Question Question 1 Starting to invest early for retirement increases the benefits of compound interest.

Question 1

Starting to invest early for retirement increases the benefits of compound interest.

True

False

Question 2

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

A.

Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually. Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

B.

The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

C.

If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

D.

A bank loan’s nominal interest rate will always be equal to or less than its effective annual rate.

E.

A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

Question 3

If a firm raises capital by selling new bonds, it is called the “issuing firm,” and the coupon rate is generally set equal to the required rate on bonds of equal risk.

True

False

Question 4

Which of the following statements is CORRECT?

A.

An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank’s other offices to increase.

B.

An externality is a situation where a project would have an adverse effect on some other part of the firm’s overall operations. If the project would have a favorable effect on other operations, then this is not an externality.

C.

Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not.

D.

The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV.

E.

Identifying an externality can never lead to an increase in the calculated NPV.

Question 5

Amram Company’s current ratio is 1.9. Considered alone, which of the following actions would reduce the company’s current ratio?

A.

Borrow using short-term notes payable and use the proceeds to reduce accruals.

B.

Use cash to reduce short-term notes payable.

C.

Use cash to reduce accounts payable.

D.

Use cash to reduce accruals.

E.

Borrow using short-term notes payable and use the proceeds to reduce long-term debt.

Question 6

An option is a contract that gives its holder the right to buy or sell an asset at a predetermined price within a specified period of time.

True

False

Question 7

As a firm’s sales grow, its current assets also tend to increase. For instance, as sales increase, the firm’s inventories generally increase, and purchases of inventories result in more accounts payable. Thus, spontaneous liabilities that reduce AFN arise from transactions brought on by sales increases.

True

False

Question 8

The cash flows associated with common stock are more difficult to estimate than those related to bonds because stock has a residual claim against the company versus a contractual obligation for a bond.

True

False

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