[terryanderson42]

1. The future value of a dollar

1. increases with lower interest rates

2. increases with higher interest rates

3. increases with longer periods

4. decreases with longer periods

a. 1 and 3

b. 2 and 3

c. 1 and 4

d. 2 and 4


2. The present value of a dollar

1. increases with lower interest rates

2. increases with higher interest rates

3. increases with longer periods

4. decreases with longer periods

a. 1 and 4

b. 1 and 3

c. 2 and 3

d. 2 and 4


3. Our MBA 503 instructor is:

a. awesome

b. so,so

c. boring




PROBLEMS (Show all work or calculator keystrokes on problems for full credit)

4. An investment is expected to generate $2,000,000 each year for four years. If the firm's cost of funds is 5%, what is the maximum amount the firm should pay for the investment today?



5. You borrow $250,000 to buy a house; if the annual interest rate is 22.5% and the term of the loan is twenty years, what is the annual payment required to retire the mortgage loan?



6. You are offered two jobs. One initially pays $100,000 annually, and your salary will grow annually at 11.5%. The other pays pays $97,000 annually, but your salary will grow at 12%. After ten years, which job pays the higher salary?

(Show work! )


7. A firm has the following investment alternatives:

Cash Inflows

Year A B C

1 $500 $ 0 $ 0

2 500 400 0

3 500 800 0

4 600 900 1,900



Which investment should be considered? Show work for partial credit. Use a 10.5% discount rate. (since a discount rate is given, this is a hint as to the correct time value of money function to use ¿ be sure to show your work for credit)


8. You are thinking about acquiring a new company. The company is at a bargain asking price of $400,000. You have your expert accountants project a 10 year income statement (see below) based on how well you think you could run this new venture. Now you need to project a ten year cash flow and determine if you should acquire this new entity. You are currently using a 15% discount rate in your calculations. (use at least two decimal places in all calculations)




Net Present Value $____________________


Internal rate of return _____________________%


Should you acquire the new company? __________

Net Income

Depreciation After Taxes Net Cash Flow


Year 1 42,870 184,278 ___________

Year 2 73,470 159,018 ___________

Year 3 52,470 162,159 ___________

Year 4 37,470 158,752 ___________

Year 5 26,790 149,365 ___________

Year 6 26,760 129,707 ___________

Year 7 26,790 105,576 ___________

Year 8 13,380 84,448 ___________

Year 9 0 57,539 ___________

Year 10 0 16,053 ___________


9. The concept of compound interest refers to:

A) earning interest on the original investment.

B) payment of interest on previously earned interest.

C) investing for a multi-year period.

D) determining the APR of the investment.



10. When an investment pays only simple interest, this means:

A) the interest rate is lower than on comparable investments.

B) the future value of the investment will be low.

C) the earned interest is non taxable to the investor.

D) interest is earned only on the original investment.


11. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

A) $ 952

B) $1,600

C) $1,728

D) $3,973


12. What price would you expect to pay for a stock with 13% required rate of return, 4% rate of dividend growth, and an annual dividend of $2.50 which will be paid tomorrow?

A) $27.78

B) $30.28

C) $31.10

D) $31.39



Po = Do + D1/k-g


13. A stock's par value is represented by:

A) the maturity value of the stock.

B) the price at which each share is recorded.

C) the price at which an investor could sell the stock.

D) the price received by the firm when the stock was issued.



14. Additional paid-in capital refers to:

A) a firm's retained earnings.

B) a firm's treasury stock.

C) the difference between the issue price and the par value.

D) funds borrowed from a bank or bondholders.



15. An increase in dividends might not increase price and may actually decrease stock price if:

A) the dividend increase cannot be sustained.

B) the firm does not maintain an exact dividend payout ratio.

C) the firm has too much retained earnings.

D) markets are weak-form efficient.




16. Which of the following would not be included among the costs of carrying inventory?

A) Obsolescence

B) Opportunity cost of capital

C) Raw material cost

D) Risk of pilferage

[Curlyben]

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