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Corporate Finance Essentials Global Edition Jordan Westerfield Ross 7th Edition- Test Bank

**Sample Questions**

**Instant Download With Answers**

**Chapter 02**

**Financial Statements, Taxes, and Cash Flow**

**Multiple Choice Questions**

- Net working capital is defined as:

A. the depreciated book value of a firm’s fixed assets.

B. the value of a firm’s current assets.

C. available cash minus current liabilities.

D. total assets minus total liabilities.

E. current assets minus current liabilities.

- The accounting statement which measures the revenues, expenses, and net income of a firm over a period of time is called the:

A. statement of cash flows.

B. income statement.

C. GAAP statement.

D. balance sheet.

E. net working capital schedule.

- The financial statement that summarizes a firm’s accounting value as of a particular date is called the:

A. income statement.

B. cash flow statement.

C. liquidity position.

D. balance sheet.

E. periodic operating statement.

- Which one of the following decreases net income but does not affect the operating cash flow of a firm which owes no taxes for the current year?

A. Indirect cost

B. Direct cost

C. Noncash item

D. Period cost

E. Variable cost

- Which one of the following terms is defined as the total tax paid divided by the total taxable income?

A. Average tax rate

B. Variable tax rate

C. Marginal tax rate

D. Absolute tax rate

E. Contingent tax rate

- Which one of the following is the tax rate that applies to the next dollar of taxable income that a firm earns?

A. Average tax rate

B. Variable tax rate

C. Marginal tax rate

D. Absolute tax rate

E. Contingent tax rate

- Cash flow from assets is defined as:

A. the cash flow to shareholders minus the cash flow to creditors.

B. operating cash flow plus the cash flow to creditors plus the cash flow to shareholders.

C. operating cash flow minus the change in net working capital minus net capital spending.

D. operating cash flow plus net capital spending plus the change in net working capital.

E. cash flow to shareholders minus net capital spending plus the change in net working capital.

- Operating cash flow is defined as:

A. a firm’s net profit over a specified period of time.

B. the cash that a firm generates from its normal business activities.

C. a firm’s operating margin.

D. the change in the net working capital over a stated period of time.

E. the cash that is generated and added to retained earnings.

- Which one of the following has nearly the same meaning as free cash flow?

A. Net income

B. Cash flow from assets

C. Operating cash flow

D. Cash flow to shareholders

E. Addition to retained earnings

- Cash flow to creditors is defined as:

A. interest paid minus net new borrowing.

B. interest paid plus net new borrowing.

C. the operating cash flow minus net capital spending minus change in net working capital.

D. dividends paid plus net new borrowing.

E. cash flow from assets plus net new equity.

- Cash flow to stockholders is defined as:

A. cash flow from assets plus cash flow to creditors.

B. operating cash flow minus cash flow to creditors.

C. dividends paid plus the change in retained earnings.

D. dividends paid minus net new equity raised.

E. net income minus the addition to retained earnings.

- Which one of the following is an intangible fixed asset?

A. Inventory

B. Machinery

C. Copyright

D. Account receivable

E. Building

- Delivery trucks are classified as:

A. non-cash expenses.

B. current liabilities.

C. current assets.

D. tangible fixed assets.

E. intangible fixed assets.

- Which one of the following is included in net working capital?

A. Land

B. Accounts payable

C. Equipment

D. Depreciation

E. Dividend

- Over the past year, a firm decreased its current assets and increased its current liabilities. As a result, the firm’s net working capital:

A. had to increase.

B. had to decrease.

C. could have remained constant if the amount of the decrease in current assets equaled the amount of the increase in current liabilities.

D. could have either increased, decreased, or remained constant.

E. was unaffected as the changes occurred in the firm’s current accounts.

- Which one of the following is included in net working capital?

A. Newly purchased equipment with a useful life of six years

B. Mortgage on a building payable over the next 12 years

C. Interest on a long-term debt

D. 10-year bonds issued to the general public

E. Invoice from a supplier for inventory purchased

- Shareholders’ equity is equal to:

A. total assets plus total liabilities.

B. net fixed assets minus total liabilities.

C. net fixed assets minus long-term debt plus net working capital.

D. net working capital plus total assets.

E. total assets minus net working capital.

- Which one of the following is an equity account?

A. Paid in surplus

B. Bonds payable

C. Patent

D. Depreciation

E. Net fixed assets

- Which one of the following statements is correct?

A. Shareholders’ equity is the residual value of a firm.

B. Net working capital must be a positive value.

C. An increase in cash reduces the liquidity of a firm.

D. Equipment is generally considered a highly liquid asset.

E. Depreciation increases total assets.

- All else equal, an increase in which one of the following will decrease owners’ equity?

A. Increase in inventory

B. Increase in accounts payable

C. Increase in accounts receivable

D. Increase in net working capital

E. Increase in net fixed assets

- Which one of the following will decrease the net working capital of a firm?

