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18. Which of the following statements is TRUE? (Assume that the yearly cash flows are identical for both annuities )
(a) The present value of an annuity due is greater than the present value of an ordinary annuity.
(b) The present value of an ordinary annuity is greater than the present value of an annuity due.
(c) The future value of an ordinary annuity is greater than the future value of an annuity due.
(d) Both B and C are correct.
20. Study the time line and accompanying 5-period cash-flow pattern below.
0 1 2 3 4 5 6 Time line
|--------|--------|--------|--------|--------|--------|
$10 $10 $10 $10 $10 Cash flows
A B
The present value of the 5-period annuity shown above as of Point A is the present value of a 5-period
______________ , whereas the future value of the same annuity as of Point B is the future value of a 5-period
______________ .
(a) ordinary annuity; ordinary annuity.
(b) ordinary annuity; annuity due.
(c) annuity due; annuity due.
(d) annuity due; ordinary annuity.
Part B: Solve the following problems and select the correct answer. (10 x 2 = 20 marks)
1. Kanji Company had sales last year of $245 million. If its average collection period was 36 days, its accounts receivable
balance is closest to _____. (Assume a 365-day year.)
(a) $26.1 million
(b) $23.7 million
(c) $7.4 million
(d) $18.7 million
2. Krisle and Kringle's debt-to-total assets (D/TA) ratio is .4. What is its debt-to-equity (D/E) ratio?
(a) .2
(b) .6
(c) .667
(d) .333
3. You expect to deposit the following cash flows at the end of years 1 through 5, $1,000; $4,000; $9,000; $5,000; and
$2,000 respectively. What is the future account value at the end of year 6 if you can earn 10% compounded annually?
(a) $15,633.62
(b) $21,000.00
(c) $25,178.10
(d) $27,695.91
4. What is the future value of $25,000 received today if it is invested at 6.5% compounded annually for six years?
(a) 17,133.35
(b) 27,476.42
(c) 36,478.56
(d) 39,521.75
(e) 41,374.89
5. You want to put some money away for your child's college education. College will cost $65,000 in 18 years. You can earn
8% compounded annually. How much do you need to invest today?
(a) 16,266.19
(b) 15,258.17
(c) 13,690.82
(d) 11,763.07
(e) 9,828.18
6. A 5-year ordinary annuity has periodic cash flows of $100 each year. If the interest rate is 8 percent, the present value of
this annuity is closest to which of the following?
(a) $331.20
(b) $399.30
(c) $431.24
(d) $486.65
(e) $586.70
7. In 1889, Vincent Van Gogh's painting "Sunflowers" sold for $125. One hundred years later it sold for $36 million. Had
the painting been purchased by your great-grandfather and passed on to you, how much would your average annually
compounded rate of return have been?
(a) 9.11%
(b) 10.09%
(c) 11.88%
(d) 11.99%
(e) 13.40%
8. What's the future value of $2,000 after 3 years if the nominal interest rate is 8% compounded monthly?
(a) 2,854.13
(b) 2,491.45
(c) 2,324.89
(d) 2,011.87
(e) 2,540.47
9. You need $2,000 to buy a new stereo for your car. If you have $800 to invest at 5% compounded annually, how long will
you have to wait to buy the stereo?
(a) 18.7 years
(b) 15.75 years
(c) 14.58 years
(d) 8.42 years
(e) 6.58 years
10. Calculate the Quick Ratio given that Current Assets = $1757, Inventory = $645. and Current Liabilities = $878.
(a) 0.9
(b) 1.27
(c) 1.78
(d) 2.15
1. In financial markets, who are the providers of funds and who are the users? Name some benefits of financial markets.
2. Income Statement data for Green Corp and Red Corp. are presented below.
Green Corp Red Corp
Sales $750,000 $600,000
Cost of goods sold 450,000 390,000
Operating expenses 180,000 138,000
Income tax expense 36,000 21,000
Net income 84,000 51,000
Instructions
Prepare a a vertical analysis for the two companies and comment on their relative profitability.