# Types of Interest in Accounting

1. The concept of compound interest refers to:

A) earning interest on the original investment.

B) payment of interest on previously earned interest.

C) investing for a multi-year period of time.

D) determining the APR of the investment.

2. When an investment pays only simple interest, this means:

A) the interest rate is lower than on comparable investments.

B) the future value of the investment will be low.

C) the earned interest is non taxable to the investor.

D) interest is earned only on the original investment.

3. Assume the total expense for your current year in college equals $20,000. Approximately how much would your parents have needed to invest 21 years ago in an account paying 8% compounded annually to cover this amount?

A) $ 952

B) $1,600

C) $1,728

D) $3,973

4. How much will accumulate in an account with an initial deposit of $100, and which earns 10% interest compounded quarterly for three years?

A) $107.69

B) $133.10

C) $134.49

D) $313.84

5. How much must be invested today in order to generate a five-year annuity of $1,000 per year, with the first payment one year from today, at an interest rate of 12%?

A) $3,604,78

B) $3,746.25

C) $4,037.35

D) $4,604.78

6. A stock's par value is represented by:

A) the maturity value of the stock.

B) the price at which each share is recorded.

C) the price at which an investor could sell the stock.

D) the price received by the firm when the stock was issued.

7. Capital Budgeting is the process of evaluating:

A) short-term investment alternatives for the current assets.

B) the long-term capital rationing process.

C) the costs associated with an IPO.

D) the CAPM formula.

8. Which of the following equity concepts would you expect to be least important to a financial analyst?

A) Par value per share

B) Additional paid-in capital

C) Retained earnings

D) Net common equity

9. An increase in a firm's financial leverage will:

A) increase the variability in earnings per share.

B) reduce the operating risk of the firm.

C) increase the value of the firm in a non-MM world.

D) increase the WACC.

10. Financial risk refers to the:

A) risk of owning equity securities.

B) risk faced by equityholders when debt is used.

C) general business risk of the firm.

D) possibility that interest rates will increase.

11. Ignoring taxes, a firm's weighted-average cost of capital is equal to:

A) its expected return on assets.

B) its expected return on equity.

C) the sum of expected return on equity and expected return on debt.

D) its expected return on assets times the debt-equity ratio.

12. A firm has an expected return on equity of 16% and an after-tax cost of debt of 8%. What debt-equity ratio should be used in order to keep the WACC at 12%?

A) .50

B) .75

C) 1.00

D) 1.50

13. The following are all methods for evaluating capital projects except:

A) Payback

B) NPV

C) CAPM

D) IRR

14. The present value of $200 to be received 10 years from today, assuming an opportunity cost of 10 percent is:

A) $77

B) $200

C) $518

D) $50

15. In leasing, which of the following is true:

A) Leasing always involves more risk than buying

B) Leasing always costs more than buying

C) Leasing allows the deduction of depreciation by the lessee

D) Leasing allows the deduction of depreciation by the lessor

16. Which item is not part of the Initial Public Offering process:

A) Meet throughout the process with the media

B) Select the underwriters

C) Register the stock with the Securities and Exchange Commission

D) Distribute a prospectus

17. In the IPO process, the "spread" refers to:

A) The underwriting firm's payment for services

B) Internally generated funds

C) Prospectus

D) None of the above

18. A financial plan can be used to project all except the following:

A) Profitability

B) Cash Flow

C) Market competitiveness

D) Asset utilization

19. A merger tactic that buys shares directly from a shareholder is called:

A) Tender offer

B) Poison pill

C) Leveraged buyout

D) Shark repellent

20. Which of the following merger motivations is least compelling from a financial perspective:

A) Horizontal Integration

B) Vertical Integration

C) Diversification

D) Use surplus funds