A. Obtaining a 3-year loan and using the proceeds to buy inventory

B. Collecting a payment from a credit customer

C. Obtaining a 5-year loan to buy equipment

D. Selling inventory at a profit

E. Making a payment on a long-term debt

- Which one of the following will decrease the liquidity level of a firm?

A. Cash purchase of inventory

B. Credit sale of inventory

C. Cash sale of inventory

D. Collection of an account receivable

E. Proceeds from a long-term loan

- Highly liquid assets:

A. increase the probability a firm will face financial distress.

B. appear on the right side of a balance sheet.

C. generally produce a high rate of return.

D. can be sold quickly at close to full value.

E. include all intangible assets.

- Financial leverage:

A. increases as the net working capital increases.

B. is equal to the market value of a firm divided by the firm’s book value.

C. is inversely related to the level of debt.

D. is the ratio of a firm’s revenues to its fixed expenses.

E. increases the potential return to the shareholders.

- Which one of the following statements concerning market and book values is correct?

A. The market value of accounts receivable is generally higher than the book value of those receivables.

B. The market value tends to provide a better guide to the actual worth of an asset than does the book value.

C. The market value of fixed assets will always exceed the book value of those assets.

D. Book values represent the amount of cash that will be received if an asset is sold.

E. The current book value of equipment purchased last year is equal to the initial cost of the equipment.

- Which one of the following is included in the market value of a firm but not in the book value?

A. Raw materials

B. Partially-built inventory

C. Tax liability

D. Reputation of the firm

E. Value of a partially-depreciated machine

- The market value of a firm’s fixed assets:

A. must exceed the book value of those assets.

B. is more predictable than the book value of those assets.

C. in addition to the firm’s net working capital reflects the true value of a firm.

D. is decreased annually by the depreciation expense.

E. is equal to the estimated current cash value of those assets.

- Which one of the following statements is correct concerning a firm’s fixed assets?

A. The market value is the expected selling price in today’s economy.

B. The market value is affected by the accounting method selected.

C. The market value is equal to the initial cost minus the depreciation to date.

D. The book value is equal to the market value minus the accumulated depreciation.

E. The book value is the greater of the initial cost or the current market value.

- Which one of the following statements concerning the balance sheet is correct?

A. Total assets equal total liabilities minus total equity.

B. Net working capital is equal total assets minus total liabilities.

C. Assets are listed in descending order of liquidity.

D. Current assets are equal to total assets minus net working capital.

E. Shareholders’ equity is equal to net working capital minus net fixed assets plus long-term debt.

- An income statement prepared according to GAAP:

A. reflects the net cash flows of a firm over a stated period of time.

B. reflects the financial position of a firm as of a particular date.

C. distinguishes variable costs from fixed costs.

D. records revenue when payment for a sale is received.

E. records expenses based on the matching principle.

- An increase in which one of the following will increase net income?

A. Fixed costs

B. Depreciation

C. Marginal tax rate

D. Revenue

E. Dividends

- Which two of the following determine when revenue is recorded on the financial statements based on the recognition principle?

I. Payment is collected for the sale of a good or service

II. The earnings process is virtually complete

III. The value of a sale can be reliably determined

IV. The product is physically delivered to the buyer

A. I and II only

B. I and IV only

C. II and III only

D. II and IV only

E. I and III only

- Depreciation does which one of the following for a profitable firm?

A. Increases net income

B. Increases net fixed assets

C. Decreases net working capital

D. Lowers taxes

E. Has no effect on net income

- The recognition principle states that:

A. costs should be recorded on the income statement whenever those costs can be reliably determined.

B. costs should be recorded when paid.

C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

D. sales should be recorded when the payment for that sale is received.

E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

- The matching principle states that:

A. costs should be recorded on the income statement whenever those costs can be reliably determined.

B. costs should be recorded when paid.

C. the costs of producing an item should be recorded when the sale of that item is recorded as revenue.

D. sales should be recorded when the payment for that sale is received.

E. sales should be recorded when the earnings process is virtually completed and the value of the sale can be determined.

- Which one of the following statements related to the income statement is correct?

A. Depreciation has no effect on taxes.

B. Interest paid is a noncash item.

C. Taxable income must be a positive value.

D. Net income is distributed either to dividends or retained earnings.

E. Taxable income plus interest and depreciation equals earnings before interest and taxes.

- Firms that compile financial statements according to GAAP:

A. record income and expenses at the time they affect the firm’s cash flows.

B. have no discretion over the timing of recording either revenue or expense items.

C. must record all expenses when incurred.

D. can still manipulate their earnings to some degree.

E. record both income and expenses as soon as the amount for each can be ascertained.

- The concept of marginal taxation is best exemplified by which one of the following?

