## Description

**Finance Applications and Theory Marcia Cornett 5th Edition- Test Bank**

** Sample Questions**

**Instant Download With Answers**

**Chapter 2 Reviewing Financial Statements**

** **

1) Which financial statement reports a firm’s assets, liabilities, and equity at a particular point in time?

- A) balance sheet
- B) income statement
- C) statement of retained earnings
- D) statement of cash flows

Answer: A

Difficulty: 1 Easy

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

2) Which financial statement shows the total revenues that a firm earns and the total expenses the firm incurs to generate those revenues over a specific period of time–generally one year?

- A) balance sheet
- B) income statement
- C) statement of retained earnings
- D) statement of cash flows

Answer: B

Difficulty: 1 Easy

Topic: Income statement

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

3) Which financial statement reports the amounts of cash that the firm generated and distributed during a particular time period?

- A) balance sheet
- B) income statement
- C) statement of retained earnings
- D) statement of cash flows

Answer: D

Difficulty: 1 Easy

Topic: Statement of cash flows

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

4) Which financial statement reconciles net income earned during a given period and any cash dividends paid within that period using the change in retained earnings between the beginning and end of the period?

- A) balance sheet
- B) income statement
- C) statement of retained earnings
- D) statement of cash flows

Answer: C

Difficulty: 1 Easy

Topic: Statement of retained earnings

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

5) On which of the four major financial statements would you find the common stock and paid-in surplus?

- A) balance sheet
- B) income statement
- C) statement of cash flows
- D) statement of retained earnings

Answer: A

Difficulty: 1 Easy

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

6) On which of the four major financial statements would you find the increase in inventory?

- A) balance sheet
- B) income statement
- C) statement of cash flows
- D) statement of retained earnings

Answer: C

Difficulty: 1 Easy

Topic: Statement of cash flows

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

7) On which of the four major financial statements would you find net plant and equipment?

- A) balance sheet
- B) income statement
- C) statement of cash flows
- D) statement of retained earnings

Answer: A

Difficulty: 1 Easy

Topic: Balance sheet

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

8) Financial statements of publicly traded firms can be found in a number of places. Which of the following is *NOT* an option for finding publicly traded firms’ financial statements?

- A) Facebook
- B) a firm’s website
- C) Securities and Exchange Commission’s (SEC) website
- D) websites such as finance.yahoo.com

Answer: A

Difficulty: 1 Easy

Topic: Financial statements

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

9) Which of the following changes are true of the Tax Cut and Jobs Act (TCJA) of 2017?

- A) Businesses are allowed to immediately deduct 100% of the cost of eligible property in the year it is placed into service through 2022.
- B) Allowable bonus depreciations will phase down over four years.
- C) Both A and B are true.
- D) None of the above are true.

Answer: C

Difficulty: 1 Easy

Topic: Financial statements

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

10) Which of the following statements is **NOT** true of the Tax Cut and Jobs Act (TCJA) of 2017?

- A) The act permanently lowers corporate taxes from a progressive schedule to a flat 21% starting in 2018.
- B) The act limits the deductibility of net interest expense that exceeds 21% of a firm’s adjusted taxable income starting in 2018.
- C) Neither A or B is false.
- D) Both A and B are false.

Answer: B

Difficulty: 1 Easy

Topic: Financial statements

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

11) For which of the following would one expect the book value of the asset to differ widely from its market value?

- A) cash
- B) accounts receivable
- C) inventory
- D) fixed assets

Answer: D

Difficulty: 1 Easy

Topic: Market and book values

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-02 Differentiate between book (or accounting) value and market value.

12) Common stockholders’ equity divided by number of shares of common stock outstanding is the formula for

- A) earnings per share (EPS).
- B) dividends per share (DPS).
- C) book value per share (BVPS).
- D) market value per share (MVPS).

Answer: C

Difficulty: 1 Easy

Topic: Per-share valuations

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-02 Differentiate between book (or accounting) value and market value.

13) When a firm alters its capital structure to include more or less debt (and, in turn, less or more equity), it impacts which of the following?

- A) the residual cash flows available for stockholders
- B) the number of shares of stock outstanding
- C) the earnings per share (EPS)
- D) all of these choices are correct.

Answer: D

Difficulty: 2 Medium

Topic: Capital structure basics

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-03 Explain how taxes influence corporate managers’ and investors’ decisions.

14) This is the amount of additional taxes a firm must pay out for every additional dollar of taxable income it *earns*.

- A) average tax rate
- B) marginal tax rate
- C) progressive tax system
- D) earnings before tax

Answer: B

Difficulty: 1 Easy

Topic: Taxes

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-03 Explain how taxes influence corporate managers’ and investors’ decisions.

