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INSTANT DOWNLOAD COMPLETE TEST BANK WITH ANSWERS

 

 

Financial Management Principles And Applications  13Th Ed By Sheridan Titman – Test Bank

 

 

Sample  Questions

 

 

Financial Management: Principles & Applications, 13e (Titman)

Chapter 3   Understanding Financial Statements, Taxes, and Cash Flows

 

1) Which of the basic financial statements is best used to answer the question, “How profitable is the business?”

  1. A) Balance sheet
  2. B) Statement of shareholder’s equity
  3. C) Income statement
  4. D) Accounts receivable aging schedule

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 3: Cash flows are the source of value

 

2) Who owns the retained earnings of a public firm?

  1. A) The IRS
  2. B) Common stockholders
  3. C) Bondholders
  4. D) Preferred stockholders

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 3: Cash flows are the source of value

 

3) Which of the following represents an attempt to measure the earnings of the firm’s operations over a given time period?

  1. A) Balance sheet
  2. B) Cash flow statement
  3. C) Income statement
  4. D) None of the above

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 3: Cash flows are the source of value

 

4) Stock that is repurchased by the issuing company is called

  1. A) paid in capital.
  2. B) treasury stock.
  3. C) retained capital.
  4. D) par value stock.

Answer:  B

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 3: Cash flows are the source of value

 

5) Which of the basic financial statements is best used to answer the questions “What does the company own and how is it financed?”

  1. A) Balance sheet
  2. B) Statement of shareholder’s equity
  3. C) Income statement
  4. D) Cash flow statement

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 3: Cash flows are the source of value

 

6) Which of the basic financial statements is best used to answer the questions “Where did the company’s money come from and how was it spent over the preceding year?”

  1. A) Balance sheet
  2. B) Statement of shareholder’s equity
  3. C) Income statement
  4. D) Cash flow statement

Answer:  D

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 3: Cash flows are the source of value

 

7) Which of the basic financial statements is best used to answer questions about changes in owner’s equity that are not explained by the income statement?

  1. A) Balance sheet
  2. B) Statement of shareholder’s equity
  3. C) Income statement
  4. D) Cash flow statement

Answer:  B

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 3: Cash flows are the source of value

 

8) The revenue recognition principle requires that

  1. A) revenue be recognized only after cash payment has been received.
  2. B) only the amount of revenue for which cash will be received in the current fiscal year be recognized in the current year.
  3. C) allows considerable latitude in the timing of revenue recognition.
  4. D) revenue be recognized in the period when the firm becomes entitled to payment for goods or services delivered.

Answer:  D

Diff: 1

AACSB:  7.  Application of knowledge

Question Status:  New question

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 4: Market Prices Reflect Information

 

9) The matching principle requires that

  1. A) expenses be recognized in the period when cash payments occurred.
  2. B) allows considerable latitude in the timing of expense recognition.
  3. C) expenses be recognized in the same period as when the firm became liable for payment.
  4. D) all expenses be allocated to some specific source of revenue.

Answer:  C

Diff: 1

AACSB:  7.  Application of knowledge

Question Status:  New question

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 4: Market Prices Reflect Information

 

10) The historical cost principle requires that

  1. A) assets be valued at their cost when they were acquired.
  2. B) raw materials costs be recognized at their average price over the last three years.
  3. C) assets be be valued at their average cost over the last three years.
  4. D) historical costs be used on both the income statement and the balance sheet.

Answer:  A

Diff: 1

AACSB:  7.  Application of knowledge

Question Status:  New question

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 4: Market Prices Reflect Information

 

11) International Financial Reporting Standards (IFRS)

  1. A) are not acceptable for use by U.S. companies.
  2. B) are growing in acceptance for use by U.S. companies.
  3. C) have completely replaced GAAP since 2007.
  4. D) are far more complicated and rigid than GAAP.

Answer:  A

Diff: 2

AACSB:  5. Diverse and multicultural work environments

Question Status:  New question

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 4: Market Prices Reflect Information

 

12) The income statement shows a company’s earnings since it has been in business.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 4: Market Prices Reflect Information

 

13) The balance includes information about the company’s assets and liabilities.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 4: Market Prices Reflect Information

 

14) The cash flow statement shows amounts that the company has earned but for which it has not yet received cash.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 4: Market Prices Reflect Information

 

15) The cash flow statement is an alternative term for the balance sheet.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.1  Describe the content of the four basic financial statements and discuss the importance of financial statement analysis to the manager.

Keywords:  financial statements

Principles:  Principle 4: Market Prices Reflect Information

 

16) On the income statement, sales revenue, minus cost of goods sold and operating expenses, equals

  1. A) Net profit.
  2. B) Retained earnings.
  3. C) Net income available to preferred shareholders.
  4. D) Net operating income (EBIT).

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

17) Which of the following streams of income is not affected by how a firm is financed (whether with debt or equity)?

  1. A) Net profit after tax but before dividends
  2. B) Net working capital
  3. C) Operating income
  4. D) Income before tax

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

18) Which of the following is NOT included in computing EBT (earnings before taxes)?

  1. A) Marketing expenses
  2. B) Depreciation expense
  3. C) Cost of goods sold
  4. D) Dividends

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

19) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm’s EBIT?

  1. A) $15,552,000
  2. B) $58,000,000
  3. C) $5,110,000
  4. D) $4,630,000

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

20) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm’s gross profit?

  1. A) $18,000,000
  2. B) $15,225,000
  3. C) $5,000,110
  4. D) $6,632,000

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

21) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $10,115,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm’s income before tax?

  1. A) $4,360,000
  2. B) $750,000
  3. C) $10,865,000
  4. D) $25,115,000

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

22) Your firm has the following income statement items: sales of $50,250,000; income tax of $1,744,000; operating expenses of $8,750,000; cost of goods sold of $35,025,000; and interest expense of $750,000. What is the amount of the firm’s net income?

