An ordinary annuity is best defined by which one of the following?

 
 
A. increasing payments paid for a definitive period of time
B.  increasing payments paid forever
C. equal payments paid at regular intervals over a stated time period
D. equal payments paid at regular intervals of time on an ongoing basis
E.  unequal payments that occur at set intervals for a limited period of time
Which one of the following accurately defines a perpetuity? 
 
A. a limited number of equal payments paid in even time increments
B.  payments of equal amounts that are paid irregularly but indefinitely
C.  varying amounts that are paid at even intervals forever
D. unending equal payments paid at equal time intervals
E.  unending equal payments paid at either equal or unequal time intervals
3. What is the interest rate charged per period multiplied by the number of periods per year
called? 
 
A. effective annual rate
B.  annual percentage rate
C.  periodic interest rate
D. compound interest rate
E.  daily interest rate

4.You are comparing two investment options that each pay 5 percent interest, compounded
annually. Both options will provide you with $12,000 of income. Option A pays three annual
payments starting with $2,000 the first year followed by two annual payments of $5,000 each.
Option B pays three annual payments of $4,000 each. Which one of the following statements
is correct given these two investment options? 
 

A. Both options are of equal value given that they both provide $12,000 of income.
B.  Option A has the higher future value at the end of year three.
C. Option B has a higher present value at time zero than does option A.
D. Option B is a perpetuity.
E.  Option A is an annuity.

5. A monthly interest rate expressed as an annual rate would be an example of which one
of the following rates? 
 
A. stated rate
B.  discounted annual rate
C. effective annual rate
D. periodic monthly rate
E.  consolidated monthly rate

6.Which one of the following statements related to annuities and perpetuities is

correct? 
 A. An ordinary annuity is worth more than an annuity due given equal annual cash
flows for ten years at 7 percent interest, compounded annually.
B.  A perpetuity comprised of $100 monthly payments is worth more than an annuity
comprised of $100 monthly payments, given an interest rate of 12 percent,
compounded monthly.
C.  Most loans are a form of a perpetuity.
D. The present value of a perpetuity cannot be computed, but the future value can.
E.  Perpetuities are finite but annuities are not.
7. Phil can afford $200 a month for 5 years for a car loan. If the interest rate is 7.5
percent, how much can he afford to borrow to purchase a car? 
 

A. $8,750.00
B.  $9,348.03
C. $9,981.06
D. $10,266.67
E.  $10,400.00
8. Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent.
How much will she have in her account at the end of 45 years? 
 

A. $1,806,429
B.  $1,838,369
C.  $2,211,407
D. $2,333,572
E.  $2,508,316
9.
You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5
years at 8.6 percent interest. What is the amount of each payment? 
 

A. $287.71
B.  $291.40
C.  $301.12
D. $342.76
E.  $366.05
10.
You borrow $165,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 30
years. Payments are made monthly. If you pay the mortgage according to the loan agreement,
how much total interest will you pay? 
 

A. $106,408
B.  $129,079
C. $135,971
D. $164,319
E.  $191,406
12.
On this date last year, you borrowed $3,400. You have to repay the loan principal plus all of the
interest six years from today. The payment that is required at that time is $6,000. What is the
interest rate on this loan? 
 
A. 8.01 percent
B.  8.45 percent
C.  8.78 percent
D. 9.47 percent
E.  9.93 percent

13.
The Pawn Shop loans money at an annual rate of 23 percent and compounds interest weekly.
What is the actual rate being charged on these loans? 
 

A. 25.16 percent
B.  25.80 percent
C.  26.49 percent
D. 26.56 percent
E.  26.64 percent
14. What is the annual percentage rate on a loan with a stated rate of 2.75 percent per
quarter? 
 

A. 11.00 percent
B.  11.09 percent
C.  11.18 percent
D. 11.27 percent
E.  11.31 percent

APR = 0.0275 × 4 = 11.00 percent

15. You grandfather won a lottery years ago. The value of his winnings at the time was
$50,000. He invested this money such that it will provide annual payments of $2,400 a
year to his heirs forever. What is the rate of return? 
 

