Finance Chapter 4 and 5

Considered alone, which of the following would increase a company’s current ratio?a. An increase in net fixed assets.b. An increase in accrued liabilities.c. An increase in notes payable.d. An increase in accounts receivable.e. An increase in accounts payable. D
Which of the following would, generally, indicate an improvement in a company’s financial position, holding other things constant?a. The TIE declines.b. The DSO increases.c. The quick ratio increases.d. The current ratio declines.e. The total assets turnover decreases. C
A firm wants to strengthen its financial position. Which of the following actions would increase its current ratio?a. Reduce the company’s days’ sales outstanding to the industry average and use the resulting cash savings to purchase plant and equipment.b. Use cash to repurchase some of the company’s own stock.c. Borrow using short-term debt and use the proceeds to repay debt that has a maturity of more than one year.d. Issue new stock, then use some of the proceeds to purchase additional inventory and hold the remainder as cash.e. Use cash to increase inventory holdings. D
Casey Communications recently issued new common stock and used the proceeds to pay off some of its short-term notes payable. This action had no effect on the company’s total assets or operating income. Which of the following effects would occur as a result of this action?a. The company’s current ratio increased.b. The company’s times interest earned ratio decreased.c. The company’s basic earning power ratio increased.d. The company’s equity multiplier increased.e. The company’s debt ratio increased. A
A firm’s new president wants to strengthen the company’s financial position. Which of the following actions would make it financially stronger?a. Increase accounts receivable while holding sales constant.b. Increase EBIT while holding sales and assets constant.c. Increase accounts payable while holding sales constant.d. Increase notes payable while holding sales constant.e. Increase inventories while holding sales constant. B
If the CEO of a large, diversified, firm were filling out a fitness report on a division manager (i.e., “grading” the manager), which of the following situations would be likely to cause the manager to receive a better grade? In all cases, assume that other things are held constant.a. The division’s basic earning power ratio is above the average of other firms in its industry.b. The division’s total assets turnover ratio is below the average for other firms in its industry.c. The division’s debt ratio is above the average for other firms in the industry.d. The division’s inventory turnover is 6, whereas the average for its competitors is 8.e. The division’s DSO (days’ sales outstanding) is 40, whereas the average for its competitors is 30. A
Which of the following would indicate an improvement in a company’s financial position, holding other things constant?a. The inventory and total assets turnover ratios both decline.b. The debt ratio increases.c. The profit margin declines.d. The times-interest-earned ratio declines.e. The current and quick ratios both increase. E
A firm wants to strengthen its financial position. Which of the following actions would increase its quick ratio?a. Offer price reductions along with generous credit terms that would (1) enable the firm to sell some of its excess inventory and (2) lead to an increase in accounts receivable.b. Issue new common stock and use the proceeds to increase inventories.c. Speed up the collection of receivables and use the cash generated to increase inventories.d. Use some of its cash to purchase additional inventories.e. Issue new common stock and use the proceeds to acquire additional fixed assets. A
Amram Company’s current ratio is 2.0. Considered alone, which of the following actions would lower the current ratio?a. Borrow using short-term notes payable and use the proceeds to reduce accruals.b. Borrow using short-term notes payable and use the proceeds to reduce long-term debt.c. Use cash to reduce accruals.d. Use cash to reduce short-term notes payable.e. Use cash to reduce accounts payable. B
Taggart Technologies is considering issuing new common stock and using the proceeds to reduce its outstanding debt. The stock issue would have no effect on total assets, the interest rate Taggart pays, EBIT, or the tax rate. Which of the following is likely to occur if the company goes ahead with the stock issue?a. The ROA will decline.b. Taxable income will decline.c. The tax bill will increase.d. Net income will decrease.e. The times-interest-earned ratio will decrease. C