  1. A) $255,223
  2. B) $4,731,000
  3. C) $2,616,000
  4. D) $7,775,000

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

23) Your firm has the following income statement items: sales of $52,000,000; income tax of $1,880,000; operating expenses of $9,000,000; cost of goods sold of $36,000,000; and interest expense of $800,000.  Compute the firm’s gross profit margin.

  1. A) 13.5%
  2. B) 8.3%
  3. C) 30.8%
  4. D) 69.2%

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

Use the information below to answer the question below.

                                    Jones Company

Financial Information

                                                March 2016     March 2017

Net income                               $1,500             $3,000

Accounts receivable                      750                  750

Accumulated depreciation         1,125               1,500

Common stock                           4,500               5,250

Capital surplus                           7,500               8,250

Retained earnings                      1,500               2,250

Accounts payable                          750                  750

 

24) Based on the information given in Table 1, calculate the dividends paid in 2017.

  1. A) $3,750
  2. B) $3,000
  3. C) $750
  4. D) $2,250

Answer:  D

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

                                               

 

Use Bird Industry’s summary financial statements to answer the following questions.

                                Bird Industries, Inc.

Balance Sheets

                                                   2016                   2017

Cash                                         $1,000                    $?

Accounts receivable                   5,000               6,000

Inventories                                 6,500               6,000

Land                                         10,000             12,000

Other fixed assets                      8,000               9,000

Accumulated depreciation        (1,000)             (1,600)

Total assets                             $29,500                    $?

Accounts payable                     $3,200            $ 6,800

Bonds                                         4,000               4,000

Common stock                         17,000             16,000

Retained earnings                      5,300               5,000

Total debt and equity             $29,500                    $?

 

Bird Industries, Inc.

Income Statement

Sales                           $84,000

Cost of goods sold      66,400

Gross profit                $17,600

Operating expenses    (13,000)

Depreciation                    (600)

EBIT                            $4,000

Interest expense               (500)

EBT                             $3,500

Taxes                            (1,500)

Net Income                  $2,000

 

25) Use Bird’s financial statements to determine the total amount of Bird Industries’ common stock dividend for 2017.

  1. A) $800
  2. B) $2,300
  3. C) $2,000
  4. D) Cannot be determined with available information

Answer:  B

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

 

26) Use Bird Industries’ financial statements to determine Bird’s operating profit margin for 2017.

  1. A) 21%
  2. B) 4.8%
  3. C) 4.2%
  4. D) 2.4%

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

Use Shark Industries’ financial statements shown below to answer the following questions.

                              Shark Enterprises, Inc.

Balance Sheets

                                                   2016                   2017

Cash                                         $1,000                    $?

Accounts receivable                   8,000               9,000

Inventories                                 4,000               7,000

Land                                         10,000             10,000

Other fixed assets                      5,000               5,500

Accumulated depreciation        (1,600)             (2,000)

Total assets                             $26,400                    $?

Accounts payable                     $4,200            $ 7,000

Bonds                                         4,000               4,000

Common stock                         15,000             16,000

Retained earnings                      3,200               3,800

Total debt and equity             $26,400                    $?

 

Shark Enterprises, Inc.

Income Statement

Sales                           $44,900

Cost of goods sold     (22,000)

Gross profit                $12,900

Operating expenses     (10,000)

Depreciation                    (400)

EBIT                            $2,500

Interest expense               (500)

EBT                              $2,000

Taxes                             (1,000)

Net Income                  $1,000

 

 

 

27) Use Shark Enterprises financial statements to determine Enterprise’s common stock dividend for 2017.

  1. A) $0
  2. B) $400
  3. C) $600
  4. D) Cannot be determined with available information

Answer:  B

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

28) Use Shark Enterprise’s financial statements shown above to determine Shark’s gross profit margin in 2017.

  1. A) 5.6%
  2. B) 4.5%
  3. C) 29.7%
  4. D) 2.2%

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

29) Which of the following best represents operating income?

  1. A) Income after financing activities
  2. B) Earnings before interest and taxes
  3. C) Income from capital gains
  4. D) Income from discontinued operations

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

30) Which of the following best represents the stream of income that is available to stockholders?

  1. A) Net profit after tax.
  2. B) Earnings before interest, taxes and dividends
  3. C) Gross profit
  4. D) Operating profit

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

31) Which of the following is (are) NOT included in net operating income?

  1. A) Cost of goods sold
  2. B) Interest
  3. C) Taxes
  4. D) Neither B nor C.

Answer:  D

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

32) Using the information provided, calculate net income for 2017. Assume a tax rate of 35 percent.

Year                                      2017

Inventory                           $5,000

Revenues                          200,000

Depreciation expense           5,000

Cost of goods sold           100,000

Interest expense                 10,000

Operating expenses            30,000

  1. A) $35,750
  2. B) $44,000
  3. C) $50,000
  4. D) $19,250

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

33) The practice of shifting income from good years to poor years in order to show a record of steady growth is

  1. A) is known as earnings management and is considered unethical.
  2. B) is highly recommended but not required by GAAP.
  3. C) is a basic requirement of accrual accounting.
  4. D) is impossible if Generally Accepted Accounting Principles are followed.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 5.  Individuals respond to incentives.

 

34) Firms should compare their gross, operating and net profit margins to past years and other companies in order to

  1. A) evaluate the firm’s performance.
  2. B) identify expenses that seem to be out-of-line
  3. C) better manage the reporting of the firm’s earnings.
  4. D) Both A and B.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

35) The income statement represents a snapshot of account balances at one point in time.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

36) Generally Accepted Accounting Principles (GAAP) require companies to smooth earnings by shifting some profits from good years to bad years.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

37) The income statement describes the financial performance of a firm over a fixed period such as a quarter or a year.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

38) On an accrual basis income statement, revenues and expenses always match the firm’s cash flow.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

39) Corporate income statements are usually compiled on an accrual, rather than cash, basis.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

 

40) The company’s gross profit margin is EBIT divided by net sales.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

                                                Table 4

       Financial Data for Dooley Sportswear, December 31, 2017

Inventory                             $206,250

Interest expense                         5,000

Accumulated depreciation     442,500

Cash                                       180,000

Net sales (all credit)            1,500,000

Accounts receivable               225,000

Operating expenses                525,000

Cost of goods sold                 937,500

Accounts payable                   168,750

Prepaid insurance                     80,000

Accrued wages                        65,000

Federal income taxes                 5,750

 

41) From the scrambled list of items presented in Table 4, prepare an income statement Dooley Sportswear Company.  Not all items from Table 4 will be used.