A. 4.75 percent
B.  4.80 percent
C.  5.00 percent
D. 5.10 percent
E.  5.15 percent

16. Shelley won a lottery and will receive $1,000 a year for the next ten years. The value of her
winnings today discounted at her discount rate is called which one of the following? 
 
A. single amount
B.  future value
C. present value
D. simple amount
E.  compounded value
Refer to section 5.2
17. Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal
invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest
annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct
assuming that neither Sue nor Neal has withdrawn any money from their accounts? 
 
A. Sue will have less money when she retires than Neal.
B.  Neal will earn more interest on interest than Sue.
C.  Neal will earn more compound interest than Sue.
D. If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings.
E.  Sue will have more money than Neal as long as they retire at the same time.
Refer to section 5.1

18. Which one of the following variables is the exponent in the present value formula? 
 
A. present value.
B.  future value.
C.  interest rate.
D. time.
E.  There is no exponent in the present value formula.
Refer to sections 5.2

19. Today, you earn a salary of $36,000. What will be your annual salary twelve years from now
if you earn annual raises of 3.6 percent? 
 
A. $55,032.54
B.  $57,414.06
C.  $58,235.24
D. $59,122.08
E.  $59,360.45
Future value = $36,000 × (1 + .036)12 = $55,032.54
20. Ten years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today,
that account has increased in value to $330,592. What rate of interest is the firm earning on this
money? 
 
A. 8.80 percent
B.  9.78 percent
C.  10.75 percent
D. 11.28 percent
E.  11.53 percent
$330,592 = $130,000 × (1 + r)10; r = 9.78 percent

21. Suppose you are committed to owning a $140,000 Ferrari. You believe your mutual fund can
achieve an annual rate of return of 8 percent and you want to buy the car in 7 years. How much
must you invest today to fund this purchase assuming the price of the car remains constant? 
 
A. $74,208.16
B.  $81,688.66
C.  $87,911.08
D. $98,019.82
E.  $99,446.60
PV = $140,000 × [1/(1 + .08)7; PV = $81,688.66
22. Which one of the following terms is defined as a conflict of interest between the corporate
shareholders and the corporate managers? 
 

A. articles of incorporation
B.  corporate breakdown
C. agency problem
D. bylaws
E.  legal liability

Refer to section 1.4

25. Why should financial managers strive to maximize the current value per share of the existing
stock? 
 
A. doing so guarantees the company will grow in size at the maximum possible rate
B.  doing so increases employee salaries
C. because they have been hired to represent the interests of the current shareholders
D. because this will increase the current dividends per share
E.  because managers often receive shares of stock as part of their compensation

26. Assume the average vehicle selling price in the United States last year was $41,996. The
average price 9 years earlier was $29,000. What was the annual increase in the selling price over
this time period? 
 
A. 3.89 percent
B.  4.20 percent
C.  4.56 percent
D. 5.01 percent
E.  5.40 percent
$41,996 = $29,000 × (1 + r)9; r = 4.20 percent

27. You expect to receive $9,000 at graduation in 2 years. You plan on investing this money at
10 percent until you have $60,000. How many years will it be until this occurs? 
 

A. 18.78 years
B.  19.96 years
C. 21.90 years
D. 23.08 years
E.  25.00 years
$60,000 = $9,000 × (1 + .10)t; t = 19.90 years
Total time = 2 + 19.90 = 21.90 years
 NARRBEGIN: Bavarian Sausage, Inc.
Bavarian Sausage, Inc.
Bavarian Sausage, Inc. posted the following balance sheet and income statement.

