BUSN 5200 Week 1 to 8 Quizzes Solution
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BUSN 5200 Week 1 to 8 Quizzes
Solution
BUSN 5200 Quiz for week 1
Note:
In the questions below, the correct answer is identified with an asterisk
1. In a
corporation, the Chief Financial Officer (CFO) usually reports to the:
a.
Treasurer
b.
Controller
c.
Chief Operating Officer (COO)
d. VP
of Financial Planning
2. The
primary factor that separates the corporate form of business from partnerships
and sole proprietorships is:
a.
Corporations are larger than partnerships and sole proprietorships
b. The
owners of corporations get to keep all the company’s profits
c. The
owners of corporations run the business and have unlimited liability
d.
Corporations are “legal persons” separate and distinct from their owners
3. The
primary goal of a publicly-owned firm interested in serving its stockholders
should be to
a.
Maximize expected total corporate profit.
b.
Maximize expected EPS.
c.
Minimize the chances of losses.
d.
Maximize the stock price per share.
e.
Maximize expected net income.
4. By
maximizing the earnings of the firm we will ensure that the price per share of
common stock is maximized, hence shareholders’ wealth will also be maximized.
a. True
b.
False
5.
Which of the following is the best measure of the wealth of a firm’s
stockholders?
a. The
firm’s Net Income during the past year
b.
Expected Earnings per Share during the coming year
c. Book
Value (or Net Worth) as recorded on the balance sheet
d. The
price of the firm’s stock on the open market
6.
Consider the following firms:
Net
Income Stock Price at Stock Price at
this year Beg of Year End of Year
this year Beg of Year End of Year
Firm A:
$10,000,000 $20 $10
Firm B:
$(10,000,000) $10 $20
a. The
manager of Firm A is doing a better job than B
b. The
manager of Firm B is doing a better job than A
c.
Neither manager is doing a good job
d. Both
managers are doing a good job
7. The
practice of locating a U.S. Firm’s corporate headquarters in Bermuda because
Bermuda does not have a corporate income tax is:
a.
Illegal
b.
Irresponsible
c.
Definitely unethical
d.
Legal, but might be considered unethical by some
8. In
corporations, the goals of management and the goals of the stockholders are
a.
Always the same
b.
Always different
c.
Might be different
d. Must
be different
9. The
corporate website for McDonalds Corporation is:
10. The
CEO of McDonalds Corporation is:
a. Mr.
Jim Skinner
b. Mr.
Ray Kroc
c. Mr.
Don Thompson
d. Ms.
Jan Fields
e. Mr.
Fred Turner
BUSN 5200 Quiz for week 2
Note:
In the questions below, the correct answer is identified with an asterisk
1. The
area of accounting called Financial accounting deals with:
a.
producing financial statements for the organization
b. costs, budgets, production rates, labor rates, prices, and so on
b. costs, budgets, production rates, labor rates, prices, and so on
c. providing
third party reviews of other firms’ financial statements
d.
maximizing the wealth of the firm’s owners
2. GAAP
stands for:
a.
Guaranteed Accounting Accuracy Program
b.
Global Access to Accounting Processing
c.
Government Accountability And Payment
d.
Generally Accepted Accounting Principles
3.
Assume Macy’s sells $20,000 worth of men’s suits in December 2013. The
customers all put the purchases on their Macy’s charge accounts and pay for the
suits in January, 2014. If Macy’s uses Accrual Accounting how much in Sales
will they record in December 2013?
a. $0
b.
$10,000
c.
$20,000
d.
$40,000
4. On a
company’s balance sheet, Total Liabilities plus Total Equity always equals
Total Assets
a. True
b.
False
5.
Family Market bought 1000 cases of beans in 2012 that it still has in a
warehouse. The amount spent for the beans would be recorded on Family’s 2012
income statement as inventory expense.
a. True
b.
False
6. The
Retained Earnings account on the balance sheet lists wages that have been
earned by employees that have not yet been paid to them.
a. True
b.
False
7. In
2012 the Simon the Pieman corporation had $10 million in sales, $5.2 million in
operating costs, and $200,000 in interest expense. It also paid 40% of it’s pre
tax income to the U.S. government as income tax expense. Simon’s Net After tax
Income for 2012 was:
a.
$1,840,000
b.
$600,000
c.
$4,600,000
d.
$2,760,000
8. How
much did McDonalds have in Total Assets at the end of 2012? (in millions)
a.
$4,922.1
b.