A. Kirby’s paid $120,000 in taxes while its primary competitor only paid $80,000 in taxes.

B. Johnson’s Retreat only paid $45,000 on total revenue of $570,000 last year.

C. Mitchell’s Grocer increased its sales by $52,000 last year and had to pay an additional $16,000 in taxes.

D. Burlington Centre paid no taxes last year due to carryforward losses.

E. The Blue Moon paid $2.20 in taxes for every $10 of revenue last year.

- The corporate tax structure in the U.S. is based on a:

A. maximum tax rate of 38 percent.

B. minimum tax rate of 10 percent.

C. flat rate of 34 percent for the highest income earners.

D. flat-rate tax.

E. modified flat-rate tax.

- Which one of the following will increase the cash flow from assets for a tax-paying firm, all else constant?

A. An increase in net capital spending

B. A decrease in the cash flow to creditors

C. An increase in depreciation

D. An increase in the change in net working capital

E. A decrease in dividends paid

- A negative cash flow to stockholders indicates a firm:

A. had a negative cash flow from assets.

B. had a positive cash flow to creditors.

C. paid dividends that exceeded the amount of the net new equity.

D. repurchased more shares than it sold.

E. received more from selling stock than it paid out to shareholders.

- If a firm has a negative cash flow from assets every year for several years, the firm:

A. may be continually increasing in size.

B. must also have a negative cash flow from operations each year.

C. is operating at a high level of efficiency.

D. is repaying debt every year.

E. has annual net losses.

- An increase in which one of the following will increase operating cash flow for a profitable, tax-paying firm?

A. Fixed expenses

B. Interest paid

C. Net capital spending

D. Inventory

E. Depreciation

- Tressler Industries opted to repurchase 5,000 shares of stock last year in lieu of paying a dividend. The cash flow statement for last year must have which one of the following assuming that no new shares were issued?

A. Positive operating cash flow

B. Negative cash flow from assets

C. Negative cash flow to stockholders

D. Negative operating cash flow

E. Positive cash flow to stockholders

- Net capital spending is equal to:

A. ending net fixed assets minus beginning net fixed assets plus depreciation.

B. beginning net fixed assets minus ending net fixed assets plus depreciation.

C. ending net fixed assets minus beginning net fixed assets minus depreciation.

D. ending total assets minus beginning total assets plus depreciation.

E. ending total assets minus beginning total assets minus depreciation.

- Which one of the following relates to a negative change in net working capital?

A. Increase in the inventory level

B. Sale of net fixed assets

C. Purchase of net fixed assets

D. Increase in current assets and decrease in current liabilities for the period

E. Increase in current liabilities with no change in current assets for the period

- Which one of the following will increase cash flow from assets but not affect the operating cash flow?

A. Increase in depreciation

B. Increase in accounts receivable

C. Sale of a fixed asset

D. Decrease in cost of goods sold

E. Increase in sales

- Cash flow to creditors is equal to:

A. cash flow from assets plus cash flow to stockholders.

B. beginning total liabilities minus ending total liabilities plus interest paid.

C. beginning long-term debt minus ending long-term debt plus interest paid.

D. ending total debt minus beginning total debt plus interest paid.

E. ending long-term debt minus beginning long-term debt plus interest paid.

- Which one of the following indicates that a firm has generated sufficient internal cash flow to finance its entire operations for the period?

A. Positive operating cash flow

B. Negative cash flow to creditors

C. Positive cash flow to stockholders

D. Negative net capital spending

E. Positive cash flow from assets

- Global Exporters has total assets of $84,300, net working capital of $22,900, owner’s equity of $38,600, and long-term debt of $23,900. What is the value of the current assets?

A. $21,600

B. $24,300

C. $38,900

D. $44,700

E. $46,100

- Morgantown Movers has net working capital of $11,300, current assets of $31,200, equity of $53,400, and long-term debt of $11,600. What is the amount of the net fixed assets?

A. $31,800

B. $32,900

C. $45,500

D. $48,100

E. $53,700

- The Corner Store currently has $3,600 in cash. The company owes $31,800 to suppliers for merchandise and $21,500 to the bank for a long-term loan. Customers owe The Corner Store $19,000 for their purchases. The inventory has a book value of $53,300 and an estimated market value of $71,200. If the store compiled a balance sheet as of today, what would be the book value of the current assets?

A. $46,800

B. $55,600

C. $64,700

D. $75,900

E. $96,500

- Donut Delite has total assets of $31,300, long-term debt of $8,600, net fixed assets of $19,300, and owners’ equity of $21,100. What is the value of the net working capital?

A. $9,800

B. $10,400

C. $18,900

D. $21,300

E. $23,200

- Pitt Metal Works had $87,600 in net fixed assets at the beginning of the year. During the year, the company purchased $6,400 in new equipment. It also sold, at a price of $2,300, some old equipment with a book value of $1,100. The depreciation expense for the year was $4,700. What is the net fixed asset balance at the end of the year?

A. $76,400

B. $78,800

C. $80,000

D. $88,200

E. $89,400

- Plato’s Foods has ending net fixed assets of $84,400 and beginning net fixed assets of $79,900. During the year, the firm sold assets with a total book value of $13,600 and also recorded $14,800 in depreciation expense. How much did the company spend to buy new fixed assets?

