1) Maximization of shareholder wealth is a concept in which



1) Maximization of shareholder wealth is a concept in which | |

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|A. |

|[pic] |

|increased earnings is of primary importance. |

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|B. |

|[pic] |

|optimally increasing the long-term value of the firm is emphasized. |

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|C. |

|[pic] |

|virtually all earnings are paid as dividends to common stockholders. |

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|D. |

|[pic] |

|profits are maximized on a quarterly basis. |

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|2) Corporate governance is the |

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|A. |

|[pic] |

|relationship and exercise of oversight by the board of directors of the company. |

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|B. |

|[pic] |

|governance of the company by the board of directors with a focus on social responsibility. |

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|C. |

|[pic] |

|operation of a company by the chief executive officer (CEO) and other senior executives on the management team. |

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|D. |

|[pic] |

|relationship between the chief financial officer and institutional investors. |

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|3) What is the primary goal of financial management? |

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|A. |

|[pic] |

|Increased earnings |

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|B. |

|[pic] |

|Maximizing shareholder wealth |

| |

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|C. |

|[pic] |

|Minimizing risk of the firm |

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|D. |

|[pic] |

|Maximizing cash flow |

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|4) The statement of cash flows does NOT include which of the following sections? |

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|A. |

|[pic] |

|cash flows from operating activities |

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|B. |

|[pic] |

|cash flows from investing activities |

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|C. |

|[pic] |

|cash flows from financing activities |

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|D. |

|[pic] |

|cash flows from sales activities |

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|5) Which of the following is an inflow of cash? |

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|A. |

|[pic] |

|funds spent in normal business operations |

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|B. |

|[pic] |

|the sale of the firm's bonds |

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|C. |

|[pic] |

|the purchase of a new factory |

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|D. |

|[pic] |

|the retirement of the firm's bonds |

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|6) An increase in investments in long-term securities will: |

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|A. |

|[pic] |

|increase cash flow from investing activities. |

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|B. |

|[pic] |

|increase cash flow from financing activities. |

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|C. |

|[pic] |

|decrease cash flow from investing activities. |

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|D. |

|[pic] |

|decrease cash flow from financing activities. |

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|7) The most rigorous test of a firm's ability to pay its short-term obligations is its |

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|A. |

|[pic] |

|current ratio. |

| |

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|B. |

|[pic] |

|debt-to-assets ratio. |

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|C. |

|[pic] |

|quick ratio. |

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|D. |

|[pic] |

|times-interest-earned ratio. |

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|8) A quick ratio that is much smaller than the current ratio reflects |

| |

|A. |

|[pic] |

|a small portion of current assets is in inventory. |

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| |

|B. |

|[pic] |

|that the firm will have a high inventory turnover. |

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|C. |

|[pic] |

|a large portion of current assets is in inventory. |

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|D. |

|[pic] |

|that the firm will have a high return on assets. |

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|9) In examining the liquidity ratios, the primary emphasis is the firm's |

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|A. |

|[pic] |

|ability to effectively employ its resources. |

| |

| |

|B. |

|[pic] |

|ability to pay short-term obligations on time. |

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|C. |

|[pic] |

|overall debt position. |

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|D. |

|[pic] |

|ability to earn an adequate return. |

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|10) A firm has current assets of $75,000 and total assets of $375,000. The firm's sales are $900,000. The firm's fixed asset turnover is |

| |

|A. |

|[pic] |

|3.0x |

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|B. |

|[pic] |

|2.4x |

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|C. |

|[pic] |

|12.0x |

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| |

|D. |

|[pic] |

|5.0x |

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|11) [pic] |

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|Refer to the figure above. The firm's debt to asset ratio is |

| |

|A. |

|[pic] |

|58%. |

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|B. |

|[pic] |

|25%. |

| |

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|C. |

|[pic] |

|33%. |

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| |

|D. |

|[pic] |

|48%. |

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|12) [pic] |

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|Refer to the figure above. The firm's inventory turnover ratio is |

| |

|A. |

|[pic] |

|10x. |

| |

| |

|B. |

|[pic] |

|2.7x. |

| |

| |

|C. |

|[pic] |

|8x. |

| |

| |

|D. |

|[pic] |

|0.1x. |

| |

|13) The percent-of-sales method of financial forecasting |

| |

|A. |

|[pic] |

|is more detailed than a cash budget approach. |

| |

| |

|B. |

|[pic] |

|assumes that balance sheet accounts maintain a constant relationship to sales. |

| |

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|C. |

|[pic] |

|requires more time than a cash budget approach. |

| |

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|D. |

|[pic] |

|provides a month-to-month breakdown of data. |

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|14) In the percent-of-sales method, an increase in dividends |