$18.602.5
c.
$15,293.6
d.
$35,386.5
9. What
was McDonalds’ Total Revenue in 2012? (in millions)
a.
$18,602.5
b.
$27,567.0
c.
$8,964.5
d.
$5,464.8
10. How
much cash was provided by McDonalds’ operating activities in 2012? (in
millions)
a.
$5,464.8
b.
$6,966.1
c. $0.4
d.
$2,336.1
End of quiz
BUSN 5200 Quiz for week 3
BUSN 5200 Quiz for week 3
Note:
In the questions below, the correct answer is identified with an asterisk
1. (See
Exhibit 2-2 on page 58 in your BUSN 5200 Custom text Version 2) Assume Main
Street Store’s Net Sales in 2010 were $1,000,000 and it’s Net Income in 2010
was $17,000. Thus, between 2010 and 2011 Main Street Store’s net sales
increased 20%. During the same period what percentage did net income increase?
a. 5.6%
b.
17.0%
c. 5.9%
d. 94.4%
c. 5.9%
d. 94.4%
2. (See
Exhibit 2-2 on page 58 in your BUSN 5200 Custom text Version 2) In 2011 Main
Street Store’s largest expense was:
a. Net
Sales
b. Cost of Goods Sold
b. Cost of Goods Sold
c.
Interest Expense
d.
Income Tax
3. (See
Exhibit 2-1 on page 56 in your BUSN 5200 Custom text Version 2) As of August
31, 2011, what percentage of Main Street Store’s assets were financed with debt
(that is, liabilities)?
a.
20.9%
b.
36.6%
c. 15.6%
c. 15.6%
d. 100%
4. (See
Exhibit 2-1 on page 56 in your BUSN 5200 Custom text Version 2) What was Main
Street Store’s Net Worth at the end of August, 2011?
a.
$320,000
b. $117,000
c. $34,000
c. $34,000
d.
$203,000
5. (See
Exhibit 2-4 on page 62 in your BUSN 5200 Custom text Version 2) Which of the
following categories produced most of Main Street Store’s cash in 2011?
a. Cash Flows from Operations $(161,000)
a. Cash Flows from Operations $(161,000)
b. Cash
Flows from Investing Activities $(40,000)
c. Cash
Flows from Financing Activities
6. (See
Exhibit 2-4 on page 62 in your BUSN 5200 Custom text Version 2) What did Main
Street Store spend most of its cash on in 2011?
a.
Buying equipment
b. Paying off debt
b. Paying off debt
c.
Increasing inventory
d.
Paying dividends
7. (See
Exhibit 2-4 on page 62 in your BUSN 5200 Custom text Version 2) What happened
to Main Street Store’s Cash Account in 2011?
a. It
increased
b. It decreased
b. It decreased
c. It
stayed the same
d. You
can’t tell without further information
8. Which
of the following is true about McDonalds Corporation?
a.
Between 2010 and 2011 total revenue increased by a higher percentage than net
income.
b.
Between 2010 and 2011 total revenue increased by a lower percentage than net
income.
income.
c.
McDonalds’ sales decreased between 2010 and 2011.
d.
McDonalds’ net income decreased between 2010 and 2011.
9.
McDonalds’ net worth (in millions) at the end of 2011 was:
a.
$16.6
b. $0
c.
$14,390.2
d.
32,989.9
10.
Which of the following is true about McDonalds in 2011?
a. The
corporation lost money.
b. The
corporation paid no taxes.
c. The
corporation paid no dividends.
d. The
corporation was authorized to issue preferred stock, but none was issued.
End of quiz
BUSN 5200 Quiz for week 4
BUSN 5200 Quiz for week 4
Note:
In the questions below, the correct answer is identified with an asterisk
1. A
firm with a Current Ratio of 2.0 is twice as profitable as a firm with a
Current Ratio of 1.0.
a. True
b.
False
2. All
other factors being equal, a company that uses debt financing will have a
higher return on equity (ROE) ratio than one that does not.
a. True
b. False
b. False
3. In
general, firms want their Times Interest Earned ratio to be as low as possible.
a. True
b.
False
4. A
company whose Total Asset Turnover ratio is 1.0 is using its assets more
efficiently than one whose ratio is 2.0.
a. True
b.
False
5. If a
firm’s current ratio is less than 1.0, it indicates that:
a. The
firm had negative net income for the year
b. The
firm will be unable to pay its short term loans which come due this year
liabilities
liabilities
c.