Answer:        Dooley Sportswear Company Income Statement

for the Year Ending December 31, 2017

Net sales (all credit)                $1,500,000

Cost of goods sold                       937,500

Gross profits                                562,500

EBIT                                            525,000

Net operating income                     37,500

Interest expense                               5,000

Net income before taxes                32,500

Federal income taxes                       5,750

Net income                                   $26,750

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.2  Evaluate firm profitability using the income statement.

Keywords:  income statement

Principles:  Principle 3: Cash flows are the source of value

 

42) 2015 U.S. Corporate tax rates are shown below:

Taxable Income Marginal Tax Rate
$0-$50,000 15%
$50,001-$75,000 25%
$75,001-$100,000 34%
$100,001-$335,000 39%
$335,001-$10,000,000 34%
$10,000,001-$15,000,000 35%
$15,000,001-$18,333,333 38%
Over $18,333,333 35%

 

RJH Inc. has earnings before taxes of $100,000 in 2015.  The company’s tax expense will be

  1. A) $22,250.
  2. B) $24,670.
  3. C) $25,000.
  4. D) $34,000.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

 

43) 2015 U.S. Corporate tax rates are shown below:

Taxable Income Marginal Tax Rate
$0-$50,000 15%
$50,001-$75,000 25%
$75,001-$100,000 34%
$100,001-$335,000 39%
$335,001-$10,000,000 34%
$10,000,001-$15,000,000 35%
$15,000,001-$18,333,333 38%
Over $18,333,333 35%

 

Bouffard Co. has earnings before taxes of $100,000,000 in 2015.  The company’s tax expense will be

  1. A) $3,500,000.
  2. B) $36,500,000.
  3. C) $31,875,000.
  4. D) $35,000,000.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

44) A & K Co. expects to have earnings before taxes of $250,000 to $300,000.  The company’s marginal tax rate is 39% and its average tax rate about 33%.  For every additional dollar of interest expense, A & K’s taxes will

  1. A) increase by 39 cents.
  2. B) fall by 39 cents.
  3. C) be unaffected.
  4. D) fall by about 33 cents.

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

 

45) A & K Co. expects to have earnings before taxes of $250,000 to $300,000.  The company’s marginal tax rate is 39% and its average tax rate about 33%.  For every additional dollar A & K’s pays out in common dividends, it’s income tax liability will

  1. A) increase by 39 cents.
  2. B) fall by 39 cents.
  3. C) be unaffected.
  4. D) fall by about 33 cents.

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

46) The most important tax rates. for financial decisions are ________ tax rates.

  1. A) marginal
  2. B) average
  3. C) implied
  4. D) capital gains

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

47) The marginal tax rate would equal the average tax rate for firms with earnings less than $50,000 or more than $18,333,333.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

 

48) The interest payments on corporate bonds are tax-deductible.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

49) A corporation’s average tax rate will always be lower than or equal to its marginal tax rate.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

50) The highest marginal corporate tax rate is 35%.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

51) When analyzing the cash flows from a new project proposal, a company should always use its marginal tax rate.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

52) Pearls, Inc. had sales in 2015 of $2.1 million. The common stockholders received $600,000 in cash dividends.  Interest totaling $150,000 was paid on outstanding debts. Operating expenses totaled $300,000, and cost of goods sold was $500,000.  What is the tax liability of Pearls, Inc.? 2013 U.S. Corporate tax rates are shown below:

 

Taxable Income Marginal Tax Rate
$0-$50,000 15%
$50,001-$75,000 25%
$75,001-$100,000 34%
$100,001-$335,000 39%
$335,001-$10,000,000 34%
$10,000,001-$15,000,000 35%
$15,000,001-$18,333,333 38%
Over $18,333,333 35%

 

Answer:  Pearls Taxable Income

Sales                                        $2,100,000

Less:

Cost of goods sold                     $500,000

Operating expenses                     300,000

Earnings before interest & taxes $1,300,000

Interest expense                           150,000

Taxable income                         1,150,000

Total taxes owed                        $391,000

Taxes on operating earnings = (.15)(50,000) + (.25)(25,000) + (.34) 25,000) + (.39)(235,000) +.(34)(735,000)= 7,500 +                      6,250 + 8500 + 91,650+277,100 = $391,000 or

Because taxable income is over $335,000

taxes can be computed 1,150,000 × .34 =

$391,000

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

53) Goodwin Enterprises had a gross profit of $2,500,000 for the year. Operating expenses and interest expense incurred in that same year were $595,000 and $362,000, respectively. Goodwin had 200,000 shares of common stock and 180,000 shares of preferred stock outstanding. Management declared a $2.50 dividend per share on the common and a $1.50 dividend per share on the preferred. Securities purchased at a cost of $37,500 in a previous year were resold at a price of $50,500. Compute the taxable income and the resulting tax liability for Goodwin Enterprises for the year.