Walter Industries’ current ratio is 0.5. Considered alone, which of the following actions would increase the company’s current ratio?a. Borrow using short-term notes payable and use the cash to increase inventories.b. Use cash to reduce accruals.c. Use cash to reduce accounts payable.d. Use cash to reduce short-term notes payable.e. Use cash to reduce long-term bonds outstanding. A
Safeco’s current assets total to $20 million versus $10 million of current liabilities, while Risco’s current assets are $10 million versus $20 million of current liabilities. Both firms would like to “window dress” their end-of-year financial statements, and to do so they tentatively plan to borrow $10 million on a short-term basis and to then hold the borrowed funds in their cash accounts. Which of the statements below best describes the results of these transactions?a. The transactions would improve Safeco’s financial strength as measured by its current ratio but lower Risco’s current ratio.b. The transactions would lower Safeco’s financial strength as measured by its current ratio but raise Risco’s current ratio.c. The transactions would have no effect on the firm’ financial strength as measured by their current ratios.d. The transactions would lower both firm’ financial strength as measured by their current ratios.e. The transactions would improve both firms’ financial strength as measured by their current ratios. B
Ryngard Corp’s sales last year were $38,000, and its total assets were $16,000. What was its total assets turnover ratio (TATO)?a. 2.04b. 2.14c. 2.26d. 2.38e. 2.49 D
Beranek Corp has $720,000 of assets, and it uses no debt–it is financed only with common equity. The new CFO wants to employ enough debt to raise the debt/assets ratio to 40%, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?a. $273,600b. $288,000c. $302,400d. $317,520e. $333,396 B
Ajax Corp’s sales last year were $435,000, its operating costs were $362,500, and its interest charges were $12,500. What was the firm’s times-interest-earned (TIE) ratio?a. 4.72b. 4.97c. 5.23d. 5.51e. 5.80 E
Royce Corp’s sales last year were $280,000, and its net income was $23,000. What was its profit margin?a. 7.41%b. 7.80%c. 8.21%d. 8.63%e. 9.06% C
River Corp’s total assets at the end of last year were $415,000 and its net income was $32,750. What was its return on total assets?a. 7.89%b. 8.29%c. 8.70%d. 9.14%e. 9.59% A
X-1 Corp’s total assets at the end of last year were $405,000 and its EBIT was 52,500. What was its basic earning power (BEP) ratio?a. 11.70%b. 12.31%c. 12.96%d. 13.61%e. 14.29% C
Zero Corp’s total common equity at the end of last year was $405,000 and its net income was $70,000. What was its ROE?a. 14.82%b. 15.60%c. 16.42%d. 17.28%e. 18.15% D
Your sister is thinking about starting a new business. The company would require $375,000 of assets, and it would be financed entirely with common stock. She will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?a. $41,234b. $43,405c. $45,689d. $48,094e. $50,625 E
Song Corp’s stock price at the end of last year was $23.50 and its earnings per share for the year were $1.30. What was its P/E ratio?a. 17.17b. 18.08c. 18.98d. 19.93e. 20.93 B
Hoagland Corp’s stock price at the end of last year was $33.50, and its book value per share was $25.00. What was its market/book ratio?a. 1.34b. 1.41c. 1.48d. 1.55e. 1.63 A
Precision Aviation had a profit margin of 6.25%, a total assets turnover of 1.5, and an equity multiplier of 1.8. What was the firm’s ROE?a. 15.23%b. 16.03%c. 16.88%d. 17.72%e. 18.60% C
Meyer Inc’s assets are $625,000, and its total debt outstanding is $185,000. The new CFO wants to establish a debt ratio of 55%. The size of the firm does not change. How much debt must the company add or subtract to achieve the target debt ratio?a. $158,750b. $166,688c. $175,022d. $183,773e. $192,962 A
Helmuth Inc’s latest net income was $1,250,000, and it had 225,000 shares outstanding. The company wants to pay out 45% of its income. What dividend per share should it declare?a. $2.14b. $2.26c. $2.38d. $2.50e. $2.63 D
Garcia Industries has sales of $200,000 and accounts receivable of $18,500, and it gives its customers 25 days to pay. The industry average DSO is 27 days, based on a 365-day year. If the company changes its credit and collection policy sufficiently to cause its DSO to fall to the industry average, and if it earns 8.0% on any cash freed-up by this change, how would that affect its net income, assuming other things are held constant?a. $241.45b. $254.16c. $267.54d. $281.62e. $296.44 E
Faldo Corp sells on terms that allow customers 45 days to pay for merchandise. Its sales last year were $325,000, and its year-end receivables were $60,000. If its DSO is less than the 45-day credit period, then customers are paying on time. Otherwise, they are paying late. By how much are customers paying early or late? Base your answer on this equation: DSO – Credit Period = Days early or late, and use a 365-day year when calculating the DSO. A positive answer indicates late payments, while a negative answer indicates early payments.a. 21.27b. 22.38c. 23.50d. 24.68e. 25.91 B