Current Assets are less than Current Liabilities
d. The
firm is insolvent
6. A
firm which has a relatively large amount of cash, accounts receivable, and
inventory on its books and a relatively small amount of current liabilities
would be considered:
a. liquid
b.
profitable
c.
risky
d. nuts
7.
Refer to the following income statement for the Classic Cappuccino Corporation
(CCC) to answer the question that follows:
Total
Revenue $50,000
Operating Expenses 25,000
Depreciation 1,000
Operating Profit 24,000
Interest Expense 1,000
Before Tax Profit 23,000
Taxes 6,900
After Tax Profit $16,100
Operating Expenses 25,000
Depreciation 1,000
Operating Profit 24,000
Interest Expense 1,000
Before Tax Profit 23,000
Taxes 6,900
After Tax Profit $16,100
CCC’s
Net Profit Margin is:
a.
16.1%
b.
23.0%
c.
32.2%
d.
$161,000
8. If a
firm’s PE ratio was 22, you would know that:
a.
Profits over Earnings = 22
b. The
firm will probably not have any trouble meeting its debt obligations this year
c. The
firm’s stock price is expected to increase 22%
d.
Investors are willing to pay 22 times the firm’s EPS for a share of the firm’s
stock
9.
Which of the following ratios would a potential creditor be most interested in?
a.
Times Interest Earned
b.
Economic Value Added (EVA)
c.
Return on Equity (ROE)
d. Net
Profit Margin
10. The
Du Pont equation allows you to gain additional insight into a firm’s
a.
Liquidity
b.
Sources of ROE
c.
Sales potential
d.
Sources of income
End of quiz
BUSN 5200 Quiz for week 5
BUSN 5200 Quiz for week 5
Note:
In the questions below, the correct answer is identified with an asterisk
1. A
budget is a formal written statement of management’s plans for the future
expressed in financial terms.
a. True
b.
False
2. The
basic budgeting process consists of four steps:
(1)
List the items to be included in the budget
(2) Summarize what is known about how each item in the budget is expected to change in the future.
(3) Apply the expected changes to each budget item to produce the budget
(4) Follow-up
(2) Summarize what is known about how each item in the budget is expected to change in the future.
(3) Apply the expected changes to each budget item to produce the budget
(4) Follow-up
a. True
b.
False
3. If
your sales this year were $37,250,000 and you were forecasting 17 percent
growth for next year, then your next year’s sales would be $54,250,000.
a. True
b.
False
4. If
ratios computed on forecasted “pro forma” financial statements are out of
acceptable tolerances, it is an indication that the forecast is faulty and must
be redone.
a. True
b.
False
5.
Consider the following financial data:
Year
Sales
2005 $3,892
2006 3,904
2007 6,094
2008 6,337
2009 5,075
2005 $3,892
2006 3,904
2007 6,094
2008 6,337
2009 5,075
The
company’s average annual sales growth rate from 2005 through 2009 was:
a.
10.1%
b.
30.4%
c. 6.9%
d. 5.5%
d. 5.5%
6.
Assume that your firm wants its Inventory Turnover ratio next year to be 7x.
Cost of goods Sold is forecasted to be $6,992. What will the forecasted
inventory balance have to be to achieve a Turnover ratio of 7x?
a. $999
b.
$6,985
c.
$48,944
d.
Can’t tell without further information
7.
Kenney Corporation recently reported the following income statement for 2009
(numbers are in millions of dollars):
2010
Sales $7,000 x 1.10 = $7,700
Total operating costs 3,000 x 1.10 = 3,300
EBIT 4,000 4,400
Interest 200 200
Earnings before tax (EBT) 3,800 4,200
Taxes (40%) 1,520 1,680
Net income $2,280 $2,520
Dividends (50%) 1,260
Addition to retained earnings $1,260
2010
Sales $7,000 x 1.10 = $7,700
Total operating costs 3,000 x 1.10 = 3,300
EBIT 4,000 4,400
Interest 200 200
Earnings before tax (EBT) 3,800 4,200
Taxes (40%) 1,520 1,680
Net income $2,280 $2,520
Dividends (50%) 1,260
Addition to retained earnings $1,260
The
company forecasts that its sales will increase by 10 percent in 2010 and its
operating costs will increase in proportion to sales. The company’s interest
expense is expected to remain at $200 million, and the tax rate will remain at
40 percent. The company plans to pay out 50 percent of its net income as
dividends, the other 50 percent will be additions to retained earnings. What is
the forecasted addition to retained earnings for 2010?
a.