 

Use the following tax rates:

Income           Tax rate

$0-$50,000              15%

$50,001-$75,000         25%

$75,001-$100,000        34%

$100,001-$335,000       39%

over $335,001           34%

Answer:

Gross profit           $2,500,000

Operating expenses (595,000)

Interest expense       (362,000)

Income before tax $1,543,000

Add: Gain on sales      13,000

Taxable Income     $1,556,000

      Income     Marginal Tax Rate      Tax Liability

$50,000     ×            15%                        $7,500

$25,000     ×            25%                        $6,250

$25,000     ×            34%                        $8,500

$235,000     ×            39%                      $91,650

$1,221,000    ×            34%                    $415,140

$1,556,000                                             $529,040

By design, the marginal and the average tax rates are the same, 34%, for corporate incomes between $335,000 and $10,000,000.

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.3  Estimate a firm’s tax liability using the corporate tax schedule and distinguish between the average and marginal tax rate.

Keywords:  tax liability

Principles:  Principle 3: Cash flows are the source of value

 

 

54) Which of the following is NOT a current asset?

  1. A) Accounts payable
  2. B) Cash
  3. C) Accounts receivable
  4. D) Inventory

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

55) Net plant and equipment is

  1. A) plant and equipment purchases less amount borrowed to finance purchases.
  2. B) current year plant and equipment purchases less current year’s depreciation expense.
  3. C) gross plant and equipment less accumulated depreciation.
  4. D) plant and equipment at current market valuations.

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

56) Your firm has the following balance sheet statement items: total current liabilities of $805,000; total assets of $2,655,000; fixed and other assets of $1,770,000; and long-term debt of $200,000. What is the amount of the firm’s total current assets?

  1. A) $885,000
  2. B) $1,550,000
  3. C) $600,000
  4. D) $325,000

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

 

57) Your firm has the following balance sheet statement items: total current liabilities of $805,000; total assets of $2,655,000; fixed and other assets of $1,770,000; and long-term debt of $200,000. What is the amount of the firm’s net working capital?

  1. A) $25,000
  2. B) $325,000
  3. C) $770,000
  4. D) $80,000

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

58) Which of the following best describes a balance sheet?

  1. A) Reports cash receipts and cash disbursements for a specific accounting period
  2. B) Reports investment activities for a specified accounting period
  3. C) Reports revenues and expenses for a specific accounting period
  4. D) Reports the amount and composition of assets and liabilities at a specified point in time

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

59) Which of the following would NOT be included as an asset on a corporate balance sheet?

  1. A) Accounts receivable
  2. B) Common stock
  3. C) Inventory
  4. D) Buildings

Answer:  B

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

 

60) Which of the following would NOT be included as a liability in a corporate balance sheet?

  1. A) Notes payable
  2. B) Accounts payable
  3. C) Bonds
  4. D) Accumulated Depreciation

Answer:  D

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

61) On a balance sheet, equity equals

  1. A) Total assets minus total liabilities.
  2. B) Current assets plus fixed assets.
  3. C) Fixed assets minus long-term debt.
  4. D) Long term debt plus preferred stock plus common stock plus retained earnings.

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

62) Patriot Corporation purchased manufacturing equipment with an expected useful life of five years.  The purchase of the machinery would be shown as

  1. A) an expense on the balance sheet.
  2. B) an expense on the income statement.
  3. C) an asset on the balance sheet.
  4. D) both an expense and an asset.

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

 

63) When a company pays a dividend on common stock, it appears as

  1. A) an expense on the income statement.
  2. B) a reduction in the amount of retained earnings.
  3. C) a current liability on the balance sheet.
  4. D) dividend payments have no effect on the financial statements.

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

64) Grass Gadgets had sales of $30 million and net income of $2 million in 2015. Grass paid a dividend of $1.5 million. Assuming that their beginning balance for retained earnings was $3 million, calculate their ending balance for retained earnings.

  1. A) $2.5 million
  2. B) $3 million
  3. C) $3.5 million
  4. D) $4 million

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

65) Total equity on the balance sheet increases as dividends paid increases.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

 

66) A balance sheet is a statement of the financial position of the firm on a given date, including its asset holdings, liabilities, and equity.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

67) Under current accounting rules, plant and equipment appear on a company’s balance sheet valued at replacement value.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

68) When a corporation sells common stock to investors, the amount is added to common equity on the balance sheet.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

69) An advantage of balance sheet numbers is that assets reflect current market values.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

 

70) A firm’s balance sheet provides a representation of the current market value of the company.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

71) Gross plant and equipment minus accumulated depreciation represents the fair market value of a company’s fixed assets.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

72) Balance sheet and other accounts for GPA are listed below in alphabetical order.  Use these accounts to construct GPA’s balance sheet for 2016.  All balance sheet accounts are shown, but some accounts will not be used.  All amounts are in millions of dollars.

Accounts payable        $1900

Accounts receivable                $661

Cash    $1,000

Common stock            $2,000

EBIT   $1,968

Interest expense                      $8.00

Inventories                  $1,620

Long-term debt           $890

Net plant & equipment           $2,563

Other current assets                $645

Other long-term assets            $576

Retained earnings       $2,080

Short-term debt           $195

Taxes,  $778

Answer:

       Balance Sheet: GPA Inc. 2013
Cash $1,000 Accounts payable                  $1,900
Accounts receivable 661 Short-term debt                       195
Inventories                    1,620 Total current liabilities                  $2,095
Other current assets                       645 Long-term debt                       890
Total current assets                  $3,926 Common stock                    2,000
Net plant & equipment                    2,563 Retained earnings                    2,080
Other long-term assets                       576
Total assets                  $7,065 Total liab. & equity                  $7,065

 

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  3.4  Use the balance sheet to describe a firm’s investment in assets and the way it has financed them.

Keywords:  balance sheet

Principles:  Principle 2: There Is a Risk-Return Tradeoff

 

 

73) Which of the following represents a source of cash?

