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# Present Value, Future Value questions

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1. Raybac is about to go public. Its present stockholders own 5000,000 shares. The new public issue will represent 800,000 shares. The shares will be priced at \$25 to the public with a 4% spread. The out-of-pocket costs will be \$450,000. What are the net proceeds to the firm?
\$18,750,000
\$19,200,000
\$18,250,000
\$19,550,000

2. Dr. Jones wants to buy a Dell computer, which will cost \$2,788 four years from today. He would like to set aside an equal amount at the end of each year, in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside?
\$697.00
\$627.93
\$823.15
\$531.81

3. Mr. Smith just invested \$20,000 for his 7 year old son. The money will be used for the son's education in 10 years, which he estimates will cost \$70,000. What rate of return will Mr. Smith need, in order to meet this goal?
Between 12% and 13%
Between 13% and 14%
Between 14% and 15%
Between 15% and 16%

4. Carol Thomas will deposit \$2,000 today. It will grow for 6 years, at 10% interest, compounded semiannually. She will then withdraw the funds, annually over the next 4 years. The annual interest rate is 8%. Her annual withdrawal will be ______.
\$2,340
\$4,332
\$797
\$1,085

5. To save for her newborn son's college education, Leas Wilson will invest \$1,000 at the beginning of each year for the next 18 years the interest rate is 12%. What is the future value?
\$30,690
\$34,931
\$63,440
\$55,750

6. A firm has \$1,000,000 in its common stock account and \$2,500,000 in its paid-in capital account. The firm issued 100, shares of common stock. What was the original issue price, if only one stock issue has ever been sold?
\$35 per share
\$30 per share
\$25 per share
\$10 per share

7. Maxwell Corporation is coming to the market with a new offering of 3000,000 shares of stock at \$25 to the public. Maxwell will receive \$22 per share. The firm has 1 million shares outstanding and earnings of \$6 million. What is the amount of dilution in earnings per share?
\$2.00
\$1.38
\$1.77

8. No dilution occurs since new money is received by Maxwell.
Which investment has the least amount of risk?
Standard deviation = \$500, expected return = \$5000
Standard deviation = \$700, expected return = \$500
Standard deviation = \$900, expected return = \$800
Standard deviation = \$400, expected return = \$350

#### Solution Preview

1. Raybac is about to go public. Its present stockholders own 5000,000 shares. The new public issue will represent 800,000 shares. The shares will be priced at \$25 to the public with a 4% spread. The out-of-pocket costs will be \$450,000. What are the net proceeds to the firm?
\$18,750,000
\$19,200,000
\$18,250,000
\$19,550,000

The spread is 4%. The net proceeds per share are 25X.96 = \$24. Number of shares issued are 800,000.
Total amount received is 800,000X24-450,000 = 1,875,000

2. Dr. Jones wants to buy a Dell computer, which will cost \$2,788 four years from today. He would like to set aside an equal amount at the end of each year, in order to accumulate the amount needed. He can earn 7% annual return. How much should he set aside?
\$697.00
\$627.93
\$823.15
\$531.81

We have to find the annnuity amount that would grow to \$2,788 in 4 years at 7%. Use the PMT function in excel to calculate the annuity. It comes to 627.93

3. Mr. Smith just ...

#### Solution Summary

The solution explains how to calculate the present value and future value of amounts and annuity

\$2.19

## 40 Multiple choice questions: business, accounting and finance

1. When analysts and investors determine the value of a firm's stock, they should consider:
a. the size of the expected cash flows associated with owning the stock
b. the timing of the cash flows.
c. the riskiness of the cash flows.
d. all of the above

2. An officer of a firm that is a majority owner in a competing firm will probably be subject to:
a. an IRS audit
b. an FBI or police investigation
c. a conflict of interest with shareholders of the firm
d. arbitrage profit regulations

3. Which of the following is responsible for performing an independent audit of a firm's financial statements?
a. the CFO
b. the CEO
c. a CPA firm
d. the audit committee of the board of directors