| |

|A. |

|[pic] |

|will increase required new funds. |

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|B. |

|[pic] |

|has no effect on required new funds. |

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|C. |

|[pic] |

|will decrease required new funds. |

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|D. |

|[pic] |

|more information is needed. |

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|15) In general, the larger the portion of a firm's sales that are on credit, the |

| |

|A. |

|[pic] |

|lower will be the firm's need to borrow. |

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| |

|B. |

|[pic] |

|more rapidly credit sales will be paid off. |

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|C. |

|[pic] |

|higher will be the firm's need to borrow. |

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|D. |

|[pic] |

|more the firm can buy raw materials on credit. |

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|16) The pro forma income statement is important to the overall process of constructing pro forma statements because it allows us to determine a value for: |

| |

|A. |

|[pic] |

|change in retained earnings. |

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|B. |

|[pic] |

|interest expense. |

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|C. |

|[pic] |

|gross profit. |

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|D. |

|[pic] |

|prepaid expenses. |

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|17) The key initial element in developing pro forma statements is |

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|A. |

|[pic] |

|a cash budget. |

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|B. |

|[pic] |

|a sales forecast. |

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|C. |

|[pic] |

|an income statement. |

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|D. |

|[pic] |

|a collections schedule. |

| |

| |

|18) A firm has beginning inventory of 300 units at a cost of $11 each. Production during the period was 650 units at $12 each. If sales were 700 units, what is the|

|cost of goods sold (assume FIFO)? |

| |

|A. |

|[pic] |

|$9,000 |

| |

| |

|B. |

|[pic] |

|$7,700 |

| |

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|C. |

|[pic] |

|$8,000 |

| |

| |

|D. |

|[pic] |

|$8,100 |

| |

|19) The degree of operating leverage is computed as |

| |

|A. |

|[pic] |

|percent change in operating profit divided by percent change in net income. |

| |

| |

|B. |

|[pic] |

|percent change in volume divided by percent change in operating profit. |

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| |

|C. |

|[pic] |

|percent change in EPS divided by percent change in operating income. |

| |

| |

|D. |

|[pic] |

|percent change in operating income divided by percent change in volume. |

| |

| |

|20) When a firm employs no debt |

| |

|A. |

|[pic] |

|it has a financial leverage of one. |

| |

| |

|B. |

|[pic] |

|it has a financial leverage of zero. |

| |

| |

|C. |

|[pic] |

|its operating leverage is equal to its financial leverage. |

| |

| |

|D. |

|[pic] |

|it will not be profitable. |

| |

| |

|21) Financial leverage deals with: |

| |

|A. |

|[pic] |

|the relationship of fixed and variable costs. |

| |

| |

|B. |

|[pic] |

|the relationship of debt and equity in the capital structure. |

| |

| |

|C. |

|[pic] |

|the entire income statement. |

| |

| |

|D. |

|[pic] |

|the entire balance sheet. |

| |

|22) The break-even point can be calculated as |

| |

|A. |

|[pic] |

|variable costs divided by contribution margin. |

| |

| |

|B. |

|[pic] |

|total costs divided by contribution margin. |

| |

| |

|C. |

|[pic] |

|variable cost times contribution margin. |

| |

| |

|D. |

|[pic] |

|fixed cost divided by contribution margin. |

| |

| |

|23) [pic] |

| |

|Refer to the figure above. This firm's break-even point is |

| |

|A. |

|[pic] |

|4,800 units |

| |

| |

|B. |

|[pic] |

|14,634 units |

| |

| |

|C. |

|[pic] |

|7,142 units |

| |

| |

|D. |

|[pic] |

|18,000 units |

| |

| |

|24) A firm's break-even point will rise if |

| |

|A. |

|[pic] |

|fixed costs decrease |

| |

| |

|B. |

|[pic] |

|contribution margins increase |

| |

| |

|C. |

|[pic] |

|price per unit rises |

| |

| |

|D. |

|[pic] |

|variable cost per unit rises |

| |

|25) Normally, permanent current assets should be financed by |

| |

|A. |

|[pic] |

|long-term funds. |

| |

| |

|B. |

|[pic] |

|short-term funds. |

| |

| |

|C. |

|[pic] |

|borrowed funds. |

| |

| |

|D. |

|[pic] |

|internally generated funds. |

| |

| |

|26) A conservatively financed firm would |

| |

|A. |

|[pic] |

|use long-term financing for all fixed assets and short-term financing for all other assets. |

| |

| |

|B. |

|[pic] |

|finance a portion of permanent assets and short-term assets with short-term debt. |

| |

| |

|C. |

|[pic] |

|use equity to finance fixed assets, long-term debt to finance permanent assets, and short-term debt to finance fluctuating current assets. |