$1,140
b.
$1,260
c.
$1,440
d. $1,790
e.
$1,810
8. If
you constructed a set of pro forma financial statements for 2010 and found that
projected Total Assets exceeded projected Total Liabilities and Equity by
$11,250, you would know that:
a. your
forecasting method is inaccurate
b. your
forecasting assumptions or calculations must be in error, because projected
Assets
and projected Liabilities and Equity must always balance
and projected Liabilities and Equity must always balance
c. you
must arrange for $11,250 in additional financing
d. your
firm will have $11,250 of excess funds available in 2010
9.
Consider the following condensed Income Statement:
2009
2010
Sales
$8,000,000 x 1.15 = $9,200,000
COGS 6,500,000 x 1.15 = 7,475,000
Gross Profit 1,500,000 $1,725,000
COGS 6,500,000 x 1.15 = 7,475,000
Gross Profit 1,500,000 $1,725,000
Sales
growth in 2010 is expected to be 15%
If COGS
is assumed to vary directly with sales, then Gross Profit for 2010 will be:
a.
$7,475,000
b.
$1,725,000
c.
$1,200,000
d.
$1,500,000
10.
Jill’s Wigs Inc. had the following balance sheet last year:
Forecast this year
Cash $ 800 x 2 = $1,600
Accounts receivable 450 x 2 = 900
Inventory 950 x 2 = 1,900
Net fixed assets 34,000 34,000
Total assets $36,200 $38,400
Forecast this year
Cash $ 800 x 2 = $1,600
Accounts receivable 450 x 2 = 900
Inventory 950 x 2 = 1,900
Net fixed assets 34,000 34,000
Total assets $36,200 $38,400
Accounts
payable $ 350 x 2 = $ 700
Accrued wages 150 x 2 = 300
Notes payable 2,000 2,000
Mortgage 26,500 26,500
Common stock 3,200 3,200
Retained earnings 4,000 + $1,000 = 5,000
Total liabilities & equity $36,200 $37,700
Accrued wages 150 x 2 = 300
Notes payable 2,000 2,000
Mortgage 26,500 26,500
Common stock 3,200 3,200
Retained earnings 4,000 + $1,000 = 5,000
Total liabilities & equity $36,200 $37,700
AFN =
$38,400 – $37,700 = $700
Jill
has just invented a non-slip wig for men which she expects will cause sales to
double from $10,000 to $20,000, increasing net income to $1,000. On Jill’s
balance sheet the cash, accounts receivable, and inventory accounts, and the
accounts payable and accrued wages accounts all vary directly with sales (that
is, when sales changes these accounts change by the same percentage). Jill also
feels that she can handle the increase in sales without adding any fixed
assets. (1) Will Jill need any outside capital if she pays no dividends? (2) If
so, how much?
a. No;
zero
b. Yes;
$7,700
c. Yes;
$1,700
d. Yes;
$700
e. No;
there will be a $700 surplus.
End of quiz
BUSN 5200 Quiz for week 6
BUSN 5200 Quiz for week 6
Note:
In the questions below, the correct answer is identified with an asterisk
1. When
we say why we say money has time value, we mean:
a. It
takes time to make money
b. Time
is money
c.
Money to be received or paid at one time is not of the same value as money to
be received or paid at another time
be received or paid at another time
d. A
dollar to be paid today is worth less than a dollar to be paid next week
2. It
is important for managers to be familiar with time value of money concepts
because
a. You
need them to measure the value of future cash
b. It is illegal to manage a firm without them
b. It is illegal to manage a firm without them
c. Time
value of money concepts affect how much managers are paid
d. They
must be considered when making managerial decisions
3. In a
rare moment of generosity, you give your nephew $100 on his first birthday.
Your nephew’s mother, however, knew about the time value of money, so she
invested the gift in a 20-year 7% CD. (At maturity the CD pays back the
principal plus accumulated interest at 7% a year.) If your nephew cashes in the
CD at maturity, how much will he receive?
a. $107
b. $358
c. $387
d.
$2,140
4. You
deposit $2,000 in a savings account that pays 10 percent interest, compounded
annually. How much will your account be worth in 15 years?
a. $2,030.21
a. $2,030.21
b.
$5,000.00
c.
$8,091.12
d.
$8,354.50
e.
$9,020.10
5. You
can earn 8 percent interest, compounded annually. How much must you deposit
today to withdraw $10,000 in 6 years?
a.