  1. A) a decrease in accounts payable
  2. B) a decrease in accounts receivable
  3. C) payment of dividends
  4. D) an increase in inventories

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.5  Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

Keywords:  cash flow

Principles:  Principle 3: Cash flows are the source of value

74) The change between a firm’s beginning cash balance and ending cash balance would equal

  1. A) cash flow from operations + cash flow from investing activities+cash flow from financing activities
  2. B) the change in current assets minus the change in current liabilities.
  3. C) net income plus new borrowing minus asset purchases.
  4. D) total assets minus total liabilities minus total stockholders’ equity.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  3.5  Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

Keywords:  cash flow

Principles:  Principle 3: Cash flows are the source of value

 

75) Which of the following does NOT represent cash outflows to the firm?

  1. A) Taxes
  2. B) Interest payments
  3. C) Dividends
  4. D) Depreciation

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.5  Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

Keywords:  cash flow

Principles:  Principle 3: Cash flows are the source of value

 

 

76) The ratio of ________ to ________ is an indicator of the quality of a firm’s earnings.

  1. A) cash flow from operations, net income
  2. B) liabilities, assets
  3. C) dividends, interest expense
  4. D) cash flow from operations, capital expenditures

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.5  Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

Keywords:  cash flow

Principles:  Principle 3: Cash flows are the source of value

 

77) Operating cash flow will increase with a decrease in

  1. A) inventories.
  2. B) current liabilities.
  3. C) depreciation expense.
  4. D) capital expenditures.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.5  Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

Keywords:  cash flow

Principles:  Principle 3: Cash flows are the source of value

78) In a growing business, negative cash flow from investing activities is normal.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.5  Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

Keywords:  cash flow

Principles:  Principle 3: Cash flows are the source of value

 

79) Reducing a firm’s debt will increase its cash flow.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.5  Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

Keywords:  cash flow

Principles:  Principle 3: Cash flows are the source of value

 

 

80) Beginning cash balance + cash flow from operations + cash flow from investing activities + cash flow from financing activities = ending cash balance.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  3.5  Identify the sources and uses of cash for a firm using the firm’s cash flow statement.

Keywords:  cash flow

Principles:  Principle 3: Cash flows are the source of value

 

Financial Management: Principles & Applications, 13e (Titman)

Chapter 5   Time Value of Money-The Basics

 

1) Financial managers use the time value of money to

  1. A) make business decisions.
  2. B) compare cash flows of different projects.
  3. C) determine the price of common stock.
  4. D) both A and B.
  5. E) all of the above.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

2) The time value of money is created by

  1. A) the existence of profitable investment alternatives and interest rates.
  2. B) the fact that the passing of time increases the value of money.
  3. C) the elimination of the opportunity cost as a consideration.
  4. D) the fact that the value of saving money for tomorrow could be more or less than spending it today.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

3) Which of the following statements is FALSE?

  1. A) A dollar received one year from now will be worth more than a dollar received today.
  2. B) A dollar received one year from now will be worth more than a dollar received two years from now.
  3. C) Compounding essentially means earning interest on interest on an initial balance.
  4. D) Perpetuities pay an equal payment forever.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

4) An investor will invest $1,000 now and expect to receive $10 for each of the next 10 years plus $1,000 at the end of the 10th year.  Her cash flow at time period 0 is

  1. A) $1,000.
  2. B) -$1,000.
  3. C) $-990.
  4. D) $1,010.

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

5) Timelines can be expressed in terms of

  1. A) years.
  2. B) months.
  3. C) days.
  4. D) any of the above

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

6) Should you prefer to receive $100,000 right now or $10,000 at the end of each of the next 12 years?

  1. A) $100,000 now.
  2. B) $10,000 at the end of each of the next 12 years.
  3. C) The answer depends on the time value of money.
  4. D) Either alternative is equally valuable.

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

7) Money has a greater time value time value

  1. A) when rates of return are higher.
  2. B) when rates of return are lower.
  3. C) when the future is uncertain.
  4. D) when investors are willing to assume greater risks.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

8) A diagram for visualizing future cash flows is known as

  1. A) a future value vector.
  2. B) a cash flow chart.
  3. C) an FV/PV plot.
  4. D) a timeline.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

9) On timeline, the present is represented as

  1. A) time sub n.
  2. B) time zero
  3. C) time sub i
  4. D) time 1

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

 

10) A timeline typically represents cash flows as an exponential growth curve.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

11) A timeline is a linear representation of the timing of cash flows.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

12) A timeline represents the value of a sum invested now at the end of a series of time periods.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

13) The end of one time period and the beginning of the next occupy the same place on a timeline.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

 

14) Timelines are always expressed in years.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

15) Timelines used to visualize cash flows normally represent present values on the left and future values on the right.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

16) The last amount shown on a timeline represents the future value of all amounts invested up to that point.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

17) The first amount on a timeline represent the present value of all the future amounts at a given interest rate.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

 

18) Sketch a timeline that represents an immediate investment of $20,000 with $25,000 to be received at the end of 4 years.

Answer:

_0__________1__________2_________3__________4

-$20,000                                                                      $25,000

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.1  Construct cash flow timelines to organize your analysis of problems involving the time value of money.

Keywords:  time value of money

Principles:  Principle 1: Money Has a Time Value

 

19) Which of the following is the formula for compound value?

  1. A) FVn= P(1 + i)n
  2. B) FVn= (1 + i)/P
  3. C) FVn= P/(1 + i)n
  4. D) FVn= P(1 + i)-n

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

20) At 8% compounded annually, how long will it take $750 to double?

  1. A) 6.5 years
  2. B) 48 months
  3. C) 9 years
  4. D) 12 years

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

21) At what rate must $400 be compounded annually for it to grow to $716.40 in 10 years?

  1. A) 6%
  2. B) 5%
  3. C) 7%
  4. D) 8%

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

22) An increase in future value can be caused by

  1. A) an increase in the: annual interest rate.
  2. B) an increase in the: number of compounding periods.
  3. C) deferring the original investment by one or more periods.
  4. D) both A and B.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

23) A friend plans to buy a big-screen TV/entertainment system and can afford to set aside $1,320 toward the purchase today. If your friend can earn 5.0%, compounded yearly, how much can your friend spend in four years on the purchase? Round off to the nearest $1.

