CHAPTER 03: WORKING WITH FINANCIAL STATEMENTS

1. Activities of a firm which require the spending of cash are known as:
A. uses of cash.
2. The sources and uses of cash over a stated period of time are reflected on the
A. statement of cash flows.
3. A common-size income statement is an accounting statement that expresses all of a firm's
expenses as percentage of:
A. sales.
4. Which one of the following standardizes items on the income statement and balance sheet
relative to their values as of a chosen point in time?
A. common-base year statement
5. Relationships determined from a firm's financial information and used for comparison
purposes are known as:
A. financial ratios.
6. The formula which breaks down the return on equity into three component parts is referred to as
which one of the following?
A. Du Pont identity
7. The U.S. government coding system that classifies a firm by the nature of its business
operations is known as the:
A. Standard Industrial Classification code.
8. Which one of the following is a source of cash?
A. increase in accounts payable
9. Which one of the following is a use of cash?
A. decrease in common stock
10. Which one of the following is a source of cash?
A. acquisition of debt
11. Which one of the following is a source of cash?
A. decrease in inventory
12. On the Statement of Cash Flows, which of the following are considered financing activities?
I. increase in long-term debt
II. decrease in accounts payable III.
interest paid
IV. dividends paid
A. I and IV only
13. On the Statement of Cash Flows, which of the following are considered operating activities?
I. costs of goods sold
II. decrease in accounts payable III.
interest paid
IV. dividends paid
A. I, II, and III only
14. According to the Statement of Cash Flows, a decrease in accounts receivable will _____ the cash
flow from _____ activities.
A. increase; operating
15. According to the Statement of Cash Flows, an increase in interest expense will _____ the cash
flow from _____ activities.
A. decrease; operating
16. On a common-size balance sheet all accounts are expressed as a percentage of:
A. total assets for the current year.
17. On a common-base year financial statement, accounts receivables will be expressed relative to
which one of the following?
A. base-year accounts receivables
18. A firm uses 2011 as the base year for its financial statements. The common-size, base-year
statement for 2012 has an inventory value of 1.08. This is interpreted to mean that the 2012 inventory is
equal to 108 percent of which one of the following?
A. 2011 inventory expressed as a percent of 2011 total assets
19. Which of the following ratios are measures of a firm's liquidity?
A. II and IV only
20. An increase in current liabilities will have which one of the following effects, all else held
constant? Assume all ratios have positive values.
A. decrease in the quick ratio
21. An increase in which one of the following will increase a firm's quick ratio without affecting
its cash ratio?
A. accounts receivable
22. A supplier, who requires payment within ten days, should be most concerned with which one
of the following ratios when granting credit?
A. cash
23. A firm has an interval measure of 48. This means that the firm has sufficient liquid assets to do
which one of the following?
A. cover its operating costs for the next 48 days
24. Ratios that measure a firm's financial leverage are known as _____ ratios.
A. long-term solvency
25. Which one of the following statements is correct?
A. An increase in the depreciation expense will not affect the cash coverage ratio.
26. If a firm has a debt-equity ratio of 1.0, then its total debt ratio must be which one of the following?
A. 0.5
27. The cash coverage ratio directly measures the ability of a firm's revenues to meet which one
of its following obligations?
A. payment of interest to a lender
28. Jasper United had sales of $21,000 in 2011 and $24,000 in 2012. The firm's current
accounts remained constant. Given this information, which one of the following statements
must be true?
A. The net working capital turnover rate increased.
29. The Corner Hardware has succeeded in increasing the amount of goods it sells while holding the
amount of inventory on hand at a constant level. Assume that both the cost per unit and the selling
price per unit also remained constant. This accomplishment will be reflected in the firm's
financial ratios in which one of the following ways?
A. decrease in the day's sales in inventory
30. Dee's has a fixed asset turnover rate of 1.12 and a total asset turnover rate of 0.91. Sam's has a
fixed asset turnover rate of 1.15 and a total asset turnover rate of 0.88. Both companies have similar
operations. Based on this information, Dee's must be doing which one of the following?
A. utilizing its total assets more efficiently than Sam's
31. Ratios that measure how efficiently a firm manages its assets and operations to generate net
income are referred to as _____ ratios.
A. profitability
32. If a firm produces a twelve percent return on assets and also a twelve percent return on equity,
then the firm:
A. has an equity multiplier of 1.0.
33. Which one of the following will decrease if a firm can decrease its operating costs, all else
constant?
A. price-earnings ratio
34. Al's has a price-earnings ratio of 18.5. Ben's also has a price-earnings ratio of 18.5. Which one of
the following statements must be true if Al's has a higher PEG ratio than Ben's?
A. Ben's is increasing its earnings at a faster rate than the Al's.
35. Tobin's Q relates the market value of a firm's assets to which one of the following?
A. today's cost to duplicate those assets
36. The price-sales ratio is especially useful when analyzing firms that have which one of the
following?
A. negative earnings
37. Shareholders probably have the most interest in which one of the following sets of ratios?
A. return on equity and price-earnings
38. Which one of the following accurately describes the three parts of the Du Pont identity?
A. equity multiplier, profit margin, and total asset turnover
39. An increase in which of the following will increase the return on equity, all else constant?
A. I and II only
40. Which of the following can be used to compute the return on equity?
I. Profit margin × Return on assets
II. Return on assets × Equity multiplier III. Net
income/Total equity
IV. Return on assets × Total asset turnover
A. II and III only
41. The Du Pont identity can be used to help managers answer which of the following questions
related to a firm's operations?
I. How many sales dollars has the firm generated per each dollar of assets?
II. How many dollars of assets has a firm acquired per each dollar in shareholders' equity?
III. How much net profit is a firm generating per dollar of sales?
IV. Does the firm have the ability to meet its debt obligations in a timely manner?
A. I, II, and III only
42. A firm currently has $600 in debt for every $1,000 in equity. Assume the firm uses some of its
cash to decrease its debt while maintaining its current equity and net income. Which one of the
following will decrease as a result of this action?
A. equity multiplier
43. Which one of the following statements is correct?
A. Financial statements are frequently used as the basis for performance evaluations.
44. It is easier to evaluate a firm using financial statements when the firm:
A. uses the same accounting procedures as other firms in the industry.
45. The most acceptable method of evaluating the financial statements of a firm is to compare the
firm's current:
A. financial ratios to the firm's historical ratios.
46. Which of the following represent problems encountered when comparing the financial
statements of two separate entities?
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business.
II. The operations of the two firms may vary geographically.
III. The firms may use differing accounting methods.
IV. The two firms may be seasonal in nature and have different fiscal year ends.
I,II,III,IV
47. I, II, III, and IVWise's Corner Grocer had the following current account values. What effect
did the change in net working capital have on the firm's cash flows for 2012?

