1. Present Value of a Perpetuity What\'s the present value, when interest rates

Question

1.   Present Value of a Perpetuity What's the present value, when interest rates are 6.90 percent, of a $240 payment made every year forever?
A.   $3,478.26
B.   $2,400.00
C.   $16.56
D.   $1,656.00

2.   Solving for Rates What annual rate of return is earned on a $2,800 investment when it grows to $6,100 in twenty years?
A.   3.78%
B.   1.18%
C.   3.97%
D.   2.18%

3.   Which of the following statements is correct?
A.   The use of debt in the capital structure results in tax benefits to the firm.
B.   Debt is referred to as "financial leverage" because it magnifies returns to shareholders.
C.   Debt management ratios evaluate whether a firm is financing its assets with a reasonable amount of debt versus equity financing.
D.   All of these statements are correct.

4.   Which statement is true?
A.   The lower the liquidity ratios, the less liquidity risk a firm has.
B.   Liquid assets generate profits for the firm.
C.   The less liquid assets a firm holds, the less likely it is that the firm will experience financial distress.
D.   Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.

5.   Which of the following is NOT a source of cash?
A.   The firm reduces its inventory.
B.   The firm pays off some of its long-term debt.
C.   The firm has positive net income.
D.   The firm sells more common stock.

6.   Which of these can be used by interested parties to identify changes in corporate performance?
A.   Common-size financial statements
B.   Industrialized financial statements
C.   Sanitized financial statements
D.   None of these

7.   The maximum growth rate that can be achieved financing asset growth with new debt and retained earnings is called the:
A.   sustainable growth rate.
B.   retention rate.
C.   internal growth rate.
D.   operating expansion rate.

8.   This should be the primary objective of a firm as it may actually be the most beneficial for society in the long run.
A.   Maximizing market share
B.   Minimizing costs
C.   Maximizing shareholder value
D.   Minimizing layoffs

9.   Firm A and Firm B have the same total assets, ROA and profit margin (greater than 0). However, Firm B has a higher debt ratio and interest expense than Firm A. Which of the following statements is correct?
A.   Firm B must have a higher ROE than firm A.
B.   Firm B must have a lower ACP than Firm A.
C.   Firm B must have a higher fixed asset turnover than Firm A.
D.   Firm B must have a higher capital intensity ratio than Firm A.

10.   Present Value of an Annuity What is the present value of a $2,100 annuity payment over 7 years if interest rates are 11 percent?
A.   $9,895.61
B.   $1,011.48
C.   $4,359.94
D.   $10,806.86

Explanation / Answer

1 Calculation of the Present Value Value Amount/ Interest Rate 240/.0690 3478.26087 The correct answer is A. $ 3478.26 2 Future Value = Present Value( 1+r)^n r = interest Rates n = Time Period 6100= 2800(1+r)^20 2.17 = (1+r)^20 r = 3.97% The correct answer is C. 3.97% 3 The debts are the tax deductible as the cost of debt is taken after taxes. The debts are the financial leverages.Hence we can say that all the statements are true The correct answer is D. All of these statements are correct 5 The correct answer is D. Extremely high levels of liquidity guard against liquidity crises, but at the cost of lower returns on assets.

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