FIN350 In Class Work No. 1 First Name_______ Last Name_______
1. An example of a firm's capital structure decision would be:
A) acquisition of a competitive firm.
B) how much to pay for a specific asset.
C) the issuance of ten-year bonds versus the issuance of more stocks.
D) whether or not to increase the price of its products.
2. Which of the following would be considered a capital budgeting decision?
A) Planning to issue common stock rather than issuing preferred stock
B) A decision to expand into a new line of products, at a cost of $5 million
C) Repurchasing shares of common stock
D) Issuing debt in the form of long-term bonds
3. Which of the following statements is true regarding the corporate form of
organization compared to that of the sole proprietorship?
A)
The owners of the sole proprietorship have limited liability for the firm's
debts.
B)
The sole proprietorship is the simplest business form to start-up.
C)
The corporation has a limited life.
D)
Dividends received by the corporation's shareholders are tax-exempt.
E)
It is more difficult to transfer ownership in a corporation.
4. The goal of a financial manager is to:
A) Maximize sales
B) Maximize profits
C) Maximize the wealth of both bond holders and stock holders.
D) Maximize the wealth of the shareholders
E) Maximize the stock price on fiscal year end.
5. Which of the following is an example of agency problem in corporations?
A)
B)
C)
D)
E)
shirking
empire building
entrenchment
excessive perks
all of above
1
6. In a corporation, creditor’s interest might be hurt when management take which of the
following project?
A) a very profitable project
B) a very safe project
C) a very risky project
D) a government-contracted project
7. Which of the following statements is true?
A) Discounting means the procedure to find future values.
B) On loans with monthly compounding, the EAR will exceed the APY.
C) All else the same, the longer the term of a loan the lower will be the total
interest you pay on it.
D) Present values and interest rates (discount rates) move in the same direction
with one another.
E) Compounding essentially means earning interest on both principal and past
interest.
8. Making more investment than optimal and making firm sizes too big are called the ________
agency problem.
A)
B)
C)
D)
E)
shirking
empire building
entrenchment
excessive perks
all of above
9. Compared to other years, double taxation for corporate shareholders in year 2003 to
2012 is _________ .
A)
B)
C)
less severe
more severe
no different
10. Suppose a U.S. government bond will pay $1,000 three years from now. If the going
interest rate on 3-year government bonds is 4%, how much is the bond worth
today?
a.
b.
c.
d.
e.
$943.46
$991.43
$889.00
$907.91
$968.40
2
11.
You want to go to grad school 4 years from now, and you can save $5,000 per year,
beginning one year from today. You plan to deposit the funds in a mutual fund
which you expect to return 9% per year. Under these conditions, how much will you
have just after you make the 4th deposit, 4 years from now?
a.
b.
c.
d.
e.
$22,865.65
$20,199.47
$21,513.78
$17,976.84
$19,390.50
12.
You need $4,500 to buy a new stereo for your car. If now you have $1,800 to
invest at 6% compounded daily, how long will you have to wait to buy the stereo?
A)
15.28 years
B)
18.42 years
C)
8.60 years
D)
14.58 years
E)
15.73 years
13.
What’s the present value of a 6-year ordinary annuity of $1,000 per year plus an
additional $1,500 at the end of Year 6
if the interest rate is 6%?
a.
b.
c.
d.
e.
$5,324.89
$5,591.45
$5,974.77
$6,011.87
$4,854.13
Q14 and Q15 may be worked under “BGN” mode
14.
Your father is about to retire, and he wants to buy an annuity that will provide him
with $50,000 of income a year for 20 years, with the first payment coming immediately. The
going rate on such annuities is 6%. How much would it cost him to buy the annuity today?
a.
b.
c.
d.
e.
15.
$607,905.82
$416,110.34
$517,513.68
$615,976.84
$488,349.15
Your father has $500,000 and wants to retire. He expects to live for another 20 years,
and he also expects to earn 8% on his invested funds. How much could he withdraw
at the beginning of each of the next 20 years and end up with zero in the account?
a. $53,431.83
b. $47,153.80
c. $54,764.40
d. $47,843.15
e. $45,119.76
(Do not forget to return to the “END” mode after this question)
3
16.
How much would you pay for a perpetuity that pays $800 per month when interest
rate (APR) is 12% monthly?
a.
b.
c.
d.
e.
17.
18.
$80,000
$6,666.66
$960,000
$66,666.66
$92,000
What’s the present value of $4,000 discounted back 3 years if the appropriate interest
rate is 8%, compounded monthly?
a. $3,149.02
b. $2,982.90
c. $2,649.78
d. $2,023.74
e. $3,708.26
Credit card issuers must by law print their Annual Percentage Rate (APR) on their
monthly statements. If the APR is stated to be 7.30% monthly, what is the interest
rate per month?
a.
b.
c.
d.
0.303%
0.608%
0.0608%
0.309%
19.What is the present value of the following cash flows at a discount rate of 12%?
t=0
-250,000
A)
B)
C)
D)
20.
t=1
100,000
t=2
150,000
t=3
200,000
$101,221
$200,000
$142,208
$153.317
Which of the following bank accounts has the highest effective annual return?
a.
b.
c.
d.
e.