Han Corp’s sales last year were $425,000, and its year-end receivables were $52,500. The firm sells on terms that call for customers to pay 30 days after the purchase, but some delay payment beyond Day 30. On average, how many days late do customers pay? Base your answer on this equation: DSO – Allowed credit period = Average days late, and use a 365-day year when calculating the DSO.a. 12.94b. 13.62c. 14.33d. 15.09e. 15.84 D
Wie Corp’s sales last year were $315,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. The firm’s new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?a. $201,934b. $212,563c. $223,750d. $234,938e. $246,684 C
A new firm is developing its business plan. It will require $615,000 of assets, and it projects $450,000 of sales and $355,000 of operating costs for the first year. Management is reasonably sure of these numbers because of contracts with its customers and suppliers. It can borrow at a rate of 7.5%, but the bank requires it to have a TIE of at least 4.0, and if the TIE falls below this level the bank will call in the loan and the firm will go bankrupt. What is the maximum debt ratio the firm can use? (Hint: Find the maximum dollars of interest, then the debt that produces that interest, and then the related debt ratio.)a. 41.94%b. 44.15%c. 46.47%d. 48.92%e. 51.49% E
Chang Corp. has $375,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $595,000, and its net income was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15.0%. What profit margin would the firm need in order to achieve the 15% ROE, holding everything else constant?a. 9.45%b. 9.93%c. 10.42%d. 10.94%e. 11.49% A
Last year Ann Arbor Corp had $155,000 of assets, $305,000 of sales, $20,000 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?a. 11.51%b. 12.11%c. 12.75%d. 13.42%e. 14.09% D
Brookman Inc’s latest EPS was $2.75, its book value per share was $22.75, it had 315,000 shares outstanding, and its debt ratio was 44%. How much debt was outstanding?a. $4,586,179b. $4,827,557c. $5,081,639d. $5,349,094e. $5,630,625 E
Last year Harrington Inc. had sales of $325,000 and a net income of $19,000, and its year-end assets were $250,000. The firm’s total-debt-to-total-assets ratio was 45.0%. Based on the DuPont equation, what was the ROE?a. 13.82%b. 14.51%c. 15.23%d. 16.00%e. 16.80% A
Last year Rennie Industries had sales of $305,000, assets of $175,000, a profit margin of 5.3%, and an equity multiplier of 1.2. The CFO believes that the company could reduce its assets by $51,000 without affecting either sales or costs. Had it reduced its assets by this amount, and had the debt ratio, sales, and costs remained constant, how much would the ROE have changed?a. 4.10%b. 4.56%c. 5.01%d. 5.52%e. 6.07% B
Last year Blease Inc had a total assets turnover of 1.33 and an equity multiplier of 1.75. Its sales were $295,000 and its net income was $10,600. The CFO believes that the company could have operated more efficiently, lowered its costs, and increased its net income by $10,250 without changing its sales, assets, or capital structure. Had it cut costs and increased its net income by this amount, how much would the ROE have changed?a. 6.55%b. 7.28%c. 8.09%d. 8.90%e. 9.79% C
Last year Jandik Corp. had $295,000 of assets, $18,750 of net income, and a debt-to-total-assets ratio of 37%. Now suppose the new CFO convinces the president to increase the debt ratio to 48%. Sales and total assets will not be affected, but interest expenses would increase. However, the CFO believes that better cost controls would be sufficient to offset the higher interest expense and thus keep net income unchanged. By how much would the change in the capital structure improve the ROE?a. 2.13%b. 2.35%c. 2.58%d. 2.84%e. 3.12% A
Last year Kruse Corp had $305,000 of assets, $403,000 of sales, $28,250 of net income, and a debt-to-total-assets ratio of 39%. The new CFO believes the firm has excessive fixed assets and inventory that could be sold, enabling it to reduce its total assets to $252,500. Sales, costs, and net income would not be affected, and the firm would maintain the same debt ratio (but with less total debt). By how much would the reduction in assets improve the ROE?a. 2.85%b. 3.00%c. 3.16%d. 3.31%e. 3.48% C
Jordan Inc has the following balance sheet and income statement data:Cash $ 14,000 Accounts payable $ 42,000Receivables 70,000 Other current liab. 28,000Inventories 280,000 Total CL $ 70,000 Total CA $364,000 Long-term debt 140,000Net fixed assets 126,000 Common equity 280,000 Total assets $490,000 Total liab. and equity $490,000Sales $280,000Net income $21,000The new CFO thinks that inventories are excessive and could be lowered sufficiently to cause the current ratio to equal the industry average, 2.75, without affecting either sales or net income. Assuming that inventories are sold off and not replaced to get the current ratio to the target level, and that the funds generated are used to buy back common stock at book value, by how much would the ROE change?a. 11.26%b. 11.85%c. 12.45%d. 13.07%e. 13.72% B