  1. A) $1,444
  2. B) $1,604
  3. C) $1,764
  4. D) $1,283

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

24) You just purchased a parcel of land for $10,000. If you expect a 12% annual rate of return on your investment, how much will you sell the land for in 10 years?

  1. A) $25,000
  2. B) $31,060
  3. C) $38,720
  4. D) $34,310

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

25) If you place $50 in a savings account with an interest rate of 7% compounded weekly, what will the investment be worth at the end of five years (round to the nearest dollar)?

  1. A) $72
  2. B) $70
  3. C) $71
  4. D) $57

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

26) If you put $700 in a savings account with a 10% nominal rate of interest compounded monthly, what will the investment be worth in 21 months (round to the nearest dollar)?

  1. A) $827
  2. B) $833
  3. C) $828
  4. D) $1,176

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

27) If you put $6,000 in a savings account that yields an 1% rate of interest compounded daily, what will the investment be worth at the end of one year?

  1. A) $6060.00
  2. B) $6,060.30
  3. C) $6,006.03
  4. D) $6,760.95

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

28) Which of the following formulas represents the future value of $500 invested at 8% compounded quarterly for five years?

  1. A) 500(1 + .08)5
  2. B) 500(1 + .08)20
  3. C) 500(1 + .02)5
  4. D) 500(1 + .02)20

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

29) What is the value of $750 invested at 7.5% compounded quarterly for 4.5 years (round to the nearest $1)?

  1. A) $1,048
  2. B) $1,010
  3. C) $1,038
  4. D) $808

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

30) Shorty Jones wants to buy a one-way bus ticket to Mule-Snort, Pennsylvania. The ticket costs $142, but Mr. Jones has only $80. If Shorty puts the money in an account that pays 9% interest compounded monthly, how many months must Shorty wait until he has $142 (round to the nearest month)?

  1. A) 73 months
  2. B) 75 months
  3. C) 77 months
  4. D) 79 months

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

31) Alva Thomas has decided to place $10,000 in an account payable to his alma matter when he dies.  If the account grows at an annual rate of 6% compounded monthly and he lives for another 10 years, the university will receive

  1. A) 10,000(1 + .06)10
  2. B) 10,000(1 + .005)120
  3. C) 10,000(1 + .06)120
  4. D) 10,000/(1 + .005)120

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

32) Dawn Swift discovered that 20 years ago, the average tuition for one year at an Ivy League school was $15,000. Today, the average cost is $60,000. What is the growth rate in tuition cost over this 20-year period?

  1. A) 15.5%
  2. B) 4.2%
  3. C) 7.18%
  4. D) 10.6%

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

Use the following information to answer the following question(s).

 

A Max, Inc. deposited $2,000 in a bank account that pays 12% interest annually.

 

33) What will the dollar amount be in four years, assuming that interest is paid annually?

  1. A) $2,800
  2. B) $3,100
  3. C) $3,111
  4. D) $3,148

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

34) What will the dollar amount be if the interest is compounded semiannually for those four years?

  1. A) $3,100
  2. B) $3,188
  3. C) $3,240
  4. D) $3,290

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

35) How many periods would it take for the deposit to grow to $6,798 if the interest is compounded semiannually?

  1. A) 17
  2. B) 19
  3. C) 21
  4. D) 25

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

36) You bought a painting 10 years ago as an investment. You originally paid $85,000 for it. If you sold it for $484,050, what was your annual return on investment?

  1. A) 47%
  2. B) 4.7%
  3. C) 19%
  4. D) 12.8%

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

37) You deposit $5,000 today in an account drawing 12% compounded quarterly. How much will you have in the account at the end of 2 1/2 years?

  1. A) $7,401
  2. B) $5,523
  3. C) $7,128
  4. D) $6,720

Answer:  D

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

38) Middletown, USA currently has a population of 1.5 million people. It has been one of the fastest growing cities in the nation, growing by an average of 4% per year for the last five years. If this city’s population continues to grow at 4% per year, what will the population be 10 years from now?

  1. A) 1,560,000
  2. B) 2,220,366
  3. C) 2,100,000
  4. D) 1,824,979

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

39) How many years will it take for an initial investment of $200 to grow to $544 if it is invested today at 8% compounded annually?

  1. A) 8 years
  2. B) 10 years
  3. C) 11 years
  4. D) 13 years

Answer:  D

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

40) When using a financial calculator, which of the following is the correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 3%?

  1. A) N=4, i=.03, PV=-200, PMT=0, solve for FV
  2. B) N=4, i=3, PV=-200, PMT=0, solve for FV
  3. C) N=4, i=3, PV=0, PMT=$200, solve for FV
  4. D) N=4, i=3, FV=200, PMT=0, solve for PV

Answer:  B

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

41) The future value of a single sum

  1. A) increases as the compound rate decreases.
  2. B) decreases as the compound rate increases.
  3. C) increases as the number of compound periods decreases.
  4. D) increases as the compound rate increases.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

42) When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?

  1. A) N=16, i=.005, PV=200, PMT=0, solve for FV
  2. B) N=4, i=.5, PV=200, PMT=0, solve for FV
  3. C) N=16, i=.5, PV=-200, PMT=0, solve for FV
  4. D) N=16, i=.03, FV=-200, PMT=0, solve for PV

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

43) When using EXCEL to find the future value of $2,000 invested in an account that would earn interest of 7.5% for 18 years, the correct entry would be

  1. A) =FV(7.5,18,0,-1,000).
  2. B) =PV(.075,18,0,-1,000).
  3. C) =FV(7.5,18,0,1,000).
  4. D) =FV(.075,18,0,-1,000).

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

44) When using a financial calculator, which of the following is a correct way to find the future value of $200 deposited today in an account for four years paying annual interest of 2% compounded quarterly?

