1. What Is the Primary Financial Goal of the Firm? (As Stated in Class)

Practice Exam 1

Finance 301

9.15.08

1.  What is the primary financial goal of the firm? (as stated in class)

a.  Become as wealthy as possible

b.  Reduce costs as much as possible

c.  Maximize shareholder value

d.  Maximize management value

2.  What is the future value of an initial $400 after 13 years if the annual interest rate is 12%?

a.  $1,832.98

b.  $1,745.40

c.  $1,058.23

d.  $1000.00

3.  Investment X will pay 5% compounded annually. Investment Y will pay 4% compounded daily. Which is the most financially rewarding investment and why?

a.  Investment X because it has a higher interest rate.

b.  Investment Y because it is compounded more frequently.

c.  Investment X because the EAR of X is greater than the EAR of Y.

d.  Both investments yield the same return.

4.  You just graduated from college and have decided to buy your first house. In order to finance the purchase, you have decided to take out a loan for $200,000 from your local bank. It is a 30 year mortgage with an 8.4% nominal interest rate and monthly payments. What is the payment?

a.  $1,523.68

b.  $9,099.84

c.  $3,333.33

d.  $1,513.08

5.  Using the information from number 4, how much total interest will you pay for the life of the loan?

a.  $16,800

b.  $10,000

c.  $348,523.11

d.  $111,352.89

6.  Using the information from number 4, how much interest did you pay for the 52nd payment? How much principal?

a.  $1,347.16 Interest and $176.52 Principal

b.  $100,000 Interest and $25,987 interest

c.  $1,523.68 Interest and $0 Principal

d.  $121.89 Interest and $1,401.79

7.  An investment pays you $100 at the end of the next 3 years. The investment will then pay you $200 at the end of year 4, $300 at the end of year 5, and $500 at the end of year 6. If the interest rate earned on the investment is 8%, what is its future value?

a.  $987.09

b.  $923.98

c.  $5567.99

d.  $1400.00

8.  What is the future value of a 5 year annuity due that promises to pay you $300 each year. Assume that all payments are reinvested at 7% each year until year 5.

a.  $1,725.22

b.  $1,845.99

c.  $1,099.45

d.  $1,776.23

9.  Your bank quoted you a CD at 12% compounded monthly. What is its EAR?

a.  12.55%

b.  11.65%

c.  12%

d.  12.68%

10. What is the present value of $350 due in 6 years at 15% nominal interest rate with semi annual compounding?

a.  $146.95

b.  $122.98

c.  $198.78

d.  $254.65

11. What is the present value of a $488 perpetuity if the interest rate is 6.5%? What if the interest rate doubles to 13%

a.  @6.5 the PV is $7,507.69 and @13% the PV is $3,753.85. Thus the present value of the perpetuity is halved when the interest rate doubles.

b.  @6.5 the PV is $3,573.85 and @13% the PV is $7,507.69. Thus the present value of the perpetuity doubles when the interest rate doubles.

c.  I have no idea…how do you calculate the PV of a perpetuity again?

d.  The perpetuity value is $488 no matter what interest rate it is invested at.

12. What is a firm’s intrinsic value?

a.  A firm’s intrinsic value is its assets minus its liabilities.

b.  A firm’s intrinsic value is an estimate of a stock’s “true” value based on accurate risk and return data. It can be estimated but not precisely measured.

c.  A firm’s intrinsic value is its market price, the value based on perceived but possibly incorrect information as seen by the marginal investor.

d.  A firm’s intrinsic value is the total number of shares outstanding times the value per share.

13. What is a firm’s current stock price?

a.  A firm’s current stock price is its market price: the value based on perceived but possibly incorrect information as seen by the marginal investor.

b.  A firm’s current stock price is the total number of shares outstanding times the value per share.

c.  A firm’s current stock price is the equilibrium price.

14. A company’s attitude and conduct toward its employees, customers, community and stockholders is _____?

a.  Mission Statement

b.  Conduct Goals

c.  Business Ethics

d.  Business Philosophy

15. An assets ____ reflects the ease of selling the asset and converting it to cash at a fair market value.

a.  Growth Opportunities

b.  Intrinsic Value

c.  Market Price

d.  Liquidity

16. A ______is an unincorporated business owned by a single individual.

a.  Partnership

b.  Proprietorship

c.  Joint Venture

d.  Monopoly

17. I decided to start an unincorporated business with 3 of my closest friends. This is an example of which of the following?

a.  Partnership

b.  Proprietorship

c.  S Corp

d.  Corporation

18. A dollar ______is worth _____ a dollar ______.

a.  tomorrow, more than, today

b.  today, less than, tomorrow

c.  today, more than, tomorrow

d.  yesterday, the same as, tomorrow

19. How long will it take $500 to double if it earns a 5% annual rate?

a.  14.2 years

b.  5 years

c.  8.2 years

d.  9.35 years

20. You won the lottery and you have three different choices for how to receive your money. Option A: A lump sum of $55 million. Option B: 10 end of year payments of $8.5 million. Option C: 30 end of year payments of 4 million. If you expect to earn 8% annually, which option should you chose?

a.  Option A

b.  Option B

c.  Option C

d.  There isn’t enough information to decide.