| |

| |

|D. |

|[pic] |

|use long-term financing for permanent current assets and fixed assets and a portion of the short-term fluctuating assets and use short-term financing for all other|

|short-term assets |

| |

| |

|27) During tight money periods |

| |

|A. |

|[pic] |

|long-term rates are higher than short-term rates. |

| |

| |

|B. |

|[pic] |

|short-term rates are higher than long-term rates. |

| |

| |

|C. |

|[pic] |

|short-term rates are equal to long-term rates. |

| |

| |

|D. |

|[pic] |

|the relationship between short and long-term rates remains unchanged. |

| |

|28) An aggressive working capital policy would have which of following characteristics? |

| |

|A. |

|[pic] |

|A high ratio of long-term debt to fixed assets. |

| |

| |

|B. |

|[pic] |

|A low ratio of short-term debt to fixed assets. |

| |

| |

|C. |

|[pic] |

|A high ratio of short-term debt to long-term sources of funds. |

| |

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|D. |

|[pic] |

|A short average collection period. |

| |

| |

|29) Which of the following combinations of asset structures and financing patterns is likely to create the most volatile earnings? |

| |

|A. |

|[pic] |

|Illiquid assets and heavy short-term borrowing |

| |

| |

|B. |

|[pic] |

|Illiquid assets and heavy long-term borrowing |

| |

| |

|C. |

|[pic] |

|Liquid assets and heavy long-term borrowing |

| |

| |

|D. |

|[pic] |

|Liquid assets and heavy short-term borrowing |

| |

| |

|30) An aggressive, risk-oriented firm will likely |

| |

|A. |

|[pic] |

|borrow long-term and carry low levels of liquidity. |

| |

| |

|B. |

|[pic] |

|borrow short-term and carry low levels of liquidity. |

| |

| |

|C. |

|[pic] |

|borrow long-term and carry high levels of liquidity. |

| |

| |

|D. |

|[pic] |

|borrow short-term and carry high levels of liquidity. |

| |

|31) In managing cash and marketable securities, what should be the manager's primary concern? |

| |

|A. |

|[pic] |

|Maximization of profit |

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| |

|B. |

|[pic] |

|Maximization of liquid assets |

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|C. |

|[pic] |

|Acceptable return on investment |

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|D. |

|[pic] |

|Liquidity and safety |

| |

| |

|32) Which of the following is not a valid reason for holding cash? |

| |

|A. |

|[pic] |

|to meet transaction requirements |

| |

| |

|B. |

|[pic] |

|to earn the highest return possible |

| |

| |

|C. |

|[pic] |

|to satisfy emergency needs for funds |

| |

| |

|D. |

|[pic] |

|to provide a compensating balance for a bank |

| |

| |

|33) How would electronic funds transfer affect the use of "float"? |

| |

|A. |

|[pic] |

|Increase its use somewhat |

| |

| |

|B. |

|[pic] |

|Have no effect on its use |

| |

| |

|C. |

|[pic] |

|Virtually eliminate its use |

| |

| |

|D. |

|[pic] |

|Decrease its use somewhat |

| |

|34) Variables important to credit scoring models include |

| |

|A. |

|[pic] |

|age of company in years. |

| |

| |

|B. |

|[pic] |

|facility ownership. |

| |

| |

|C. |

|[pic] |

|all of these variables apply. |

| |

| |

|D. |

|[pic] |

|negative public records. |

| |

| |

|35) Which of the following is not a valid quantitative measure for accounts receivable collection policies? |

| |

|A. |

|[pic] |

|average collection period |

| |

| |

|B. |

|[pic] |

|ratio of debt to equity |

| |

| |

|C. |

|[pic] |

|ratio of bad debts to credit sales |

| |

| |

|D. |

|[pic] |

|aging of accounts receivables |

| |

| |

|36) When developing a credit scoring report, many variables would be considered. Which of the following best represent the major factors Dun & Bradstreet would |

|examine? |

| |

|A. |

|[pic] |

|The age of the management team, the dollar amount of sales, net profits, and long-term debt. |

| |

| |

|B. |

|[pic] |

|The financial statements, satisfactory or slow payment experiences, negative public records (suits, liens, judgments, bankruptcies). |

