Quiz 1: Fin 819
1. Businesses can be organized as
A) sole proprietorships
B) partnerships
C) corporations
D) any of the above
Answer: D
2.Which of the following would be the characteristic associated with the sole proprietorship form
of organization?
A) Wide access to capital markets
B) Unlimited liability
C) A pool of expertise
D) Profits taxed at more than one levels
E) None of the above
B)
3.Conflicts of interest between shareholders and managers of a firm result in:
A) Principal-agent problem
B) Increased agency costs
C) Both A and B
D) None of the above
Answer: C
4.The goal of financial managers is to:
A) Maximize sales
B) Maximize profits
C) Maximize the value of the firm
D) Maximize the value of equity and bond holders
E) None of the above
Answer: E
5.The following groups share a firm's cash stream:
A) Shareholders
B) Bondholders
C) Government
D) All the above
E) None of the above
Answer: D
6. 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
E) None of the above
B)
7. What is the present value of $1 you will receive two years from now at a discount rate of 10%
per year ?
A) 1.1
B) 1.0
C) 0.909
D) 0.826
E) None of the above
Answer: D
Response: PV = 1/1.12 = 0.826
8. The following statements regarding the NPV rule and the rate of return rule are true except:
A) Reject a project if its rate of return < opportunity cost of capital
B) Reject a project if its NPV < 0
C) Reject a project if NPV < opportunity cost of capital
D) Accept a project if its rate of return > opportunity cost of capital
E) None of the above
Answer: C
9. The opportunity cost of capital for taking a risky project is
A) The expected rate of return on a government security having the same maturity as the
project
B) The expected rate of return on a well diversified portfolio of common stocks
C) The expected rate of return on a portfolio of securities in the final market with the
same risk.
D) The expected rate of return on a portfolio of projects in the real asset market with the
same risk.
E) None of the above
Answer: C
10. Mr. Dell has $100 income this year and zero income next year. The financial market
interest rate is 30% per year. In addition to the investment opportunity in the market, Mr.
Dell also has another investment opportunity to take a project in the real asset market in
which he has to invest $50 this year and receive $65 next year. Suppose Mr. Dell
consumes $50 this year and invests the remaining in the project or in the financial market.
What is the maximum amount of money Mr. Dell has next year ?
A) $65
B) $50
C) $130
D) $ 60
E) None of the above.
Answer: A
Response: Take the project in the real asset market or invest in the market
11.
Firms that do not issue financial securities such as stock or debt obligations:
A) will not be able to increase sales.
B) cannot be profitable.
C) have no funds to take NPV-positive projects .
D) can use internal cash flows to finance good projects.
E) None of the above
D)
12.Which of the following statements best distinguishes the difference between real and financial
assets?
A) Real assets have less value than financial assets.
B) Real assets are tangible; financial assets are not.
C) Real assets represent claims to the cash flows that are generated by financial assets.
D) Financial assets appreciate in value; real assets depreciate in value.
E) None of the above
E)
13. The managers of a firm can maximize stockholder wealth by:
A) Taking all projects with positive NPVs
B) Taking all projects with NPVs greater than the cost of investment
C) Taking all projects with NPVs greater than present value of cash flow
D) All of the above
Answer: A
14. What is the present value of the following cash flow at a 12% discount rate?
Year (-1)
100,000
A)
B)
C)
D)
E)
Year 2
150,000
Year 3
200,000
$373,935
$450,000
$493,440
$673,200
None of the above
Answer: A
Response: PV = 100,000*1.12 + (150,000/(1.12^2)) + 200,000/(1.12^3) = $373,935.1
15. What is the net present value of the following cash flows at a discount rate of 10%?
t=0
-250,000
A)
B)
C)
D)
E)
t=2
100,000
t=3
150,000
t=4
200,000
$101,221
$200,000
$142,208
$115,139
none of the above
Answer: E
Response: NPV = -250,000 + (100,000/1.1^2) + (150,000/(1.1^3)) + 200,000/(1.1^4) =
$81,945
16. You would like to have enough money saved to receive a growing annuity of 40 years,
growing at a rate of 4% per year, the first payment being $60,000, after retirement so that
you can lead a good life. How much would you need to save in your retirement fund to
achieve this goal (assume that the growing annuity payments start three years from the
date of your retirement. The interest rate is 8%)?
A) $927,599
B) $1,001,806
C) $1,100,006
D) $1,168,507
E) None of the above
Answer: B
Response: C2=PV2 = (60,000/(0.08-0.04))*(1-1.0440/1.0840) = $1,168,507
PV=C2/(1.08^2) =$1,001,806
17. After retirement, you expect to live for 30 years. You would like to have $80,000 income
each year. How much should you have saved in the retirement to receive this income, if
the interest is 10% per year (assume that the payments start at the year of the
retirement)?
