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# Higher the interest rate, the higher the future value

1) Everything else being equal, the higher the interest rate, the higher the future value.

2) The present value interest factor for i percent and n periods is the inverse of the future value interest factor for i percent and n periods.

3) The future value of \$100 received today and deposited at 6 percent for four years is.
a) \$126 b) \$79 c) \$124 d) \$116

4) Investment A guarantees its holder \$100 return. Investment B earns \$0 or \$200 with equal
chances (i.e., an average of \$100) over the same period. Both investments have equal risk.

5) Market risk is the chance that the value of an investment will decline because of market factors
(such as economic, political, and social events) that are independent of the investment.

6) Last year Mike bought 100 shares of Dallas Corporation common stock for \$53 per share.
During the year he received dividends of \$1.45 per share. The stock is currently selling for \$60
per share. What rate of return did Mike earn over the year?
A) 11.7 percent.
B) 13.2 percent.
C) 14.1 percent.
D) 15.9 percent.

7) An inverted yield curve is an upward-sloping yield curve that indicates generally cheaper
short-term borrowing costs than long-term borrowing costs.

8) The risk free rate of interest is equal to the sum of the real rate of interest plus an inflation risk

9) Nico Nelson, a management trainee at a large New York-based bank is trying to estimate the
real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3
percent and has decided to use the consumer price index as a proxy for expected inflation.
What is the estimated real rate of interest if the CPI is currently 2 percent?
A) 5%
B) 1%
C) 3%
D) 2%

10) In the case of liquidation, bondholders are paid first, followed by preferred stockholders,
followed by common stockholders.

11) Interest paid to bondholders is tax deductible but dividends paid to stockholders is not.

12) Which of the following terms typically applies to common stock but not to preferred stock?
A) Par value.
B) Dividend yield.
C) Legally considered as equity in the firm.
D) Voting rights.

13) Leverage results from the use of fixed-cost assets or funds to magnify returns to the firm?s
owners.

14) Financial leverage is concerned with the relationship between the firm?s earnings after interest
and taxes and its common stock earnings per share.

15) ________ costs are a function of volume, not time.
A) Fixed operating
B) Semi-variable
C) Variable
D) Fixed financial

16) Breakeven analysis is used by the firm
A) to determine the level of operations necessary to cover all operating costs.
B) to evaluate the profitability associated with various levels of sales.
C) Both A and B.
D) none of the above.

17) Net working capital can be defined as the portion of the firm?s current assets financed with
long-term funds.

18) The more predictable a firm?s cash inflows, the more net working capital it will need.

19) The portion of a firm?s current assets financed with long-term funds may be called
A) working capital.
B) accounts receivable.
C) net working capital.
D) inventory.