15) An equity-financed firm will

- A) pay more in income taxes than a debt-financed firm.
- B) pay less in income taxes than a debt-financed firm.
- C) pay the same in income taxes as a debt-financed firm.
- D) not pay any income taxes.

Answer: A

Difficulty: 2 Medium

Topic: Taxes

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-03 Explain how taxes influence corporate managers’ and investors’ decisions.

16) Deferred taxes occur when a company postpones taxes on profits pertaining to

- A) tax years they are under an audit by the Internal Revenue Service.
- B) funds they have not collected because they use the accrual method of accounting.
- C) a loss they intend to carry back or carry forward on their income tax returns.
- D) a particular period as they end up postponing part of their tax liability on this year’s profits to future years.

Answer: D

Difficulty: 2 Medium

Topic: Taxes

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-03 Explain how taxes influence corporate managers’ and investors’ decisions.

17) When evaluating the statement of cash flows, which of the following statement(s) is/are true?

- A) Negative cash flow could be a result of investments in new fixed assets or inventory.
- B) Cash expenditures used to expand the firm could drain cash during expansion periods.
- C) Can assist financial professionals in identifying where cash is generated and dispersed.
- D) All of the above.

Answer: D

Difficulty: 2 Medium

Topic: Taxes

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-03 Explain how taxes influence corporate managers’ and investors’ decisions.

18) Net operating profit after taxes (NOPAT) is defined as which of the following?

- A) net profit a firm earns before taxes, but after any financing costs
- B) net profit a firm earns after taxes, and after any financing cost
- C) net profit a firm earns after taxes, but before any financing costs
- D) net profit a firm earns before taxes, and before any financing cost

Answer: C

Difficulty: 2 Medium

Topic: Free cash flow

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-04 Differentiate between accounting income and cash flows.

19) This is cash flow available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.

- A) net income available to common stockholders
- B) cash flow from operations
- C) net cash flow
- D) free cash flow

Answer: D

Difficulty: 1 Easy

Topic: Free cash flow

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-05 Demonstrate how to use a firm’s financial statements to calculate its cash flows.

20) Which of the following activities result in an increase in a firm’s cash?

- A) decrease fixed assets
- B) decrease accounts payable
- C) pay dividends
- D) repurchase of common stock

Answer: A

Difficulty: 2 Medium

Topic: Sources and uses of cash

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-05 Demonstrate how to use a firm’s financial statements to calculate its cash flows.

21) These are cash inflows and outflows associated with buying and selling of fixed or other long-term assets.

- A) cash flows from operations
- B) cash flows from investing activities
- C) cash flows from financing activities
- D) net change in cash and cash equivalents

Answer: B

Difficulty: 1 Easy

Topic: Investing activities

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-05 Demonstrate how to use a firm’s financial statements to calculate its cash flows.

22) Which statement regarding retained earnings is false?

- A) Reinvesting earnings is more expensive than raising capital from outside sources.
- B) Increases in retained earnings can occur because a firm has net income.
- C) Increases in retained earnings can occur when the firm’s common stockholders let management reinvest net income back into the firm rather than payout dividends.
- D) None of the above.

Answer: A

Difficulty: 1 Easy

Topic: Investing activities

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

23) If a company reports a large amount of net income on its income statement during a year, the firm could have

- A) positive cash flow.
- B) negative cash flow.
- C) zero cash flow.
- D) all of these choices are correct.

Answer: D

Difficulty: 2 Medium

Topic: Cash flows

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

24) Free cash flow is defined as

- A) cash flows available for payments to stockholders of a firm after the firm has made payments to all others with claims against it.
- B) cash flows available for payments to stockholders and debt holders of a firm after the firm has made payments necessary to vendors.
- C) cash flows available for payments to stockholders and debt holders of a firm after the firm has made investments in assets necessary to sustain the ongoing operations of the firm.
- D) cash flows available for payments to stockholders and debt holders of a firm that would be tax-free to the recipients.

Answer: C

Difficulty: 2 Medium

Topic: Free cash flow

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

25) The Sarbanes-Oxley Act requires public companies to ensure which of the following individuals have considerable experience applying generally accepted accounting principles (GAAP) for financial statements?

- A) external auditors
- B) internal auditors
- C) chief financial officers
- D) corporate boards’ audit committees

Answer: D

Difficulty: 2 Medium

Topic: Ethics, governance, and regulation

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-06 Observe cautions that should be taken when examining financial statements.