A. -$23,900

B. $3,300

C. $32,900

D. $36,800

E. $37,400

- Green Roofs, Inc. has current liabilities of $14,300 and accounts receivable of $7,800. The firm has total assets of $43,100 and net fixed assets of $23,700. The owners’ equity has a book value of $21,400. What is the amount of the net working capital?

A. $5,100

B. $5,700

C. $6,500

D. $8,200

E. $9,400

- Pete’s Warehouse has net working capital of $2,400, total assets of $19,300, and net fixed assets of $10,200. What is the value of the current liabilities?

A. -$6,700

B. -$2,900

C. $2,900

D. $6,700

E. $11,500

- Albertson and Roberts reports the following account balances: inventory of $27,600, equipment of $128,300, accounts payable of $24,700, cash of $11,900, and accounts receivable of $31,900. What is the amount of the current assets?

A. $46,700

B. $56,000

C. $71,400

D. $175,000

E. $199,700

- Donner United has total owner’s equity of $18,800. The firm has current assets of $23,100, current liabilities of $12,200, and total assets of $36,400. What is the value of the long-term debt?

A. $5,400

B. $12,500

C. $13,700

D. $29,800

E. $43,000

- The Walters Co. has beginning long-term debt of $54,500, which is the principal balance of a loan payable to Centre Bank. During the year, the company paid a total of $16,300 to the bank, including $4,100 of interest. The company also borrowed $11,000. What is the value of the ending long-term debt?

A. $45,100

B. $53,300

C. $58,200

D. $65,500

E. $85,900

- The Toy Store has beginning retained earnings of $28,975. For the year, the company earned net income of $4,680 and paid dividends of $1,600. The company also issued $3,000 worth of new stock. What is the value of the retained earnings account at the end of the year?

A. $20,445

B. $22,695

C. $27,375

D. $32,055

E. $35,255

- Blasco Printing has net income of $26,310 for the year. At the beginning of the year, the firm had common stock of $35,000, paid-in surplus of $11,200, and retained earnings of $48,420. At the end of the year, the firm had total equity of $142,430. The firm does not pay dividends. What is the amount of the net new equity raised during the year?

A. $18,000

B. $21,500

C. $32,700

D. $48,900

E. $48,310

- The Embroidery Shoppe had beginning retained earnings of $18,670. During the year, the company reported sales of $83,490, costs of $68,407, depreciation of $8,200, dividends of $950, and interest paid of $478. The tax rate is 35 percent. What is the retained earnings balance at the end of the year?

A. $21,883.25

B. $22,193.95

C. $22,833.24

D. $23,783.24

E. $30,393.95

- The owners’ equity for The Buck Store was $58,900 at the beginning of the year. During the year, the company had aftertax income of $34,200, of which $2,200 was paid in dividends. Also during the year, the company repurchased $6,500 of stock from one of the shareholders. What is the value of the owners’ equity at year end?

A. $54,500

B. $56,700

C. $82,200

D. $84,400

E. $90,900

- Gino’s Winery has net working capital of $29,800, net fixed assets of $64,800, current liabilities of $34,700, and long-term debt of $23,000. What is the value of the owners’ equity?

A. $36,900

B. $66,700

C. $71,600

D. $89,400

E. $106,300

- The Import Store has cash of $34,600 and accounts receivable of $54,200. The inventory cost $92,300 and can be sold today for $146,900. The fixed assets were purchased at a cost of $234,500 of which $87,900 has been depreciated. The fixed assets can be sold today for $199,000. What is the total book value of the firm’s assets?

A. $309,900

B. $327,700

C. $346,800

D. $382,300

E. $434,700

- Lester’s Fried Chick’n purchased its building 11 years ago at a cost of $139,000. The building is currently valued at $179,000. The firm has other fixed assets that cost $66,000 and are currently valued at $58,000. To date, the firm has recorded a total of $79,000 in depreciation on the various assets. The company has current liabilities of $36,600 and net working capital of $18,400. What is the total book value of the firm’s assets?

A. $181,000

B. $241,000

C. $331,000

D. $339,000

E. $379,000

- The financial statements of Mark’s Auto Repair reflect cash of $4,600, accounts receivable of $11,500, accounts payable of $22,900, inventory of $17,800, long-term debt of $42,000, and net fixed assets of $63,800. The firm estimates that if it wanted to cease operations today it could sell the inventory for $25,000 and the fixed assets for $49,000. The firm could also collect 100 percent of its receivables. What is the market value of the assets?

A. $32,800

B. $39,900

C. $74,000

D. $90,100

E. $97,700

- The Good Life Store has sales of $79,600. The cost of goods sold is $48,200 and the other costs are $18,700. Depreciation is $8,300 and the tax rate is 34 percent. What is the net income?

A. $2,904

B. $8,382

C. $11,204

D. $14,660

E. $16,682

- Gallagher’s Supply has sales of $387,000 and costs of $294,500. The depreciation expense is $43,800. Interest paid equals $18,200 and dividends paid equal $6,500. The tax rate is 35 percent. What is the addition to retained earnings?