Balance Sheet
Cash $  50,000 Accounts Payable $185,000
Accounts Receivable 125,000 Notes Payable 125,000
Inventories 225,000 Long-term debt 115,000
Net Plant and
Equipment   525,000 Common Stock 350,000
Retained earnings   150,000
Total liabilities and
Total Assets $925,000 Stockholders’ Equity $925,000

Income Statement
Sales $525,000
Cost of goods sold 215,000
Depreciation     65,000

Earnings before
interest and taxes 245,000
Interest expense 35,000

Net profit before

taxes 210,000
Taxes (@ 40%)     84,000

Net income $126,000

NARREND

7. What is Bavarian Sausage, Inc.’s quick ratio?

a. 0.5645
b. 1.2903
c. 1.9565
d. 0.8871
ANS: A
(CA-INV)/CL
175/310=.5645

PTS: 1 DIF: E
REF: 2.3 Analyzing Financial Performance Using Ratio Analysis
NAT: Analytic skills
 LOC: acquire knowledge of financial analysis and cash flows

10. What is Bavarian Sausage, Inc.’s net profit margin?

a. 40%
b. 47%
c. 15%
d. 24%
ANS: D
NPM=NI/Sales=126/525=.24

PTS: 1 DIF: E
REF: 2.3 Analyzing Financial Performance Using Ratio Analysis
NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

11. What is Bavarian Sausage, Inc.’s debt-equity ratio?

a. 0.23
b. 0.52
c. 1.25
d. 0.85
ANS: A
LTD/Eq.=115/(350+150)=.23

PTS: 1 DIF: E
REF: 2.3 Analyzing Financial Performance Using Ratio Analysis
NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

12. Calculate Bavarian Sausage, Inc.’s return on assets.

a. 25.20%
b. 16.35%
c. 13.62%
d. 8.47%
ANS: C
ROA=NI/TA=126/925=.1362

PTS: 1 DIF: E
REF: 2.3 Analyzing Financial Performance Using Ratio Analysis
NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

14. Calculate Bavarian Sausage, Inc.’s inventory turnover.

a. 1.05
 b. 0.96
c. 0.76
d. 1.51
ANS: B
Inv. Turn=CGS/Inv=215/225=.96

PTS: 1 DIF: E
REF: 2.3 Analyzing Financial Performance Using Ratio Analysis
NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

15. Calculate Bavarian Sausage, Inc.’s return on equity.

a. 24.00%
b. 13.62%
c. 15.74%
d. 25.20%
ANS: D
126/(150+350)=.2520

PTS: 1 DIF: E
REF: 2.3 Analyzing Financial Performance Using Ratio Analysis
NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

17. If a company’s net profit margin is 5% and its total asset turnover is 3.5, what is its ROA?
a. 17.50%
b. 1.43%
c. 70.00%
d. 12.53%
ANS: A
ROA=Net profit margine * Invintory turnover
ROA=.05*3.5=.1750

PTS: 1 DIF: E
REF: 2.3 Analyzing Financial Performance Using Ratio Analysis
NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

18. You have the following information about a firm: total asset = $350,000; common stock equity =
$175,000; ROE = 12.5%. What is the firm’s earnings available for common stockholders?
a. $43,750
b. $21,875
c. $50,000
d. $47,632
ANS: B
.125*175,000=21,875
PTS: 1 DIF: M
REF: 2.3 Analyzing Financial Performance Using Ratio Analysis
NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows

6) Nielsen Auto Parts had beginning net fixed assets of $218,470 and ending net fixed assets of
$209,411. During the year, assets with a combined book value of $6,943 were sold. Depreciation
for the year was $42,822. What is the amount of net capital spending? 
 

A. $33,763
B.  $40,706
C.  $58,218
D. $65,161
E.  $67,408
Net capital spending = $209,411 - $218,470 + $42,822 = $33,763

11) A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and
current liabilities of $3,908. How many dollars worth of sales are generated from every $1 in
total assets? 
 

A. $1.08
B.  $1.14
C.  $1.19
D. $1.26
E.  $1.30
Total asset turnover = $31,350/($2,715 + $22,407 + $3,908) = 1.08
Every $1 in total assets generates $1.08 in sales.