  1. A) N=16, i=.005, PV=-200, PMT=0, solve for FV
  2. B) N=4, i=.5, PV=$200, PMT=0, solve for FV
  3. C) N=16, i=.5, PV=-200, PMT=0, solve for FV
  4. D) N=16, i=.03, FV=200, PMT=0, solve for PV

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

45) If you plotted the future value of $1,000 growing at any interest rate greater than 0 with dollars on the vertical axis and time on the horizontal axis, the resulting curve would

  1. A) slope upward at a constant rate.
  2. B) eventually become parallel to the horizontal axis.
  3. C) slope upward at a decreasing rate.
  4. D) slope upward at an increasing rate.

Answer:  D

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

46) At 8%, compounded annually, how long will it take $750 to double?

  1. A) 9 years
  2. B) 8 years
  3. C) 12 years
  4. D) 4 years
  5. E) 6 years

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

47) Which of the following is the formula for present value?

  1. A) FVn= P(1 + i)n
  2. B) FVn= (1 + i)/P
  3. C) FVn= P/(1 + i)n
  4. D) FVn= P(1 + i)-n

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

48) The future value of a lump sum deposited today increases as the number of years of compounding at a positive rate of interest declines.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

49) If we invest money for 10 years at 8% interest, compounded semi-annually, we are really investing money for 20 six-month periods, during which we receive 4% interest each period.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

50) Determining the specified amount of money that you will receive at the maturity of an investment is an example of a future value equation.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

51) When performing time value of money computations with a financial calculator or EXCEL, PV and FV must have opposite signs.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

52) Assuming equal annual rates, the more frequent the compounding periods in a year, the higher the future value.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

53) Briefly discuss how non-annual compounding (more than one compounding period per year) is preferable to annual compounding if you are an investor.

Answer:  Non-annual compounding is preferable to annual compounding because with non-annual compounding, interest is compounded more frequently within a year period. This means that more interest on interest would be generated on a given investment.

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

54) If you deposit $1,000 each year in a savings account earning 4%, compounded annually, how much will you have in 10 years?

Answer:  FV[10] = $1,000(12.006) = $12,006

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

55) Your bank has agreed to loan you $3,000 if you agree to pay a lump sum of $5,775 in five years. What annual rate of interest will you be paying?

Answer:  FVIF[? %, 5 yr] $3,000 = $5,775

FVIF[? %, 5 yr] = $1.925

i = 14%

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

 

56) Earnings per share for XYZ, Inc. grew constantly from $7.99 in 1974 to $12.68 in 1980. What was the compound annual growth rate in earnings-per-share over the period?

Answer:

$12.68 = $7.99 FVIF[? %, 6 yr]

1.587 = FVIF[? %, 6 yr]

g = 8%

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

57) If you invest $450 today and it increases to $6,185 at the end of 20 years, what rate of return have you earned?

Answer:  $6,185 = $450 FVIF[? %, 20 yr]

13.743 = FVIF[? %, 20 yr]

i = 14%

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.2    Understand compounding and calculate the future value of cash flows using mathematical formulas, a financial calculator, and an EXCEL spreadsheet.

Keywords:  future value

Principles:  Principle 1: Money Has a Time Value

 

58) The present value of a single future sum

  1. A) increases as the number of discount periods increases.
  2. B) is generally larger than the future sum.
  3. C) depends upon the number of discount periods.
  4. D) increases as the discount rate increases.

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

59) Assuming two investments have equal lives, a high discount rate tends to favor

  1. A) the investment with large cash flow early.
  2. B) the investment with large cash flow late.
  3. C) the investment with even cash flow.
  4. D) neither investment since they have equal lives.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

60) High discount rates favor

  1. A) neither long-term nor short-term investments.
  2. B) both long-term and short-term investments.
  3. C) long-term investments.
  4. D) short-term investments.

Answer:  D

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

61) An increase in ________ will decrease present value.

  1. A) the discount rate per period
  2. B) the original amount invested
  3. C) the number of periods
  4. D) both A and C

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

62) What is the present value of $1,000 to be received 10 years from today? Assume that the investment pays 8.5% and it is compounded monthly (round to the nearest $1).

  1. A) $893
  2. B) $3,106
  3. C) $429
  4. D) $833

Answer:  C

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

63) What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $1.00.

  1. A) $5,790
  2. B) $11,574
  3. C) $9,210
  4. D) $17,010

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

64) Three years from now, Barbara Waters will purchase a laptop computer that will cost $2,250. Assume that Barbara can earn 6.25% (compounded monthly) on her money. How much should she set aside today for the purchase? Round off to the nearest $1.

  1. A) $1,250
  2. B) $900
  3. C) $1,866
  4. D) $3,775

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

65) If you want to have $875 in 32 months, how much money must you put in a savings account today? Assume that the savings account pays 16% and it is compounded monthly (round to the nearest $10).

  1. A) $630
  2. B) $570
  3. C) $650
  4. D) $660

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

66) All else constant, the present value of an investment will increase if

  1. A) the investment is discounted at a higher interest rate.
  2. B) the investment is discounted for fewer years.
  3. C) the investment is discounted at a lower interest rate.
  4. D) both B & C.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

67) To find the present value of $1000 discounted for 20 years at 8%, when using a financial calculator, the correct entry is

  1. A) N=20, i=.08,PMT=0, FV=1000 solve for PV.
  2. B) N=20, i=8,PMT=0, FV=1000 solve for PMT.
  3. C) N=20, i=.08,PMT=0, PV=1000 solve for FV.
  4. D) N=20, i=8,PMT=0, FV=1000 solve for PV.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

68) California Investors recently advertised the following claim: Invest your money with us at 21%, compounded annually, and we guarantee to double your money sooner than you imagine. Ignoring taxes, how long would it take to double your money at a nominal rate of 21%, compounded annually?

  1. A) 330 years
  2. B) 3.6 years
  3. C) 9.5 years
  4. D) 4.8 years

Answer:  B

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

69) Using a financial calculator, which of the following would be a correct way to find how long it would take for a sum to triple at a rate of 3%?