26) Within the GAAP framework:

- A) Managers may smooth earnings to show investors that firm assets are growing.
- B) Managers may take steps to over or understate earnings.
- C) Both A and B are possible
- D) None of the above.

Answer: C

Difficulty: 2 Medium

Topic: Ethics, governance, and regulation

Bloom’s: Understand

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-06 Observe cautions that should be taken when examining financial statements.

27) You are evaluating the balance sheet for Campus Corporation. From the balance sheet you find the following balances: cash and marketable securities = $400,000, accounts receivable = $200,000, inventory = $100,000, accrued wages and taxes = $10,000, accounts payable = $300,000, and notes payable = $600,000. What is Campus’s net working capital?

- A) –$210,000
- B) $700,000
- C) $910,000
- D) $1,610,000

Answer: A

Explanation: net working capital = current assets – current liabilities.

Cypress’s current assets | = | |||||

Cash and marketable securities | = | $ | 400,000 | |||

Accounts receivable | = | $ | 200,000 | |||

Inventory | = | $ | 100,000 | |||

Total current assets | = | $ | 700,000 | |||

Accrued wages and taxes | = | $ | 10,000 | |||

Accounts payable | = | $ | 300,000 | |||

Notes payable | = | $ | 600,000 | |||

Total current liabilities | $ | 910,000 | ||||

So the firm’s net working capital is −$210,000 ($700,000 − $910,000).

Difficulty: 1 Easy

Topic: Net working capital

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

28) Jack and Jill Corporation’s year-end 2018 balance sheet lists current assets of $250,000, fixed assets of $800,000, current liabilities of $195,000, and long-term debt of $300,000. What is Jack and Jill’s total stockholders’ equity?

- A) $495,000
- B) $555,000
- C) $1,050,000
- D) There is not enough information to calculate total stockholders’ equity.

Answer: B

Explanation: Recall the balance sheet identity in Equation 2-1: Assets = Liabilities + Equity.

Rearranging this equation: Equity = Assets − Liabilities. Thus, the balance sheets would appear as follows:

Book value | Book value | |||||||||

Assets | Liabilities and Equity | |||||||||

Current assets | $ | 250,000 | Current liabilities | $ | 195,000 | |||||

Fixed assets | 800,000 | Long—term debt | 300,000 | |||||||

Stockholder’s equity | 555,000 | |||||||||

Total | $ | 1,050,000 | Total | $ | 1,050,000 | |||||

Difficulty: 1 Easy

Topic: Balance sheet

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

29) Bullseye, Inc.’s 2018 income statement lists the following income and expenses: EBIT = $900,000, interest expense = $85,000, and net income = $570,000. What are the 2018 taxes reported on the income statement?

- A) $245,000
- B) $330,000
- C) $815,000
- D) There is not enough information to calculate 2018 taxes.

Answer: A

Explanation: Using the setup of an Income Statement in Table 2.2:

EBIT | $ | 900,000 | |

Interest expense | − | 85,000 | |

EBT | 815,000 | ||

Taxes | − | 245,000 | |

Net income | $ | 570,000 |

Difficulty: 1 Easy

Topic: Income statement

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

30) Consider a firm with an EBIT of $500,000. The firm finances its assets with $2,000,000 debt (costing 6 percent) and 50,000 shares of stock selling at $20.00 per share. To reduce the firm’s risk associated with this financial leverage, the firm is considering reducing its debt by $1,000,000 by selling an additional 50,000 shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain $500,000. What is the change in the firm’s EPS from this change in capital structure?

- A) decrease EPS by $1.68
- B) decrease EPS by $1.92
- C) decrease EPS by $3.20
- D) increase EPS by $0.72

Answer: B

Explanation: Using the setup of an Income Statement in Example 2.2:

Before Capital | After Capital | ||||||||||

Structure Change | Structure Change | ||||||||||

Change | |||||||||||

EBIT | $ | 500,000 | $ | 500,000 | |||||||

−Interest ($2,000,000 × 0.06) | 120,000 | ||||||||||

−Interest ($1,000,000 × 0.06) | 60,000 | ||||||||||

EBT | $ | 380,000 | $ | 440,000 | |||||||

−Taxes (40%) | 152,000 | 176,000 | |||||||||

Net Income | $ | 228,000 | $ | 264,000 | |||||||

Divide # of Shares | 50,000 | 100,000 | |||||||||

EPS | $ | 4.56 | $ | 2.64 | |||||||

The change in capital structure would dilute the stockholders’ EPS by $1.92.