| |

| |

|C. |

|[pic] |

|The company's cash balances, return on equity, and its average tax rates. |

| |

| |

|D. |

|[pic] |

|The age of the company, the number of employees, the level of current assets. |

| |

|37) Large firms tend to be |

| |

|A. |

|[pic] |

|net users of trade credit. |

| |

| |

|B. |

|[pic] |

|firms with high levels of profitability. |

| |

| |

|C. |

|[pic] |

|net suppliers of trade credit. |

| |

| |

|D. |

|[pic] |

|firms with low levels of inventory turnover and accounts receivable turnover. |

| |

| |

|38) Which of the following is not a true statement about commercial paper? |

| |

|A. |

|[pic] |

|Finance paper is sold directly to the lender by the finance company. |

| |

| |

|B. |

|[pic] |

|Dealer paper is sold directly to the lender by a finance company. |

| |

| |

|C. |

|[pic] |

|Finance paper is also referred to as direct paper. |

| |

| |

|D. |

|[pic] |

|Industrial companies, utility firms or finance companies too small to sell direct paper sell dealer paper. |

| |

| |

|39) What is generally the largest source of short-term credit small firms? |

| |

|A. |

|[pic] |

|Bank loans |

| |

| |

|B. |

|[pic] |

|Installment loans |

| |

| |

|C. |

|[pic] |

|Commercial paper |

| |

| |

|D. |

|[pic] |

|Trade credit |

| |

|40) Trade credit may be used to finance a major part of the firm's working capital when |

| |

|A. |

|[pic] |

|the firm extends less liberal credit terms than the supplier. |

| |

| |

|B. |

|[pic] |

|the firm and the supplier both extend the same credit terms. |

| |

| |

|C. |

|[pic] |

|the firm extends more liberal credit terms than the supplier. |

| |

| |

|D. |

|[pic] |

|neither the firm nor the supplier extends credit. |

| |

| |

|41) Which method of controlling pledged inventory provides the greatest degree of security to the lender? |

| |

|A. |

|[pic] |

|Blanket inventory liens |

| |

| |

|B. |

|[pic] |

|Trust receipts |

| |

| |

|C. |

|[pic] |

|Overall inventory liens |

| |

| |

|D. |

|[pic] |

|Warehousing |

| |

| |

|42) Firms exposed to the risk of interest rate changes may reduce that risk by |

| |

|A. |

|[pic] |

|obtaining a Eurodollar loan. |

| |

| |

|B. |

|[pic] |

|hedging in the commodities market. |

| |

| |

|C. |

|[pic] |

|hedging in the financial futures market. |

| |

| |

|D. |

|[pic] |

|pledging or factoring accounts receivable. |

| |

|43) In determining the future value of a single amount, one measures |

| |

|A. |

|[pic] |

|the future value of periodic payments at a given interest rate. |

| |

| |

|B. |

|[pic] |

|the future value of an amount allowed to grow at a given interest rate. |

| |

| |

|C. |

|[pic] |

|the present value of an amount discounted at a given interest rate. |

| |

| |

|D. |

|[pic] |

|the present value of periodic payments at a given interest rate. |

| |

| |

|44) An annuity may be defined as |

| |

|A. |

|[pic] |

|a payment at a fixed interest rate. |

| |

| |

|B. |

|[pic] |

|a series of yearly payments. |

| |

| |

|C. |

|[pic] |

|a series of payments of unequal amount. |

| |

| |

|D. |

|[pic] |

|a series of consecutive payments of equal amounts. |

| |

| |

|45) As the discount rate becomes higher and higher, the present value of inflows approaches |

| |

|A. |

|[pic] |

|0 |

| |

| |

|B. |

|[pic] |

|plus infinity |

| |

| |

|C. |

|[pic] |

|minus infinity |

| |

| |

|D. |

|[pic] |

|need more information |

| |

|46) Mr. Blochirt is creating a college investment fund for his daughter. He will put in $850 per year for the next 15 years and expects to earn an 8% annual rate |

|of return. How much money will his daughter have when she starts college? |

| |

|A. |

|[pic] |

|$11,250 |

| |

| |

|B. |

|[pic] |

|$24,003 |

| |

| |

|C. |

|[pic] |

|$12,263 |

| |

| |

|D. |

|[pic] |

|$23,079 |

| |

| |

|47) If you were to put $1,000 in the bank at 6% interest each year for the next ten years, which table would you use to find the ending balance in your account? |

| |

|A. |

|[pic] |

|Present value of $1 |

| |

| |

|B. |

|[pic] |

|Present value of an annuity of $1 |

| |

| |

|C. |

|[pic] |

|Future value of $1 |

| |

| |

|D. |

|[pic] |

|Future value of an annuity of $1 |

| |

| |

|48) John Doeber borrowed $125,000 to buy a house. His loan cost was 11% and he promised to repay the loan in 15 equal annual payments. How much are the annual |

|payments? |

| |

|A. |

|[pic] |

|$3,633 |

| |

| |

|B. |

|[pic] |

|$13,113 |

| |

| |

|C. |

|[pic] |

|$9,250 |

| |

| |

|D. |

|[pic] |

|$17,383 |

| |

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