Ch1_5_6examQuestions2023_review

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1 Exam 1 Version A (Chapter 1 – 8 questions; Chapter 5 –12 questions; Chapter 6 – 8 questions) Chapter 1 Review - (19 questions in this document) 1) Which of the following is an example of agency cost? A) costs incurred for setting up an agency B) failure to make an investment that would make shareholders wealthier C) payment of income tax D) payment of interest 2) Financial managers evaluating decision alternatives or potential actions must consider ________. A) only risk B) only return C) either risk or return D) risk, return, and the impact on share price 3. The primary goal of financial management is most associated with increasing the: A) dollar amount of each sale. B) traffic flow within the firm's stores. C) the fixed costs while lowering the variable costs. D) firm's liquidity. E) market value of the firm. 4. Which one of the following is most apt to align management's priorities with shareholders' interests? A) Holding corporate and shareholder meetings at high-end resort-type locations preferred by managers B) Compensating managers with shares of stock that must be held for a minimum of three years C) Paying a special management bonus on every fifth year of employment D) Increasing the number of paid holidays that long-term employees are entitled to receive E) Allowing employees to retire early with full retirement benefits 5) A financial manager must choose between four alternative Assets: 1, 2, 3, and 4. Each asset costs $35,000 and is expected to provide earnings over a three-year period as described below. Based on the wealth maximization goal, the financial manager would choose ________. A) Asset 1 B) Asset 2 C) Asset 3 D) Asset 4 6) Which of the following is true of stakeholders? A) They are the owners of a firm. B) They are groups to whom a firm has financial obligations. C) They are groups having a direct economic link to a firm. D) They include only the bondholders, common stockholders, and preferred stockholders.

2 7) Which of the following is true regarding cash flow? A) Profits do not necessarily result in cash flows available to the stockholders. B) It is guaranteed that the board of directors will increase dividends when net cash flows increase. C) A firm's income statement will never show a positive profit when its cash outflows exceed its cash inflows. D) An increase in revenue will always result in an increase in cash flow. 8) Which of the following is true of cash flows and risk? A) Lower cash flow and lower risk result in an increase in share price. B) Higher cash flow and lower risk result in an increase in share price. C) Higher cash flow and higher risk result in an increase in share price. D) Lower cash flow and higher risk result in an increase in share price. 9) The primary goal of a financial manager should be ________. A) minimizing risk B) maximizing profit of firm C) maximizing wealth of shareholders D) minimizing return 10) Corporate owners earn a return ________. A) by realizing gains through increases in share price and interest earnings B) by realizing gains through increases in share price and cash dividends C) through capital appreciation and retained earnings D) through interest earnings and earnings per share 11) The wealth of the owners of a corporation is represented by ________. A) profits B) earnings per share C) share value D) cash flow 12) Wealth maximization as the goal of a firm implies enhancing the wealth of ________. A) the auditors B) the creditors C) the federal reserve D) the firm's stockholders 13) Which of the following is NOT a reason that a firm that maximizes profits may fail to maximize shareholder wealth. A) The timing of profits matters. Shareholders might prefer lower profits that arrive sooner. B) Risk matters. Shareholders are risk averse, so they prefer less risky investments that generate lower profits. C) Shareholder wealth depends on cash flow which is not the same as profit. D) If a firm maximizes profits by engaging in unethical business practices, it's stock price may be adversely affected. 14) ________ pool investment capital, make risky investment decisions, and manage risky investments on behalf of investors who would otherwise not be able to do so own their own. A) Firms B) Stockholders C) Stakeholders D) Regulators