4. John Shoemaker estimates that his new business will make \$75,000 in its first year. He wants to withdraw all the money earned from the business for personal use. You are hired to help him decide whether to structure his business as a C-corporation or to leave it in the form of a sole proprietorship. Assuming that the tax rate for a C corporation is 34%, while the tax rate for an individual is 28%, how much after-tax earnings will John have under the two systems?
a. For a corporation, \$35,640; for a proprietorship, \$54,000
b. For a corporation, \$49,500; for a proprietorship, \$54,000
c. For either a corporation or a proprietorship, \$54,000
d. For either a corporation or a proprietorship, \$35,640

5. In finance the primary goal of management is to:
a. utilize its economic resources in the most advantageous way
b. minimize all possible expenses
c. maximize shareholder wealth which is generally achieved by maximizing stock price
d. make the best use of its assets

6. Peak Teak Corp., an importer of teak from Thailand, reported a gross sales figure of \$660 million for the 2009 business year. Its reported cost of goods sold was \$310 million. It depreciated its warehouse and trucks (the only depreciable assets it owned) to the amount of \$55 million and it paid \$40 million as interest on its outstanding debt. Excluding depreciation, its operating expenses were \$115 million. What was Peak Teak's EBIT?
a. \$660,000,000
b. \$350,000,000
c. \$180,000,000
d. \$140,000,000

7. Cod Shark is planning to buy a seafood restaurant in a downtown district. He figures that he should make about \$40,000 in profits in the first year if the economic outlook doesn't change. But, if the economy weakens, he expects to just about break even and, if it improves, he expects that the increased business will result in a total profit of \$110,000. According to a research group, the probability that the economic climate will improve is 50% and the probability that the economic climate will weaken is 30%. What is Cod's expected profit in year one?
a. \$50,000
b. \$63,000
c. \$58,000
d. \$75,000

8. Holding all other variables constant, a decrease in Cost of Goods Sold will lead to:
a. an increased cost ratio
b. higher net income
c. a decrease in gross margin
d. lower tax bill

9. Which of the following will increase equity?
a. An increase in dividends paid
b. Issuance of new stock
c. An increase in retained earnings from net income
d. Both b. and c.
e. All of the above

10. The generally accepted accounting principles (GAAP) are:
a. rules that outline how a firm can operate ethically
b. rules on how the firm will be valued in the event of a merger
c. rules and procedures that define how companies are to maintain financial records and prepare financial reports
d. rules and procedures that define how a company can issue stock and raise money

11. Which one of the following is NOT a cash flow from operating activities?
a. payments for utilities and rent
b. cash payments on the principal of long-term debt
c. payments to purchase raw materials
d. cash receipts from selling goods and services

12. The Ragin Cajun had an operating income (EBIT) of \$360,000 last year. The firm had \$38,000 in depreciation expenses, \$35,000 in interest expenses, and \$70,000 in selling, general, and administrative expenses. If Ragin Cajun has a marginal tax rate of 30 percent, what was its cash flow from operating activities last year?
a. \$165,000
b. \$265,500
c. \$227,500
d. \$325,000

13. Cautious Books, Inc. carries a debt of \$800,000 on its books. Its total assets are \$3,200,000. What is its debt to equity ratio?
a. 0.25
b. 0.33
c. 0.20
d. 0.80

14. Raging Bull Corp has a total equity of \$1,400,000. Its long term debt is \$2,600,000. What is its debt to assets ratio?
a. .67
b. .65
c. 1.86
d. none of the above

15. Rope Curler Corporation has reported the following information: Sales/Total Assets = 2.89; ROA=10.74%; ROE = 20.36%. What are the firm's profit margin and equity multiplier?
a. 7.04%; 0.53
b. 7.04%; 1.90
c. 3.72%; 0.53
d. 3.72%; 1.90

16. The lower the rate of interest:
a. the larger the future value of an amount invested to-day
b. the smaller the present value of a future sum of money
c. the larger the present value of a future sum of money
d. none of the above