Difficulty: 1 Easy

Topic: Per-share valuations

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

31) Consider a firm with an EBIT of $5,000,000. The firm finances its assets with $20,000,000 debt (costing 5 percent) and 70,000 shares of stock selling at $50.00 per share. To reduce the firm’s risk associated with this financial leverage, the firm is considering reducing its debt by $5,000,000 by selling an additional 100,000 shares of stock. The firm is in the 40 percent tax bracket. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain $5,000,000. What is the change in the firm’s EPS from this change in capital structure?

- A) decrease EPS by $9.29
- B) decrease EPS by $18.70
- C) decrease EPS by $19.29
- D) increase EPS by $2.14

Answer: C

Explanation: Using the setup of an Income Statement in Example 2.2:

Before Capital | After Capital | ||||||||||||

Structure Change | Structure Change | ||||||||||||

Change | |||||||||||||

EBIT | $ | 5,000,000 | $ | 5,000,000 | |||||||||

−Interest ($20,000,000 × 0.05) | 1,000,000 | ||||||||||||

−Interest ($15,000,000 × 0.05) | 750,000 | ||||||||||||

EBT | $ | 4,000,000 | $ | 4,250,000 | |||||||||

−Taxes (40%) | 1,600,000 | 1,700,000 | |||||||||||

Net Income | $ | 2,400,000 | $ | 2,550,000 | |||||||||

Divide # of Shares | 70,000 | 170,000 | |||||||||||

EPS | $ | 34.29 | $ | 15.00 | |||||||||

The change in capital structure would dilute the stockholders’ EPS by $19.29.

Difficulty: 1 Easy

Topic: Per-share valuations

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

32) Barnyard, Inc.’s 2018 income statement lists the following income and expenses: EBIT = $500,000, interest expense = $45,000, and taxes = $152,000. Barnyard’s has no preferred stock outstanding and 200,000 shares of common stock outstanding. What are its 2018 earnings per share?

- A) $2.50
- B) $2.275
- C) $1.74
- D) $1.515

Answer: D

Explanation: Using the setup of an Income Statement in Table 2.2:

EBIT | $ | 500,000 | |

Interest expense | –45,000 | ||

EBT | 455,000 | ||

Taxes | – | 152,000 | |

Net income | $ | 303,000 |

Thus,

Earnings per share (EPS) | = | 303,000 | = $1.515 per share |

200,000 |

Difficulty: 1 Easy

Topic: Per-share valuations

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-01 Recall the major financial statements that firms must prepare and provide.

33) Eccentricity, Inc. had $300,000 in 2018 taxable income. Using the tax schedule from Table 2.3, what are the company’s 2018 income taxes, average tax rate, and marginal tax rate, respectively?

Pay this amount on | Plus this percentage on | |||||||

Taxable income | Base income | anything over the base | ||||||

$0 – $50,000 | $ | 0 | 15 | % | ||||

$50,001 – $75,000 | $ | 7,500 | 25 | % | ||||

$75,001 – $100,000 | $ | 13,750 | 34 | % | ||||

$100,001 – $335,000 | $ | 22,250 | 39 | % | ||||

$335,000 – $10,000,000 | $ | 113,900 | 34 | % |

- A) $22,250, 7.42%, 39%
- B) $78,000, 26.00%, 39%
- C) $100,250, 33.42%, 39%
- D) $139,250, 46.42%, 39%

Answer: C

Explanation: From Table 2.3, the $300,000 of taxable income puts Eccentricity in the 39 percent marginal tax bracket. Thus,

Tax liability = Tax on base amount + Tax rate (amount over base): = $22,250 + .39 ($300,000 − $100,000) = $100,250

Note that the base amount is the maximum dollar value listed in the previous tax bracket. The average tax rate for Eccentricity Inc. comes to:

Average tax rate | = | $100,250 |

$300,000 | ||

= | 33.4167% |

If Eccentricity earned $1 more of taxable income, it would pay 39 cents (its tax rate of 39 percent) more in taxes. Thus, the firm’s marginal tax rate is 39 percent.

Difficulty: 1 Easy

Topic: Taxes

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-03 Explain how taxes influence corporate managers’ and investors’ decisions.

34) Swimmy, Inc. had $400,000 in 2018 taxable income. Using the tax schedule from Table 2.3, what are the company’s 2018 income taxes, average tax rate, and marginal tax rate, respectively?