3 15) Finance is ________. A) the system of verifying, analyzing, and recording business transactions B) the science of the production, distribution, and consumption of goods and services C) the science and art of how individuals and businesses raise, allocate, and invest money D) the art of merchandising products and services 16) In a recent quarter, Amazon and Clorox reported nearly identical earnings per share, but the stock price of Amazon was more than six times higher than the Clorox stock price. The most likely explanation for that difference is that ________. A) Clorox is bad for the environment B) Amazon is a riskier company C) investors see better long-term prospects for Amazon D) Amazon has more shares of stock outstanding 17) An objection to managing a firm on behalf of stakeholders rather than shareholders is that ________. A) stakeholders have no economic interest in the firm B) stakeholders have an interest only in short-term outcomes C) there is no clear way to satisfy all stakeholders whose economic interests may be at odds with each other D) the goal of managing on behalf of stakeholders is too narrow 18) Cash flows and risk are the key determinants in share price. Increased cash flow results in ________, other things remaining the same. A) a lower share price B) a higher share price C) an unchanged share price D) an undetermined share price 19) ________ decisions focus on how a company will spend its financial resources on long-term projects that ultimately determine whether the firm successfully creates value for its owners. A) Investment B) Financing C) Working capital D) Risk management Chapter 5 – Time Value Review (25 questions/problems in this document) 1) You invest a certain amount of money today. The process of determining how much money that investment will produce in the future is called ________. A) discounting B) compounding C) present value D) annuitizing the cash flow 2) The future value of a dollar ________ as the interest rate increases and ________ the longer the money remains invested. A) decreases; decreases B) decreases; increases C) increases; increases D) increases; decreases

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4 3) Which of the following is not a term that might be used interchangeably with the term discount rate? A) inflation rate B) required return C) opportunity cost D) cost of capital 4) Which of the following is true of annuities? A) An ordinary annuity is an equal payment paid or received at the beginning of each period. B) An annuity due is a payment paid or received at the beginning of each period that increases by an equal amount each period. C) An annuity due is an equal stream of cash flows that is paid or received at the beginning of each period. D) An ordinary annuity is an equal payment paid or received at the end of each period that increases by an equal amount each period. 5) In comparing an ordinary annuity and an annuity due, which of the following is true? A) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity. B) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due. C) The present value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due. D) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due. 6) Philip and Megan have just purchased a condominium for $70,000. Since the condo is very small, they hope to move into a single-family house in 5 years. How much will their condo be worth in 5 years if inflation is expected to be 8 percent? A) $105,376 B) $102,853 C) $103,422 D) $97,687 7) Emily will receive $12,000 per year for the next 10 years as royalty for her work on a finance book. What is the present value of her royalty income if the opportunity cost is 12 percent? Assume that payments come at the end of each year. A) $65,855 B) $67,803 C) $210,585 D) $235,939 8) Janice would like to send her parents on a cruise for their 25th wedding anniversary. She has priced the cruise at $15,000, and she has 5 years to accumulate this money. How much must Janice deposit at the end of each year for the next 5 years to accumulate enough money to send her parents on the cruise? Assume that she can earn 10% on the money she saves and invests. A) $1,862 B) $2,457 C) $3,000 D) $2,234 9) Daniel borrows $50,000 at 10 percent and must repay the loan by making four , equal end-of-year payments. The actual end-of-year loan payment is ________. A) $10,774 B) $12,500 C) $14,340 D) $15,773 10) How much money would you have to deposit today to create an income stream that pays $10,000 one year from today and continues to make annual payments forever, with payments after the first $10,000 growing at 4% per year? Assume money that you invest today to fund this income stream earns a 7% rate of return. A) $142,857 B) $250,000 C) $1,250,000 D) $333,333

