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The process of determining the present value of future cash flows in

order to know their worth today is referred to as:


A
A. Compound interest valuation.
B
B. Interest on interest computation.
C
C. Discounted cash flow valuation.
D
D. Present value interest factoring.
E
E. Complex factoring.

Andy deposited $3,000 this morning into an account that pays 5 percent
interest, compounded annually. Barb also deposited $3,000 this
morning into an account that pays 5 percent interest, compounded
annually. Andy will withdraw his interest earnings and spend it as soon
as possible. Barb will reinvest her interest earnings into her account.
Given this, which one of the following statements is true?
A
A. Barb will earn more interest the first year than Andy will.
B
B. Andy will earn more interest in year three than Barb will.
C
C. Barb will earn more interest the second year than Andy.
D
D. After five years, Andy and Barb will both have earned the same amount of interest.
E
E. Andy will earn compound interest.

Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25
years old. Neal invests $5,000 at 7 percent when he is 30 years old.
Both investments compound interest annually. Both Sue and Neal retire
at age 60. Which one of the following statements is correct assuming
neither Sue nor Neal withdraw any money from their accounts prior to
retiring?
A
A. Sue will have less money when she retires than Neal.
B
B. Neal will earn more interest on interest than Sue.
C
C. Neal will earn more compound interest than Sue.
D
D. If both Sue and Neal wait to age 70 to retire, they will have equal amounts of savings.
E
E. Sue will have more money than Neal at age 60.

This afternoon, you deposited $1,000 into a retirement savings account. The account will
compound interest at 6 percent annually. You will not withdraw any principal or interest until you
retire in 40 years. Which one of the following statements is correct?
Correct Answer:

D. The present value of this investment is equal to $1,000.

Your grandmother has promised to give you $10,000 when you


graduate from college. She is expecting you to graduate three years
from now. What happens to the present value of this gift if you speed up
your graduation by one year and graduate two years from now?
A
A. Remains constant.
B
B. Increases.
C
C. Decreases.
D
D. Becomes negative.
E
E. Cannot be determined from the information provided.

Your grandmother has promised to give you $10,000 when you


graduate from college. She is expecting you to graduate three years
from now. What happens to the present value of this gift if you speed up
your graduation by one year and graduate two years from now?
A
A. Remains constant.
B
B. Increases.
C
C. Decreases.
D
D. Becomes negative.
E
E. Cannot be determined from the information provided.

Phillippe invested $1,000 10 years ago and expected to have $1,800


today. He has not added or withdrawn any money from this account
since his initial investment. All interest was reinvested in the account. As
it turns out, he only has $1,680 in his account today. Which one of the
following must be true?
A
A. He earned simple interest rather than compound interest.
B
B. He earned a lower interest rate than he expected.
C
C. He did not earn any interest on interest as he expected.
D
D. He ignored the Rule of 72 which caused his account to decrease in value.
E
E. The future value interest factor turned out to be higher than he expected.

Today, you earn a salary of $28,000. What will be your annual salary 12
years from now if you earn annual raises of 2.6 percent?
A
A. $38,100.12
B
B. $37,414.06
C
C. $38,235.24
D
D. $37,122.08
E
E. $36,736.00

You hope to buy your dream car four years from now. Today, that car
costs $54,500. You expect the price to increase by an average of 3.1
percent per year over the next four years. How much will your dream
car cost by the time you are ready to buy it?
A
A. $58,340.00
B
B. $58,666.67
C
C. $61,578.79
D
D. $61,818.02
E
E. $61,023.16

This morning, DJ’s invested $238,000 to help fund a company


expansion project planned for three years from now. How much
additional money will the firm have three years from now if it can earn 4
percent rather than 3.5 percent on its savings?
A
A. $3,940.09
B
B. $3,842.78
C
C. $4,008.17
D
D. $4,219.68
E
E. $3,711.08

You just received a $5,000 gift from your grandmother. You have
decided to save this money so that you can gift it to your grandchildren
50 years from now. How much additional money will you have to gift to
your grandchildren if you can earn an average of 7.5 percent instead of
just 7 percent on your savings?
A
A. $39,318.09
B
B. $39,464.79
C
C. $38,211.16
D
D. $37,811.99
E
E. $38,663.60

Which one of the following statements related to annuities and


perpetuities is correct?
A
A. An ordinary annuity is worth more than an annuity due given equal annual cash flows
for 10 years at 7 percent interest, compounded annually.
B
B. A perpetuity composed of $100 monthly payments is worth more than an annuity of
$100 monthly payments given equal discount rates.
C
C. Most loans are a form of a perpetuity.
D
D. The present value of a perpetuity cannot be computed but the future value can.
E
E. Perpetuities are finite but annuities are not.

