ACCOUNTING 333 CHAPTER 4 PRACTICE QUIZ | COMPLETE GUIDE

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ACCOUNTING 333 CHAPTER 4 PRACTICE QUIZ The value of a firm is best defined as the: o sum of all of the firm's future cash flows. o current year's cash flow times (1 + g). o current year's cash flo... w divided by r. o total present value of all of the firm's future cash flows. o current year's cash flows divided by (g - r). 2. Given a firm with positive annual cash flows, which one of the following will increase the current value of that firm? o Increasing the annual growth rate of the cash flows o Increasing the discount rate o Decreasing the amount of each cash flow o Decreasing the life of the firm o Increasing either the growth rate of the cash flows or the discount rate 3. Which one of the following would have the greatest value assuming each has Year 1 annual cash flows of $100 and a discount rate of 8 percent, compounded annually? o Perpetuity o Annuity o Growing perpetuity o Growing annuity o Growing perpetuity or growing annuity, as they would have equal values 4. Jennings Lumber just paid an annual dividend of $1.20 a share. The dividend is expected to increase by 2 percent annually and the applicable discount rate is 13 percent. Which one of these is the correct formula for computing the current value of this stock? o $1.20 + [$1.20/1.13 + .02] o ($1.20 × 1.02)/1.13 o ($1.20 × 1.02)/.13 o ($1.20 × 1.02)/(.13 - .02) o $1.20 + ($1.20 × 1.02)/(.13 - .02) 5. By federal law, lenders must disclose which one of these? o APR, excluding fees or other noninterest charges o EAR, excluding fees or other noninterest charges o APR, including fees and other noninterest charges o EAR, including fees and other noninterest charges o both the APR and EAR, excluding fees and other charges   6. You are comparing two investments, A and B, with unequal annual cash flows and varying numbers of years. Which one of these statements is correct regarding this comparison? o If A has a higher present value at one discount rate, then A will have the higher present value at any other discount rate. o If B has a higher present value, then B will have the higher future value at any point in time, given a stated discount rate. o If B has a higher future value at one discount rate, then B will have the higher present value at any discount rate. o The two projects cannot be compared since they are of varying lengths. o The project with the greatest number of years will have the higher present value. 7. You are comparing two investment options. The cost to invest in either option is the same today. Both options will provide $20,000 of income. Option A pays five annual payments starting with $8,000 the first year followed by four annual payments of $3,000 each. Option B pays five annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? o Option A is preferable because it is an annuity due. o Option A is the better choice of the two given any positive rate of return. o Option B has a higher present value than option A given a positive rate of return. o Option B has a lower future value at Year 5 than option A given a zero rate of return. o Both options are of equal value given that they both provide $20,000 of income. 8. Which one of the following will increase the future value of a finite stream of uneven cash flows? Assume a positive rate of return. o Moving every cash flow one time period further into the future o Decreasing the amount of each cash flow o Increasing the first cash flow by $100 and lowering the last cash flow by $100 o Moving the Time 0 cash inflow to Time 1 o Decreasing the total number of cash flows 9. The discount rate assigned to a proposed project is the rate: o the firm must expect to earn before committing funding for the project. o the firm can earn on a riskless investment, such as U.S. Treasury bills. o that will create a zero average accounting rate of return. o of return the company desires prior to considering the risks of the project. o that exceeds the economic opportunity cost of investing by the required profit margin. 10. The highest effective annual rate that can be derived from an annual percentage rate of 9 percent is computed as: o .09e - 1. o e.09 × q. o e.09 - 1. o e × (1 + .09). o (1 + .09)q. 11. Which one of these statements related to the time value of money is correct? Assume a positive rate of interest. o A dollar increases in value the further into the future it is received. o The future value of an invested dollar is inversely related to the rate of interest. o The present value of a dollar to be received in one year is directly related to the interest rate. o A dollar received today is more valuable than a dollar received next month. o A dollar invested today will increase in value in a linear manner if interest earned is reinvested. 