5 11) Han has just won a $20 million lottery, which will pay her $1 million at the end of each year for 20 years. An investor has offered her $10 million for this annuity. She estimates that she can earn 10 percent interest, compounded annually, on any amounts she invests. She asks your advice on whether to accept or reject the offer. What is the correct advice based on time value of money? (Ignore Taxes) A) $11,077,304, keep the annuity B) $10,430,500, keep the annuity C) $9,621,836, accept the $10 million C) $8,513,564, accept the $10 million 12) Michael makes annual end-of-year payments of $5,043.71 on a four-year loan with an interest rate of 13 percent. The original principal amount was ________. A) $24,450 B) $15,000 C) $3,100 D) $20,175 13) What is the annual rate of return on an investment that costs $124,090 today and pays $10,000 at the end of each of the next 30 years? A) 7 percent B) 4 percent C) 6 percent D) 5.5 percent 14) James plans to fund his individual retirement account, beginning today, with 20 annual deposits of $2,000. If he can earn an annual compound rate of 8 percent on his deposits, the amount in the account 20 years from today will be ________. A) $19,636 B) $91,524 C) $98,846 D) $21,207 15) Marc has purchased a used car for $15,000. He paid $2,500 as down payment and he paid the balance by taking out a loan from his hometown bank. The loan is to be paid on a monthly basis for two years and has a stated annual interest rate of 12 percent. How much are the monthly payments? A) $588.42 16) Ashley is planning to accumulate $40,000 in 5 years by making 5 equal beginning-of-year deposits. If she plans to make her first deposit today and can earn an annual compound rate of 9 percent on her investment, how much must each deposit be in order to accumulate the $40,000 five years from now? A) $6,132 B) $6,684 C) $8,000 D) $9,434 17) Anthony is planning for his son's college education to begin ten years from today. He estimates the end-of-the-year tuition, books, and living expenses to be $10,000 per year for a four-year degree. How much must Otto deposit today, at an interest rate of 12 percent, for his son to be able to withdraw $10,000 per year for four years of college? A) $12,880 B) $9,780 C) $40,000 D) $18,950 18) Kristin wants to buy a house but does not want to get a loan. The average price of her dream house is $500,000, and its price is growing at 5 percent per year. How much should Kristin invest at the end of each year for the next 5 years to accumulate enough money to buy her dream house with cash at the end of the fifth year? Assume the investment pays a 12 percent rate of return. A) $100,450 B) $159,780 C) $721,332 D) $638,141 19) A firm wishes to establish a fund which, in 10 years, will accumulate to $10,000,000. The fund will be used to repay an outstanding bond issue. The firm plans to make deposits, which will earn 12 percent, to this fund at the end of each of the 10 years prior to maturity of the bond. How large must these deposits be to accumulate to $10,000,000? A) $1,000,000 B) $496,783 C) $569,842 D) $602,431

6 20) A corporation will make an investment today and receive the following cash flows year 1 – year 3. The firm requires 9% APR on investments. What is the value today of the cash flows and should the corporation make the investment? Cash Investment = $200,000 Cash inflow year 1 = $75,000 Cash inflow year 2 = $85,000 Cash inflow year 3 = $90,000 A) $209,847, make the investment, the value is greater than the investment amount B) $209,847, reject the investment, the value is greater than the investment amount C) $203,444, make the investment, the value is greater than the investment amount D) $203,444, reject the investment, the value is greater than the investment amount 21) What is the total interest paid on a loan if the loan amount is $300,000, the loan term is 360 months, the APR is 7% if the loan is held for all 360 months. A) $300,000 B) $376,231 C) $418,527 D) $721,638 22) What annual rate of return would Jia need to earn if she deposits $20,000 per year into an account beginning one year from today and her goal is to have a total of $1,000,000 in 30 years? A) 2.3% B) 3.3% C) 1.3% D) 4.3% 23) The principle of the time value of money basically says that ________. A) because firms pay managers a great deal, managers need to use their time very effectively B) money received today is more valuable than money received in the future because money in the future is more risky C) money received today is more valuable than money received in the future because firms and individuals can invest money they have today and earn a return on that money D) because of the principal-agent problem, investors cannot trust that money firms promise to pay in the future will ever arrive 24 & 25 are possible substitutes questions on the exam – the maximum you can earn is 100%. That will be based on answering 28 out of the first 28 on the exam correctly or if you miss 2 of the those and answer either of the two below correctly on the exam – you will still have 28 correct or 100%. If you attempt these, you will mark them on the scantron as normal. 24. Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par? A) 5.78% B) 6.88% C) 6.50% D) 6.71% 25. At the end of each year, Fred puts $5,000 per year into a retirement account that pays 7 percent interest. Fred will retire in 15 years and expects 10 years of retirement life. He plans to withdraw an equal amount from his retirement account at the end of each year that he is retired. What is the maximum annual retirement benefit Fred can get during his retirement years? A) $16,883 B) $19,786 C) $17,889 D) $18,322