Pay this amount on | Plus this percentage on | |||||||||

Taxable income | Base income | anything over the base | ||||||||

$0 – $50,000 | $ | 0 | 15 | % | ||||||

$50,001 – $75,000 | $ | 7,500 | 25 | % | ||||||

$75,001 – $100,000 | $ | 13,750 | 34 | % | ||||||

$100,001 – $335,000 | $ | 22,250 | 39 | % | ||||||

$335,000 – $10,000,000 | $ | 113,900 | 34 | % | ||||||

- A) $22,100, 5.53%, 34%
- B) $113,900, 28.48%, 34%
- C) $136,000, 34.00%, 34%
- D) $136,000, 39.00%, 34%

Answer: C

Explanation: From Table 2.3, the $400,000 of taxable income puts Swimmy in the 34 percent marginal tax bracket. Thus, Tax liability = Tax on base amount + Tax rate (amount over base): = $113,900 + 0.34 ($400,000 − $335,000) = $136,000

Note that the base amount is the maximum dollar value listed in the previous tax bracket. The average tax rate for Swimmy Inc. comes to:

Average tax rate | = | $136,000 |

$400,000 | ||

= | 34% |

If Swimmy earned $1 more of taxable income, it would pay 34 cents (its tax rate of 34 percent) more in taxes. Thus, the firm’s marginal tax rate is 34 percent.

Difficulty: 1 Easy

Topic: Taxes

Bloom’s: Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 02-03 Explain how taxes influence corporate managers’ and investors’ decisions.

*Finance, 5e* (Cornett)

**Chapter 4 Time Value of Money 1: Analyzing Single Cash Flows **

** **

1) Which of the following is *NOT* true when developing a time line?

- A) Cash inflows are designated with a positive number.
- B) Cash outflows are designated with a positive number.
- C) The cost is known as the interest rate.
- D) The time line shows the magnitude of cash flows at different points in time.

Answer: B

Difficulty: 1 Easy

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-01 Create a cash flow time line.

2) People borrow money because they expect

- A) their purchases to give them the satisfaction in the future that compensates them for the interest payments charged on the loan.
- B) the time value of money to apply only if they are saving money.
- C) interest rates to rise.
- D) that consumers don’t need to calculate the impact of interest on their purchases.

Answer: A

Difficulty: 1 Easy

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-01 Create a cash flow time line.

3) How are future values affected by changes in interest rates?

- A) The lower the interest rate, the larger the future value will be.
- B) The higher the interest rate, the larger the future value will be.
- C) Future values are not affected by changes in interest rates.
- D) One would need to know the present value in order to determine the impact.

Answer: B

Difficulty: 1 Easy

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-02 Compute the future value of money.

4) How do you calculate the future value of a single period?

- A) Add the interest earned to today’s cash flow.
- B) Add the interest earned to next year’s cash flow.
- C) Multiply the interest eared with today’s cash flow.
- D) Multiply the interest eared with next year’s cash flow.

Answer: A

Difficulty: 1 Easy

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-02 Compute the future value of money.

5) How are present values affected by changes in interest rates?

- A) The lower the interest rate, the larger the present value will be.
- B) The higher the interest rate, the larger the present value will be.
- C) Present values are not affected by changes in interest rates.
- D) One would need to know the future value in order to determine the impact.

Answer: A

Difficulty: 1 Easy

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

6) We call the process of earning interest on both the original deposit and on the earlier interest payments

- A) discounting.
- B) multiplying.
- C) compounding.
- D) computing.

Answer: C

Difficulty: 1 Easy

Topic: Simple and compound interest

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

7) Which of these statements is true of discounting?

- A) It is the reverse of compounding.
- B) It significantly decreases the value of a future amount to the present.
- C) It is the process of figuring out how much an amount that you expect to receive in the future is worth today.
- D) All of the above.

Answer: D

Difficulty: 1 Easy

Topic: Simple and compound interest

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

8) The process of figuring out how much an amount that you expect to receive in the future is worth today is called

- A) discounting.
- B) multiplying.
- C) compounding.
- D) computing.

Answer: A

Difficulty: 1 Easy

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

9) The interest rate, *i*, which we use to calculate present value, is often referred to as the

- A) discount rate.
- B) multiplier.
- C) compound rate.
- D) dividend.

Answer: A

Difficulty: 1 Easy

Topic: Interest rates

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

10) The Rule of 72 is a simple mathematical approximation for

- A) the present value required to double an investment.
- B) the future value required to double an investment.
- C) the payments required to double an investment.
- D) the number of years required to double an investment.

Answer: D

Difficulty: 1 Easy

Topic: Rule of 72

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-06 Apply the Rule of 72.

11) With regard to money deposited in a bank, future values are

- A) smaller than present values.
- B) larger than present values.
- C) equal to present values.
- D) are completely independent of present values.

Answer: B

Difficulty: 1 Easy

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-02 Compute the future value of money.

12) Which of the following statements about the Rule of 72 is not true?

