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Practice Problems 1

Practice Problems 1
Prof. S. Park
Practice Problems 1
True/false questions
(1) Key limitations of the proprietorship form of business involve potential difficulty in raising needed capital
and the presence of unlimited personal liability for business debts.
(2) The proper goal of the financial manager should be to maximize the firm's expected profit, because this
will add the most wealth to each of the individual shareholders (owners) of the firm.
(3) All else equal, a dollar received sooner is worth more than a dollar received at some later date, because the
sooner the dollar is received the more quickly it can be invested to earn a positive return.
5-7. At 6.1 percent interest, how long does it take to double your money? To quadruple it?
5-11. You have just received notification that you have won the $2 million first prize in the Centennial
Lottery. However, the prize will be awarded on your 100th birthday, 80 years from now. What is the present
value of your windfall if the appropriate discount rate is 8.4 percent?
5-19. You are scheduled to receive $20,000 in two years. When you receive it, you will invest it for six more
years at 6.8 percent per year. How much will you have in eight years?
6-C3. What happens to the future value of an annuity if you increase the rate r? What happens to the present
6-1. McCann Co. has identified an investment project with the following cash flows. If the discount rate is 10
percent, what is the present value of these cash flows?
Cash Flow
Practice Problems 1
Prof. S. Park
6-7. If you deposit $4,500 at the end of each of the next 20 years into an account paying 9.7 percent interest,
how much money will you have in the account in 20 years?
6-13. Find the APR, or stated rate, in each of the following cases:
# of Times Compounded
6-34. You want to be a millionaire (literally) when you retire in 40 years. How much do you have to save each
month if you can earn a 9.7 percent annual return?
6-41. You want to borrow $115,000 from your local bank to buy a new sailboat. You can afford to make
monthly payments of $2,250, but no more. Assuming monthly compounding, what is the highest rate (APR)
you can afford on a 60-month loan?
6-53. Suppose you are going to receive $13,500 per year for five years. The appropriate interest rate is 6.8
percent. What is the present value of the payments if the payments are an annuity due (= if the first payment is
made today = if the payments are made at the beginning of each year)?
6-58. After deciding to buy a new car, you can either lease the car or purchase it on a three-year loan. The car
you wish to buy costs $43,000. The dealer has a special leasing arrangement where you pay $4,300 today and
$505 per month for the next three years. If you purchase the car, you will pay it off in monthly payments over
the next three years at a 6 percent APR. You believe you will be able to sell the car for $28,000 in three years.
Should you buy or lease the car? What break-even resale price in three years would make you indifferent
between buying and leasing?
Practice Problems 1
Prof. S. Park
< Multiple-choice Questions >
1. Which one of the following statements concerning a sole proprietorship is correct?
A. A sole proprietorship is designed to protect the personal assets of the owner.
B. The profits of a sole proprietorship are subject to double taxation.
C. The owner of a sole proprietorship is personally responsible for all of the company's debts.
D. The sole proprietorship can continue even after the death of the sole proprietor.
E. A sole proprietorship is structured the same as a limited liability company.
2. The primary goal of a corporation should be to:
A. maximize total corporate revenue
B. maximize the stock price per share
C. minimize the chance of losses
D. maximize earnings per share (EPS)
E. none of the above
3. Luis is going to receive $20,000 six years from now. Soo Lee is going to receive $20,000 nine years from
now. Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate
to these amounts?
A. The present values of Luis and Soo Lee's monies are equal.
B. In future dollars, Soo Lee's money is worth more than Luis' money.
C. In today's dollars, Luis' money is worth more than Soo Lee's.
D. Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money.
E. Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.
4. You are comparing two annuities which offer monthly payments of $2,500 for five years and pay 0.75
percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on
the last day of each month. Which one of the following statements is correct concerning these two annuities?
A. These two annuities have equal present values but unequal futures values at the end of year five.
B. These two annuities have equal present values as of today and equal future values at the end of year five.
C. Annuity B is an annuity due.
D. Annuity A has a smaller future value than annuity B.
E. Annuity B has a smaller present value than annuity A.
Practice Problems 1
Prof. S. Park
5. Which one of the following statements concerning interest rates is correct?
A. Savers would prefer annual compounding over monthly compounding.
B. The effective annual rate decreases as the number of compounding periods per year increases.
C. The effective annual rate equals the annual percentage rate when interest is compounded annually.
D. Borrowers would prefer monthly compounding over annual compounding.
E. For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.
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