A. $10,775

B. $11,460

C. $13,120

D. $13,325

E. $15,450

- Last year, The Pizza Joint added $4,100 to retained earnings from sales of $93,600. The company had costs of $74,400, dividends of $2,500, and interest paid of $1,400. The tax rate was 34 percent. What was the amount of the depreciation expense?

A. $7,300

B. $7,500

C. $7,800

D. $8,100

E. $8,400

- Frank Town Farms has sales of $481,600, costs of $379,700, depreciation expense of $32,100, and interest paid of $8,400. The tax rate is 32 percent. How much net income did the firm earn for the period?

A. $41,752

B. $43,090

C. $43,380

D. $45,671

E. $45,886

- For the year, Movers United has net income of $31,800, net new equity of $7,500, and an addition to retained earnings of $24,200. What is the amount of the dividends paid?

A. $100

B. $7,500

C. $7,600

D. $15,100

E. $16,700

- Home Repairs, Inc. incurred depreciation expenses of $21,900 last year. The sales were $811,400 and the addition to retained earnings was $14,680. The firm paid interest of $9,700 and dividends of $1,100. The tax rate was 34 percent. What was the amount of the costs incurred by the firm?

A. $665,200.00

B. $689,407.67

C. $742,306.08

D. $755,890.91

E. $780,400.21

**Chapter 04**

**Introduction to Valuation: The Time Value of Money**

**Multiple Choice Questions**

- Martha is investing $5 today at 6 percent interest so she can have $10 later. The $10 is referred to as the:

A. true value.

B. future value.

C. present value.

D. discounted value.

E. complex value.

- Tom earned $120 in interest on his savings account last year. Tom has decided to leave the $120 in his account so that he can earn interest on the $120 this year. This process of earning interest on prior interest earnings is called:

A. discounting.

B. compounding.

C. duplicating.

D. multiplying.

E. indexing.

- Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as:

A. simple interest.

B. complex interest.

C. accrued interest.

D. interest on interest.

E. discounted interest.

- Lester had $6,270 in his savings account at the beginning of this year. This amount includes both the $6,000 he originally invested at the beginning of last year plus the $270 he earned in interest last year. This year, Lester earned a total of $282.15 in interest even though the interest rate on the account remained constant. This $282.15 is best described as:

A. simple interest.

B. interest on interest.

C. discounted interest.

D. complex interest.

E. compound interest.

- By definition, a bank that pays simple interest on a savings account will pay interest:

A. only at the beginning of the investment period.

B. on interest.

C. only on the principal amount originally invested.

D. on both the principal amount and the reinvested interest.

E. only if all previous interest payments are reinvested.

- Sue needs to invest $3,626 today in order for her savings account to be worth $5,000 six years from now. Which one of the following terms refers to the $3,626?

A. Present value

B. Compound value

C. Future value

D. Complex value

E. Factor value

- Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:

A. aggregating.

B. discounting.

C. simplifying.

D. compounding.

E. extrapolating.

- The interest rate used to compute the present value of a future cash flow is called the:

A. prime rate.

B. current rate.

C. discount rate.

D. compound rate.

E. simple rate.

- Computing the present value of a future cash flow to determine what that cash flow is worth today is called:

A. compounding.

B. factoring.

C. time valuation.

D. simple cash flow valuation.

E. discounted cash flow valuation.

- Sara is investing $1,000 today. Which one of the following will increase the future value of that amount?

A. Shortening the investment time period

B. Paying interest only on the principal amount

C. Paying simple interest rather than compound interest

D. Paying interest only at the end of the investment period rather than throughout the investment period

E. Increasing the interest rate

- Sam wants to invest $5,000 for 5 years. Which one of the following rates will provide him with the largest future value?

A. 5 percent simple interest

B. 5 percent interest, compounded annually

C. 6 percent interest, compounded annually

D. 7 percent simple interest

E. 7 percent interest, compounded annually

- Jenny needs to borrow $16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

A. 8 percent simple interest

B. 8 percent interest, compounded annually

C. 8.5 percent simple interest

D. 8.5 percent interest, compounded annually

E. 9 percent interest, compounded annually

- Which of the following will increase the future value of a lump sum investment?

I. Decreasing the interest rate

II. Increasing the interest rate

III. Increasing the time period

IV. Decreasing the amount of the lump sum investment

A. I and III only

B. I and IV only

C. II and III only

D. II and IV only

E. II, III, and IV only

- Which one of the following is the correct formula for the future value of $500 invested today at 7 percent interest for 8 years?