Which one of the following statements concerning interest rates is


correct?
A. Savers would prefer annual compounding over monthly compounding given the same
annual percentage rate.
B
B. The effective annual rate decreases as the number of compounding periods per year
increases.
C
C. The effective annual rate equals the annual percentage rate when interest is
compounded annually.
D
D. Borrowers would prefer monthly compounding over annual compounding given the
same annual percentage rate.
E
E. For any positive rate of interest, the annual percentage rate will always exceed the
effective annual rate.

Which one of the following statements correctly defines a time value of


money relationship?
A
A. Time and future values are inversely related, all else held constant.
B
B. Interest rates and time are positively related, all else held constant.
C
C. An increase in a positive discount rate increases the present value.
D
D. An increase in time increases the future value given a zero rate of interest.
E
E. Time and present value are inversely related, all else held constant.

Which one of the following compounding periods will yield the lowest
effective annual rate given a stated future value at year 5 and an annual
percentage rate of 10 percent?
A
A. Annual.
B
B. Semiannual.
C
C. Monthly.
D
D. Daily.
E
E. Continuous.

An amortized loan:
A
A. Requires the principal amount to be repaid in even increments over the life of the loan.
B
B. May have equal or increasing amounts applied to the principal from each loan
payment.
C
C. Requires that all interest be repaid on a monthly basis while the principal is repaid at
the end of the loan term.
D
D. Requires that all payments be equal in amount and include both principal and interest.
E
E. Repays both the principal and the interest in one lump sum at the end of the loan term.

Which one of the following statements is correct?


A
If the total debt ratio is greater than .50, then the debt-equity ratio must be less than 1.0, because
it measures the ability of a firm to meet payment to supplier.
B
Long-term creditors would prefer the times interest earned ratio be 1.4 rather than 1.5 because it
measures the ability of a firm to meet payment to employee.
C
The debt-equity ratio can be computed as 1 plus the equity multiplier because it measures the
ability of a firm to meet payment of expenses to a lender.
D
An equity multiplier of 1.2 means a firm has $1.20 in sales for every $1 in equity so the firm has
the ability to meet payment of a dividend to a shareholder.
E
An increase in the depreciation expense will not affect the cash coverage ratio because it
measures the ability of a firm to meet payment of interest to a lender.

Which of the following represent problems encountered when


comparing the financial statements of two separate entities?
I. Either one, or both, of the firms may be conglomerates and thus have
unrelated lines of business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods.
IV. The two firms may be seasonal in nature and have different fiscal
year ends.
A
I and II only.
B
II and III only.
C
I, III, and IV only.
D
I, II, and III only.
E
I, II, III, and IV.

A firm has sales of $96,400, costs of $53,800, interest paid of $2,800,


and depreciation of $7,100. The tax rate is 34 percent. What is the value
of the cash coverage ratio?
A
15.21
B
12.14
C
17.27
D
23.41
E
12.68

Uptown Men's Wear has accounts payable of $2,214, inventory of


$7,950, cash of $1,263, fixed assets of $8,400, accounts receivable of
$3,907, and long-term debt of $4,200. What is the value of the net
working capital to total assets ratio?
A
.31
B
.42
C
.47
D
.51
E
.56

A firm has an interval measure of 48. This means that the firm has
sufficient liquid assets to ________________________. Ratios that
measure a firm’s liquidity are known as _______________ratios.
A
Pay all of its debts that are due within the next 48 hours; Asset management.
B
Pay all of its debts that are due within the next 48 days; Long-term solvency.
C
Cover its operating costs for the next 48 hours; Profitability
D
Cover its operating costs for the next 48 days; Short-term solvency.
E
Meet the demands of its customers for the next 48 hours; Book value.

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