A. net source of cash of $132

48. During the year, Kitchen Supply increased its accounts receivable by $130, decreased its
inventory by $75, and decreased its accounts payable by $40. How did these three accounts affect
the firm's cash flows for the year?
A. $95 use of cash

49. A firm generated net income of $862. The depreciation expense was $47 and dividends were
paid in the amount of $25. Accounts payables decreased by $13, accounts receivables increased by $28,
inventory decreased by $14, and net fixed assets decreased by $8. There was no interest expense. What
was the net cash flow from operating activity?
Net cash from operating activities = $862 + $47 - $13 - $28 + $14 = $882
50. A firm has sales of $2,190, net income of $174, net fixed assets of $1,600, and current assets of
$720. The firm has $310 in inventory. What is the common-size statement value of inventory?
A. 13.36 percent
Common-size inventory = $310/($1,600 + $720) = 13.36 percent
51. A firm has sales of $3,200, net income of $390, total assets of $4,500, and total equity of
$2,750. Interest expense is $50. What is the common-size statement value of the interest
expense?
Common-size interest = $50/$3,200 = 1.56 percent
52. Last year, which is used as the base year, a firm had cash of $52, accounts receivable of $218,
inventory of $509, and net fixed assets of $1,107. This year, the firm has cash of $61, accounts
receivable of $198, inventory of $527, and net fixed assets of $1,216. What is the common-base
year value of accounts receivable?
Common-base year accounts receivable = $198/$218 = 0.91
53. Russell's Deli has cash of $136, accounts receivable of $95, accounts payable of $210, and
inventory of $409. What is the value of the quick ratio?
Quick ratio = ($136 + $95)/$210 = 1.10
54. Uptown Men's Wear has accounts payable of $2,214, inventory of $7,950, cash of $1,263, fixed
assets of $8,400, accounts receivable of $3,907, and long-term debt of $4,200. What is the value of
the net working capital to total assets ratio?
Net working capital to total assets = ($1,263 + $3,907 + $7,950 - $2,214)/($1,263 + $3,907 +
$7,950 + $8,400) = 0.51
55. A firm has total assets of $310,100 and net fixed assets of $168,500. The average daily
operating costs are $2,980. What is the value of the interval measure?
Interval measure = ($310,100 - $168,500)/$2,980 = 47.52 days
56. A firm has a debt-equity ratio of 0.42. What is the total debt ratio?
The debt-equity ratio is 0.42. If total debt is $42 and total equity is $100, then total assets are
$142.
Total debt ratio = $42/$142 = 0.30.
57. A firm has total debt of $4,850 and a debt-equity ratio of 0.57. What is the value of the total assets?
Total equity = $4,850/0.57 = $8,508.77
Total assets = $4,850 + $8,508.77 = $13,358.77
58. A firm has sales of $68,400, costs of $42,900, interest paid of $2,100, and depreciation of $6,500.
The tax rate is 34 percent. What is the value of the cash coverage ratio?
Cash coverage ratio = ($68,400 - $42,900)/$2,100 = 12.14
59. The Bike Shop paid $1,990 in interest and $1,850 in dividends last year. The times interest
earned ratio is 2.2 and the depreciation expense is $520. What is the value of the cash
coverage ratio?
EBIT = 2.2 × $1,990 = $4,378; Cash coverage ratio = ($4,378 + $520)/$1,990 = 2.46
60. Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400,
and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its
inventory assuming that all sales are on credit?
Inventory turnover = $628,300/$208,400 = 3.014875
Days in inventory = 365/3.014875 = 121.07 days
61. The Flower Shoppe has accounts receivable of $3,506, inventory of $4,407, sales of $218,640, and
cost of goods sold of $169,290. How many days does it take the firm to sell its inventory and
collect the payment on the sale assuming that all sales are on credit?
Days in inventory = 365/($169,290/$4,407) = 9.502 days
Days' sales in receivables = 365/($218,640/$3,506) = 5.853 days
Total days in inventory and receivables = 9.502 + 5.853 = 15.35 days
62. A firm has net working capital of $2,715, net fixed assets of $22,407, sales of $31,350, and
current liabilities of $3,908. How many dollars worth of sales are generated from every $1 in
total assets?
Total asset turnover = $31,350/($2,715 + $22,407 + $3,908)