A) $754,153
B) $1,600,300
C) $829,568
D) None of the above
Answer: D
Response: PV = 80000+[(1/0.10)- (1/((0.10)(1.10^30)))]*80,000 = $834,153
18. If the present value of $1.00 received n years from today at an interest rate of r is 0.621,
then what is the future value of $1.00 invested today at an interest rate of r for n years?
A) $2.59
B) $1.61
C) $2.70
D) Not enough information to solve the problem
Answer: B
Response: FV = 1/0.621 = $1.61
19. Which of the following statements is true?
A) Present value of an annuity due is always less than the present value of an equivalent
annuity for a given interest rate ( an annuity due means immediate cash flows now)
B) The present value of an annuity approaches the present value of a perpetuity as n
goes to infinity for a given interest rate
C) Both A and B are true
D) Both A and B are false
Answer: B
20. Which of the following statements regarding simple interest and compound interest are
true?
A) Problems in finance generally use the simple interest concept
B) Problems in finance generally use the compound interest concept
C) It does not really matter whether you use simple interest or compound interest for
solving problems in finance
D) None of the above
Answer: B
21. If we use the payback period rule with a required payback period of 4 years to examine the
projects being taken by many small firms, which of the following may be the reason for
us to reject these projects? (assume that all the projects require initial investments)
A)
B)
C)
D)
E)
The cash flow at year 1 is larger than the initial investment cost
The sum of the cash flows in the first three years is less than the initial cost
These projects don’t produce any positive cash flows in the first four years
A and B
None of the above
Answer: C
22. Given the following cash flows for project A: C0 = -2000, C1 = +500 , C2 = +1400 and
C3 = 5000, C4=$200,000, which of the following is true for the payback period?
A) The payback period is one year
B) The payback period is 2 years
C) The payback period is 3 years
D) The payback period is larger than 3 years
E) none of the above
Answer: C
23. The IRR is defined as:
A) The discount rate that makes the initial investment cost equal to the sum of future
cash flows
B) The difference between the cost of capital and the present value of the cash flows
C) The discount rate that makes the initial investment cost equal to the sum of the
present values of future cash flows .
D) The discount rate used in the discounted payback period method
E) None of the above
Answer: C
24. Project A has the following cash flows: C0 = 100, C1 = -120. The IRR of the project is
20% and if the cost of capital is 15%, you would:
A) Accept the project since IRR is larger than the cost of capital
B) Reject the project, even though the IRR is larger than the cost of capital.
C) There is no enough information
D) None of the above
Answer: B
25.
You have a car loan of $30,000 (which is called the principal) with the interest rate of
10%. You decide to pay off this loan in next four years with equal payment each year,
how much do you pay for the interest in your last payment?
A) $9,464
B) $8,604
C) $7,111
D) $860
E) None of the above
Answer
D)
26.Company Imagine has a cost of capital at 12% and $10 million to take some projects from the
following available projects (units in million US dollars) to maximize the profits:
Project
A
B
C
D
C0
-7
-8
-2
-3
NPV at 12%
14
16
6
12
Which set of projects should company Imagine take?
A) A
B)
C)
D)
E)
B
B and C
A and D
none of the above
Answer: D
27.Net Working Capital (simply referred to as working capital) is the:
A) Difference between short-term assets and short term liabilities
B) Difference between long-term assets and long term liabilities
C) Difference between long-term assets and short term liabilities
D) None of the above
Answer: A
28 .Capital equipment costing $200,000 today has $50,000 salvage book value at the end of year
5. In addition, (net) working capital of $10,000 is built up today. If the straight line
depreciation method is used and the capital equipment is sold at the end of year 3 for a market
price of $150,000, what is the tax the firm has to pay at year 3 related to this sale if the tax rate
is 50% ?
A) $75,000
B) $60,000
C) $30,000
D) $20,000
E) none of the above
Answer: D
Response:
Annual depreciation = (200,000 -50,000)/5 = 30,000
Book value at the end of year three = 200,000 -90,000 = 110,000
Tax=50%*(150000-110000)=$20,000
29. For project X, year 5 inventories Increase by $5,000, accounts receivables increase by $3,000
and accounts payables increase by $2,000. Calculate the increase or decrease in working
capital for year 5.
A) Increases by $6,000
B) Decreases by $6,000
C) Increases by $8,000
D) there is no change
E) None of the above
Answer: A
Response: Working capital: 5000 + 3000 -2000 = 6000
30.You have been asked to evaluate a project with an infinite life. Sales and costs are now $600
and $100 respectively. There is no depreciation and the tax rate is 30%. The real required rate of
return is 10%. The inflation rate is 4% and is expected to be 4% forever. Sales and costs are
expected to increase at the rate of inflation in the future. If the project costs $2000, what is the
NPV?
A) $1,000
B) $1,500
C) $500
D) $1,365
E) None of the above
Answer: E
Response: (600-100)*0.7+ [(600*1.04/1.04-100*1.04/1.04)*0.7)] / 0.1 - 2000 = $1,850