Last year Hamdi Corp. had sales of $500,000, operating costs of $450,000, and year-end assets of $395,000. The debt-to-total-assets ratio was 17%, the interest rate on the debt was 7.5%, and the firm’s tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 50% debt ratio. Assume that sales, operating costs, total assets, and the tax rate would not be affected, but the interest rate would rise to 8.0%. By how much would the ROE change in response to the change in the capital structure?a. 1.71%b. 1.90%c. 2.11%d. 2.34%e. 2.58% D
Quigley Inc. is considering two financial plans for the coming year. Management expects sales to be $300,000, operating costs to be $265,000, assets to be $200,000, and its tax rate to be 35%. Under Plan A it would use 25% debt and 75% common equity. The interest rate on the debt would be 8.8%, but under a contract with existing bondholders the TIE ratio would have to be maintained at or above 4.0. Under Plan B, the maximum debt that met the TIE constraint would be employed. Assuming that sales, operating costs, assets, the interest rate, and the tax rate would all remain constant, by how much would the ROE change in response to the change in the capital structure?a. 3.71%b. 4.08%c. 4.48%d. 4.93%e. 5.18% A
Sue now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?a. $205.83b. $216.67c. $228.07d. $240.08e. $252.08 D
Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.5% with annual compounding?a. $591.09b. $622.20c. $654.95d. $689.42e. $723.89 D
Suppose you have $1,500 and plan to purchase a 5-year certificate of deposit (CD) that pays 3.5% interest, compounded annually. How much will you have when the CD matures?a. $1,781.53b. $1,870.61c. $1,964.14d. $2,062.34e. $2,165.46 A
Suppose you have $2,000 and plan to purchase a 10-year certificate of deposit (CD) that pays 6.5% interest, compounded annually. How much will you have when the CD matures?a. $3,754.27b. $3,941.99c. $4,139.09d. $4,346.04e. $4,563.34 A
Last year Rocco Corporation’s sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?a. $271.74b. $286.05c. $301.10d. $316.16e. $331.96 C
Last year Dania Corporation’s sales were $525 million. If sales grow at 7.5% per year, how large (in millions) will they be 8 years later?a. $845.03b. $889.51c. $936.33d. $983.14e. $1,032.30 C
How much would $1, growing at 3.5% per year, be worth after 75 years? a. $12.54b. $13.20c. $13.86d. $14.55e. $15.28 B
How much would $100, growing at 5% per year, be worth after 75 years? a. $3,689.11b. $3,883.27c. $4,077.43d. $4,281.30e. $4,495.37 B
You deposit $1,000 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?a. $2,245.08b. $2,363.24c. $2,481.41d. $2,605.48e. $2,735.75 B
You deposit $500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 25 years?a. $1,122.54b. $1,181.62c. $1,240.70d. $1,302.74e. $1,367.88 B
Suppose a State of New York bond will pay $1,000 ten years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?a. $585.43b. $614.70c. $645.44d. $677.71e. $711.59 A
Suppose a State of California bond will pay $1,000 eight years from now. If the going interest rate on these 8-year bonds is 5.5%, how much is the bond worth today?a. $651.60b. $684.18c. $718.39d. $754.31e. $792.02 A
How much would $20,000 due in 50 years be worth today if the discount rate were 7.5%?a. $438.03b. $461.08c. $485.35d. $510.89e. $537.78 E
How much would $5,000 due in 25 years be worth today if the discount rate were 5.5%?a. $1,067.95b. $1,124.16c. $1,183.33d. $1,245.61e. $1,311.17 E
Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?a. $1,928.78b. $2,030.30c. $2,131.81d. $2,238.40e. $2,350.32 B
Suppose an Exxon Corporation bond will pay $4,500 ten years from now. If the going interest rate on safe 10-year bonds is 4.25%, how much is the bond worth today?a. $2,819.52b. $2,967.92c. $3,116.31d. $3,272.13e. $3,435.74 B
Suppose the U.S. Treasury offers to sell you a bond for $747.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? a. 4.37%b. 4.86%c. 5.40%d. 6.00%e. 6.60% D
Suppose the U.S. Treasury offers to sell you a bond for $3,000. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $5,000. What interest rate would you earn if you bought this bond at the offer price?a. 3.82%b. 4.25%c. 4.72%d. 5.24%e. 5.77% D
Ten years ago, Lucas Inc. earned $0.50 per share. Its earnings this year were $2.20. What was the growth rate in earnings per share (EPS) over the 10-year period?a. 15.17%b. 15.97%c. 16.77%d. 17.61%e. 18.49% B
