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Chapter 9

1. If you invest \$8,000 per period for 40 years at 11 percent, how much would you have?
a. \$4,654,640
b. \$6,544,640
c. \$4,546,640
d. \$3,544,640

2. How is the future value related to the present value of a single sum?
a. future value represents expected dollar limits of a current amount, whereas the present value represents the total dollar worth
b. future value represents expected worth of a current amount, whereas the present value represents the future worth
c. future value represents expected worth of a single amount, whereas the present value represents the current worth
d. All of the above

Chapter 10

3. Which of the following is not an adjustment that has to be made in going form annual to semiannual bonds analysis?
a. divide the annual interest rate by two
b. multiply the number of years by two
c. divide the annual yield to maturity by two
d. multiply the number of years by four

4. Essex Biochemical Co. has a \$1,000 par value bond outstanding that pays 10 percent annual interest. The current yield to maturity on such bonds in the market is 7 percent. Compute the price of the bond for a 30 year maturity date:
a. \$2,894.63
b. \$1,371.90
c. \$1,781.71
d. \$1,892.46

Chapter 12

5. A weakness of the payback period are:
a. there is no consideration of inflows after the cutoff period
b. the concept fails to consider the time value of money
c. both a & b
d. none of the above

6. If a corporation has projects that will earn more than the cost of capital, should it ration capital?

a. from a purely economic viewpoint, a firm should not ration capital
b. only if marginal returns is less than marginal cost
c. only if marginal return is greater than marginal cost
d. from a purely economic viewpoint, a firm should ration capital

Chapter 13

7. When is the coefficient of variation a better measure of risk than the standard deviation?
a. consider the relative size of the standard deviation
b. compare two or more investments of different sizes
c. when the standard deviation has no risk
d. both a & b

8. Possible outcomes for three investment alternatives and their probabilities of occurrence are given below.

Alternative 1 Alternative 2 Alternative 3
Outcomes Probability Outcomes Probability Outcomes Probability
Failure 50 0.2 90 0.3 80 0.4
Acceptable 80 0.4 160 0.5 200 0.5
Successful 120 0.4 200 0.2 400 0.1

Rank the three alternatives in terms of risk from lowest to highest (compute the coefficient of variation)

a. #3 - .675, #1 - .582, #2 - .374
b. #1 - .753, #2 - .891, #3 - .897
c. #2 - .358, #3 - .468, #2 - .759
d. #2 - .274, #1 - .298, #3 - .551

Chapter 11

9. What are the two sources of equity (ownership) capital for the firm?
a. preferred stock and bonds
b. retained earnings and new common stock
c. retained earnings and long term debt
d. retained earnings and treasury stock

10. Retained earnings has an opportunity cost?
a. True
b. False
c. Only if it has a U-shaped approach to the cost of capital

Chapter 18

11. How is a stock split treated on the financial statements of a corporation?
a. debit to stock splits and credit to stock
b. stock splits are recorded on the financials dependent on the materiality
c. recording on stock splits in not required by GAAP or FASB
d. reduction in par value and a proportionate increase in the number of shares outstanding

12. Neil Diamond Brokers, Inc. reported earnings per share of \$4.00 and paid \$.90 in dividends. What is the payout ratio?:
a. 22.7%
b. 22.6%
c. 22.5%
d. 22.4%

Chapter 19

13. Which of the following are basic advantages to the corporation of issuing convertible securities?
a. the interest rate is lower than on a straight issue
b. this type of security may be the only device for allowing a small firm access to the capital markets
c. the convertible allows the firm to effectively sell stock at a higher price than that possible when the bond was initially issued (but perhaps at a lower price than future price potential might provide)
d. all of the above

14. Futures are;.

a. two parties agree to exchange obligations to make specified payment streams
b. a debt obligation derived from another debt obligation
c. standardized contracts that are traded on exchanges and are "market to market" daily, but where physical delivery of the underlying asset is virtually never taken.
d. none of the above

Chapter 16

15. Which of the following is not a specific feature of a bond agreement?
a. par value
b. coupon rate
c. serial payment
d. maturity date

16. What is a Eurobond?
a. a bond payable in the borrower's currency but sold outside the borrower's country
b. A bond sold by a foreign borrower but denominated in the currency of the country in which it is sold
c. a bond that is exchangeable, at the option of the holder, for common stock of the issuing firm
d. a bond that pays interest only if the interest is earned

Chapter 17

17. Why has corporate management become increasingly sensitive to the desires of large institutional investors?
a. poison pill
b. stock prices increasing rapidly
c. Euro dollar exchange rate
d. mergers and take over attempts

18. Cumulative voting is?
a. a provision in the corporate charter or bylaws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock (or convertible securities).
b. a voting scheme that encourages minority representation by permitting each stockholder to cast all of his or her votes for one candidate for the firm's board of directors
c. stock owned by the firm's founders that has sole voting rights but restricted dividends for a specified number of years
d. common stock that is given a special designation, such as Class A, Class B, and so forth, to meet special needs of the company.

Chapter 20

19. Synergy is:
a. the condition wherein the whole is greater than the sum of its parts; in a synergistic merger, the post-merger value exceeds the sum of the separate companies' premerger values.
b. the combination of two firms to form a single firm
c. a merger designed to make a company less vulnerable to a takeover
d. a firm's value if its assets are sold off in pieces

Chapter 21

20. The effective exchange rate for a foreign currency for delivery on (approximately) the current day is?

a. forward rate
b. cross rate
c. spot rate
d. parallel loan

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#### Solution Preview

Chapter 9

1. If you invest \$8,000 per period for 40 years at 11 percent, how much would you have?
a. \$4,654,640
b. \$6,544,640
c. \$4,546,640
d. \$3,544,640

a. \$4,654,640

2. How is the future value related to the present value of a single sum?
a. future value represents expected dollar limits of a current amount, whereas the present value represents the total dollar worth
b. future value represents expected worth of a current amount, whereas the present value represents the future worth
c. future value represents expected worth of a single amount, whereas the present value represents the current worth
d. All of the above

c. future value represents expected worth of a single amount, whereas the present value represents the current worth

Chapter 10

3. Which of the following is not an adjustment that has to be made in going form annual to semiannual bonds analysis?
a. divide the annual interest rate by two
b. multiply the number of years by two
c. divide the annual yield to maturity by two
d. multiply the number of years by four

d. multiply the number of years by four

4. Essex Biochemical Co. has a \$1,000 par value bond outstanding that pays 10 percent annual interest. The current yield to maturity on such bonds in the market is 7 percent. Compute the price of the bond for a 30 year maturity date:
a. \$2,894.63
b. \$1,371.90
c. \$1,781.71
d. \$1,892.46

b. \$1,371.90

Market value of Bond= Present Value of Inflows
Present value of inflows =
Present value of coupons Interest received + Pv of Principal repayment =\$1372

PV of coupons=
Here we have to find out the present value of annuity
P=A*((1/r)-((1/(r*((1+r)^n)))
P=present value, A= Annuity r= rate of interest n=duration =\$ 1241 A=100, r =7%, n=30
PV of Principal repayment= \$131
P=present value, F= Future value r= rate of interest n=duration
P=F/(1+r)^n, r=7%, n=30, F=\$1000

Chapter 12

5. A weakness of the payback period are:
a. there is no consideration of inflows after the cutoff period
b. the concept fails to consider the time value of money
c. both a & b
d. none of the above

c. both a & b

6. ...

#### Solution Summary

Accounting and Finance questions are answered in detail.

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