$5,402.69
b.
$6,301.70
c.
$6,756.76
d.
$8,432.10
e.
$9,259.26
6. From
a financial point of view, which is the best choice: to receive $10,000 now, or
a note that promises $15,000 five years from now? Five year interest rates are
8%.
a.
$10,000 now
b.
$15,000
7.
Examining your finances, you decide that you can afford to invest $1,200 each
year toward your retirement fund. If you invest the money at the end of each
year at 9% interest, and you retire in 20 years, how much will be in your fund
at that time?
a.
$6,725
b.
$10,954
c.
$24,000
d.
$61,392
8. You
are in charge of a new Missouri State Lottery. The lottery rules say that winners
are to be paid $10 million in the form of 10 annual payments of $1 million
each. Assuming that the interest rate is 10% and the payments are to be made at
the end of each of the next 10 years, how much money does your lottery
organization have to deposit in an account today in order to make the required
payments to a lottery winner?
a.
$10,000,000
b.
$3,855,433
c.
$6,144,567
d.
$9,090,909
9. In
November 2007 you bought 100 shares of Microsoft stock for $35.375 a share. In
November 2009 you sold your stock for $92.5625 a share. What was your average
annual rate of return on your Microsoft investment? (disregard dividends and
commissions)
a. 262%
b. 62%
c. 585%
d. 1.6%
10. You
may have heard of zero coupon bonds (zero-coupon bonds pay their owners $1,000
at maturity and involve no other cash flows other than the purchase price). If
you bought a zero coupon bond for $300, held the bond for 10 years, and then
cashed it in for $1,000 at the end of the 10th year, what average annual rate
of return would you realize on your investment?
a. 30%
b. 233%
c. 113%
d.
1.28%
e.
12.79%
End of quiz
BUSN 5200 Quiz for week 7
BUSN 5200 Quiz for week 7
Note:
In the questions below, the correct answer is identified with an asterisk
1.
(Monthly compounding) How much would you have to invest today at 12% annual
interest, compounded monthly, in order to end up with $1,000 in your investment
account at the end of 12 months?
a.
$887.45
b.
$892.86
c.
$256.68
d.
$990.10
2.
(Annualizing a rate) The effective annual rate (EAR) of 1% interest per month is:
a. 12%
b.
12.68%
c. 1%
c. 1%
d. Not
enough information to determine
3.
(Annualizing a rate) Your bank advertises 12 month CDs with a stated annual
interest rate of 12%, compounded monthly. What is the effective annual rate
(EAR) on the CD?
a. 1%
b. 12%
c. 12.68%
d. 144%
4. (PV
of annuity due) You are in charge of a new Missouri State Lottery. The lottery
rules say that winners are to be paid $10 million in the form of 10 annual
payments of $1 million each. Assuming that the interest rate is 10% and the
payments are to be made at the beginning of each of the next 10 years, how much
money does your lottery organization have to deposit in an account today in
order to make the required payments to a lottery winner?
a.
$10,000,000
b.
$6,759,024
c.
$6,144,567
d. $9,090,909
5.
(Rate of return of annuity) If the Bank of America agreed to lend you $50,000
for 10 years in return for 10 annual payments of $7,791 (each payment due at
the end of each year), what annual percent rate of interest are you being
charged?
a. about
20%
b.
about 16%
c.
about 9%
d. 5.4%
6.
(Rate of return of annuity) Joe’s Dockyard is financing a new boat with an
amortizing loan of $24,000 which is to be repaid in 10 annual installments of
$4,247.62 each. What annual interest rate is Joe paying on the loan?
a.
18.9%
b.
17.7%
c.
14.0%
d.
12.0%
7.
(Loan payments) Tom’s Toyotas has a 2004 4 Runner on sale for $16,995. If you
could borrow that amount from Tom’s Credit Union at 7% for 4 years, what would
be your monthly loan payments?
a.
$232.30
b.
$378.85
$
c. $406.97 $
$
c. $406.97 $
d.
$5,017.40
8. (PV
of a perpetuity) The PV of an endless stream of annual payments (the payments
in the stream continue to be paid forever) of $1,200 each to an investor with a
required rate of return of 10% is:
a.
$1,000
a.
$1,200
b. $12,000
d.
