Finance Quiz

Ria wants to buy an ordinary annuity that will pay her $4,000 a year for the next 20 years. She expects annual interest rates will be 8 per cent over that time period. The maximum price she would be willing to pay for the annuity is closest to

• $32,000.

• $39,272.

• $40,000.

• $80,000.

In 3 years, you are to receive $5,000. If the interest rate were to suddenly increase, the present value of that future amount to you would

• fall.

• rise.

• remain unchanged.

• cannot be determined without more information

In a typical loan amortization schedule, the dollar amount of interest paid each period ____.

• increases with each payment

• decreases with each payment

• remains constant with each payment

"Shareholder wealth" in a firm is represented by:

• the number of people employed in the firm.

• the book value of the firm's assets less the book value of its liabilities.

• the amount of salary paid to its employees.

• the market price per share of the firm's common stock.

A(n) would be an example of a principal, while a(n) would be an example of an agent.

• shareholder; manager

• manager; owner

• accountant; bondholder

• shareholder; bondholder

The market price of a share of common stock is determined by:

• the board of directors of the firm.

• the stock exchange on which the stock is listed.

• the president of the company.

• individuals buying and selling the stock.

The cost of equity capital is all of the following EXCEPT:

• the minimum rate that a firm should earn on the equity-financed part of an investment.

• a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.

• by far the most difficult component cost to estimate.

• generally lower than the before-tax cost of debt.

The common stock of a company must provide a higher expected return than the debt of the same company because

• there is less demand for stock than for bonds.

• there is greater demand for stock than for bonds.

• there is more systematic risk involved for the common stock.

• there is a market premium required for bonds.

Market values are often used in computing the weighted average cost of capital because

• this is the simplest way to do the calculation.

• this is consistent with the goal of maximizing shareholder value.

• this is required in the U.S. by the Securities and Exchange Commission.

• this is a very common mistake.

The discount rate at which two projects have identical is referred to as crossover rate.

• present values

• net present values

• IRRs

• profitability indexes