Exam 1

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1. Agency problems exist in which forms of Corporation 9. Future Value Given a 7.25 percent interest $18,238.52
business ownership? rate, compute the year 9 future value of
2. Discounting One Year What is the present $476.19 deposits made in years 1, 2, 3, and 4 of N = 8, I =
value of a $500 payment in one year when $2,600, $2,800, $3,100, and $3,100. 7.25, PV =
the discount rate is 5 percent? FV = 500, I = 5, 2,600, CPT
N = 1, PV = ? FV =
4,551.471
3. Effective Annual Rate A loan is offered with 9.11% N = 7, I =
monthly payments and a 8.75 percent APR. 7.25, PV =
What's the loan's effective annual rate [1 + (0.0875 / 2,800, CPT
(EAR)? 12)]^12 - 1 = FV =
9.11% 4,570.241
EAR = [ 1+ N = 6, I =
(APR/m)]^m - 1 7.25, PV =
4. Five Years Future Value What is the future $1,085 3,100, CPT
value of $850 deposited for five years FV =
earning 5% interest rate annually? PV = -850, I = 4,717.865
5, N = 5, FV = ? N = 5, I =
5. For corporations, maximizing the value of maximizing the 7.25, PV =
owner's equity can also be stated as stock price 3,100, CPT
FV =
6. From the perspective of ownership risk, the corporation
4,398.942
best form of business organization is the:
Sum of FV =
7. Future Value At age 25 you invest $1,300 At age 30 18,238.52
that earns 7.75 percent each year. At age 30 invest $1,300
10. Future Value of an Annuity What is the future $13,282.04
you invest $1,300 that earns 10.75 percent at 10.75
value of a $1,400 annuity payment over 7
per year. In which case would you have percent.
years if the interest rates are 10 percent? N = 7, I = 10,
more money at age 60?
PMT = 1,400,
At 25: N = 60 -
CPT FV =
25 = 35, PV =
13,282.04
1,300, I = 7.75,
PMT = 0, CPT 11. Future Value of an Annuity What is the future $4,364.80
FV = 17,723.44 value of a $520 annuity payment over 7 years
At 30: N = 60 - if the interest rates are 6 percent? N=7
30 = 30, PV = I=6
1,300, I = 10.75, PMT = 520
PMT = 0, CPT CPT FV =
FV = 27,813.48 4,364.80

8. Future Value Compute the future value in $918.90 12. Moving Cash Flows What is the value in year $1,349.16
year 9 of a $320 deposit in year 2 and 6 of a $1,600 cash flow made in year 8 when
another $120 deposit at the end of year 4 N = 9-2 = 7, I = interest rates are 8.9 percent? FV = 1,600, N
using a 12% interest rate. 12, PV = -320, = (8 - 6) =2, I
CPT FV = = 8.9, CPT
$707.42 PV = 1,349.16
N = 9-4 = 5, I = 13. Moving Cash Flows What is the value in year $2,938.18
12, PV = -120, 16 of a $1,700 cash flow made in year 5 when
CPT FV = the interest rates are 5.1 percent? PV = 1,700, N
$211.48 = (16 - 5) = 11,
I = 5.1, FV = ?
707.42 + 211.48
= 918.90
14. Moving Cash Flow You are scheduled $852.79 21. Present Value What is the present value of a $3,034.60
to receive a $530 cash flow in one $2,300 deposit in year 4 and another $2,800
year, a $830 cash flow in two years, 0 = CFO deposit at the end of year 8 if interest rates 0 = CFO
and pay a $430 payment in three 530 = C01, 1 F01 are 9 percent? 2,300 = C01,
years. If interest rates are 9 percent 1 F01
per year, what is the combined 830 = C02, 1 F02
present value of these cash flows? -430 = C03, 1 F03 0 = C02, 3
9=I F02
2,800= C03.
NPV = 852.79 1 F03
15. Not all cash a company generates will Dividends
be returned to the investors. Which of I=9
the following will NOT reduce the NPV =
amount of capital returned to the 3,034.60
investors? 22. Solving for Rates What annual rate of return 4.11%
16. Outside parties that monitor the firm the New York Stock is earned on a $3,300 investment when it
include all of the following EXCEPT: Exchange grows to $7,100 in nineteen years? PV = -3,300,
credit agencies. N = 19, FV =
the New York Stock Exchange. 7,100, CPT I
analysts. = 4.11
bankers. 23. Solving for Rates What annual rate of return 6.59%
17. The overall goal of the financial maximize is earned on a $3,300 investment when it
manager is to: shareholder wealth grows to $7,100 in twelve years? PV = -3,300,
N = 12, FV =
18. The practice generally is known as corporate incomes 7,100, I = ?
double taxation is due to: being taxed at the
corporate level, 24. Teaser Rate Mortgage A mortgage broker is 5.12%, 8.30%
then again at the offering a 30-year mortgage with a teaser respectively
shareholder level rate. In the first two years of the mortgage,
when corporate the borrower makes monthly payments on (1 +
profits are paid out only a 5.0 percent APR interest rate. After the .050/12)^12 -
as dividends. second year, the mortgage interest charged 1 = .05116 =
increases to 8.0 percent APR. What is the 5.12%
19. Present Value of an Annuity Due If $6,667 effective interest rate in the first two years? (1 +
the present value of an ordinary, 4- What is the effective interest rate after the .080/12)^12 -
year annuity is $5,900 and interest $5900 X (1+0.13) = second year? 1 = .08300 =
rates are 13 percent, what's the 6,667 8.30%
present value of the same annuity PVA due = PVA x
due? (1+i) 25. This is the set of laws, policies, incentives, and Corporate
FVA due = FVA x monitors designed to handle the issues governance
(1+i) arising from the separation of ownership and
control.
20. Present Value of a Perpetuity A $925.07 decrease A. agency theory
perpetuity pays $240 per year and B. corporate governance
interest rates are 6.9 percent. How $240/.069 = C. defined benefit plan
much would its value change if $3,478.26, $240/.09 D. invisible hand
interest rates increased to 9.4 = $2,553.19,
percent? change = 3,478.26 - 26. This should be the primary objective of a firm Maximizing
2,553.19 = 925.07 as it may actually be the most beneficial for shareholder
Decrease society in the long run. value
27. This subarea of finance helps facilitate the Financial
capital flows between investors and institutions
companies. and markets
28. This subarea of finance involves methods and techniques to make appropriate decisions about Investments
what kinds of securities to own, which firms' securities to buy, and how to be paid back in the
form that the investor wishes.
29. This type of business organization is entirely legally independent from its owners. Public corporations
30. Which of the following is an example of aligning managers' personal interests with those of the Offer the managers an equity
owners? stake in the firm.
A. Allow the managers to have as many perks as they request.
B. Pay the managers high salaries.
C. Offer the managers an equity stake in the firm.
D. Trust the managers' actions as they will always act in the owners' best interest.
31. Which of these are NOT basic approaches to minimizing the agency problem? All of these are basic
A. Just ignore the conflict of interest. approaches to minimizing the
B. Monitor managers' actions. agency problem.
C. Align managers' personal interest with those of the owners by making the managers owners.
D. All of these are basic approaches to minimizing the agency problem.