True
False
Answer: True
Question: Other things held constant, the more debt a firm uses, the lower its operating margin will be.
Answer Options:
a. True
b. False
Answer: b. False
Question: Your bank account pays an 8% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is CORRECT?
a. The periodic rate of interest is 2% and the effective rate of interest is 4%.
b. The periodic rate of interest is 8% and the effective rate of interest is greater than 8%.
c. The periodic rate of interest is 4% and the effective rate of interest is less than 8%.
d. The periodic rate of interest is 2% and the effective rate of interest is greater than 8%.
e. The periodic rate of interest is 8% and the effective rate of interest is also 8%.
Answer: d
Question: Market value ratios provide management with an indication of how investors view the firm’s past performance and especially its future prospects.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods.
b. If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity.
c. The cash flows for an annuity due must all occur at the beginning of the periods.
d. The cash flows for an annuity may vary from period to period, but they must occur at regular intervals, such as once a year or once a month.
e. If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity.
Answer: c
Question: You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.
b. The discount rate decreases.
c. The riskiness of the investment’s cash flows increases.
Answer: b. The discount rate decreases.
Question: If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.
True
False
Answer: True
Question: Which of the following statements is CORRECT?
a. The periodic interest rate is greater than 3%.
b. The periodic rate is less than 3%.
c. The present value would be greater if the lump sum were discounted back for more periods.
d. The present value of the $1,000 would be larger if interest were compounded monthly rather than semiannually.
e. The PV of the $1,000 lump sum has a smaller present value than the PV of a 3-year, $333.33 ordinary annuity.
Answer: e
Question: Disregarding risk, if money has time value, it is impossible for the future value of a given sum to exceed its present value.
True
False
Answer: False
Question: The advantage of the basic earning power ratio (BEP) over the return on total assets for judging a company’s operating efficiency is that the BEP does not reflect the effects of debt and taxes.
Answer Options:
a. True
b. False
Answer: a. True
Question: Which of the following statements is CORRECT?
a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. This is essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise.
d. If you solve for I and get a negative number, then you must have made a mistake.
e. If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
Answer: c
Question: The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation.
True
False
Answer: True
Question: Time lines can be constructed in situations where some of the cash flows occur annually but others occur quarterly.
True
False
Answer: True
Question: Which of the following statements is CORRECT?
a. The present value of a 3-year, $150 ordinary annuity will exceed the present value of a 3-year, $150 annuity due.
b. If a loan has a nominal annual rate of 8%, then the effective rate will never be less than 8%.
c. If a loan or investment has annual payments, then the effective, periodic, and nominal rates of interest will all be different.
d. The proportion of the payment that goes toward interest on a fully amortized loan increases over time.
e. An investment that has a nominal rate of 6% with semiannual payments will have an effective rate that is smaller than 6%.
Answer: b
Question: Which of the following statements is CORRECT?
a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is negative but each of the following CFs is positive, you can solve for I, but only if the sum of the undiscounted cash flows exceeds the cost.
c. To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the FV of the negative CFs. It is impossible to find the value of I without a computer or financial calculator.
d. If you solve for I and get a negative number, then you must have made a mistake.
e. If CF0 is positive and all the other CFs are negative, then you cannot solve for I.
Answer: e