- A) It is a mathematical approximation for the number of years required to double an investment.
- B) It illustrates the power of a discounted rate.
- C) It can be used to approximate the interest rate needed to double an investment for a specified amount of time.
- D) None of the above.

Answer: B

Difficulty: 1 Easy

Topic: Rule of 72

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-06 Apply the Rule of 72.

13) A dollar paid (or received) in the future is

- A) worth more than a dollar paid (or received) today.
- B) worth as much as a dollar paid (or received) today.
- C) not worth as much as a dollar paid (or received) today.
- D) not comparable to a dollar paid (or received) today.

Answer: C

Difficulty: 1 Easy

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

14) When computing the rate of return from selling an investment, the number of years between the present and future cash flows is an important factor in determining

- A) the annual rate earned.
- B) the annual payments required.
- C) whether the present value or the future value is a cash inflow.
- D) whether the present value or the future value is a cash outflow.

Answer: A

Difficulty: 1 Easy

Topic: Number of time periods

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-07 Compute the rate of return realized on selling an investment.

15) When calculating the number of years needed to grow an investment to a specific amount of money

- A) the lower the interest rate, the shorter the time period needed to achieve the growth.
- B) the higher the interest rate, the shorter the time period needed to achieve the growth.
- C) the interest rate has nothing to do with the length of the time period needed to achieve the growth.
- D) the Rule of 72 is the only way to calculate the time period needed to achieve the growth.

Answer: B

Difficulty: 1 Easy

Topic: Number of time periods

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-08 Calculate the number of years needed to grow an investment.

16) Moving cash flows from one point in time to another requires us to use

- A) only present value equations.
- B) only future value equations.
- C) both present value and future value equations.
- D) the Rule of 72.

Answer: C

Difficulty: 2 Medium

Topic: Time value of money

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-05 Move cash flows from one year to another.

17) The longer money can earn interest,

- A) the greater the interest earned on the original deposit exceeds the interest-on-interest.
- B) the greater the compounding effect.
- C) the greater the present value must be to reach a financial goal.
- D) the greater the risk to the investor of not reaching a financial goal.

Answer: B

Difficulty: 1 Easy

Topic: Simple and compound interest

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

18) To solve for time-value equations, you need to know:

- A) the starting cash flow.
- B) the interest rate.
- C) the future cash flow.
- D) all of the above.

Answer: D

Difficulty: 1 Easy

Topic: Rate of return

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-05 Move cash flows from one year to another.

19) What information would you need to know to solve a rate of return problem?

- A) the present value cash flow.
- B) the number of years of the investment.
- C) the future value cash flow.
- D) all of the above.

Answer: D

Difficulty: 1 Easy

Topic: Rate of return

Bloom’s: Remember

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-05 Move cash flows from one year to another.

20) What is the future value of $700 deposited for one year earning 4 percent interest rate annually?

- A) $28
- B) $700
- C) $728
- D) $1,428

Answer: C

Explanation: PV = 700, PMT = 0, I = 4, N = 1, FV = 728

Difficulty: 1 Easy

Topic: Future value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-02 Compute the future value of money.

21) What is the future value of $1,000 deposited for one year earning 5 percent interest rate annually?

- A) $1,000
- B) $1,005
- C) $1,050
- D) $2,050

Answer: C

Explanation: PV = 1000, PMT = 0, I = 5, N = 1, FV = 1050

Difficulty: 1 Easy

Topic: Future value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-02 Compute the future value of money.

22) What is the future value of $2,000 deposited for one year earning 6 percent interest rate annually?

- A) $120
- B) $2.000
- C) $2,120
- D) $4,120

Answer: C

Explanation: PV = 2000, PMT = 0, I = 6, N = 1, FV = 2120

Difficulty: 1 Easy

Topic: Future value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-02 Compute the future value of money.

23) How much would be in your savings account in 7 years after depositing $100 today if the bank pays 5 percent interest per year?

- A) $135.00
- B) $140.71
- C) $735.00
- D) $814.20

Answer: B

Explanation: PV = 100, PMT = 0, I = 5, N = 7, FV = 140.71

Difficulty: 1 Easy

Topic: Future value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

24) How much would be in your savings account in 10 years after depositing $50 today if the bank pays 7 percent interest per year?

- A) $35.00
- B) $98.36
- C) $535.00
- D) $690.82

Answer: B

Explanation: PV = 50, PMT = 0, I = 7, N = 10, FV = 98.36

Difficulty: 1 Easy

Topic: Future value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

25) A deposit of $500 earns the following interest rates?