Five years ago, Weed Go Inc. earned $1.50 per share. Its earnings this year were $3.20. What was the growth rate in earnings per share (EPS) over the 5-year period?a. 15.54%b. 16.36%c. 17.18%d. 18.04%e. 18.94% B
Janice has $5,000 invested in a bank that pays 3.8% annually. How long will it take for her funds to triple?a. 23.99b. 25.26c. 26.58d. 27.98e. 29.46 E
Bob has $2,500 invested in a bank that pays 4% annually. How long will it take for his funds to double?a. 14.39b. 15.15c. 15.95d. 16.79e. 17.67 E
Last year Thomson Inc’s earnings per share were $3.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Thomson’s EPS to triple?a. 9.29b. 10.33c. 11.47d. 12.75e. 14.02 D
You plan to invest in securities that pay 8.0%, compounded annually. If you invest $5,000 today, how many years will it take for your investment to grow to $9,140.20?a. 5.14b. 5.71c. 6.35d. 7.05e. 7.84 E
You plan to invest in bonds that pay 6.0%, compounded annually. If you invest $10,000 today, how many years will it take for your investment to grow to $30,000?a. 12.37b. 13.74c. 15.27d. 16.97e. 18.85 E
You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?a. $11,973b. $12,603c. $13,267d. $13,930e. $14,626 C
You want to buy a new ski boat 2 years from now, and you plan to save $8,200 per year, beginning one year from today. You will deposit your savings in an account that pays 6.2% interest. How much will you have just after you make the 2nd deposit, 2 years from now?a. $15,260b. $16,063c. $16,908d. $17,754e. $18,642 C
You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?a. $18,369b. $19,287c. $20,251d. $21,264e. $22,327 A
You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $3,500 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?a. $16,112b. $16,918c. $17,763d. $18,652e. $19,584 A
You want to quit your job and return to school for an MBA degree 3 years from now, and you plan to save $7,000 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?a. $20,993b. $22,098c. $23,261d. $24,424e. $25,645 C
What is the PV of an ordinary annuity with 10 payments of $2,700 if the appropriate interest rate is 5.5%?a. $16,576b. $17,449c. $18,367d. $19,334e. $20,352 E
What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?a. $16,806b. $17,690c. $18,621d. $19,601e. $20,633 E
You have a chance to buy an annuity that pays $2,500 at the end of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?a. $5,493.71b. $5,782.85c. $6,087.21d. $6,407.59e. $6,744.83 E
You just inherited some money, and a broker offers to sell you an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other investments with equal risk. What is the most you should pay for the annuity?a. $50,753b. $53,424c. $56,236d. $59,195e. $62,311 E
Your aunt is about to retire, and she wants to sell some of her stock and buy an annuity that will provide her with income of $50,000 per year for 30 years, beginning a year from today. The going rate on such annuities is 7.25%. How much would it cost her to buy such an annuity today?a. $574,924b. $605,183c. $635,442d. $667,214e. $700,575 B
What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?a. $11,262.88b. $11,826.02c. $12,417.32d. $13,038.19e. $13,690.10 A
What’s the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?a. $4,750b. $5,000c. $5,250d. $5,513e. $5,788 B
What’s the rate of return you would earn if you paid $950 for a perpetuity that pays $85 per year?a. 8.95%b. 9.39%c. 9.86%d. 10.36%e. 10.88% A
You have a chance to buy an annuity that pays $550 at the beginning of each year for 3 years. You could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?a. $1,412.84b. $1,487.20c. $1,565.48d. $1,643.75e. $1,725.94 C
You have a chance to buy an annuity that pays $5,000 at the beginning of each year for 5 years. You could earn 4.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?a 20,701b. $21,791c. $22,938d. $24,085e. $25,289 C
Your uncle is about to retire, and he wants to buy an annuity that will provide him with $75,000 of income a year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much would it cost him to buy the annuity today?a. $825,835b. $869,300c. $915,052d. $963,213e. $1,011,374 D
Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?a. $1,063,968b. $1,119,966c. $1,178,912d. $1,240,960e. $1,303,008 D
You inherited an oil well that will pay you $25,000 per year for 25 years, with the first payment being made today. If you think a fair return on the well is 7.5%, how much should you ask for it if you decide to sell it?a. $284,595b. $299,574c. $314,553d. $330,281e. $346,795 B
Sam was injured in an accident, and the insurance company has offered him the choice of $25,000 per year for 15 years, with the first payment being made today, or a lump sum. If a fair return is 7.5%, how large must the lump sum be to leave him as well off financially as with the annuity?a. $225,367b. $237,229c. $249,090d. $261,545e. $274,622 B
