B. the compound value of a series of payments with a series of interest rates.
C. the compound value of a single payment.
D. the present value of a series of payments with a single interest rate.
E. the present value of a single payment.

 

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Blooms: Remember
Difficulty: Easy
Topic: 05-02 The Multiperiod Case

12.                The future value table provides the factors for the:
A.compound interest rate for 1/N periods for a specified interest rate.
B. compound value of a dollar for 1/N periods for a specified interest rates.
C. single value of a dollar for N periods for a specified interest rate.
D. simple interest rate for N periods.

 

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Blooms: Remember
Difficulty: Easy
Topic: 05-03 Future Value and Compounding

13.                Jim Mayer has deposited $7,000 in a guaranteed investment account with a promised rate of 7% 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.$8,960.00
B. $1,960.00
C. $2,175.57
D. $9,175.57

 

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Blooms: Analyze
Difficulty: Medium
Topic: 05-02 The Multiperiod Case

14.                Which of the following statements is true?
A.Regardless of the value of the interest rate, increasing the compounding frequency will decrease the future value.
B. Regardless of the value of the interest rate, increasing the compounding frequency will increase the future value.
C. There is a relationship between the future value of investment and the effect of compounding frequency. At high interest rates, increases in compounding frequency will decrease the future value.
D. There is a relationship between the future value of investment and the effect of compounding frequency. At low interest rates, increases in compounding frequency will decrease the future value.

 

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Blooms: Understand
Difficulty: Easy
Topic: 05-03 Future Value and Compounding

15.                The discount rate is adjusted:
A.upward to reflect higher risk and to increase the future cash flows.
B. upward to reflect higher risk and to reduce the future cash flows.
C. downward to reflect higher risk and to increase the future cash flows.
D. downward to reflect higher risk and to reduce the future cash flows.

 

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Blooms: Understand
Difficulty: Medium
Topic: 05-04 The Power of Compounding: A Digression

16.                The great grandparents of one of your classmates sold their munitions factory to the government in beginning of 1898 during the Spanish-American War for $150,000. If these proceeds had been invested at 6% from then until the end of 2001, what would the legacy to your classmate’s family be worth at the end of 2001 (assume whole years)?
A.$936,000
B. $64,254,159.44
C. $1,086,000
D. $60,617,131.54
E. $60,467,131.54

 

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Difficulty: Medium
Topic: 05-04 The Power of Compounding: A Digression

17.                The present value factor is:
A.the dollar amount of the future value.
B. the rate that equates the present value with the future value.
C. the process of calculating future or present values.
D. the value of $1 to be received in T periods at a given interest rate.

 

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Blooms: Remember
Difficulty: Medium
Topic: 05-02 The Multiperiod Case

18.                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

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Easy
Topic: 05-03 Future Value and Compounding

19.                The equation (1 + (r/m))^m-1 gives the:
A.effective annual interest rate, and r is the stated annual interest rate.
B. effective annual interest rate, and m is the number of years to maturity.
C. stated annual interest rate, and r is the effective annual interest rate.
D. stated annual interest rate, and m is the number of years to maturity.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

20.                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. $223,162.50
E. $224,267.10

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

21.                You have deposited $1,500 in an account that promises to pay 8% compounded quarterly for the next five years. How much will you have in the account at the end?
A.$1,598.33
B. $2,228.92
C. $2,203.99
D. $6,991.44

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Hard
Topic: 05-03 Future Value and Compounding

22.                Which of the following amounts is closest to the end value of investing $9,000 for 7 years at a continuously compounded rate of 11%?
A.$18,685.44
B. $19,369.83
C. $15,930.00
D. $19,437.90

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Hard
Topic: 05-03 Future Value and Compounding

23.                Which of the following amounts is closest to the end value of investing $3,000 for 3/4 year at a continuously compounded rate of 12%?
A.$3,163
B. $3,283
C. $3,263
D. $3,287
E. $3,317

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Hard
Topic: 05-03 Future Value and Compounding

24.                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

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

25.                Which of the following amounts is closest to the end value of investing $5,000 for 14 months at a stated annual interest rate of 6 percent compounded monthly?
A.$5,352
B. $5,362
C. $5,350
D. $5,293
E. $6,183

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

26.                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.

 

Accessibility: Keyboard Navigation
Blooms: Analyze
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

27.                Which of the following amounts is closest to the end value of investing $10,000 for 1 1/2 years at a stated annual interest rate of 12% compounded quarterly?
A.$11,800
B. $11,852
C. $11,941
D. $11,961

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

28.                The present value table provides the factors for the:
A.simple interest rate for N periods.
B. discount value of a dollar for N periods for a specified interest rate.
C. discount value of a dollar for 1/N periods for a specified interest rate.
D. simple interest value of an investment for N periods.
E. simple interest value of an investment for 1/N periods.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Topic: 05-02 The Multiperiod Case

29.                Which of the following amounts is closest to the end value of investing $7,500 for 2 1/2 years at an effective annual interest rate of 12.36%? Interest is compounded semiannually.
A.$7,531
B. $8,427
C. $9,818
D. $9,469
E. $10,122

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

30.                The present value of a set of cash flows is:
A.the sum of the present value of the individual cash flows.
B. the sum of individual cash flows which are then discounted.
C. not equal to the sum of the present value of the individual cash flows.
D. always greater than the present value of the investment.

 

Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Medium
Topic: 05-02 The Multiperiod Case

31.                If the compound period is greater than one:
A.the effective annual interest rate is always equal to the annual percentage rate.
B. the effective annual interest rate is always less than the annual percentage rate.
C. the effective annual interest rate is always greater than the annual percentage rate.
D. the effective annual interest rate is never greater than the annual percentage rate.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

32.                A court settlement awarded an accident victim four payments of $50,000 to be paid at the end of each of the next four years. Using a discount rate of 4%, calculate the present value of the annuity.
A.$173,255
B. $178,495
C. $181,495
D. $184,095
E. $200,000

 

Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Medium
Topic: 05-03 Future Value and Compounding

33.                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

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Topic: 05-03 Future Value and Compounding

34.                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.

 

Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: Easy
Topic: 05-03 Future Value and Compounding