11)When the amount earned on a deposit has become part of the principal at the end of a specified
time period the concept is called
A)future value. B)discount interest.
C)compound interest. D)primary interest.
12)The future value of $100 received today and deposited at 6% for 4 years is
A)$126. B)$124. C)$79. D)$116.
13)As the interest rate increases for any given period, the future value interest factor will
C)move toward 1. D)remain unchanged.
14) he present value of $100 to be received 20 years from today, assuming an opportunity cost of 8%, is
A)$42.24. B)$ 75. C)$23.60. D)$21.45.
15)The ___ financing strategy requires the firm to pay interest on excess funds borrowed but not
needed throughout the entire year.
A)seasonal B)conservative C)permanent D)aggressive
16)Strikes, lawsuits, regulatory actions, and increased competition are all examples of
A)nondiversifiable risk. B)economic risk.
C)systematic. D)diversifiable risk.
You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows:
Asset Name Annual
Asset Return Probability Beta Proportion
X 10% .50 1.2 .333
Y 8% .25 1.6 .333
Z 16% .25 2.0 .333
17)Given the information in Table 5.2, what is the expected annual return of this portfolio?
A)10.0% B)11.7% C)11.0% D)11.4%
18)The beta of the portfolio in Table 5.2, containing assets X, Y, and Z, is
A)1.6. B)2.4. C)1.5. D)2.0.
19)If the required return is greater than the coupon rate, a bond will sell at
A)book value. B)a premium. C)a discount. D)par.
20)A firm has an issue of $1,000 par value bonds with a 10% 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%, the firm's bond will sell for __ today.
A)$851.50 B)$1,134.20 C)$805.20 D)$1,268.20
21)A firm has an issue of $1,000 par value bonds with a 9% stated interest rate outstanding. The
issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk
are currently earning 11%, the firm's bond will sell for __ today.
A)$840.67 B)$1,123.33 C)$1,000 D)$716.67
22)A firm has an expected dividend next year of $1.20 per share, a zero growth rate of dividends, and
a required return of 10%. The value of a share of the firm's common stock is __.
A)$100 B)$10 C)$12 D)$120
23)A firm has experienced a constant annual rate of dividend growth of 9% on its common stock
and expects the dividend per share in the coming year to be $2.70. The firm can earn 12% on
similar risk involvements. The value of the firm's common stock is ________.
A)$9/share B)$90/share C)$22.50/share D)$30/share
Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10%.
Year Project A Project B
0 $350,000 $425,000
Cash Inflows (CF)
1 $140,000 $175,000
2 165,000 150,000
3 190,000 125,000
24)The NPVs of projects A and B are ________. (See Table 10.6):
A)$45,805 and -$19,312 respectively. B)$95,066 and $56,386, respectively.
C)-$45,805 and $19,312 respectively. D)none of the above.
25)In the EBIT-EPS approach to capital structure, risk is represented by
A)shifts in the cost of debt capital. B)the slope of the capital structure line.
C)shifts in the cost of equity capital. D)shifts in the times-interest-earned ratio.
26)A firm has a current capital structure consisting of $400,000 of 12 percent annual interest debt and
50,000 shares of common stock. The firm's tax rate is 40 percent on ordinary income. If the EBIT is
expected to be $200,000, two EBIT-EPS coordinates for the firm's existing capital structure are
A)($152,000, $3.50) and ($150,000, $1.82). B)($36,000, $0) and ($200,000, $3.04).
C)($48,000, $0) and ($200,000, $1.82). D)($0, $48,000) and ($200,000, $1.82).
Flum Packages, Inc.
Assets Liabilities & Equity
Current assets $12,000 Current Liabilities $ 5,000
Fixed assets 20,000 Long-term debt 12,000
Total $30,000 Total $30,000
27)The company earns 5 percent on current assets and 15 percent on fixed assets. The firm's current liabilities cost 7 percent to maintain and the average annual cost of long-term funds is 20 percent.
The firm's initial net working capital is ________. (See Table 14.2)
A)$ 5,000. B)$10,000. C)$7,000. D)-$ 5,000.
28)The beta of the market
A)is less than 1. B)is greater than 1.
C)is 1. D)cannot be determined.
29)XYZ Corporation borrowed $100,000 for six months from the bank. The rate is prime plus 2
percent. The prime rate was 8.5 percent at the beginning of the loan and changed to 9 percent after
two months. This was the only change. How much interest must XYZ corporation pay?
A)$2,476. B)$5,417. C)$21,500. D)$18,212.