A. FV = $500/[(1 + 0.08) ´ 7]

B. FV = $500/[(1 + 0.07) ´ 8]

C. FV = $500/(0.07 ´ 8)

D. FV = $500 (1 + 0.07)^{8}

E. FV = $500 (1 + 0.08)^{7}

- Given an interest rate of zero percent, the future value of a lump sum invested today will always:

A. remain constant, regardless of the investment time period.

B. decrease if the investment time period is shortened.

C. decrease if the investment time period is lengthened.

D. be equal to $0.

E. be infinite in value.

- Terry invested $2,000 today in an investment that pays 6.5 percent annual interest. Which one of the following statements is correct, assuming all interest is reinvested?

A. Terry will earn the same amount of interest each year.

B. Terry could have the same future value and invest less than $2,000 initially if he could earn more than 6.5 percent interest.

C. Terry will earn an increasing amount of interest each and every year even if he should decide to withdraw the interest annually rather than reinvesting the interest.

D. Terry’s interest for year two will be equal to $2,000 ´ 0.065 ´ 2.

E. Terry will be earning simple interest.

- Which of the following will decrease the future value of a lump sum investment made today assuming that all interest is reinvested? Assume the interest rate is a positive value.

I. Increase in the interest rate

II. Decrease in the lump sum amount

III. Increase in the investment time period

IV. Decrease in the investment time period

A. I and III only

B. I and IV only

C. I, II, and III only

D. II and III only

E. II and IV only

- Which one of the following will increase the present value of a lump sum future amount? Assume the interest rate is a positive value and all interest is reinvested.

A. Increase in the time period

B. Increase in the interest rate

C. Decrease in the future value

D. Decrease in the interest rate

E. None of the above

- Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent interest, compounded annually. At the end of three years:

A. Both Jeff and Kurt will have accounts of equal value.

B. Kurt will have twice the money saved that Jeff does.

C. Kurt will earn exactly twice the amount of interest that Jeff earns.

D. Kurt will have a larger account value than Jeff will.

E. Jeff will have more money saved than Kurt.

- Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money?

A. 6 percent interest for 3 years

B. 12 percent interest for 5 years

C. 7 percent interest for 9 years

D. 8 percent interest for 9 years

E. 6 percent interest for 10 years

- Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.

A. PV = $600 (1 + 6)^{7}

B. PV = $600 (1 + 0.07)^{6}

C. PV = $600 ´ (0.07 ´ 6)

D. PV = $600/(1 + 0.07)^{6}

E. PV = $600/(1 + 6)^{0.07}

- Centre Bank pays 2.5 percent interest, compounded annually, on its savings accounts. Country Bank pays 2.5 percent simple interest on its savings accounts. You want to deposit sufficient funds today so that you will have $1,500 in your account 2 years from today. The amount you must deposit today:

A. is the same regardless of which bank you choose because they both pay compound interest.

B. is the same regardless of which bank you choose because they both pay simple interest.

C. is the same regardless of which bank you choose because the time period is the same for both banks.

D. will be greater if you invest with Centre Bank.

E. will be greater if you invest with Country Bank.

- The present value of a lump sum future amount:

A. increases as the interest rate decreases.

B. decreases as the time period decreases.

C. is inversely related to the future value.

D. is directly related to the interest rate.

E. is directly related to the time period.

- The relationship between the present value and the time period is best described as:

A. direct.

B. inverse.

C. unrelated.

D. ambiguous.

E. parallel.

- Today, Courtney wants to invest less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct?

A. The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest.

B. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal.

C. She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest.

D. The length of time she has to wait to reach her goal is directly related to the interest rate she earns.

E. The period of time she has to wait decreases as the amount she invests today increases.

- Which one of the following is a correct statement, all else held constant?

A. The present value is inversely related to the future value.

B. The future value is inversely related to the period of time.

C. The period of time is directly related to the interest rate.

D. The present value is directly related to the interest rate.

E. The future value is directly related to the interest rate.

- You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 8 percent interest. Approximately how long must you wait for your investment to double in value?

A. 6 years

B. 7 years

C. 8 years

D. 9 years

E. 10 years

- Today, you deposit $2,400 in a bank account that pays 4 percent simple interest. How much interest will you earn over the next 5 years?

A. $96.00

B. $101.15

C. $480.00

D. $492.16

E. $519.97

- Your parents just gave you a gift of $15,000. You are investing this money for 12 years at 5 percent simple interest. How much money will you have at the end of the 12 years?

A. $15,750

B. $16,000

C. $17,375

D. $24,000

E. $26,938

- Precision Engineering invested $110,000 at 6.5 percent interest, compounded annually for 4 years. How much interest on interest did the company earn over this period of time?

A. $2,481.25

B. $2,911.30

C. $3,014.14

D. $3,250.00

E. $3,333.33

- Roger just deposited $13,000 into his account at Market Place Bank. The bank will pay 2.3 percent interest, compounded annually, on this account. How much interest on interest will he earn over the next 15 years?

A. $638.16

B. $799.28

C. $821.03

D. $906.15

E. $923.70

- Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years?

