You have the option of leasing an asset for $100,000 per year, with payments to be made at the end of each year of use. This lease cannot be cancelled. Alternatively, you may buy the asset for $248,700. For reimbursement purposes, the lease must be capitalized. If the asset is purchased, it will be debt-financed with $210,000 of three-year serial notes (that is, $70,000 of principal will be repaid each year). The effective interest rate on this loan will be eight percent. Assume that the asset has an allowable useful life of three years with no estimated salvage value.
â?¢ Determine the amount of expense that would be reported during each of the three years under the two financing plans.
â?¢ Assuming that 80 percent of all reported capital expenses are reimbursed and that the discount rate is six percent, determine the present value of the asset in these two methods of financing.
Expense amount and discounted rate with present value of an asset are presented.
Finance Multiple Choice questions
See attached file.
1. The ultimate owner(s) of an ongoing corporation are
the federal government.
the debt holders.
the equity holders.
the executive staff of the corporation.
2. Which of the following is a valid criticism concerning the goal of firms to maximize profits?
profit maximization ignores expenses
profit maximization is completely unrelated to shareholder wealth
profit maximization may ignore the timing of those profits
there are no valid criticisms of profit maximizing firms
7. You are planning your retirement and you come to the conclusion that you need to have saved $1,250,000 in 30 years. You can invest into an retirement account that guarantees you a 5% annual return. How much do you have to put into your account at the end of each year to reach your retirement goal?
8. The largest stock exchange in the world is
the New York Stock Exchange.
the Paris Bourse.
9. You set up a college fund in which you pay $2,000 each year at the beginning of the year. How much money will you have accumulated in the fund after 18 years, if your fund earns 7% compounded annually?
10. Bavarian Sausage is expected to pay a $1.57 dividend next year and investors expect that dividend to grow by 5% each year forever. If the required return on the stock investment is 14%, what should be the price of the stock today.
11. The amount that someone is willing to pay today, for a single cash flow in the future is
the future value of the cash flow.
the future value of the stream of cash flows.
the present value of the cash flow.
the present value of the annuity of cash flows
12. Miller Juice traditionally pays out 35% of its earnings as dividends. Last year Miller's earnings available for common stockholders were $256 million and the book value of its equity was $678 million. What is Miller's growth rate?
13. An annuity can best be described as
a set of payments to be received during a period of time.
a stream of payments to be received at a common interval over the life of the payments.
an even stream of payments to be received at a common interval over the life of the payments.
the present value of a set of payments to be received during a future period of time.
14. Which of the following securities poses the greatest financial risk for the investor?
15. According to the CAPM (capital asset pricing model), the security market line is a straight line. The intercept of this line should be equal to
the expected risk premium on the market portfolio
the risk-free rate
the expected return on the market portfolio
16. If we are able to eliminate all of the unsystematic risk in a portfolio then, what is the result?
a risk-free portfolio
a portfolio that contains only systematic risk
a portfolio that has an expected return of zero
such a portfolio cannot be constructed since there will always be unsystematic risk in any portfoli
17. Bavarian Sausage just issued a 10-year 7% coupon bond. The face value of the bond is $1,000 and the bond makes semiannual coupon payments. If the required return on the bond is 10%, what is the bond's price?
18. What is the purpose of diversification?
Maximize possible returns.
Increase the risk of your portfolio.
Lower the overall risk of your portfolio.
None of the above.
19. What is the average return of a portfolio that has 10% invested in stock A, 40% invested in stock B and 50% invested in stock C?
Stock A Stock B Stock C
1 15% 12% 5%
2 25% 14% -6%
3 8% 9% 10%
4 16% 25% 1%
5 5% 3% 15%
20. Unsecured bonds that have legal claims inferior to other outstanding bonds are
21. Bavarian Sausage just issued a 10-year 12% coupon bond. The face value of the bond is $1,000 and the bond makes annual coupon payments. If the bond is trading at $967.25, what is the bond's yield to maturity?
22. You bought a share of Bavarian Sausage stock for $46.50 at the beginning of the year. During the year the stock paid a $2.75 dividend and at the end of the year it trades at $52.75. Referring to Bavarian Sausage. What is the total return of your stock investment?
23. Which of the following is not part of the procedure for valuing a risky asset?
determining the asset's expected cash flows
choosing a discount rate that reflects the asset's risk
calculating the present value
determining whether the project is mutually exclusive or not
24. The risk-free rate is 5% and the expected return on the market portfolio is 13%. A stock has a beta of 1.5, what is its expected return?
25. A bond's coupon rate
equals its annual coupon payment divided by the bonds' current market price.
varies during the life of the bond.
equals its annual coupon payment divided by its par value.
both a and b are correct.