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# 35 Finance Multiple Choice Problems

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1. Financial leverage is beneficial only if the firm can employ the borrowed funds to earn a higher rate of return than the interest rate on the borrowed amount. Generally speaking, the higher the financial leverage, the greater the profits at high levels of operating profit.
a) true
b) false

2. How long must one wait (to the nearest year) for an initial investment of \$1,000 to triple in value if the investment earns 8% compounded annually?
a) 9
b) 14
c) 22
d) 25

3. How much can be accumulated for retirement if \$2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years (rounded up to the nearest 100th dollar)?
a) \$87,200
b) \$320,950
c) \$675,800
d) \$802,350

4. What is the YTM of a 7.5 % annual coupon bond, with a \$1,000 face value, which matures in 4 years? The market price of the bond is \$1,108.32.
a) 4.48%
b) 5.23%
c) 5.76%
d) 6.99%

5. You just bought new furniture for \$5,000. The payment is due in 3 years, same as cash. If you can earn 8% on your money, how much money should you set aside today in order to make the payment when due in three years (rounded to the nearest dollar)?
a) \$3,969
b) \$4,287
c) \$4,624
d) \$6,299

6. How long must one wait (to the nearest year) for an initial investment of \$1,000 to equal \$4,500 in value if the investment earns 12% compounded annually?
a) 4 years
b) 6 years
c) 9 years
d) 13 years

7. The present value of cash flows minus initial investments is known as the net present value.
a) true
b) false

8. The expected rate of return given up by investing in a project is known as:
a) break-even point
b) operating leverage
c) internal rate of return
d) opportunity cost of capital

9. Suppose we can invest \$4,000 today and receive \$6,200 in 4 years. What is the Net Present Value given a 10% expected return?
a) \$4,235
b) \$4,000
c) \$235
d) \$2,200

10. The payback rule considers all cash flows that arrive after the payback period.
a) true
b) false

11. The discount rate at which NPV = 0 is known as:
a) degree of operating leverage
b) internal rate of return
c) forward premium
d) Purchasing Power Parity (PPP)

12. The (A) ____________ is the ratio of present value to initial investment, and provides the highest net present value per dollar of investment.
a) forward contract
b) perpetuity
c) plowback ratio
d) profitability index

13. Hard rationing involves limits on available funds imposed by management.
a) true
b) false

14. When performing cash flow analysis, you should discount actual cash flows, not accounting income. Using accounting income, rather than cash flow, could lead to erroneous decisions.
a) true
b) false

15. A stock or bond's real rate of return factors in:
a) inflation
b) the market premium
c) compound interest
d) the cost of capital

16. The place where the sale of new stock first occurs is known as the:
a) initial public offering
b) over the counter market
c) primary market
d) discount market

17. The movement of stock prices from day to day reflects an upward pattern. Statistically speaking, the movement of stock prices reflect a gradual increase.
a) true
b) false

18. Leverage is using ___________ to magnify the potential return to a firm.
a) profit
b) equity
c) fixed costs
d) interest

19. By decreasing leverage, the firm increases its profit potential, but also increases its risk of failure.
a) true
b) false

Assume the following data for the next three (3) questions:

Company A Fixed Costs = \$100,000
Company A Variable Costs per unit = \$0.50
Company A price per unit = \$3.00

Company B Fixed Costs = \$50,000
Company B depreciation = 10 percent
Company B Contribution Margin = \$1.50

20. The break-even point for Company A is:
a) 20,000 units
b) 28,571.43 units
c) 33,333.33 units
d) 40,000 units

21. The break-even point for Company B is:
a) 20,000 units
b) 30,000 units
c) 33,333.33 units
d) 40,000 units

22. As compared to Company A, Company B utilizes low operating leverage. This will work against them when sales are low, but will work in their favor when sales are high.
a) true
b) false

23. Generally, if the projected return of a potential project is higher than a firm's current Weighted Average Cost of Capital (WACC), then the firm should ACCEPT the project. Conversely, they should REJECT the project if the potential return is lower than the expected rate of return on a portfolio of all the firm's current securities (WACC).
a) true
b) false