12. Rodger is saving for an expansion project and has decided to save $2,500 a month, starting today and continuing for four years. The firm expects to earn 7.9 percent, compounded monthly. If the company had wanted to deposit an equivalent lump sum today, how much would it have had to deposit? o $104,964.59 o $102,601.95 o $105,330.60 o $103,277.41 o $101,998.01 PVADue = $2,500({1 - 1/[1 + (.079/12)]4 × 12}/(.079/12)) × [(1 + (.079/12)] = $103,277.41 2nd BGN 2nd SET 13. You are comparing two annuities with equal present values. The applicable discount rate is 7.25 percent, compounded annually. One annuity pays $6,500 on the first day of each year for 20 years. How much does the second annuity pay each year for 20 years if it pays at the end of each year? o $5,581.40 o $6,060.61 o $6,028.75 o $6,971.25 o $7,086.50 Payment = $6,500 × 1.0725 = $6,971.25 Each payment is received one year later, so every payment will earn one additional year of interest. 14. Wings and More purchased a piece of property for $1.4 million. It paid a down payment of 15 percent in cash and financed the balance. The loan terms require monthly payments for 15 years at an annual percentage rate of 7.60 percent, compounded monthly. What is the amount of each mortgage payment? o $12,440.01 o $11,029.33 o $10,236.25 o $10,799.18 o $11,099.18 Amount borrowed = $1,400,000 × (1 - .15) = $1,190,000 $1,190,000 = C({1 - 1/[1 + (.076/12)]15 × 12}/(.076/12)); C = $11,099.18 15. You are buying a previously owned car today at a price of $8,125. You are paying $600 down in cash and financing the balance for 36 months at 7.9 percent, compounded monthly. What is the amount of each loan payment? o $198.64 o $199.94 o $202.02 o $214.78 o $235.46 Amount financed = $8,125 - 600 = $7,525 $7,525 = C({1 - 1/[1 + (.079/12)]36}/(.079/12)); C = $235.46 16. Charley wants to sell you an investment that will pay $1,000 per quarter for 25 years. You desire an annual rate of return of 5.5 percent, compounded quarterly. What is the most you would be willing to pay as a lump sum today for this investment? o $54,165.88 o $57,082.94 o $51,152.59 o $212,232.81 o $218,806.30 PV = $1,000({1 - 1/[1 + (.055/4)]25 × 4}/(.055/4)); C = $54,165.88 17. Today, you are retiring. You have a total of $413,926 in your retirement savings and have the funds invested at 4.2 percent, compounded monthly. You want to withdraw $2,500 at the beginning of every month, starting today. You also want the withdrawals to stop when your account balance declines to $100,000. For how many years can you make withdrawals? o 17.07 years o 16.96 years o 15.22 years o 18.24 years o 13.81 years 2nd BGN 2nd SET   18. Erickson s is considering a project with an initial cost of $623,000. The project will produce cash inflows of $33,500 monthly for 21 months. What is the annual rate of return on this project? o 11.57% o 13.59% o 16.59% o 17.47% o 18.44% APR = 1.1322% × 12 = 13.59% 19. Rose Stores has been investing $135,000 a year for the past 5 years into a business venture. Today, that venture was sold for $925,000. What rate of return was earned on this investment? o 12.43% o 14.06% o 15.59% o 15.67% o 15.81% 20. You are considering a project with the following cash flows: What is the present value of these cash flows at a discount rate of 9 percent? o $4,713.62 o $4,855.27 o $5,103.18 o $5,292.25 o $6,853.61 PV = $1,200/1.09 + $1,800/1.092 + $2,900/1.093 = $4,855.27   21. Antonio is going to receive $12,000 today as an insurance settlement. In addition, he will receive $18,000 one year from today and $35,000 two years from today. If he invests these funds, how much will he have saved when he retires 25 years from now if he earns an average annual return of 10 percent? o $556,124.93 o $561,414.14 o $595,072.9 o $607,008.77 o $620,712.24 FV = $12,000 × 1.125 + $18,000 × 1.124 + $35,000 × 1.123 = $620,712.24 22. Your insurance agent is offering you a policy that will pay you and your heirs $7,500 a year forever. The current cost of the policy is $175,000. What is the rate of return on this policy? o 3.85% o 4.29% o 4.36% o 4.48% o 4.60% r = $7,500/$175,000 = .0429, or 4.29% 23. You just invested $13,000 for seven years at 14 percent, compounded continuously. What will the value of your investment be at the end of the seven years? o $32,529.49 o $28,685.44 o $19,967.90 o $34,637.93 o $21,637.93 $13,000 × e.14 × 7 = $34,637.93 24. A project is expected to provide a cash flow of $15,600 next year with annual increases of 4.5 percent for a total of 12 cash flows. After that, the project will be worthless. What is the present value of this project at a discount rate of 13 percent, compounded annually? o $91,987.56 o $111,723.56 o $63,206.07 o $103,008.67 o $89,407.11 PV = $15,600{[1 - (1.045/1.13)12]/(.13 - .045)} = $111,723.56 25. A 5-year loan in the amount of $169,000 is to be repaid in equal annual payments. What is the remaining principal balance after the third payment if the interest rate is 3 percent, compounded annually? o $71,716.84 o $58,294.24 o $62,998.30 o $68,677.70 o $70,610.72 $169,000 = C{[1 - (1/1.035)]/.03}; C = $36,901.92 [Show More]

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