= 1.08 Every $1 in total assets generates $1.08 in sales.
63. The Purple Martin has annual sales of $687,400, total debt of $210,000, total equity of $365,000,
and a profit margin of 4.80 percent. What is the return on assets?
Return on assets = (.048 × $687,400)/($210,000 + $365,000) = 5.74 percent
64. Reliable Cars has sales of $807,200, total assets of $1,105,100, and a profit margin of 9.68
percent. The firm has a total debt ratio of 78 percent. What is the return on equity?
Return on equity = (.0968 × $807,200)/[$1,105,100 × (1 - .78)] = 32.14 percent
65. The Meat Market has $747,000 in sales. The profit margin is 4.1 percent and the firm has 7,500
shares of stock outstanding. The market price per share is $22. What is the price-earnings ratio?
Earnings per share = (.041 × $747,000)/7,500 = 4.0836
Price-earnings ratio = $22/4.0836 = 5.39
66. Big Guy Subs has net income of $150,980, a price-earnings ratio of 12.8, and earnings per
share of $0.87. How many shares of stock are outstanding?
Number of shares = $150,980/$0.87 = 173,540
67. A firm has 160,000 shares of stock outstanding, sales of $1.94 million, net income of $126,400, a
price-earnings ratio of 18.7, and a book value per share of $7.92. What is the market-to-book ratio?
Earnings per share = $126,400/160,000 = $0.79
Price per share = $0.79 × 18.7 = $14.773
Market-to-book ratio = $14.773/$7.92 = 1.87
68. Oscar's Dog House has a profit margin of 5.6 percent, a return on assets of 12.5 percent, and
an equity multiplier of 1.49. What is the return on equity?
Return on equity = 12.5 percent × 1.49 = 18.63 percent, using the Du Pont Identity
69. Taylor's Men's Wear has a debt-equity ratio of 42 percent, sales of $749,000, net income of
$41,300, and total debt of $206,300. What is the return on equity?
Return on equity = $41,300/($206,300/0.42) = 8.41 percent
70. A firm has a debt-equity ratio of 57 percent, a total asset turnover of 1.12, and a profit margin
of 4.9 percent. The total equity is $511,640. What is the amount of the net income?
Return on equity = .049 × 1.12 × (1 + 0.57) = .0861616
Net income = $511,640 × .0861616 = $44,084
87. BL Lumber has earnings per share of $1.21. The firm's earnings have been increasing at an
average rate of 3.1 percent annually and are expected to continue doing so. The firm has 21,500
shares of stock outstanding at a price per share of $15.60. What is the firm's PEG ratio?
PEG ratio = ($15.60/$1.21)/(.031 × 100) = 4.16
88. Townsend Enterprises has a PEG ratio of 5.3, net income of $49,200, a price-earnings ratio of
17.6, and a profit margin of 7.1 percent. What is the earnings growth rate?
5.3 = 17.6/(Earnings growth rate × 100); Earnings growth rate = 3.32 percent
89. A firm has total assets with a current book value of $68,700, a current market value of $74,300,
and a current replacement cost of $79,200. What is the value of Tobin's Q?
Tobin's Q = $74,300/$79,200 = .94
90. Dixie Supply has total assets with a current book value of $368,900 and a current replacement
cost of $486,200. The market value of these assets is $464,800. What is the value of Tobin's Q?
Tobin's Q = $464,800/$486,200 = .96
91. Dandelion Fields has a Tobin's Q of .96. The replacement cost of the firm's assets is $225,000 and
the market value of the firm's debt is $101,000. The firm has 20,000 shares of stock outstanding
and a book value per share of $2.09. What is the market to book ratio?
Market value of assets = .96 × $225,000 = $216,000
Market value of equity = $216,000 - $101,000 = $115,000
Market value per share $115,000/20,000 = $5.75
Market-to-book ratio = $5.75/$2.09 = 2.75 times
92. A firm has annual sales of $320,000, a price-earnings ratio of 24, and a profit margin of 4.2
percent. There are 14,000 shares of stock outstanding. What is the price-sales ratio?
Earnings per share = ($320,000 × .042)/14,000 =
$0.96 Price-sales ratio = (24 ×
$0.96)/($320,000/14,000) = 1.01
93. Lassiter Industries has annual sales of $220,000 with 10,000 shares of stock outstanding. The firm
has a profit margin of 6 percent and a price-sales ratio of 1.20. What is the firm's price-earnings
ratio?
Price per share = 1.20 × ($220,000/10,000) = $26.40
Earnings per share = ($220,000 × .06)/10,000 = $1.32
Price-earnings ratio = $26.40/$1.32 = 20