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7 Chapter 6 – Bond Review (18 questions/problems in this document) 1) Generally, an increase in risk will result in ________. A) a lower required return or interest rate B) a higher required return or interest rate C) a higher inflation premium D) a lower real interest rate 2) Although no investment is truly risk free, ________ are generally viewed as the closest thing we can come to in the real world to a risk-free investment. A) U.S. Treasury securities B) AAA-rated corporate bonds C) secured bonds D) zero-coupon bonds 3) Ai Lun, a management trainee at a large New York-based bank, is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent , and consumer prices have been rising steadily at a 2% rate for several years. What should Ai Lun's estimate of the real rate be? A) 5% B) 1% C) 3% D) 2% 4) The ________ is the compound annual rate of interest earned on a debt security purchased on a given date and held to maturity. A) risk premium B) yield curve C) risk-free rate D) yield to maturity 5) An upward-sloping yield curve that indicates cheaper short-term borrowing costs than long-term borrowing costs is called as ________. A) normal yield curve B) inverted yield curve C) flat yield curve D) lognormal yield curve 6) Which of the following is true of the risk premium? A) T-bills have a have a higher risk premium compared with Treasury bonds. B) Government bonds have a higher risk premium compared with corporate bonds. C) Junk bonds have a lower risk premium investment-grade bonds. D) The lower-rated corporate issues have a higher risk premium than that of the higher rated corporate issues. 7) The current yield on a bond is measured by ________. A) the annual interest payment divided by the current price B) the annual interest payment divided by the par value C) the annual interest payment divided by the maturity value D) the annual interest payment divided by the yield to maturity

8 8) The riskiness of publicly traded bond issues is rated by independent agencies. According to Moody's rating system, an Aaa bond and a Caa bond are ________ and ________ respectively. A) speculative; investment grade B) prime quality; medium grade C) investment grade; speculative D) medium grade; lowest grade 9) If the coupon rate of a bond is equal to its required rate of return, then ________. A) the market value is less than par value B) the market value is equal to par value C) the market value is greater than par value D) the bond has just been issued 10) Bonds that sell at less than face value are priced at a ________, while bonds which sell at greater than face value sell at a ________. A) par; premium B) discount; par C) discount; premium D) coupon; premium 11) A bond will sell at ___________ when the stated coupon rate of interest exceeds the required rate of return, at ___________ when the stated coupon rate of interest is less than the required rate of return, and at ___________ when the stated coupon rate of interest is equal to the required return. A) a premium; par value; a discount B) a discount; a premium; par value C) a premium; a discount; par value D) par value; a premium; a discount 12) Interest rate risk is the risk that a bond's _________ will change when market interest rates change. Generally, ___________ bonds have higher interest rate risk than ____________ bonds. A) coupon; perpetuity; annuity B) par value; municipal; government C) maturity; primary; secondary D) value; long-term; short-term 13) A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today. A) $1,000 B) $805.20 C) $1,115.50 D) $1,268.40 14) To finance a new line of product, the Tang Toys has issued a bond with a par value of $1,000, coupon rate of 8 percent, and maturity of 30 years. Compute the price of the bond if the opportunity cost is 11 percent. A) $922 B) $739 C) $1,338 D) -$652

9 15) Zheng Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zheng Corporation has identified a company of similar risk with an outstanding bond issue that has an 8 percent coupon rate having a maturity of ten years. This firm's bonds are currently selling for $1,091.96. If interest is paid annually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par? A) 5.78% B) 6.88% C) 6.50% D) 6.71% 16) What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity? A) 11 percent B) 12 percent C) 13 percent D) 14 percent 17) Nico Corp issued bonds bearing a coupon rate of 12 percent, pay coupons semiannually, have 3 years remaining to maturity, and are currently priced at $940 per bond. What is the yield to maturity? A) 7.27% B) 13.99% C) 14.54% D) 15.25% 18) What is the yield to call for a corporate bond selling for $1,120 today that matures in 30 years, has a 12 percent coupon rate, pays interest semi-annually, is callable in 6 years, and has a call price of $1,000? A) 9.34 percent B) 7.46 percent C) 5.67 percent D) 10.66 percent

