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FIN350 Quiz No. 1 Section MWF First Name______ Last Name_______ Version A

EFF=

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When using calculator, sometimes you might need to enter a negative number to get the answer.

When there are several cash flows within a year, apply periodic rate.

For HP calculator, after doing an operation to convert nominal rate to EFF, you might need to change to setting of P/YR back to 1. 1, orange, P/YR

For Texas, to get EFF, use 2nd, ICONV.

1. Relaxant Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT?

a. Relaxant’s shareholders (the ex-partners) will now be exposed to limited liability.

b. The company will probably be subject to fewer regulations and required disclosures.

c. Assuming the firm is profitable, none of its income will be subject to federal income taxes.

d. The firm will find it more difficult to raise capital to support its growth.

2. Which of the following would be considered a capital budgeting decision?

A) Planning to distribute dividends to shareholders

B) A decision to upgrade the firm’s equipment that is used in production at a cost of $2 million

C) Repurchasing shares of common stock

D) Issuing debt in the form of long-term bonds

3. The goal of a financial manager is to:

A) Maximize market share of the firm’s product in the current year.

B) Minimizing operating expense

C) Maximize the wealth of creditors.

D) Maximize the current value per share of the existing stock.

E) Maximize the stock price on fiscal year end.

4. Which of the following statements is CORRECT?

a. Corporations are taxed more favorably than sole proprietorships.

b. The threat of potential corporate takeover ads some pressure on managers to act in shareholders’ interest.

c. It is very difficult to transfer ownership in a corporation.

5. In a corporation, shareholders (through management) might favor which of the following project that could hurt creditor’s interest?

A) a profitable project

B) a very safe project

C) a very risky project

D) a government-contracted project

6. Investing in a project that is unprofitable hurts shareholders’ interest. However, a manager may take such a project if he/she has special expertise on the project (For example, a manager may prefer to take a project to make vodka instead of red wine.) Doing so can secure his/her job. This is an example of the ________ agency problem.

A) proxy

B) stock option

C) entrenchment

D) excessive perks

E) covenant

7. Which of the following statements is true?

Discounting means the procedure to find present values.

On loans with monthly compounding, the APR will exceed the APY.

C) All else the same, the longer the term of a loan the lower will be the total interest you pay on it.

D) Present values and interest rates (discount rates) move in the same direction with one another.

E) Compounding essentially means earning interest only on principal and not

on past interest.

8. Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?

a. $585.43

b. $614.70

c. $645.44

d. $677.71

e. $711.59

9. You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

a. $11,973

b. $12,603

c. $13,267

d. $13,930

e. $14,626

10. What’s the present value of a 6-year ordinary annuity of $70 per year plus an additional $1,000 at the end of Year 6 if the interest rate is 7%?

a. $666.34

b. $1070

c. $1000

d. $1063

e. $974

11. How much would you pay for a perpetuity that pays $600 per half-year when interest rate (APR) is 12% compounded semiannually? (12% is nominal rate, two compounding periods per year. Note cashflows occur twice in a year.)

a. $5,000

b. $72,000

c. $10,000

d. $7,200

e. $60,000

12. Credit card issuers must by law print their Annual Percentage Rate (APR) on their statements. If the APR is stated to be 8%, with interest compounded quarterly, what is the interest rate per quarter ? (Periodic rate, not EFF)

a. 2%

b. 4%

c. 8%

d. 12%

e. 8.24%

13. You plan to invest some money in a bank account. Which of the following banks provides you with the highest effective rate of interest?

a. Bank 1; 6.1% with annual compounding.

b. Bank 2; 6.0% with monthly compounding.

c. Bank 3; 6.0% with annual compounding.

d. Bank 4; 6.0% with quarterly compounding.

e. Bank 5; 6.0% with daily (365-day) compounding.

14. A lump sum payment of $1,000 is due at the end of year 5. The nominal interest rate is 10%, quarterly compounding. Which of the following statements is CORRECT?

a. The present value of the $1,000 would be greater if interest were compounded monthly rather than quarterly.

b. The periodic interest rate is greater than 2.5%.

c. The periodic interest rate is less than 2.5%.

d. Compared with this $1,000 lump sum that is due at the end of year 5, a 5-year, $200 ordinary annuity has a higher present value.

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A) $222.84

B) $247.82

C) $311.80

D) $331.80

E) $233.81

16. What is the present value of the following cash flow stream at a rate of 6.25%?

Years: 0 1 2 3 4

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CFs: $0 $75 $225 $0 $300

a. $411.57

b. $433.23

c. $456.03

d. $480.03

e. $505.30

17. Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?

a. 14.39

b. 15.15

c. 15.95

d. 16.79

e. 17.67

The next question may be worked under “BGN” mode

18. What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

a. $11,262.88

b. $11,826.02

c. $12,417.32

d. $13,038.19

e. $13,690.10

(Do not forget to return to the “END” mode after the above question)

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