$10,000
9. (FV
of an uneven cash flow stream) What’s the future value (FV) of the following
cash flow stream: (discount rate = 10%)
Year Cash Flow FV @ end of year 3
Year Cash Flow FV @ end of year 3
1 100
FV = 100(1+.10)2 = $121
2 200 FV = 200(1+.10)1 = $220
3 300 FV = 300(1+.10)0 = $300
Total FV = $641
a. $600
2 200 FV = 200(1+.10)1 = $220
3 300 FV = 300(1+.10)0 = $300
Total FV = $641
a. $600
b. $660
b. $641
c. $799
10. (PV
of uneven cash flow stream) What’s the present value (PV) of the following cash
flow stream: (discount rate = 10%)
Year Cash Flow PV of cash flow
Year Cash Flow PV of cash flow
a. $451
b. $482
c. $545
d. $600
End of quiz
BUSN 5200 Quiz for week 8
BUSN 5200 Quiz for week 8
Note:
In the questions below, the correct answer is identified with an asterisk
1. In
essence, capital budgeting is the process of:
a.
Deciding what to do with the firm’s money
b.
Deciding how much capital the firm needs
c. Deciding
where to get the money for capital investment projects
d.
Deciding when to invest in a new project
2.
Which of the following cash flows is an “incremental cash flow” for the
purposes of capital budgeting?
a.
Expenditures on plant and equipment for a new project
b.
R& D expenditures for a new project during the last three years
c.
Dividend payments
d.
Reduction of a competitor’s sales as a result of the your company’s
introduction of a new product
3. In
capital budgeting, the payback period is the:
a.
Amount of time it takes to receive all the future cash flows from a project
b.
Amount of time it takes to pay back any money borrowed to finance the project
c.
Amount of time it take for the project to be completed
d.
Amount if time it takes to recoup the initial investment for the project
4. The
Seattle Corporation has been presented with an investment opportunity which
will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per
year in Years 5 through 9, and $40,000 in Year 10. This investment will cost
the firm $150,000 today, and the firm’s cost of capital is 10 percent. At what
point will the initial investment be paid back?
a. at
the end of the 4th year Cumulative cash flows:
b. at
the end of the 5th year
c. at
the end of the 6th year
d. at
the end of the 7th year
5.
Consider the following income statement and answer the question that follows:
Sales
(100 units) $200 P x 100 = $200, P = $2
Variable costs ($.20 ea) 20
Fixed Costs 80
EBIT 100
Interest Expense 30
EBT 70
Income tax 24
Net Income 46
Variable costs ($.20 ea) 20
Fixed Costs 80
EBIT 100
Interest Expense 30
EBT 70
Income tax 24
Net Income 46
What is
the firm’s Breakeven Point in units?
a. 1
b. 45
c. 56
d.
2,000
6. The
net present value of an investment is its present value minus its future value.
a. True
b.
False
7. If
the NPV of a proposed project is positive, the NPV amount represents:
a. The
amount of profit the firm will make if it adopts the project
b. The
amount of cash that the project will produce if adopted
c. The
amount of value that will be added to the firm if the project is adopted
d. The
project’s expected rate of return
8. Joe
the cut-rate bond dealer has offered to sell you a ten year zero-coupon bond
for $300. (Remember, zero-coupon bonds pay their owners $1,000 at maturity and
involve no other cash flows other than the purchase price.) If your required
rate of return for cut-rate bonds is 20%, what is the NPV of Joe’s deal?
a.
about $161
b.
about -$138
c.
about $700
d.
about -$200
e.
about $1096
9. When
using the IRR method to evaluate investments, those with positive IRRs are
accepted and those with negative IRRs are rejected.
a. True
b.
False
10.
You’ve decided to give up playing the stock market and buy some zero-coupon
bonds from Joe the cut-rate bond dealer instead. (Remember, zero-coupon bonds
because they pay off a known amount, $1,000, at maturity and involve no other
cash flows other than the purchase price.) Assume your required rate of return
is 12%. If you buy some 10-year zero coupon bonds for $400 each today will the
bonds meet your return requirements?
a. Yes
IRR = (FV/PV)(1/n) – 1
IRR = ($1,000/$400)(1/10) – 1
b. No * IRR = 2.50.1 – 1
IRR = 1.09596 – 1
c. It depends IRR = .09596, or about 9.6%, which is less than your
12% required rate of return
IRR = ($1,000/$400)(1/10) – 1
b. No * IRR = 2.50.1 – 1
IRR = 1.09596 – 1
c. It depends IRR = .09596, or about 9.6%, which is less than your
12% required rate of return
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