Midterm test 1:

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

Equal payments paid at the end of regular intervals over a stated time
period
2. The number of years forecasted to recover an original investment is classified as:
payback period
3. A business owned by a solitary individual who has unlimited liability for its debt is
called a: sole proprietorship.
4. Which of the following is not included in the computation of operating cash flow?
Interest paid
5. The internal rate of return can best be described as:
the discount rate at which a set of cash flows have a zero net present value
6. ________ is concerned with the maximization of a firm's stock price:
Shareholder wealth maximization
7. Statement of cash flows includes: All of the Above
8. Which of the following statements concerning the payback period, is not true?
It takes account of the time value of money.
9. Which of the following statements concerning the NPV is not true?
If two competing projects are being considered, the one expected to yield the
lowest NPV should be selected
10. Bond Ltd is considering two possible projects, W and X, but can only raise
enough funds to proceed with one of them. Investment appraisal techniques
have been used and the following results found: The payback period, accounting
rate of return and net present value of project W are 3.8 years; 16% and
$880,000, respectively. The payback period, accounting rate of return and net
present value of project X are 2.8 years; 14% and $610,000, respectively. Which
of the following is the most logical interpretation of the results?
Project W should be selected because it will yield the highest NPV.
11. Which one of the following statements related to the cash flow to creditors is
correct?
A positive cash flow to creditors represents a net cash outflow from the firm.
 12. ABC Co wishes to undertake a project requiring an investment of $732,000 which
will generate equal annual inflows of $146,400 in perpetuity. If the first inflow
from the investment is a year after the initial investment, what is the IRR of the
project?
Key: 20%
13. You are scheduled to receive $40,000 in two years. When you receive it, you will
invest it for 9 more years at 7.5 percent per year. How much will you have in 11
years? Key: 76689.55
14. Bean Ltd is considering undertaking a project, which will involve an initial outlay
of $300,000. The project generates the following cash inflows from year 1 to year
3, $100,000; $150,000; $200,000 respectively. If a discount rate of 10% is used
to calculate the NPV of the project, which of the following statements is correct?
(Assume the cash flows arise at the end of each year)
The project will yield a positive NPV of $65,000 approximately, and have a
payback period of 2 years and 3 months.
15. Suppose a business takes out a $5,000, 5-year loan at 9%. The loan agreement
calls for the borrower to pay the interest on the loan balance each year. If the
borrower makes a single, fixed payment every period, how much were interest
and principal paid in year two? $374.81 and $910.65
16. At the beginning of the year, the long-term debt of a firm was S72,918 and total
debt was $138,407. At the end of the year, long-term debt was S68,219 and total
debt was S145,838. The interest paid was $6,430. What is the amount of the
cash flow to creditors? Key: $11,129
17. Which one of the following will increase the value of a firm’s net working
capital: Selling inventory at a profit
18. Which one of the following statements concerning net working capital is most
correct?
Net working capital increases when inventory is sold for cash at a profit.
19. Which one of the following represents the most liquid asset?
$100 of inventory that is sold today for $100 cash
 20. You need a 25-year, fixed-rate mortgage to buy a new home for $250,000. Your
mortgage bank will lend you the money at a 6.6 percent APR for this 300-month
loan. However, you can afford monthly payments of only $1,000, so you offer to
pay off any remaining loan balance at the end of the loan in the form of a single
balloon payment. How large will this balloon payment have to be for you to keep
your monthly payments at $1,000?
Key: $535,238.13