  1. A) i=5, PV=-1, PMT=0, FV=3, solve for N
  2. B) i=5, PV=1, PMT=0, FV=3, solve for N
  3. C) i=.05, PV=-1, PMT=0, FV=3, solve for N
  4. D) Financial calculators cannot be used to solve this problem.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

70) Stephen’s grandmother deposited $100 in an investment account for him when he was born, 25 years ago. The account is now worth $1,500.  What was the average rate of return on the account?

  1. A) 6.00%
  2. B) 16.67%
  3. C) 15.00%
  4. D) 11.44%

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

71) Stephen’s grandmother deposited $100 in an investment account for him when he was born, 25 years ago. The account is now worth $1,500.  What was the average rate of return on the account?  Which of the following is a correct way to solve this problem using EXCEL?

  1. A) =PV(25,i,-100,1500)
  2. B) =rate(25,0,100,1500)
  3. C) =rate(25,0,-100,1500)
  4. D) =rate(0,-100,1500,25)

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

72) The present value of $400 to be received at the end of 10 years, if the discount rate is 5%, is

  1. A) $400.00.
  2. B) $248.40.
  3. C) $313.60.
  4. D) $245.60.

Answer:  D

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

73) The present value of $1,000 to be received at the end of five years, if the discount rate is 10%, is

  1. A) $621.
  2. B) $784.
  3. C) $614.
  4. D) $500.

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

74) What is the present value of an investment that pays $400 at the end of three years and $700 at the end of 10 years if the discount rate is 5%?

  1. A) $1,100.00
  2. B) $675.30
  3. C) $775.40
  4. D) $424.60

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

75) The present value of a single sum

  1. A) increases as the discount rate decreases.
  2. B) decreases as the discount rate decreases.
  3. C) increases as the number of discount periods increases.
  4. D) increases as the discount rate increases.
  5. E) none of the above.

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

76) If you want to have $1,700 in seven years, how much money must you put in a savings account today? Assume that the savings account pays 6% and it is compounded quarterly (round to the nearest $10).

  1. A) $1,120
  2. B) $1,130
  3. C) $1,110
  4. D) $1,140

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

77) If you want to have $90 in four years, how much money must you put in a savings account today? Assume that the savings account pays 8.5% and it is compounded monthly (round to the nearest $1).

  1. A) $64
  2. B) $65
  3. C) $66
  4. D) $71

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

78) How much money must be put into a bank account yielding 5.5% (compounded annually) in order to have $250 at the end of five years (round to nearest $1)?

  1. A) $237
  2. B) $191
  3. C) $187
  4. D) $179

Answer:  B

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

79) If you want to have $1,200 in 27 months, how much money must you put in a savings account today? Assume that the savings account pays 14% and it is compounded monthly (round to the nearest $10).

  1. A) $910
  2. B) $890
  3. C) $880
  4. D) $860

Answer:  C

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

80) As the discount rate increases, the present value of future cash flows increases.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

81) As the compound interest rate increases, the present value of future cash flows decreases.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

82) The present value of a future sum of money increases as the number of years before the payment is received increases.

Answer:  FALSE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

83) When calculating either discount rates or the number of periods using a financial calculator, the PV and FV must have opposite signs.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.3  Understand discounting and calculate the present value of cash flows using mathematical formulas, a financial calculator, and an Excel spreadsheet.

Keywords:  present value

Principles:  Principle 1: Money Has a Time Value

 

 

84) Which of the following provides the greatest annual interest?

  1. A) 10% compounded annually
  2. B) 9.5% compounded monthly
  3. C) 9% compounded quarterly
  4. D) 8.5% compounded daily

Answer:  A

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

85) The effective annual rate increases when the ________ increases.

  1. A) number of compounding periods in a year
  2. B) number of years invested
  3. C) quoted rate
  4. D) both A and C

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

 

86) What is the annual compounded interest rate of an investment with a stated interest rate of 6% compounded quarterly for seven years (round to the nearest .1%)?

  1. A) 51.7%
  2. B) 6.7%
  3. C) 10.9%
  4. D) 6.1%

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

 

 

87) You are considering two investments. Investment A yields 10% compounded quarterly. Investment B yields i% compounded semiannually. Both investments have equal annual yields. Find i.

  1. A) 19.875%
  2. B) 10%
  3. C) 10.38%
  4. D) 10.125%

Answer:  D

Diff: 3

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

88) The annual percentage rate (APR) is calculated as

  1. A) Interest rate per period x compounding periods per year.
  2. B) (1+quoted annual rate/compounding periods per year)compounding periods per year-1.
  3. C) Interest rate per period / compounding periods per year.
  4. D) 1+quoted annual rate/compounding periods per year)1/compounding periods per year-1.

Answer:  A

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  Previous edition

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

 

89) You have been offered a credit card with an interest rate of 1.5% per month.  This is equivalent to and effective annual rate (EAR) of

  1. A) 12.17%.
  2. B) 18.00%.
  3. C) 24.00%.
  4. D) 19.56%.

Answer:  D

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

 

 

90) For any number of compounding periods per year greater than 1, EAR will always be greater than the APR.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

 

91) As the number of compounding periods per year increase, the annual percentage rate of interest increases.

Answer:  FALSE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

92) A monthly credit card interest rate of 1.5% is equal to and effective annual rate of 19.56%.

Answer:  TRUE

Diff: 1

AACSB:  3.  Analytic thinking skills

Question Status:  New question

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value

 

93) The annual percentage rate on two different investments will equal the effective annual rate on the two investments only if interest on both investments is compounded annually.

Answer:  TRUE

Diff: 2

AACSB:  3.  Analytic thinking skills

Question Status:  Revised

Objective:  5.4  Understand how interest rates are quoted and know how to make them comparable.

Keywords:  effective annual rate

Principles:  Principle 1: Money Has a Time Value