A. $0

B. $2,109.16

C. $3,266.49

D. $7,109.16

E. $8,266.49

- Scott has $4,800 that he wants to invest for 3 years. He can invest this amount at his credit union and earn 4 percent simple interest. Or, he can open an account at Trust Bank and earn 3.65 percent interest, compounded annually. If he decides to invest at Trust Bank for 3 years, he will:

A. earn $15.02 more than if he had invested with his credit union.

B. earn $30.98 less than if he had invested with his credit union.

C. earn the same amount as if he had invested with the credit union.

D. have a total balance of $4,992 in his account after one year.

E. have a total balance of $4,876 in his account after one year.

- What is the future value of $4,900 invested for 8 years at 7 percent compounded annually?

A. $8,397.74

B. $8,419.11

C. $8,511.15

D. $8,513.06

E. $8,520.22

- Elaine has just received an insurance settlement of $25,000. She wants to save this money until her daughter goes to college. If she can earn an average of 6.5 percent, compounded annually, how much will she have saved when her daughter enters college 8 years from now?

A. $38,000.00

B. $40,929.02

C. $41,374.89

D. $41,899.60

E. $42,000.00

- Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account?

A. $129,411.20

B. $132,827.88

C. $134,616.56

D. $141,919.67

E. $142,003.12

- Thirteen years ago, you deposited $2,400 into an account. Eight years ago, you added an additional $1,000 to this account. You earned 8 percent, compounded annually, for the first 5 years and 5.5 percent, compounded annually, for the last 8 years. How much money do you have in your account today?

A. $4,666.67

B. $4,717.29

C. $5,411.90

D. $6,708.15

E. $6,946.59

- Your parents spent $6,200 to buy 500 shares of stock in a new company 13 years ago. The stock has appreciated 9 percent per year on average. What is the current value of those 500 shares?

A. $18,824.17

B. $19,007.99

C. $19,580.92

D. $20,515.08

E. $22,449.92

- You just won $25,000 and deposited your winnings into an account that pays 6.2 percent interest, compounded annually. How long will you have to wait until your winnings are worth $50,000?

A. 11.52 years

B. 12.00 years

C. 12.29 years

D. 12.67 years

E. 12.90 years

- When you were born, your parents opened an investment account in your name and deposited $500 into the account. The account has earned an average annual rate of return of 4.8 percent. Today, the account is valued at $36,911.22. How old are you?

A. 74.47 years

B. 76.67 years

C. 81.08 years

D. 87.33 years

E. 91.75 years

- Today, Tony is investing $16,000 at 6.5 percent, compounded annually, for 4 years. How much additional income could he earn if he had invested this amount at 7 percent, compounded annually?

A. $323.22

B. $389.28

C. $401.16

D. $442.79

E. $484.08

- Sixty years ago, your grandparents opened two savings accounts and deposited $200 in each account. The first account was with City Bank at 3 percent, compounded annually. The second account was with Country Bank at 3.5 percent, compounded annually. Which one of the following statements is true concerning these accounts?

A. The City Bank account is currently worth $1,201.54.

B. The City Bank account has earned $211.19 more in interest than the Country Bank account.

C. The Country Bank account is currently worth $1,526.08.

D. The Country Bank account has paid $367.48 more in interest than the City Bank account.

E. The Country Bank account has paid $397.30 more in interest than the City Bank account.

- Six years from now, you will be inheriting $100,000. What is this inheritance worth to you today if you can earn 6.5 percent interest, compounded annually?

A. $68,533.41

B. $70,008.21

C. $72,419.05

D. $72,798.47

E. $74,003.15

- You want to have $25,000 for a down payment on a house 6 years from now. If you can earn 6.5 percent, compounded annually, on your savings, how much do you need to deposit today to reach your goal?

A. $17,133.35

B. $17,420.73

C. $17,880.69

D. $18,211.17

E. $18,886.40

- You want to have $35,000 in cash to buy a car 4 years from today. You expect to earn 8 percent, compounded annually, on your savings. How much do you need to deposit today if this is the only money you save for this purpose?

A. $23,618.92

B. $24,511.68

C. $25,726.04

D. $26,013.01

E. $26,311.15

- Skyline Industries will need $1.8 million 5 years from now to replace some equipment. Currently, the firm has some extra cash and would like to establish a savings account for this purpose. The account pays 5.25 percent interest, compounded annually. How much money must the company deposit today to fully fund the equipment purchase?

A. $1,279,947.20

B. $1,298,407.21

C. $1,350,868.47

D. $1,393,676.52

E. $1,412,308.18

- You and your brother are planning a large anniversary party 3 years from today for your grandparents’ 50
^{th}wedding anniversary. You have estimated that you will need $2,500 for this party. You can earn 3.5 percent compounded annually on your savings. How much would you and your brother have to deposit today in one lump sum to pay for the entire party?

A. $2,199.74

B. $2,254.86

C. $2,308.16

D. $2,334.90

E. $2,368.81

- Isaac only has $690 today but needs $800 to buy a new laptop. How long will he have to wait to buy the laptop if he earns 5.4 percent compounded annually on his savings?

