Final Review

Final Exam Review

Multiple Choice

Which of the following types of firms does NOT have limited liability?

• Corporations

• Limited partnerships

• Sole proprietorships

• None of the above

Multiple Choice

Which type of firms is the majority of U.S. firms?

• Sole Proprietorships

• Partnerships

• Limited Liability Companies

• Corporations

Multiple Choice

Which type of firms generate the most revenue?

• Sole Proprietorships

• Partnerships

• Limited Liability Companies

• Corporations

Multiple Choice

Which type of firms where its shareholders are subjected to double taxation?

• Partnerships

• S-Corporations

• Limited Liability Companies

• C-Corporations

Multiple Choice

Which type of firms where the owner is subjected to unlimited liability of the firm’s debts?

• S-Corporations

• Sole Proprietorship

• Limited Liability Companies

• C-Corporations

Multiple Choice

The principal goal of a financial manager is to maximize the wealth of the stockholders.

• True

• False

Fill in the Blank

You are a shareholder in a C corporation. The corporation earns $2.5 per share before taxes. After it has paid taxes, it will distribute the rest of its earnings to you as a dividend. Assume the corporate tax rate is 41%; your tax rate on dividend income is 10%; and the personal tax on non-dividend income is 15%. How much is the amount tax paid if company only distribute $1 as dividend to its shareholders?

Fill in the Blank

You are a shareholder in an S corporation. The corporation earns $2.65 per share before taxes. As a pass-through entity, you will receive $2.65 for each share that you own. Your marginal tax rate is 30%. How much is the amount tax paid?

Refer to the balance sheet and click the next slide to answer the question.

Multiple Choice

Refer to the balance sheet above. What is Luther's quick ratio for 2006?

• 0.87

• 1.21

• 1.73

• 1.3

Multiple Choice

Which of the following best describes why a firm produces financial statements?

• to show the daily activities a firm has undertaken in the previous financial year, and what activities are planned for the near future

• to increase the intrinsic value of a firm

• to provide a means for interested outside parties such as creditors to obtain information about a firm, with an overview of the short − and long − term financial condition of a business

• to use as a tool when planning future investments within a firm

Refer to the balance sheet and click the next slide to answer the question.

Multiple Choice

Refer to the balance sheet above. When using the book value of equity, what is the debt-equity ratio for Luther in 2006?

• 4.53

• 2.26

• 1.13

• 3.17

Fill in the Blank

You expect to have $4,000 in two year. A bank is offering a 9% interest per year. How much do you need to invest today?

Multiple Choice

Owen expects to receive $22,000 at the end of next year from a trust fund. If a bank loans money at an interest rate of 7%, how much money can he borrow from the bank on the basis of this information?

• 1,540

• 20,561

• 23,540

• 10,281

Multiple Choice

Jeff has the opportunity to receive lump-sum payments either now or in the future. Which of the following opportunities is the best, given that the interest rate is 7% per year?

• one that pays $1,000 now

• one that pays $1,200 in two years

• one that pays $1,500 in five years

• one that pays $1,800 in ten years

Multiple Choice

If $16,000 is invested at 10 % per year, in approximately how many years will the investment double?

• 8.4 years

• 7.3 years

• 14.6 years

• 11 years

Multiple Choice

Which of the following best describes the valuation principle?

• It is not possible to compare costs and benefits that occur at different points in time, in different currencies, or with different risks.

• If equivalent goods or securities trade simultaneously in different markets across the world, they will trade for the same price.

• The rate at which we can exchange money today for money in the future by borrowing or investing is the current market interest rate and is same across all banks.

• The value of a commodity/an asset to a firm or its investors is determined by its competitive market price. When the value of the benefits exceeds the value of the costs in terms of market prices, decision will increase the market value of the firm.

Multiple Choice

You are given two choices of investments, Investment A and Investment B. Both investments have the same future cash flows. Investment A has a discount rate of 7%, and Investment B has a discount rate of 6%. Which of the following is true?

• The present value of cash flows in Investment A is equal to the present value of cash flows in

  Investment B.

• The present value of cash flows in Investment A is higher than the present value of cash

  flows in Investment B.

• The present value of cash flows in Investment A is lower than the present value of cash flows in Investment B.

• No comparison can be made we need to know the cash flows to calculate the present

  value.

Multiple Choice

A lottery winner will receive $3 million at the end of each of the next twenty years. What is the future value (FV) of her winnings at the time of her final payment, given that the interest rate is 8.3% per year?

