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BUSN 5200 Week 1 to 8 Homework

BUSN 5200 Week 1 Homework

1. Describe the field of finance. How is it different from the field of accounting?
2. In a typical corporation the finance function is divided into two divisions, or departments.
What are they? What does each department do?
3. What are the three forms of business generally encountered in the US? What are the main
defining characteristics of each?
4. What is the basic financial goal of a business?
5. In the context of a corporation seeking to maximize the wealth of its owners, how is “wealth”
defined?
6. What are the three main factors affecting the market price of a corporation’s stock?
7. What’s wrong (if anything) with saying the basic financial goal of a business is to “maximize
profits?”
8. How would you state the basic goal of a non-profit firm?
9. The Internet company Google managed to avoid $2 billion in international income taxes in
2011 by moving a hefty sum of its revenues to subsidiaries in Bermuda, according to CNBC,
which cited a report by Bloomberg. The search giant reportedly stashed $9.8 billion in revenues
to its shell company in Bermuda — which doesn’t have a corporate income tax — last year
allowing the company to shave its overall tax rate by almost 50 percent. Google’s Bermuda
move was disclosed in a Nov. 21 filing by a subsidiary in the Netherlands. While the company’s

move to shift funds to the country was legal, it could spur the growing global criticism of
corporate tax avoidance. What do you think? Is Google’s action ethical? Why or why not?
10. What is “the agency problem?”

BUSN 5200 Week 2 Homework Assignment

1. Define the process of accounting.
2. What are the three major divisions in the accounting field?
3. What is the Fundamental Accounting Equation?
4. What is the purpose of a balance sheet? What are some examples of typical balance sheet
accounts?
5. What is the purpose of an income statement? What are some examples of typical income
statement accounts?
6. What is the purpose of a statement of cash flows? What are some examples of typical
statement of cash flow accounts?
•
7. Based on the financial information below, prepare an income statement and a balance sheet for
Joe’s-Fly-by-Night Oil company for the year ended December 31, 2012. Unless otherwise
indicated, assume all information below is either for the year 2012 or as of December 31, 2012.

BUSN5200 Week 3 Homework Assignment

For Week 3, please complete the following for Joe’s Fly-By-Night Oil Company, whose latest
income statement and balance sheet are shown below:
• Prepare a graph of sales and net income for the years 2009 – 2012. For the purposes of this
exercise, assume the following historical sales and net income figures for Joe’s Fly-By-Night

Oil:
o
o The following graph illustrates trends in population growth compared to the price of gas:
o Another factor that can affect the company’s sales is the price of oil. The following graph
illustrates gas and crude oil prices:
http://www.theatlantic.com/technology/archive/2013/11/why-are-gas-prices-falling/281450/
• Prepare a pie chart of Joe’s Fly-By-Night Oil’s expense distribution for 2012 and comment on
the results displayed.
o
• Prepare a pie chart of Joe’s Fly-By-Night Oil’s asset distribution for Dec 31, 2012 and
comment on the results displayed.
o
• Prepare a pie chart of Joe’s Fly-By-Night Oil’s capital structure for Dec 31, 2012 and comment
on the results displayed.
o

• BUSN5200 Week 4 Homework Assignment

•
• For Week 4, please complete the following for Joe’s Fly-By-Night Oil Company, whose
financial statements are shown below:
•
•
•
• • Prepare a ratio analysis for the fiscal year ended Dec 31, 2012. Organize your analysis per the
following outline:
•
•
•
•
• BUSN5200 Week 5 Homework Assignment
•
Question 1. Prepare a budget for this year for the Administrative Department at Tom’s Toyota
Company based on the following information:

Question 2. Define a “Static Budget.”
Question 3. Define a “Flexible Budget.”
Question 4. Define the term “Zero-based Budgeting.”
Question 5. Define “Period Budgets.”
Question 6. Define “Rolling Budgets.”
•
Question 7. Big Bob’s Discount Appliances expects sales of $5,000, $5,000, and $10,000 during
April, May, and June (big sale in June). To build business, Big Bob lets all customers buy on
credit, and all do so. In the past, 50% of Big Bob’s sales have been collected during the month of
sale, 40% are collected the following month, and 10% the month after that. If this trend
continues, what will be Big Bob’s total cash collections in the month of June?
Question 8. Little Louie’s expects to have $100 in cash on hand at the beginning of June, and the
company’s target cash balance is $100. Net cash flow for June is minus $300. Assuming that
Little Louie’s borrows to meet short term cash needs and pays back as soon as surplus cash is
available, what will be the company’s ending cash balance after financing at the end of June?
Question 9. Ma & Pa Kettle’s Chili Company has begun selling a new chili recipe and they want
you to help them with next year’s budgeted financial statements. Using the worksheet below,
complete Ma & Pa’s forecast and answer the questions which follow.
Assumptions:

•

For Week 6, please turn in the answers to the following questions:
1. Why do we say money has time value?
2. Why is it important for business managers to be familiar with time value of money concepts?
3. Define Present Value.
4. Define Future Value.
5. What are present value and future value interest factors? (as in PVIF and FVIF)

6. (calculating future value) You buy a 6 year, 8% CD for $1,000. Interest is compounded
annually. How much is it worth at maturity?
7. (calculating present value) What’s the present value of $1,000 to be received in 8 years? (Your
required rate of return is 7% a year.)
8. (calculating the rate of return) A friend promises to pay you $600 two years from now if you
loan him $500 today. What interest rate is your friend offering you?
9. (calculating the future value of an annuity) If you invest $100 a year for 20 years at 7% annual
interest, how much will you have at the end of the 20th year?
10. (calculating the present value of an annuity) How much would you be willing to pay today
for an investment that pays $800 a year at the end of the next 6 years? (Your required rate of
return is 5% a year.)
Case Study Tasks:
1. Refer to the Case Study topic lecture on the Week 5 Content page. Using the information you
obtained last week, complete the Part 3, Ratio Analysis


1. (Monthly compounding) If you bought a $1,000 face value CD that matured in nine months,
and which was advertised as paying 9% annual interest, compounded monthly, how much would
you receive when you cashed in your CD at maturity?
2. (Annualizing a monthly rate) You credit card statement says that you will be charged 1.05%
interest a month on unpaid balances. What is the Effective Annual Rate (EAR) being charged?
3. (FV of annuity due) To finance your newborn daughter’s education you deposit $1,200 a year
at the beginning of each of the next 18 years in an account paying 8% annual interest. How much
will be in the account at the end of the 18th year?
4. (Rate of return of an annuity) Paul’s Perfect Peugeot says they’ll sell you a brand new Italian
“Iron Man” motor scooter for $1,699. Financing is available, and the terms are 10% down and
payments of $46.57 a month for 40 months. What annual interest rate is Paul charging you?

5. (Rate of return of an annuity) You would like to have $1,000,000 40 years from now, but the
most you can afford to invest each year is $1,200. What annual rate of return will you have to
earn to reach your goal?
6. (Monthly loan payment) Best Buy has a flat-screen HDTV on sale for $1,995. If you could
borrow that amount from Carl’s Credit Union at 12% for 1 year, what would be your monthly
loan payments?
12%/year = 1%/month
7. (Solving for an annuity payment) You would like to have $1,000,000 accumulated by the time
you turn 65, which will be 40 years from now. How much would you have to put away each year
to reach your goal, assuming you’re starting from zero now and you earn 10% annual interest on
your investment?
8. (PV of a perpetuity) If your required rate of return was 12% a year, how much would you pay
today for $100 a month forever?
9. (PV of an uneven cash flow stream) what is the PV of the following project?
(Assume r = 10%)
10. (FV of an uneven cash flow stream) what is the FV at the end of year 4 of the following
project?
(Assume r = 10%)


Question 1. List the three steps that make up the general approach to capital budgeting.
Question 2. Define an “Incremental cash flow” as the term is used in capital budgeting.
Question 3. Your firm is considering buying a new machine that costs $200,000, is expected to
generate $110,000 in new revenue each year and will cost $45,000 a year to operate. If your
firm’s marginal income tax rate is 35% what is the Net Cash Flow your firm will realize from the
new machine during the first year? Assume the MACRS depreciation rate for the machine for
year 1 is 20%. Note – do not include the cost of the machine in your answer.
Question 4. Define the payback period method in capital budgeting and state the payback period
decision rule.
Question 5. What is the payback period of the following project?
Question 6: a. What is the firm’s Breakeven Point in units?
Question 7. Define the Net present Value (NPV) method in capital budgeting and state the NPV

decision rule. In economic terms, what does the NPV amount represent?
Question 8. Your firm is looking at a new investment opportunity, Project Alpha, with net cash
flows as shown below. Calculate project Alpha’s Net Present Value (NPV), assuming your
firm’s required rate of return is 10%.
Question 9. Define the Internal Rate of Return (IRR) method in capital budgeting and state the
IRR Decision rule.
Question 10. Calculate the IRR of the project shown below.
Question 10. Calculate the IRR of the project shown below.

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
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:
a. www.mickie-d’s.com
b. www.mcdonalds.com
c. www.bigmacattack.com
d. www.mcdonaldscorp.com
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


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
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


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%
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
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%
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
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)
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
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
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.
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


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
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
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
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


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
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
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%
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
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
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
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
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
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


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
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
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
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


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%
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 $
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
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
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
a. $451
b. $482
c. $545
d. $600

End of quiz


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
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

BUSN 5200 Week 1 to 8 Discussion Questions

BUSN 5200 Discussion Questions 1 and 2 ANSWERS

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