TRUE/FALSE. Write 'T' if the statement is true and 'F' if the statement is false. (Worth .25 points each or 2.5 points for this section) 1) For a given positive interest rate, the future value of $100 increases with the passage of time. Thus, the longer the period of time, the greater the future value. 2) Future value is the value of a future amount at the present time, found by applying compound interest over a specified period of time. 3) The aggressive financing strategy is a strategy by which the firm finances its current assets with short-term funds and its fixed assets with long-term funds. 4) Combining negatively correlated assets can reduce the overall variability of returns. 5) A portfolio that combines two assets having perfectly positively correlated returns cannot reduce the portfolio's overall risk below the risk of the least risky asset. 6) In general, exchange rate risk is easier to protect against than political risk. 7) In selecting the best group of unequal-lived projects, if the projects are mutually exclusive, the length of the projects lives is not critical. 8) The EBIT-EPS analysis tends to concentrate on maximization of earnings rather than maximization of owners' wealth. 9) The three basic types of risk associated with international cash flows are 1) business and financial risks, 2) inflation and foreign exchange risks, and 3) political risks. 10) Accounts payable result from transactions in which merchandise is purchased but no formal note is signed to show the purchaser's liability to the seller. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. (Worth .50 points each or 9.5 points for this section) 11) When the amount earned on a deposit has become part of the principal at the end of a specified time period the concept is called A) future value. B) discount interest. C) compound interest. D) primary interest. 12) The future value of $100 received today and deposited at 6 percent for four years is A) $126. B) $124. C) $ 79. D) $116. 13) As the interest rate increases for any given period, the future value interest factor will A) decrease. B) increase. C) move toward 1. D) remain unchanged. 14) The present value of $100 to be received 20 years from today, assuming an opportunity cost of 8 percent, is A) $ 42.24. B) $ 75. C) $23.60. D) $21.45. 15) The ________ financing strategy requires the firm to pay interest on excess funds borrowed but not needed throughout the entire year. A) seasonal B) conservative C) permanent D) aggressive 16) Strikes, lawsuits, regulatory actions, and increased competition are all examples of A) nondiversifiable risk. B) economic risk. C) systematic. D) diversifiable risk. Table 5.2 You are going to invest $20,000 in a portfolio consisting of assets X, Y, and Z, as follows: Asset Name Annual Asset Return Probability Beta Proportion X 10% .50 1.2 .333 Y 8% .25 1.6 .333 Z 16% .25 2.0 .333 17) Given the information i ...

1. TRUE/FALSE. Write 'T' if the statement is true and 'F' if the
statement is false.
(Worth .25 points each or 2.5 points for this section)
1) For a given positive interest rate, the future value of $100
increases with the passage of time. Thus,
the longer the period of time, the greater the future value.
2) Future value is the value of a future amount at the present
time, found by applying compound
interest over a specified period of time.
3) The aggressive financing strategy is a strategy by which the
firm finances its current assets with
short-term funds and its fixed assets with long-term funds.
4) Combining negatively correlated assets can reduce the
overall variability of returns.
5) A portfolio that combines two assets having perfectly
positively correlated returns cannot reduce
the portfolio's overall risk below the risk of the least risky
asset.
6) In general, exchange rate risk is easier to protect against than
political risk.
7) In selecting the best group of unequal-lived projects, if the
projects are mutually exclusive, the
length of the projects lives is not critical.
8) The EBIT-EPS analysis tends to concentrate on maximization
of earnings rather than maximization

2. of owners' wealth.
9) The three basic types of risk associated with international
cash flows are 1) business and financial
risks, 2) inflation and foreign exchange risks, and 3) political
risks.
10) Accounts payable result from transactions in which
merchandise is purchased but no formal note is
signed to show the purchaser's liability to the seller.
MULTIPLE CHOICE. Choose the one alternative that best
completes the statement or answers the question.
(Worth .50 points each or 9.5 points for this section)
11) When the amount earned on a deposit has become part of
the principal at the end of a specified
time period the concept is called
A) future value. B) discount interest.
C) compound interest. D) primary interest.
12) The future value of $100 received today and deposited at 6
percent for four years is
A) $126. B) $124. C) $ 79. D) $116.
13) As the interest rate increases for any given period, the
future value interest factor will
A) decrease. B) increase.
C) move toward 1. D) remain unchanged.
14) The present value of $100 to be received 20 years from
today, assuming an opportunity cost of 8
percent, is
A) $ 42.24. B) $ 75. C) $23.60. D) $21.45.
15) The ________ financing strategy requires the firm to pay

3. interest on excess funds borrowed but not
needed throughout the entire year.
A) seasonal B) conservative C) permanent D) aggressive
16) Strikes, lawsuits, regulatory actions, and increased
competition are all examples of
A) nondiversifiable risk. B) economic risk.
C) systematic. D) diversifiable risk.
Table 5.2
You are going to invest $20,000 in a portfolio consisting of
assets X, Y, and Z, as follows:
Asset Name
Annual
Asset Return
Probability
Beta
Proportion
X
10%
.50
1.2
.333
Y
8%
.25
1.6
.333
Z
16%
.25
2.0
.333
17) Given the information in Table 5.2, what is the expected