A. 2.29 years

B. 2.48 years

C. 2.51 years

D. 2.77 years

E. 2.81 years

- How long will it take to double your savings if you earn 3.6 percent interest, compounded annually?

A. 17.78 years

B. 18.04 years

C. 18.67 years

D. 19.42 years

E. 19.60 years

- You have $1,100 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?

A. 18.08 percent

B. 19.90 percent

C. 22.15 percent

D. 24.57 percent

E. 27.21 percent

- You have been told that you need $21,600 today in order to have $100,000 when you retire 42 years from now. What rate of interest was used in the present value computation? Assume interest is compounded annually.

A. 3.72 percent

B. 3.89 percent

C. 4.01 percent

D. 4.23 percent

E. 4.28 percent

- Your friend claims that he invested $5,000 seven years ago and that this investment is worth $38,700 today. For this to be true, what annual rate of return did he have to earn? Assume the interest compounds annually.

A. 28.87 percent

B. 31.39 percent

C. 33.96 percent

D. 36.01 percent

E. 37.87 percent

- You have $2,158 today in your savings account. How long must you wait for your savings to be worth $4,000 if you are earning 2.1 percent interest, compounded annually?

A. 26.68 years

B. 29.69 years

C. 32.13 years

D. 33.33 years

E. 34.14 years

**Essay Questions**

- Explain the time value of money principle and also identify the underlying assumption of that principle.

- Draw a graph that illustrates the relationship between interest rates and the present value of $1,000 to be received in one year.

- Explain the Rule of 72.

- Identify the relationship (direct or inverse) between each of the following pairs of variables as they relate to the time value of money: (Assume all else constant)

Present value and future value _________

Present value and interest rate _________

Present value and time _________

Time and interest rate _________

Time and future value _________

Interest rate and future value _________

- You want to have $2.5 million saved on the day you retire. Explain how you can minimize the amount of cash you must invest in order to achieve this goal.

**Multiple Choice Questions**

- Second Union Bank pays 5 percent simple interest on its savings account balances, whereas Third Street Bank pays 5 percent compounded annually. If you made a $12,000 deposit in each bank, how much more money would you earn from your Third Street Bank account at the end of 15 years?

A. $3,602.89

B. $3,947.14

C. $4,008.01

D. $4,221.15

E. $4,414.14

- Assume the total cost of a college education will be $285,000 when your child enters college in 22 years. You presently have $35,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child’s college education?

A. 8.65 percent

B. 9.40 percent

C. 10.00 percent

D. 10.60 percent

E. 11.00 percent

- At 14 percent interest, how long does it take to quadruple your money?

A. 10.42 years

B. 10.58 years

C. 11.03 years

D. 11.21 years

E. 11.36 years

- You’re trying to save to buy a new $210,000 Ferrari. You have $38,000 today that can be invested at your bank. The bank pays 4.1 percent annual interest on its accounts. How long will it be before you have enough to buy the car?

A. 39.13 years

B. 39.29 years

C. 40.67 years

D. 41.08 years

E. 42.54 years

- Your coin collection contains ten 1949 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2050, assuming they appreciate at a 6.1 percent annual rate?

A. $3,550.61

B. $3,697.29

C. $3,728.54

D. $3,955.98

E. $4,197.29

- Suppose that in 2010, a $10 silver certificate from 1898 sold for $11,200. For this to have been true, what would the annual increase in the value of the certificate have been?

A. 6.47 percent

B. 6.81 percent

C. 7.23 percent

D. 7.49 percent

E. 7.97 percent

- You have just made your first $3,000 contribution to your individual retirement account. Assuming you earn a 9 percent rate of return and make no additional contributions, what will your account be worth when you retire in 35 years? What if you wait for 5 years before contributing?

A. $48,507.26; $42,614.08

B. $57,311.20; $39,803.04

C. $57,311.20; $42,614.08

D. $61,241.90; $39,803.04

E. $61,241.90; $42.614.08

- You are scheduled to receive $7,500 in three years. When you receive it, you will invest it for eight more years at 7.5 percent per year. How much will you have in eleven years?

A. $13,376.08

B. $14,428.09

C. $15,110.24

D. $16,113.33

E. $16,617.07

- You expect to receive $12,000 at graduation one year from now. You plan on investing it at 8 percent until you have $100,000. How long will you wait from now?

A. 27.47 years

B. 27.51 years

C. 27.55 years

D. 28.47 years

E. 28.55 years

- You have $5,000 you want to invest for the next 45 years. You are offered an investment plan that will pay you 6 percent per year for the next 15 years and 10 percent per year for the last 30 years. How much will you have at the end of the 45 years? How much will you have if the investment plan pays you 10 percent per year for the first 15 years and 6 percent per year for the next 30 years?

A. $201,516.38 ; $201,516.38

B. $209,092.54; $201,516.38

C. $209,092.54; $119,959.94

D. $209,092.54; $209,092.52

E. $221,408.97; $119,949.94

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