An account that pays 5.2% nominal interest with monthly compounding.
An account that pays 4% nominal interest with quarterly compounding.
An account that pays 4.5% nominal interest with daily compounding.
An account that pays 5.4% nominal interest with annual compounding.
An account that pays 4.5% nominal interest with monthly compounding.
4
21.
A lump sum payment of $1,000 is due at the end of 5 years. The nominal interest
rate is 10%, semiannual compounding. Which of the following statements is
CORRECT?
a. The present value of the $1,000 would be greater if interest were compounded
monthly rather than semiannually.
b. The periodic rate is greater than 5%.
c. The periodic interest rate is 5%.
d. The present value would greater if the lump sum were discounted back for
more periods.
e. The PV of the $1,000 lump sum has a higher present value than the PV of a 5year, $200 ordinary annuity.
22.
What’s the future value of a 3-year $100
annuity, if the quoted interest rate is 10%,
compounded semiannually?
0
1
2
1
3
2
4
5
3
6
5%
100

100
100
Payments occur annually, but compounding
occurs every 6 months.
2-34
A)
B)
C)
D)
E)
$105*3
$386.74
$311.80
$331.80
$333.81
23. You are to make annual deposit of $3000/year into a retirement account that pays
11% interest compounded monthly. If your first deposit will be made one year from
now, how large will your retirement account be in 30 years.
A) $666,480
B) $734,222
C) $597,063
D) $701,130
E) $580,023
24.
A real estate investment has the following expected cash flows:
Year
1
2
3
4
Cash Flows
$10,000
25,000
0
35,000
If the discount rate (interest rate) is 8%, what is the investment’s present value?
5
a.
b.
c.
d.
e.
25.
a.
b.
c.
d.
e.
$64,107
$56,418
$55,661
$80,308
$37,900
APY is also called:
EAR
APR
quoted rate
nominal rate
periodic rate
Key: cbbde cebac aacab aabad cdaba
6
Chapter 1 More exercise problems
1.
a.
b.
c.
d.
One common reason for partnerships to convert to a corporate form of organization is
that the partnership:
faces rapidly growing marketing requirements.
wishes to avoid taxation of profits.
has issued all of its partnerships.
faces rapidly growing capital needs
2.
a.
b.
c.
d.
e.
A business owned by a single individual is called a:
corporation.
sole proprietorship.
general partnership.
limited partnership.
limited liability company.
3.
a.
b.
c.
d.
e.
The primary goal of financial management is to:
maximize current dividends per share of the existing stock.
maximize the current value per share of the existing stock.
avoid financial distress.
minimize operational costs and maximize firm efficiency.
maintain steady growth in both sales and net earnings.
4.
a.
b.
c.
d.
e.
A conflict of interest between the stockholders and management of a firm is called:
stockholders’ liability.
corporate breakdown.
the agency problem.
corporate activism.
legal liability.
5.
a.
b.
c.
d.
e.
A general partner:
has less legal liability than a limited partner.
has more management responsibility than a limited partner.
faces double taxation whereas a limited partner does not.
cannot lose more than the amount of his/her equity investment.
is the term applied only to corporations which invest in partnerships.
6.
I.
II.
III.
IV.
a.
b.
c.
d.
e.
Which of the following are advantages of the corporate form of business ownership?
limited liability for firm debt
double taxation
ability to raise capital
unlimited firm life
I and II only
III and IV only
I, II, and III only
II, III, and IV only
I, III, and IV only
7
7.
capital?
a.
b.
c.
d.
e.
8.
a.
b.
c.
d.
e.
9.
a.
b.
c.
d.
e.
equity
Which one of the following business types is best suited to raising large amounts of
sole proprietorship
limited liability company
corporation
general partnership
limited partnership
Financial managers should strive to maximize the current value per share of the
existing stock because:
doing so guarantees the company will grow in size at the maximum possible rate.
doing so increases the salaries of all the employees.
the current stockholders are the owners of the corporation.
doing so means the firm is growing in size faster than its competitors.
the managers often receive shares of stock as part of their compensation.
Which one of the following actions by a financial manager creates an agency problem?
refusing to borrow money when doing so will create losses for the firm
refusing to lower selling prices if doing so will reduce the net profits
agreeing to expand the company at the expense of stockholders’ value
agreeing to pay bonuses based on the market value of the company stock
increasing current costs in order to increase the market value of the stockholders’
10. Which of the following statements is CORRECT?
a. Corporations are taxed more favorably than sole proprietorships.
b. Corporations have unlimited liability.
c. Because of their size, large corporations face fewer regulations than smaller
corporations and sole proprietorships.
d. Reducing the threat of corporate takeover decreases the likelihood that managers will
act in shareholders’ interest.
e. Managerial compensation plans are designed to protect bondholders and to increase
potential conflicts between stockholders and bondholders.
Key: dbbcb ecccd
8