94. The Burger Hut has sales of $29 million, total assets of $43 million, and total debt of $13
million. The profit margin is 11 percent. What is the return on equity?
Return on equity = (.11 × $29m)/($43m - $13m) = 10.63 percent
95. The Home Supply Co. has a current accounts receivable balance of $280,000. Credit sales for the
year just ended were $1,830,000. How many days on average did it take for credit customers to pay
off their accounts during this past year?
Receivables turnover = $1,830,000/$280,000 = 6.536
times Days' sales in receivables = 365/6.536 = 55.85
96. BL Industries has ending inventory of $300,000, and cost of goods sold for the year just ended was
$1,410,000. On average, how long does a unit of inventory sit on the shelf before it is sold?
Inventory turnover = $1,410,000/$300,000 = 4.7 times
Day's sales in inventory = 365/4.7 = 77.66 days
97. Coulter Supply has a total debt ratio of 0.52. What is the equity multiplier?
Debt-equity ratio = .52/(1 - 0.52) = 1.083
Equity multiplier = 1 + 1.083 = 2.083
98. High Mountain Foods has an equity multiplier of 1.55, a total asset turnover of 1.3, and a profit
margin of 7.5 percent. What is the return on equity?
Return on equity = .075 × 1.3 × 1.55 = 15.11 percent
99. Lancaster Toys has a profit margin of 7.5 percent, a total asset turnover of 1.71, and a return on
equity of 21.01 percent. What is the debt-equity ratio?
Equity multiplier = .2101/(.075 × 1.71) = 1.638
Debt-equity ratio = 1.638 - 1 = 0.638
100. Charlie's Chicken has a debt-equity ratio of 2.05. Return on assets is 9.2 percent, and total
equity is $560,000. What is the net income?
Equity multiplier = 1 + 2.05 = 3.05
Return on equity = .092 × 3.05 = .2806
Net income = .2806 × $560,000 = $157,136
101. Canine Supply has sales of $2,200, total assets of $1,400, and a debt-equity ratio of 0.5. Its return
on equity is 15 percent. What is the net income?
Return on equity = .15 = (Net income/$2,200) × ($2,200/$1,400) × (1 + 0.50)
Net income = $140.00
102. Billings, Inc. has net income of $161,000, a profit margin of 7.6 percent, and an accounts
receivable balance of $127,100. Assume that 66 percent of sales are on credit. What is the days'
sales in receivables?
Sales = $161,000/.076 = $2,118,421
Credit sales = $2,118,421 × .66 = $1,398,158
Accounts receivable turnover = $1,398,158/$127,100 = 11 times
Days' sales in receivables = 365/11 = 33.18 days
103. Gladstone Pavers has a long-term debt ratio of 0.6 and a current ratio of 1.6. Current liabilities
are $700, sales are $4,440, the profit margin is 9.5 percent, and the return on equity is 19.5
percent. How much does the firm have in net fixed assets?
Current assets = 1.6 × $700 = $1,120
Net income = .095 × $4,440 = $421.80
Total equity = $421.80/.195 = $2,163.0769
0.6 = Long term debt/(Long-term debt + $2,163.0769); Long-term debt =
$3,244.6153 Total debt = $700 + $3,244.6153 = $3,944.6153
Total assets = $3,944.6153 + $2,163.0769 =
$6,107.6922 Net fixed assets = $6,107.6922 -
$1,120 = $4,987.69
104. A firm has a debt-total asset ratio of 74 percent and a return on total assets of 13 percent. What is
the return on equity?
(Total assets - Total equity)/Total assets = .74; Total equity = .26
Total assets Net income = .13 Total assets
Return on equity = .13 Total assets/.26 Total assets = 50 percent
105. The Dockside Inn has net income for the most recent year of $8,450. The tax rate was 35 percent.
The firm paid $1,300 in total interest expense and deducted $1,900 in depreciation expense. What
was the cash coverage ratio for the year?
Earnings before taxes = $8,450/(1 - .35) = $13,000.00
Earnings before interest, taxes, and depreciation = $13,000.00 + $1,300 + $1,900 =
$16,200.00 Cash coverage ratio = $16,200.00/$1,300 = 12.46 times
106. Beach Wear has current liabilities of $350,000, a quick ratio of 1.65, inventory turnover of 3.2,
and a current ratio of 2.9. What is the cost of goods sold?
Current assets = 2.9 × $350,000 = $1,015,000
($1,015,000 - Inventory)/$350,000 = 1.65; Inventory =
$437,500 Costs of goods sold = 3.2 × $437,500 =
$1,400,000
CHAPTER 06: DISCOUNTED CASH FLOW VALUATION
1. An ordinary annuity is best defined by which one of the following?
A. equal payments paid at regular intervals over a stated time period