What’s the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?a. $8,509b. $8,957c. $9,428d. $9,924e. $10,446 E
Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the end of each of the next 20 years?a. $28,532b. $29,959c. $31,457d. $33,030e. $34,681 A
Your uncle has $375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?a. $28,843.38b. $30,361.46c. $31,959.43d. $33,641.50e. $35,323.58 D
Your uncle has $375,000 and wants to retire. He expects to live for another 25 years, and he also expects to earn 7.5% on his invested funds. How much could he withdraw at the beginning of each of the next 25 years and end up with zero in the account?a. $28,243.21b. $29,729.70c. $31,294.42d. $32,859.14e. $34,502.10 C
Your grandmother just died and left you $100,000 in a trust fund that pays 6.5% interest. You must spend the money on your college education, and you must withdraw the money in 4 equal installments, beginning immediately. How much could you withdraw today and at the beginning of each of the next 3 years and end up with zero in the account?a. $24,736b. $26,038c. $27,409d. $28,779e. $30,218 C
Suppose you inherited $275,000 and invested it at 8.25% per year. How much could you withdraw at the beginning of each of the next 20 years?a. $22,598.63b. $23,788.03c. $25,040.03d. $26,357.92e. $27,675.82 D
Your father’s employer was just acquired, and he was given a severance payment of $375,000, which he invested at a 7.5% annual rate. He now plans to retire, and he wants to withdraw $35,000 at the end of each year, starting at the end of this year. How many years will it take to exhaust his funds, i.e., run the account down to zero?a. 22.50b. 23.63c. 24.81d. 26.05e. 27.35 A
Your uncle has $300,000 invested at 7.5%, and he now wants to retire. He wants to withdraw $35,000 at the end of each year, starting at the end of this year. He also wants to have $25,000 left to give you when he ceases to withdraw funds from the account. For how many years can he make the $35,000 withdrawals and still have $25,000 left in the end?a. 14.21b. 14.96c. 15.71d. 16.49e. 17.32 B
Your Aunt Ruth has $500,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds, i.e., run the account down to zero?a. 18.62b. 19.60c. 20.63d. 21.71e. 22.86 E
Your aunt has $500,000 invested at 5.5%, and she now wants to retire. She wants to withdraw $45,000 at the beginning of each year, beginning immediately. She also wants to have $50,000 left to give you when she ceases to withdraw funds from the account. For how many years can she make the $45,000 withdrawals and still have $50,000 left in the end?a. 15.54b. 16.36c. 17.22d. 18.08e. 18.99 C
Suppose you just won the state lottery, and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000, with the first payment coming one year from today. What rate of return is built into the annuity? Disregard taxes.a. 7.12%b. 7.49%c. 7.87%d. 8.26%e. 8.67% B
Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20-year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?a. 3.44%b. 3.79%c. 4.17%d. 4.58%e. 5.04% A
Assume that you own an annuity that will pay you $15,000 per year for 12 years, with the first payment being made today. You need money today to start a new business, and your uncle offers to give you $120,000 for the annuity. If you sell it, what rate of return would your uncle earn on his investment?a. 6.85%b. 7.21%c. 7.59%d. 7.99%e. 8.41% E
What annual payment must you receive in order to earn a 6.5% rate of return on a perpetuity that has a cost of $1,250?a. $77.19b. $81.25c. $85.31d. $89.58e. $94.06 B
What is the present value of the following cash flow stream at a rate of 6.25%?Years: 0 1 2 3 4 | | | | |CFs: $0 $75 $225 $0 $300a. $411.57b. $433.23c. $456.03d. $480.03e. $505.30 E
What is the present value of the following cash flow stream at a rate of 12.0%?Years: 0 1 2 3 4 | | | | |CFs: $0 $1,500 $3,000 $4,500 $6,000a. $9,699b. $10,210c. $10,747d. $11,284e. $11,849 C
What is the present value of the following cash flow stream at a rate of 8.0%?Years: 0 1 2 3 | | | |CFs: $750 $2,450 $3,175 $4,400a. $7,917b. $8,333c. $8,772d. $9,233e. $9,695 D
You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 6.0%?Years: 0 1 2 3 4 | | | | |CFs: $0 $1,000 $2,000 $2,000 $2,000a. $5,987b. $6,286c. $6,600d. $6,930e. $7,277 A
At a rate of 6.5%, what is the future value of the following cash flow stream?Years: 0 1 2 3 4 | | | | |CFs: $0 $75 $225 $0 $300a. $526.01b. $553.69c. $582.83d. $613.51e. $645.80E E
Your father paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $10,000 at the end of the 5th year. What is the expected rate of return on this investment?a. 6.77%b. 7.13%c. 7.50%d. 7.88%e. 8.27% C