17. The principle behind time value of money is based on the fact that:
a. a sum of money in hand today is worth more than the same sum in the future
b. a sum of money in hand today is worth less than the same sum in the future
c. a sum of money in the future is worth less than the same sum in hand today
d. a and c

18. Holding all other variables constant, an increase in the interest rate will cause ________ to decrease.
a. Future values
b. Annuity payments
c. Present values
d. Growth rates

19. You have just calculated the present value of the expected cash flows of a potential investment. Management
thinks your figures are too low. Which of the following actions would increase the present value of your cash?
flows?
a. assume a longer stream of cash flows of the same amount
b. decrease the discount rate
c. increase the cash flow in earlier years and decrease it in later years keeping the total dollar value of the cash flows constant
d. a and b
e. a, b, and c

20. You and your fiancé have planned a wedding four years from now. You estimate you'll need \$25,200 for your dream wedding and collectively have \$21,000 in savings today. What annually compounded rate of interest will you need to get to entirely pay for your wedding with your current savings?
a. 16.00%
b. 4.66%
c. 4.00%
d. 5.98%
e. 19.05%

21. Shares of Unattractive Assets Corp. are trading at \$13.35. The company reported a net income of \$812,425,000 for the most recent fiscal year and has 312,490,000 shares currently outstanding. What is Unattractive Assets Price-Earnings (PE) ratio?
a. 4.87
b. 5.13
c. 5.17
d. none of the above

22. The Florida lottery agrees to pay the winner \$250,000 at the end of each year for the next 20 years. What is the future value of this prize if each payment is put in an account earning 9 percent?
a. \$2.28 million
b. \$12.79 million
c. \$14.32 million
d. \$ 5.00 million

23. The expected return for an investment is 30%. If we know the following information about the return distribution of the investment, what return will the investment produce if the economic climate is average?
Climate Return Probability
Poor 20% 0.30
Average 0.50
Exceptional 40% 0.20

a. 28.00%
b. 30.00%
c. 32.00%
d. 30.67%

24. Suppose you put \$100 into a savings account today, the account pays 8% compounded semiannually, and you withdraw \$50 one year after your initial deposit. What would your ending balance be 20 years after the initial \$100 deposit was made, assuming that you make no additional deposits?
a. \$250.31
b. \$257.45
c. \$258.16
d. \$430.10
e. \$480.10

25. John Smith has a great idea for a new social networking platform and is selling his idea to a venture capital firm. John estimates that for an initial investment of \$1,550,000 from the venture capital firm, he can generate cash flows of \$600,000; \$720,000; \$1,000,000; and \$1,150,000 over the next four years. The venture capital firm has a required rate of return of 16%. What is the NPV for John's project?
a. \$3,470,000
b. \$2,328,111
c. \$778,111
d. \$1,150,000

26. A portfolio with a level of systematic risk that is the same as that of the market has a beta that is
a. equal to zero
b. equal to one
c. less than the beta of the risk-free asset
d. less than zero
e. less than the standard deviation of the portfolio

27. Two projects are considered to be mutually exclusive if
a. the projects perform the same function
b. selecting one would automatically eliminate accepting the other
c. selecting one would automatically select the other as well

28. An investor's goal can be described best as
a. minimizing risk
b. maximizing returns
c. capturing the high average returns of equity investing while limiting the associated risk as much as
possible
d. avoiding risk regardless of the risk premium offered

29. Assume a risk-free rate of return of 3% and an expected stock market return of 8%. If the expected return on Apple Inc. is 15%, what is Apple's beta?
a. 1.58
b. 2.40
c. 2.80
d. 3.15

30. A project has the following cash flows:
Year CF Cumulative CF
0 \$(1,450,000) \$(1,450,000)
1 \$640,000 \$(810,000)
2 \$715,250 \$(94,750)
3 \$823,330 \$728,580
4 \$907,125 \$1,635,705