• 198.70 million

• 141.93 million

• 113.54 million

• 227.09 million

Fill in the Blank

A homeowner in a sunny climate has the opportunity to install a solar water heater in his home for a cost of $2,200. After installation the solar water heater will produce a small amount of hot water every day, forever, and will require no maintenance. How much must the homeowner save on water heating costs every year if this is to be a sound investment? (The interest rate is 6% per year.)

Multiple Choice

A pottery factory purchases a continuous belt conveyor kiln for $51,000. An 8.1% APR loan with monthly payments is taken out to purchase the kiln. If the monthly payments are $529.72, how many years is this loan being paid?

• 13 years

• 12 years

• 14 years

• 11 years

A lender lends $10,300, which is to be repaid in annual payments of $2,050 for 6 years.

Click the next slide to answer the question.

Multiple Choice

Which of the following shows the timeline of the loan from the lender's perspective?

• A

• B

• C

• D

Consider the following timeline detailing a stream of cash flows

Click the next slide to answer the question

Multiple Choice

If the current market rate of interest is 9%, then what is the present value (PV) of this stream of cash flows?

• 20,710

• 33,136

• 10,355

• 24,852

Fill in the Blank

You are thinking of purchasing a house. The house costs $200,000. You have 14.5% of the costs in cash that you can use as a down payment on the house, but you need to borrow the rest of the purchase price. The bank is offering a 30-year mortgage that requires annual payments and has an interest rate of 6% per year. What will be your annual payment if you sign this mortgage?

Fill in the Blank

Your rich aunt has bequeathed you a growing perpetuity. The first payment will occur in a year and will be $1,000. Each year after that, you will receive a payment (on the anniversary of the last payment) that is 8% larger than last payment, and the interest rate is 13% per year. What is today's value of the bequest?

Multiple Choice

Which of the following statements is FALSE about interest rates?

• The annual percentage rate indicates the amount of simple interest earned in one year.

• The annual percentage rate indicates the amount of interest including the effect of compounding.

• The effective annual rate indicates the amount of interest that will be earned at the end of one year.

• As interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of cash flows.

Multiple Choice

Market forces determine interest rates based ultimately on the willingness of individuals, banks, and firms to borrow, save, and lend.

• True

• False

Multiple Choice

Which of the following yield curves would most likely predict a downturn in the economy?

Multiple Choice

Historically, why were high inflation rates associated with high nominal interest rates?

• Individuals will spend more when they expect their investments to increase in value.

• High inflation leads to a decrease in purchasing power and thus increases the attractiveness of investment over consumption in the short term.

• The real interest rate needs to be high enough so that individuals can expect their savings to have greater purchasing power in the future than in the present.

• Growth in investment and savings is encouraged when consumers are judged to be overspending.

Multiple Choice

Emma runs a small factory that needs a vacuum oven for brazing small fittings. She can purchase the model she needs for $170,000 up front, or she can lease it for five years for $4,000 per month. She can borrow at 8% APR, compounded monthly. Assuming that the oven will be used for five years, should she purchase the oven, or should she lease it?

• Buy, since the present value of the lease is $27,273.7 more than the cost of the oven.

• Buy, since the present value of the buy is $27,273.7 more than the cost of the oven.

• Lease, since the present value of the lease is $27,273.7 more than the cost of the oven.

• Lease, since the present value of the buy is $27,273.7 more than the cost of the oven.

Fill in the Blank

Compute the effective annual rate (EAR) for 9.8% APR compounded semiannually.

Multiple Choice

. The Sisyphean Company has a bond outstanding with a face value of $5,000 that reaches maturity in 9 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 10.3 %, then this bond will trade at?

• a discount

• a premium

• par

• none of the above

Fill in the Blank

If the rate of inflation is 4.2%, what nominal interest rate is necessary for you to earn a 3.3% real interest rate on your investment? (Leave answer with six decimal places)

Fill in the Blank

A risk-free, zero-coupon bond with a face value of $5,000 has 15 years to maturity. If the YTM is 5.8%, which of the following would be closest to the price this bond will trade at?

Fill in the Blank

What is the yield to maturity of a ten-year, $10,000 bond with a 4.6 % coupon rate and semiannual coupons if this bond is currently trading for a price of $9,449?

Multiple Choice

A rise in interest causes bond prices to fall.

• True

• False