2. Which one of the following accurately defines a perpetuity?

A. unending equal payments paid at equal time intervals
3. Which one of the following terms is used to identify a British perpetuity?
A. consol
4. The interest rate that is quoted by a lender is referred to as which one of the following?
A. stated interest rate
5. A monthly interest rate expressed as an annual rate would be an example of which one of the following
rates?
A. effective annual rate
6. What is the interest rate charged per period multiplied by the number of periods per year called?
A. annual percentage rate
7. A loan where the borrower receives money today and repays a single lump sum on a future date is
called a(n) _____ loan.
A. pure discount
8. Which one of the following terms is used to describe a loan that calls for periodic interest payments
and a lump sum principal payment?
A. interest-only loan
9. Which one of the following terms is used to describe a loan wherein each payment is equal in amount
and includes both interest and principal?
A. amortized loan
10. Which one of the following terms is defined as a loan wherein the regular payments, including both
interest and principal amounts, are insufficient to retire the entire loan amount, which then must be repaid
in one lump sum?
A. balloon loan
11. You are comparing two annuities which offer quarterly payments of $2,500 for five years and pay 0.75
percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay
you on the last day of each month. Which one of the following statements is correct concerning these two
annuities?
A. Annuity B has a smaller present value than annuity A.
12. You are comparing two investment options that each pay 5 percent interest, compounded annually.
Both options will provide you with $12,000 of income. Option A pays three annual payments starting with
$2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual
payments of $4,000 each. Which one of the following statements is correct given these two investment
options?
A. Option B has a higher present value at time zero than does option A.
13. You are considering two projects with the following cash flows:

Which of the following statements are true concerning these two projects?
I. Both projects have the same future value at the end of year 4, given a positive rate of
return.
II. Both projects have the same future value given a zero rate of return.
III. Project X has a higher present value than Project Y, given a positive discount rate.
IV. Project Y has a higher present value than Project X, given a positive discount rate.
A. II and III only
14. Which one of the following statements is correct given the following two sets of project cash
flows?