What is the payback period for this project?
a. 2.12
b. 1.88
c. 4.00
d. 3.00

31. Use the following information to calculate the standard deviation of a portfolio of two stocks (assume that the correlation coefficient between the stock returns is 0.1):
Stock Standard Deviation Holding in portfolio
1 0.7 70%
2 0.8 30%

a. 0.32122
b. 0.54562
c. 0.56676
d. 0.75000

32. Sentry Oil Inc. is considering two mutually exclusive projects as follows:
Year 0 1 2 3 4
Cash flow A (\$185,000) \$60,000 \$75,000 \$70,000 \$70,000
Cash flow B (\$125,000) (\$60,000) \$95,000 \$90,000 \$95,000
Sentry's a cost of capital is 2%. It can spend no more than \$350,000 on capital projects this year, which of the following statements is applicable when evaluating the projects by the NPV method?
a. both projects add shareholder wealth and should be undertaken
b. project B appears to add more shareholder wealth than project A and should be done
c. project A appears to add more shareholder wealth than project B and should be done
d. project B should be undertaken because it requires a smaller investment

33. John D. C. Little Associates has cash and marketable securities worth \$335,486; accounts payables worth \$1,159,357; inventory of \$1,651,599; accounts receivables of \$1,488,121; short term notes payable worth \$313,663; and other current assets worth \$121,427. What is the company's net working capital?
a. \$3,596,632
b. \$1,801,784
c. \$2,123,612
d. \$1,673,421

34. You are considering buying a new car. The sticker price is \$15,000 and you have \$2,000 to put toward a down
payment. If you can negotiate a nominal annual interest rate of 10% and you wish to pay for the car over a 5-
year period, what are your monthly car payments?
a. \$216.67
b. \$252.34
c. \$276.21
d. \$285.78
e. \$318.71

35. Muggles Manufacturing has asked you to calculate the company's current ratio. All you have is the partial balance sheet below, the year's sales revenue, and two ratios also shown below. Using that information, calculate Muggles' current ratio.

Sales = \$3,000
Cost Ratio (Cost of Goods sold/ Sales) = 45%
Inventory Turnover (Cost of goods sold/Inv) = 5.0

Assets Liabilities & Equity
Cash ? Accounts Payable \$ 50
AR \$ 40 Accruals ?
Inventory ? Long-term Debt \$380
Net Fixed Assets \$500 Equity \$250
Total Assets \$830 Total Liabilities & Equity ?
a. 0.35
b. 0.85
c. 1.65
d. 2.25

36. Your mother is trying to choose one of the following bank CDs to deposit \$10,000. Which one will have the highest future value if she plans to invest for three years?
a. 3.5% compounded daily
b. 3.25% compounded monthly
c. 3.4% compounded quarterly
d. 3.75% compounded annually.

37. Moshe purchased a mutual fund for \$40 two years ago. He found out today that the fund lost 50% the first year and then gained 50% the second year. If the fund paid no dividends, which of the following must be true?
a. The fund price today is \$40
b. The fund price today is \$30
c. The fund price today is \$20
d. The fund price today is \$60

38. Babs purchased a piece of real estate last year for \$85,000. The real estate is now worth \$102,000. If Babs needs to have a total return of 25 percent during the year, then what is the dollar amount of income that she needed to have to reach her objective?
a. \$3,750
b. \$4,250
c. \$4,750
d. \$5,250

39. Clarity Music Company has a marginal tax rate of 34 percent and an average tax rate of 32 percent this year. It is planning to construct a new recording studio next year. The appropriate tax rate to be applied on the income generated from the new studio is
a. the average tax rate.
b. the marginal tax rate.
c. either one.
d. none of the above.

40. Galan Associates prepared its financial statement for 2008 based on the information given here. The company had cash worth \$1,234, inventory worth \$13,480, and accounts receivables of \$7,789. The company's net fixed assets are \$42,331, and other assets are \$1,822. It had accounts payables of \$9,558, notes payables of \$2,756, common stock of \$22,000, and retained earnings of \$14,008. How much long-term debt does the firm have?
a. \$54,342
b. \$76,342
c. \$12,314
d. \$18,334

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