You are offered a chance to buy an asset for $7,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000 at the end of Year 2, $850 at the end of Year 3, and $6,250 at the end of Year 4. What rate of return would you earn if you bought this asset?a. 4.93%b. 5.19%c. 5.46%d. 5.75%e. 6.05% E
What’s the future value of $1,500 after 5 years if the appropriate interest rate is 6%, compounded semiannually?a. $1,819b. $1,915c. $2,016d. $2,117e. $2,223 C
What’s the present value of $4,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?a. $3,089b. $3,251c. $3,422d. $3,602e. $3,782 D
What’s the future value of $1,200 after 5 years if the appropriate interest rate is 6%, compounded monthly?a. $1,537.69b. $1,618.62c. $1,699.55d. $1,784.53e. $1,873.76 B
What’s the present value of $1,525 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?a. $969b. $1,020c. $1,074d. $1,131e. $1,187 D
Master Card and other credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card’s EFF%?a. 18.58%b. 19.56%c. 20.54%d. 21.57%e. 22.65% B
Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?a. 0.52%b. 0.44%c. 0.36%d. 0.30%e. 0.24% D
Suppose Community Bank offers to lend you $10,000 for one year at a nominal annual rate of 8.00%, but you must make interest payments at the end of each quarter and then pay off the $10,000 principal amount at the end of the year. What is the effective annual rate on the loan?a. 8.24%b. 8.45%c. 8.66%d. 8.88%e. 9.10% A
Suppose a bank offers to lend you $10,000 for 1 year on a loan contract that calls for you to make interest payments of $250.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?a. 8.46%b. 8.90%c. 9.37%d. 9.86%e. 10.38% E
Charter Bank pays a 4.50% nominal rate on deposits, with monthly compounding. What effective annual rate (EFF%) does the bank pay?a. 3.72%b. 4.13%c. 4.59%d. 5.05%e. 5.56% C
Suppose your credit card issuer states that it charges a 15.00% nominal annual rate, but you must make monthly payments, which amounts to monthly compounding. What is the effective annual rate?a. 15.27%b. 16.08%c. 16.88%d. 17.72%e. 18.61% B
Pace Co. borrowed $20,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360-day year. How much interest would Pace have to pay in a 30-day month?a. $120.83b. $126.88c. $133.22d. $139.88e. $146.87 A
Suppose you deposited $5,000 in a bank account that pays 5.25% with daily compounding based on a 360-day year. How much would be in the account after 8 months, assuming each month has 30 days?a. $5,178.09b. $5,436.99c. $5,708.84d. $5,994.28e. $6,294.00 A
Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be?a. $3,704.02b. $3,889.23c. $4,083.69d. $4,287.87e. $4,502.26 A
Suppose you are buying your first condo for $145,000, and you will make a $15,000 down payment. You have arranged to finance the remainder with a 30-year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your monthly payments be?a. $741.57b. $780.60c. $821.69d. $862.77e. $905.91 C
Your uncle will sell you his bicycle shop for $250,000, with “seller financing,” at a 6.0% nominal annual rate. The terms of the loan would require you to make 12 equal end-of-month payments per year for 4 years, and then make an additional final (balloon) payment of $50,000 at the end of the last month. What would your equal monthly payments be?a. $4,029.37b. $4,241.44c. $4,464.67d. $4,699.66e. $4,947.01 E
Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?a. $1,200.33b. $1,263.50c. $1,330.00d. $1,400.00e. $1,470.00 D
You plan to borrow $35,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2?a. $1,994.49b. $2,099.46c. $2,209.96d. $2,326.27e. $2,442.59 D
Your bank offers to lend you $100,000 at an 8.5% annual interest rate to start your new business. The terms require you to amortize the loan with 10 equal end-of-year payments. How much interest would you be paying in Year 2?a. $7,531b. $7,927c. $8,323d. $8,740e. $9,177 B
You are considering an investment in a Third World bank account that pays a nominal annual rate of 18%, compounded monthly. If you invest $5,000 at the beginning of each month, how many months would it take for your account to grow to $250,000? Round fractional months up.a. 23b. 27c. 32d. 38e. 44 D
You are considering investing in a bank account that pays a nominal annual rate of 7%, compounded monthly. If you invest $3,000 at the end of each month, how many months will it take for your account to grow to $150,000?a. 39.60b. 44.00c. 48.40d. 53.24e. 58.57 B
Your child’s orthodontist offers you two alternative payment plans. The first plan requires a $4,000 immediate up-front payment. The second plan requires you to make monthly payments of $137.41, payable at the end of each month for 3 years. What nominal annual interest rate is built into the monthly payment plan?a. 12.31%b. 12.96%c. 13.64%d. 14.36%e. 15.08% D