4. annual return of this portfolio?
A) 10.0% B) 11.7% C) 11.0% D) 11.4%
18) The beta of the portfolio in Table 5.2, containing assets X,
Y, and Z, is
A) 1.6. B) 2.4. C) 1.5. D) 2.0.
19) If the required return is greater than the coupon rate, a bond
will sell at
A) book value. B) a premium. C) a discount. D) par.
20) A firm has an issue of $1,000 par value bonds with a 10
percent stated interest rate outstanding. The
issue pays interest annually and has 10 years remaining to its
maturity date. If bonds of similar risk
are currently earning 8 percent, the firm's bond will sell for
________ today.
A) $851.50 B) $1,134.20 C) $805.20 D) $1,268.20
21) A firm has an issue of $1,000 par value bonds with a 9
percent stated interest rate outstanding. The
issue pays interest annually and has 20 years remaining to its
maturity date. If bonds of similar risk
are currently earning 11 percent, the firm's bond will sell for
________ today.
A) $840.67 B) $1,123.33 C) $1,000 D) $716.67
22) A firm has an expected dividend next year of $1.20 per
share, a zero growth rate of dividends, and
a required return of 10 percent. The value of a share of the
firm's common stock is ________.
A) $100 B) $10 C) $12 D) $120
23) A firm has experienced a constant annual rate of dividend
growth of 9 percent on its common stock
and expects the dividend per share in the coming year to be

5. $2.70. The firm can earn 12 percent on
similar risk involvements. The value of the firm's common stock
is ________.
A) $9/share B) $90/share C) $22.50/share D) $30/share
Table 10.6
Yong Importers, an Asian import company, is evaluating two
mutually exclusive projects, A and B. The relevant cash flows
for each project are given in the table below. The cost of capital
for use in evaluating each of these equally risky projects is 10
percent.
Year
Project A
Project B
0
$350,000
$425,000
Cash Inflows (CF)
1
$140,000
$175,000
2
165,000
150,000
3
190,000
125,000
4
100,000
5
75,000
6

6. 50,000
24) The NPVs of projects A and B are ________. (See Table
10.6):
A) $45,805 and -$19,312 respectively. B) $95,066 and $56,386,
respectively.
C) -$45,805 and $19,312 respectively. D) none of the above.
25) In the EBIT-EPS approach to capital structure, risk is
represented by
A) shifts in the cost of debt capital. B) the slope of the capital
structure line.
C) shifts in the cost of equity capital. D) shifts in the times-
interest-earned ratio.
26) A firm has a current capital structure consisting of $400,000
of 12 percent annual interest debt and
50,000 shares of common stock. The firm's tax rate is 40
percent on ordinary income. If the EBIT is
expected to be $200,000, two EBIT-EPS coordinates for the
firm's existing capital structure are
A) ($152,000, $3.50) and ($150,000, $1.82). B) ($36,000, $0)
and ($200,000, $3.04).
C) ($48,000, $0) and ($200,000, $1.82). D) ($0, $48,000) and
($200,000, $1.82).
Table 14.2
Flum Packages, Inc.
Assets
Liabilities & Equity
Current assets $12,000
Current Liabilities $ 5,000
Fixed assets 20,000
Long-term debt 12,000

7. Equity 13,000
Total $30,000
Total $30,000
27) The company earns 5 percent on current assets and 15
percent on fixed assets. The firm's current liabilities cost 7
percent to maintain and the average annual cost of long-term
funds is 20 percent.
The firm's initial net working capital is ________. (See Table
14.2)
A) $ 5,000. B) $10,000. C) $7,000. D) -$ 5,000.
28) The beta of the market
A) is less than 1. B) is greater than 1.
C) is 1. D) cannot be determined.
29) XYZ Corporation borrowed $100,000 for six months from
the bank. The rate is prime plus 2
percent. The prime rate was 8.5 percent at the beginning of the
loan and changed to 9 percent after
two months. This was the only change. How much interest must
XYZ corporation pay?
A) $2,476. B) $5,417. C) $21,500. D) $18,212.
ESSAY. Write your answer on the answer key.
(Worth 3 points)
30) Congratulations! You have just won the lottery! However,
the lottery bureau has just informed you that you can take your
winnings in one of two ways. Choice X pays $1,500,000. Choice
Y pays $2,000,000 at the end of seven years from now. Using a
discount rate of 10 percent, based on present values, which
would you choose? Using the same discount rate of 10 percent,
based on future values, which would you choose? What do your

8. results suggest as a general rule for approaching such problems?
(Make your choices based purely on the time value of money.)