5 percent in the first year,

6 percent in the second year, and

8 percent in the third year.

What would be the third year future value?

- A) $527.14
- B) $595.00
- C) $601.02
- D) $1595.00

Answer: C

Explanation: $500 × (1 + 0.05) × (1 + 0.06) × (1 + 0.08) = 601.02.

Difficulty: 1 Easy

Topic: Simple and compound interest

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

26) A deposit of $1,000 earns the following interest rates?

8 percent in the first year,

7 percent in the second year, and

8 percent in the third year.

What would be the third year future value?

- A) $1,082.15
- B) $1,230.00
- C) $1,248.05
- D) $3,030.00

Answer: C

Explanation: $1,000 × (1 + 0.08) × (1 + 0.07) × (1 + 0.08) = $1,248.05.

Difficulty: 1 Easy

Topic: Simple and compound interest

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

27) A deposit of $300 earns interest rates of 7 percent in the first year and 10 percent in the second year. What would be the second year future value?

- A) $351.00
- B) $353.10
- C) $602.17
- D) $651.00

Answer: B

Explanation: $300 × (1 + 0.07) × (1 + 0.10) = $353.10.

Difficulty: 1 Easy

Topic: Simple and compound interest

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

28) A deposit of $700 earns interest rates of 10 percent in the first year and 7 percent in the second year. What would be the second year future value?

- A) $771.07
- B) $819.00
- C) $823.90
- D) $1519.00

Answer: C

Explanation: $700 × (1 + 0.10) × (1 + 0.07) = $823.90.

Difficulty: 1 Easy

Topic: Simple and compound interest

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

29) What is the present value of a $500 payment in one year when the discount rate is 5 percent?

- A) $475.00
- B) $476.19
- C) $500.00
- D) $525.00

Answer: B

Explanation: FV = 500, PMT = 0, I = 5, N = 1, PV = 476.19.

Difficulty: 1 Easy

Topic: Present value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

30) What is the present value of a $250 payment in one year when the discount rate is 6 percent?

- A) $245.00
- B) $235.85
- C) $250.00
- D) $265.00

Answer: B

Explanation: FV = 250, PMT = 0, I = 6, N = 1, PV = 235.85.

Difficulty: 1 Easy

Topic: Present value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

31) What is the present value of a $500 payment made in four years when the discount rate is 8 percent?

- A) $365.35
- B) $367.51
- C) $460.00
- D) $680.24

Answer: B

Explanation: FV = 500, PMT = 0, I = 8, N = 4, PV = 367.51

Difficulty: 1 Easy

Topic: Present value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

32) What is the present value of a $750 payment made in three years when the discount rate is 5 percent?

- A) $646.96
- B) $647.88
- C) $712.50
- D) $868.22

Answer: B

Explanation: FV = 750, PMT = 0, I = 5, N = 3, PV = 647.88

Difficulty: 1 Easy

Topic: Present value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

33) What is the present value of a $200 payment made in three years when the discount rate is 8 percent?

- A) $150.00
- B) $158.77
- C) $251.94
- D) $515.42

Answer: B

Explanation: FV = 200, PMT = 0, I = 8, N = 3, PV = 158.77

Difficulty: 1 Easy

Topic: Present value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-04 Calculate the present value of a payment made in the future.

34) Approximately how many years does it take to double a $300 investment when interest rates are 8 percent per year?

- A) 0.11 years
- B) 4.17 years
- C) 9 years
- D) 11 years

Answer: C

Explanation: 72/8 = 9

Difficulty: 1 Easy

Topic: Rule of 72

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-06 Apply the Rule of 72.

35) Approximately how many years does it take to double a $500 investment when interest rates are 4 percent per year?

- A) 0.06 year
- B) 6 years
- C) 6.94 years
- D) 18 years

Answer: D

Explanation: 72/4 = 18

Difficulty: 1 Easy

Topic: Rule of 72

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-06 Apply the Rule of 72.

36) Approximately how many years does it take to double a $600 investment when interest rates are 6 percent per year?

- A) 0.08 year
- B) 8 years
- C) 8.33 years
- D) 12 years

Answer: D

Explanation: 72/6 = 12

Difficulty: 1 Easy

Topic: Rule of 72

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-06 Apply the Rule of 72.

37) Approximately what interest rate is needed to double an investment over six years?

- A) 6 percent
- B) 12 percent
- C) 17 percent
- D) 100 percent

Answer: B

Explanation: 72/6 = 12

Difficulty: 1 Easy

Topic: Rule of 72

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-06 Apply the Rule of 72.

38) Approximately what interest rate is needed to double an investment over four years?