Your subscription to Investing Wisely Weekly is about to expire. You plan to subscribe to the magazine for the rest of your life, and you can renew it by paying $85 annually, beginning immediately, or you can get a lifetime subscription for $850, also payable immediately. Assuming that you can earn 6.0% on your funds and that the annual renewal rate will remain constant, how many years must you live to make the lifetime subscription the better buy?a. 7.48b. 8.80c. 10.35d. 12.18e. 14.33 E
You just deposited $2,500 in a bank account that pays a 4.0% nominal interest rate, compounded quarterly. If you also add another $5,000 to the account one year (4 quarters) from now and another $7,500 to the account two years (8 quarters) from now, how much will be in the account three years (12 quarters) from now?a. $15,234.08b. $16,035.88c. $16,837.67d. $17,679.55e. $18,563.53 B
Farmers Bank offers to lend you $50,000 at a nominal rate of 5.0%, simple interest, with interest paid quarterly. Merchants Bank offers to lend you the $50,000, but it will charge 6.0%, simple interest, with interest paid at the end of the year. What’s the difference in the effective annual rates charged by the two banks?a. 1.56%b. 1.30%c. 1.09%d. 0.91%e. 0.72% D
Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. By how much would you reduce the amount you owe in the first year?a. $2,404.91b. $2,531.49c. $2,658.06d. $2,790.96e. $2,930.51 B
Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years. How much would you still owe at the end of the first year, after you have made the first payment?a. $10,155.68b. $10,690.19c. $11,252.83d. $11,845.09e. $12,468.51 E
Your sister turned 35 today, and she is planning to save $7,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that’s expected to provide a return of 7.5% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year.a. $58,601b. $61,686c. $64,932d. $68,179e. $71,588 C
You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?a. 7.62%b. 8.00%c. 8.40%d. 8.82%e. 9.26% A
Your company has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?a. 73.67%b. 77.55%c. 81.63%d. 85.93%e. 90.45% E
On January 1, 2009, your brother’s business obtained a 30-year amortized mortgage loan for $250,000 at a nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes. What will the interest tax deduction be for 2009?a. $17,419.55b. $17,593.75c. $17,769.68d. $17,947.38e. $18,126.85 A
Steve and Ed are cousins who were both born on the same day, and both turned 25 today. Their grandfather began putting $2,500 per year into a trust fund for Steve on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate’s trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Steve’s 65th birthday. The grandfather set things up this way because he wants Steve to work, not be a “trust fund baby,” but he also wants to ensure that Steve is provided for in his old age.Until now, the grandfather has been disappointed with Ed, hence has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Ed. He will make the first payment to a trust for Ed today, and he has instructed his trustee to make 40 additional equal annual payments until Ed turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Ed’s trust today and each subsequent year to enable him to have the same retirement nest egg as Steve after the last payment is made on their 65th birthday?a. $3,726b. $3,912c. $4,107d. $4,313e. $4,528 A
After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your grandfather just gave you a $25,000 graduation gift which you will deposit immediately (t = 0). If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?a. $238,176b. $250,712c. $263,907d. $277,797e. $291,687 D
You are negotiating to make a 7-year loan of $25,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of each year from Year 4 through Year 7. Breck is essentially riskless, so you are confident the payments will be made. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?a. $4,271.67b. $4,496.49c. $4,733.15d. $4,969.81e. $5,218.30 C
John and Daphne are saving for their daughter Ellen’s college education. Ellen just turned 10 at (t = 0), and she will be entering college 8 years from now (at t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. Ellen should graduate in 4 years–if she takes longer or wants to go to graduate school, she will be on her own. Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11).So far, John and Daphne have accumulated $15,000 in their college savings account (at t = 0). Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1, 2, 3, and 4). Then they plan to make 3 equal annual contributions in each of the following years, t = 5, 6, and 7. They expect their investment account to earn 9%. How large must the annual payments at t = 5, 6, and 7 be to cover Ellen’s anticipated college costs?a. $1,965.21b. $2,068.64c. $2,177.51d. $2,292.12e. $2,412.76 E

Leave a Reply

Your email address will not be published. Required fields are marked *