24. Other things equal, stock securities are worth more when they are "with-dividend". Thus when the stock "goes ex," we would expect the stock price to drop by the amount of the dividend.
a) true
b) false

25. More often than not, the announcement of a stock split results in a rise in the market value of the firm. This is due to the increase in the company's long and short-term assets.
a) true
b) false

26. You've just been informed that you stand to inherit \$60,000 in 10 years. You can't wait that long, and would like to receive the money now. At an interest rate of 8%, how much would you receive?
a) \$43,200
b) \$18,677
c) \$35,481
d) \$27,792

27. You have \$30,400 to invest, and would like to receive \$40,000 in 5 years. What interest rate do you need to accomplish this?
a) 8.23%
b) 6.87%
c) 5.64%
d) 10.56%

28. "The cost of the asset is allocated equally over the periods of an asset's estimated useful life" describes the concept of:
a) leverage
b) Net Present Value
c) straight-line depreciation
d) divided perpetuities

29. If a stock dividend pays out \$4.82, there is a 6.5% growth rate, and the discount rate is 12%, the selling price of the stock will be:
a) \$87.64
b) \$92.26
c) \$97.13
d) \$101.57

30. Gains and losses resulting from the sale of securities in an arm's-length transaction are said to be:
a) liquid
b) intangible
c) with-dividend
d) realized

31. Long-run planning includes production process prioritizing and operational budgeting or profit planning.
a) true
b) false

32. A schedule of all production spending expected to occur during the budget period is known as the selling and administrative expense budget.
a) true
b) false

33. If your firm is in a mature industry with few, if any, positive NPV projects available, acquisition may be the best use of your funds.
a) true
b) false

34. If a firm uses the _________ as an investment criterion, one of the risks it takes is that it may ignore some future cash flows.
a) AAR
b) payback rule
c) IRR
d) NPV

35. Costs that have accrued in the past, which should not be included in your decision to abandon or remain with a strategy, are referred to as:
a) variable costs
b) opportunity costs
c) sunk costs
d) financing costs

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#### Solution Preview

1. Financial leverage is beneficial only if the firm can employ the borrowed funds to earn a higher rate of return than the interest rate on the borrowed amount. Generally speaking, the higher the financial leverage, the greater the profits at high levels of operating profit.
a) true
b) false

b) false

2. How long must one wait (to the nearest year) for an initial investment of \$1,000 to triple in value if the investment earns 8% compounded annually?
a) 9
b) 14
c) 22
d) 25

3000=1000*(1+.08)^n
b) 14

3. How much can be accumulated for retirement if \$2,000 is deposited annually, beginning one year from today, and the account earns 9% interest compounded annually for 40 years (rounded up to the nearest 100th dollar)?
a) \$87,200
b) \$320,950
c) \$675,800
d) \$802,350

Here we have to find out the compounded value of annuity
F=A*((1+r)^n-1)/r
F=Future value, A= Annuity r= rate of interest n=duration

=\$675,764.89

4. What is the YTM of a 7.5 % annual coupon bond, with a \$1,000 face value, which matures in 4 years? The market price of the bond is \$1,108.32.
a) 4.48%
b) 5.23%
c) 5.76%
d) 6.99%

a) 4.48%

5. You just bought new furniture for \$5,000. The payment is due in 3 years, same as cash. If you can earn 8% on your money, how much money should you set aside today in order to make the payment when due in three years (rounded to the nearest dollar)?
a) \$3,969
b) \$4,287
c) \$4,624
d) \$6,299
The money= 5000/(1.08)^3=\$3969
a)\$3,969

6. How long must one wait (to the nearest year) for an initial investment of \$1,000 to equal \$4,500 in value if the investment earns 12% compounded annually?
a) 4 years
b) 6 years
c) 9 years
d) 13 years

4500=1000*(1+.12)^n
n=13

7. The present value of cash flows minus initial investments is known as the net present value.
a) true
b) false

a) true

8. The expected rate of return given up by investing in a ...

#### Solution Summary

This Solution contains calculations and the answer to each question.

\$2.49