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10 𝐹𝑉 ௡ ൌ 𝑃𝑉 ଴ ൈ ሺ1 ൅ 𝑟ሻ ௡ 𝑃𝑉 ଴ ൌ ி௏ ೙ ሺଵା௥ሻ ೙ 𝐹𝑉𝐴 ௡ ൌ 𝐶𝐹 ଵ ൈ ቄ ሺଵା௥ሻ ೙ ିଵ ௥ ቅ 𝑃𝑉𝐴 ଴ ൌ ቀ ஼ி భ ௥ ቁ ൈ ቄ1 െ ଵ ሺଵା௥ሻ ೙ ቅ 𝐹𝑉𝐴ሺ𝑑𝑢𝑒ሻ ௡ ൌ 𝐶𝐹 ଴ ൈ ቄ ሾሺଵା௥ሻ ೙ ିଵሿ ௥ ቅ ൈ ሺ1 ൅ 𝑟ሻ 𝑃𝑉𝐴ሺ𝑑𝑢𝑒ሻ ଴ ൌ ቀ ஼ி బ ௥ ቁ ൈ ቄ1 െ ଵ ሺଵା௥ሻ ೙ ቅ ൈ ሺ1 ൅ 𝑟ሻ 𝑃𝑉 ଴ ൌ 𝐶𝐹 ଵ ൊ 𝑟 𝑃𝑉 ଴ ൌ ቀ ஼ி భ ௥ି௚ ቁ 𝐹𝑉 ௡ ൌ 𝑃𝑉 ଴ ൈ ቀ1 ൅ ௥ ௠ ቁ ௠ൈ௡ 𝐹𝑉 ௡ ൌ 𝑃𝑉 ଴ ൈ 𝑒 ௥ൈ௡ 𝐸𝐴𝑅 ൌ ቀ1 ൅ ௥ ௠ ቁ ௠ െ 1 𝐸𝐴𝑅 ሺ௖௢௡௧௜௡௨௢௨௦ ௖௢௠௣௢௨௡ௗ௜௡௚ሻ ൌ 𝑒 ௥ െ 1 𝐶𝐹 ଵ ൌ 𝐹𝑉 ௡ ൊ ቄ ሾሺଵା௥ሻ ೙ ିଵሿ ௥ ቅ 𝐶𝐹 ଵ ൌ ሺ𝑃𝑉 ଴ ൈ 𝑟ሻ ൊ ቄ1 െ ଵ ሺଵା௥ሻ ೙ ቅ 𝑟 ൌ ቀ ி௏ ೙ ௉௏ బ ቁ ଵ/௡ െ 1 𝑛 ൌ ௟௢௚ቀ ಷೇ ೙ ುೇ బ ቁ ௟௢௚ሺଵା௥ሻ ሺ1 ൅ 𝑟ሻ ൌ ሺ1 ൅ 𝑟 ∗ ሻሺ1 ൅ 𝑖ሻ 𝑟 ∗ ൎ 𝑟 െ 𝐼 𝑅 ி ൌ 𝑟 ∗ ൅ 𝑖 𝑟 ௝ ൌ 𝑅 ி ൅ 𝑅𝑃 ௝ 𝑉 ଴ ൌ ஼ி భ ሺଵା௥ሻ భ ൅ ஼ி మ ሺଵା௥ሻ మ ൅ ⋯ ൅ ஼ி ೙ ሺଵା௥ሻ ೙ Bonds: 𝐵 ଴ ൌ 𝐶 ሺ1 ൅ 𝑟ሻ ଵ ൅ 𝐶 ሺ1 ൅ 𝑟ሻ ଶ ൅ ൅ 𝐶 ሺ1 ൅ 𝑟ሻ ଷ … ൅ 𝐶 ሺ1 ൅ 𝑟ሻ ௡ ൅ 𝑀 ሺ1 ൅ 𝑟ሻ ௡ 𝐵 ଴ ൌ ቂ∑ ஼ ሺଵା௥ሻ ೟ ௡ ௧ୀଵ ቃ ൅ ቂ ெ ሺଵା௥ሻ ೙ ቃ 𝐵 ଴ ൌ ቀ ஼ ௥ ቁ ቂ1 െ ଵ ሺଵା௥ሻ ೙ ቃ ൅ ெ ሺଵା௥ሻ ೙ 𝐵 ଴ ൌ ಴ మ ቀ 1+ ೝ మ ቁ భ ൅ ಴ మ ቀ 1+ ೝ మ ቁ మ ൅ ಴ మ ቀ 1+ ೝ మ ቁ య ൅ ⋯ ൅ ಴ మ ቀ 1+ ೝ మ ቁ మ೙ ൅ ெ ቀଵା ೝ మ ቁ మ೙ 𝐵 ଴ ൌ ൥∑ ಴ మ ቀ 1+ ೝ మ ቁ ೟ ଶ௡ ௧ୀଵ ൩ ൅ ൥ ெ ቀଵା ೝ మ ቁ మ೙ ൩ 𝐵 ଴ ൌ ቀ ஼/ଶ ௥/ଶ ቁ ൥1 െ ଵ ቀଵା ೝ మ ቁ మ೙ ൩ ൅ ெ ቀଵା ೝ మ ቁ మ೙

Ch1_5_6examQuestions2023_review

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