- A) 4 percent
- B) 18 percent
- C) 25 percent
- D) 100 percent

Answer: B

Explanation: 72/4 = 18

Difficulty: 1 Easy

Topic: Rule of 72

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-06 Apply the Rule of 72.

39) Approximately what interest rate is needed to double an investment over eight years?

- A) 8 percent
- B) 9 percent
- C) 12 percent
- D) 100 percent

Answer: B

Explanation: 72/8 = 9

Difficulty: 1 Easy

Topic: Rule of 72

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-06 Apply the Rule of 72.

40) Determine the interest rate earned on a $1,500 deposit when $1,680 is paid back in one year.

- A) 0.89 percent
- B) 1.12 percent
- C) 12.00 percent
- D) 89.00 percent

Answer: C

Explanation: PV = 1500, PMT = 0, N = 1, FV = 1680, CPT I = 12

Difficulty: 1 Easy

Topic: Interest rates

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-07 Compute the rate of return realized on selling an investment.

41) Determine the interest rate earned on a $500 deposit when $650 is paid back in one year.

- A) 0.77 percent
- B) 1.30 percent
- C) 30.0 percent
- D) 77.0 percent

Answer: C

Explanation: PV = 500, PMT = 0, N = 1, FV = 650, CPT I = 30

Difficulty: 1 Easy

Topic: Interest rates

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-07 Compute the rate of return realized on selling an investment.

42) Determine the interest rate earned on a $450 deposit when $475 is paid back in one year.

- A) 0.89 percent
- B) 1.13 percent
- C) 5.56 percent
- D) 13.0 percent

Answer: C

Explanation: PV = 450, PMT = 0, N = 1, FV = 475, CPT I = 5.56

Difficulty: 1 Easy

Topic: Interest rates

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-07 Compute the rate of return realized on selling an investment.

43) Consider a $1,000 deposit earning 7 percent interest per year for four years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

- A) $28.00
- B) $30.00
- C) $280.00
- D) $310.00

Answer: C

Explanation: $1,000 × 7 percent × 4 = $280.

Difficulty: 2 Medium

Topic: Simple and compound interest

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

44) Consider a $2,000 deposit earning 6 percent interest per year for five years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

- A) $60.00
- B) $76.45
- C) $600.00
- D) $676.45

Answer: C

Explanation: $2,000 × 6 percent × 5 = $600.

Difficulty: 2 Medium

Topic: Simple and compound interest

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

45) Consider a $500 deposit earning 5 percent interest per year for five years. How much total interest is earned on the original deposit (excluding interest earned on interest)?

- A) $13.14
- B) $25.00
- C) $125.00
- D) $138.14

Answer: C

Explanation: $500 × 5 percent × 5 = $125.

Difficulty: 2 Medium

Topic: Simple and compound interest

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

46) Consider a $200 deposit earning 8 percent interest per year for three years. How much total interest is earned on interest (excluding interest earned on the original deposit)?

- A) $3.94
- B) $24.00
- C) $48.00
- D) $51.94

Answer: A

Explanation: PV = 200, N = 3, I = 8, PMT = 0, FV = 251.94.

$200 × 8 percent × 3 = $48.

$251.94 − $200 − $48 = $3.94.

Difficulty: 2 Medium

Topic: Simple and compound interest

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-03 Show how the power of compound interest increases wealth.

47) What is the value in year 3 of a $500 cash flow made in year 5 when interest rates are 6 percent?

- A) $374
- B) $420
- C) $440
- D) $445

Answer: D

Explanation: FV = 500, N = (5 − 3) = 2, I = 6, PMT = 0, CPT PV = 445

Difficulty: 2 Medium

Topic: Present value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-05 Move cash flows from one year to another.

48) What is the value in year 5 of a $600 cash flow made in year 10 when interest rates are 5 percent?

- A) $368.35
- B) $450.00
- C) $470.12
- D) $570.00

Answer: C

Explanation: FV = 600, N = (10 − 5) = 5, I = 5, PMT = 0, CPT PV = 470.12

Difficulty: 2 Medium

Topic: Present value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-05 Move cash flows from one year to another.

49) What is the value in year 3 of a $250 cash flow made in year 15 when interest rates are 12 percent?

- A) $45.67
- B) $64.17
- C) $177.95
- D) $220.00

Answer: B

Explanation: FV = 250, N = (15 − 3) = 12, I = 12, PMT = 0, CPT PV = 64.17

Difficulty: 2 Medium

Topic: Present value – single cash flow

Bloom’s: Analyze; Apply

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Learning Goal: 04-05 Move cash flows from one year to another.

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