A. As long as the discount rate is positive, Project B will always be worth less today than will
Project A.
15. Which one of the following statements related to annuities and perpetuities is correct?
 A. A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised
of $100 monthly payments, given an interest rate of 12 percent, compounded monthly.

16. Which of the following statements related to interest rates are correct?
I. Annual interest rates consider the effect of interest earned on reinvested interest payments.
II. When comparing loans, you should compare the effective annual rates.
III. Lenders are required by law to disclose the effective annual rate of a loan to prospective
borrowers.
IV. Annual and effective interest rates are equal when interest is compounded
annually.
A. II and IV only

17. Which one of the following statements concerning interest rates is correct?
A. The effective annual rate equals the annual percentage rate when interest is
compounded annually.
18. Which one of these statements related to growing annuities and perpetuities is
correct?
A. The present value of a growing perpetuity will decrease if the discount rate is increased.
19. Which one of the following statements correctly states a relationship?
A. Time and present value are inversely related, all else held constant.
20. Which one of the following compounding periods will yield the smallest present value
given a stated future value and annual percentage rate?
A. continuous
88. The entire repayment of which one of the following loans is computed simply by
computing a single future value?
A. pure discount loan
89. How is the principal amount of an interest-only loan repaid?
A. The principal is repaid in a lump sum at the end of the loan period.
90. An amortized loan:
← may have equal or increasing amounts applied to the principal from each loan payment.
91. You need $25,000 today and have decided to take out a loan at 7 percent for five years. Which
one of the following loans would be the least expensive? Assume all loans require monthly
payments and that interest is compounded on a monthly basis.
A. amortized loan with equal principal payments
92. Your grandmother is gifting you $125 a month for four years while you attend college to earn
your bachelor's degree. At a 6.5 percent discount rate, what are these payments worth to you
on the day you enter college?
 A. $5,270.94

93. You just won the grand prize in a national writing contest! As your prize, you will receive $2,000
a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you
today?
A. $172,252.71

94. Phil can afford $200 a month for 5 years for a car loan. If the interest rate is 7.5 percent, how
much can he afford to borrow to purchase a car?
A. $9,981.06

95. You are the beneficiary of a life insurance policy. The insurance company informs you that you
have two options for receiving the insurance proceeds. You can receive a lump sum of $200,000
today or receive payments of $1,400 a month for 20 years. You can earn 6 percent on your
money. Which option should you take and why?
 A. You should accept the $200,000 because the payments are only worth $195,413 to you
today.

96. Your employer contributes $50 a week to your retirement plan. Assume that you work for your
employer for another 20 years and that the applicable discount rate is 9 percent. Given these
assumptions, what is this employee benefit worth to you today?

A. $24,106.15

97. The Design Team just decided to save $1,500 a month for the next 5 years as a safety net for
recessionary periods. The money will be set aside in a separate savings account which pays 4.5
percent interest compounded monthly. The first deposit will be made today. What would
today's deposit amount have to be if the firm opted for one lump sum deposit today that would
yield the same amount of savings as the monthly deposits after 5 years?
A. $80,760.79

98. You need some money today and the only friend you have that has any is your miserly friend.
He agrees to loan you the money you need, if you make payments of $30 a month for the next
six months. In keeping with his reputation, he requires that the first payment be paid today. He
also charges you 2 percent interest per month. How much money are you borrowing?
A. $171.40

99. You buy an annuity that will pay you $24,000 a year for 25 years. The payments are paid on
the first day of each year. What is the value of this annuity today if the discount rate is 8.5
percent?
 A. $266,498

100. You are scheduled to receive annual payments of $5,100 for each of the next 7 years. The
discount rate is 10 percent. What is the difference in the present value if you receive these payments at
the beginning of each year rather than at the end of each year?
A. $2,483
Difference = $27,312 - $24,829 = $2,483
Note: The difference = 0.1 × $24,829 = $2,483
101. You are comparing two annuities with equal present values. The applicable discount rate is 8.75
percent. One annuity pays $5,000 on the first day of each year for 20 years. How much does the
second annuity pay each year for 20 years if it pays at the end of each year?
A. $5,438
Because each payment is received one year later, then the cash flow has to equal:
$5,000 × (1 + 0.0875) = $5,438
102. Trish receives $450 on the first of each month. Josh receives $450 on the last day of each
month. Both Trish and Josh will receive payments for next four years. At a 9.5 percent
discount rate, what is the difference in the present value of these two sets of payments?

103. What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume annual
compounding.

104. What is the future value of $12,000 a year for 25 years at 12 percent interest?

A. $1,600,006
105. Alexa plans on saving $3,000 a year and expects to earn an annual rate of 10.25 percent. How
much will she have in her account at the end of 45 years?

106. Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500
to his savings account on the last day of each year. They both earn 6.5 percent annual interest.
What is the difference in their savings account balances at the end of 35 years?

Difference = $198,145.42 - $186,052.04 = $12,093

Note: Difference = $186,052.04 × 0.065 = $12,093
107. You are borrowing $17,800 to buy a car. The terms of the loan call for monthly payments for 5
years at 8.6 percent interest. What is the amount of each payment?
 41. You borrow $165,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 30
years. Payments are made monthly. If you pay the mortgage according to the loan agreement,
how much total interest will you pay?

42. Holiday Tours (HT) has an employment contract with its newly hired CEO. The contract
requires a lump sum payment of $10.4 million be paid to the CEO upon the successful completion of her
first three years of service. HT wants to set aside an equal amount of money at the end of each year to
cover this anticipated cash outflow and will earn 5.65 percent on the funds. How much must HT set aside
each year for this purpose?

43. Nadine is retiring at age 62 and expects to live to age 85. On the day she retires, she has
$402,000 in her retirement savings account. She is somewhat conservative with her money and
expects to earn 6 percent during her retirement years. How much can she withdraw from her
retirement savings each month if she plans to spend her last penny on the morning of her
death?
44. Kingston Development Corp. purchased a piece of property for $2.79 million. The firm paid a
down payment of 15 percent in cash and financed the balance. The loan terms require monthly
payments for 15 years at an annual percentage rate of 7.75 percent, compounded monthly.
What is the amount of each mortgage payme

45. You estimate that you will owe $45,300 in student loans by the time you graduate. The
interest rate is 4.25 percent. If you want to have this debt paid in full within ten years, how
much must you pay each month?

46. You are buying a previously owned car today at a price of $3,500. You are paying $300 down
in cash and financing the balance for 36 months at 8.5 percent. What is the amount of each
loan payment?
47. Atlas Insurance wants to sell you an annuity which will pay you $1,600 per quarter for 25 years.
You want to earn a minimum rate of return of 6.5 percent. What is the most you are willing to
pay as a lump sum today to buy this annuity?

48. Your car dealer is willing to lease you a new car for $245 a month for 48 months. Payments are
due on the first day of each month starting with the day you sign the lease contract. If your cost
of money is 6.5 percent, what is the current value of the lease?

49. Your great aunt left you an inheritance in the form of a trust. The trust agreement states that you
are to receive $2,400 on the first day of each year, starting immediately and continuing for 20
years. What is the value of this inheritance today if the applicable discount rate is 6.75 percent?
 60. You have been investing $250 a month for the last 13 years. Today, your investment account is
worth $73,262. What is your average rate of return on your investments?

61. Will has been purchasing $25,000 worth of New Tek stock annually for the past 15 years. His
holdings are now worth $598,100. What is his annual rate of return on this stock?

62. Your father helped you start saving $20 a month beginning on your 5th birthday. He always
made you deposit the money into your savings account on the first day of each month just to
"start the month out right." Today completes your 17th year of saving and you now have
$6,528.91 in this account. What is the rate of return on your savings?

63. Today, you turn 23. Your birthday wish is that you will be a millionaire by your 40th birthday. In
an attempt to reach this goal, you decide to save $75 a day, every day until you turn 40. You
open an investment account and deposit your first $75 today. What rate of return must you earn
to achieve your goal?

64. You just settled an insurance claim. The settlement calls for increasing payments over a 10-year
period. The first payment will be paid one year from now in the amount of $10,000. The
following payments will increase by 4.5 percent annually. What is the value of this settlement to
you today if you can earn 8 percent on your investments?
65. Your grandfather left you an inheritance that will provide an annual income for the next 10
years. You will receive the first payment one year from now in the amount of $3,000. Every
year after that, the payment amount will increase by 6 percent. What is your inheritance worth
to you today if you can earn 9.5 percent on your investments?

66. You just won a national sweepstakes! For your prize, you opted to receive never-ending
payments. The first payment will be $12,500 and will be paid one year from today. Every year
thereafter, the payments will increase by 3.5 percent annually. What is the present value of your
prize at a discount rate of 8 percent?

67. A wealthy benefactor just donated some money to the local college. This gift was established
to provide scholarships for worthy students. The first scholarships will be granted one year
from now for a total of $35,000.

Annually thereafter, the scholarship amount will be increased by 5.5 percent to help offset the
effects of inflation. The scholarship fund will last indefinitely. What is the value of this gift today
at a discount rate of 9 percent?

68. Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday
Vacations can generate cash flows of $187,000, $220,000, and $245,000 over the next three
years, respectively. After that time, they feel the business will be worthless. Southern Tours has
determined that a 13.5 percent rate of return is applicable to this potential acquisition. What is
Southern Tours willing to pay today to acquire Holiday Vacations?

69. You are considering two savings options. Both options offer a 7.4 percent rate of return. The first
option is to save $900, $1,500, and $3,000 at the end of each year for the next three years,
respectively. The other option is to save one lump sum amount today. If you want to have the
 same balance in your savings account at the end of the three years, regardless of the savings
method you select, how much do you need to save today if you select the lump sum option?

70. Your parents have made you two offers. The first offer includes annual gifts of $10,000, $11,000,
and $12,000 at the end of each of the next three years, respectively. The other offer is the
payment of one lump sum amount today. You are trying to decide which offer to accept given the
fact that your discount rate is 8 percent. What is the minimum amount that you will accept today
if you are to select the lump sum offer?

71. You are considering changing jobs. Your goal is to work for three years and then return to school
full-time in pursuit of an advanced degree. A potential employer just offered you an annual salary
of $41,000, $43,000, and $46,000 a year for the next three years, respectively. All salary
payments are made as lump sum payments at the end of each year. The offer also includes a
starting bonus of $3,000 payable immediately. What is this offer worth to you today at a discount
rate of 6.75 percent?

72. You are considering a project which will provide annual cash inflows of $4,500, $5,700, and
$8,000 at the end of each year for the next three years, respectively. What is the present value of
these cash flows, given a 9 percent discount rate?

73. You just signed a consulting contract that will pay you $38,000, $52,000, and $85,000 annually
at the end of the next three years, respectively. What is the present value of these cash flows given a 10.5
percent discount rate?
74. You have some property for sale and have received two offers. The first offer is for $89,500
today in cash. The second offer is the payment of $35,000 today and an additional $70,000 two
years from today. If the applicable discount rate is 11.5 percent, which offer should you accept
and why?

75. Your local travel agent is advertising an upscale winter vacation package for travel three years
from now to Antarctica. The package requires that you pay $20,000 today, $35,000 one year from
today, and a final payment of $45,000 on the day you depart three years from today. What is the
cost of this vacation in today's dollars if the discount rate is 9.75 percent?

76. One year ago, Deltona Motor Parts deposited $16,500 in an investment account for the purpose
of buying new equipment three years from today. Today, it is adding another $12,000 to this
account. The company plans on making a final deposit of $20,000 to the account one year from
today. How much will be available when it is ready to buy the equipment, assuming the account
pays 5.5 interest?

77. Lucas will receive $7,100, $8,700, and $12,500 each year starting at the end of year one. What is
the future value of these cash flows at the end of year five if the interest rate is 9 percent?

78. You plan on saving $5,200 this year, nothing next year, and $7,500 the following year. You will
deposit these amounts into your investment account at the end of each year. What will your
investment account be worth at the end of year three if you can earn 8.5 percent on your funds?

79. Miley expects to receive the following payments: Year 1 = $50,000; Year 2 = $28,000; Year 3 =
$12,000. All of this money will be saved for her retirement. If she can earn an average of 10.5
 percent on her investments, how much will she have in her account 25 years after making her
first deposit?

80. Blackwell, Inc. has a $75,000 liability it must pay three years from today. The company is
opening a savings account so that the entire amount will be available when this debt needs to be paid. The
plan is to make an initial deposit today and then deposit an additional $15,000 each year for the next three
years, starting one year from today. The account pays a 4.5 percent rate of return. How much does the firm
need to deposit today?

81. The government has imposed a fine on the Corner Tavern. The fine calls for annual payments of
$125,000, $100,000, $75,000, and $50,000, respectively, over the next four years. The first
payment is due one year from today. The government plans to invest the funds until the final
payment is collected and then donate the entire amount, including the investment earnings, to
help the local community shelter. The government will earn 5.5 percent on the funds held. How
much will the community shelter receive four years from today?

82. Wicker Imports established a trust fund that provides $90,000 in scholarships each year for
needy students. The trust fund earns a fixed 6 percent rate of return. How much money did the
firm contribute to the fund assuming that only the interest income is distributed?

83. A preferred stock pays an annual dividend of $3.20. What is one share of this stock worth
today if the rate of return is 11.75 percent?

84. You would like to establish a trust fund that will provide $120,000 a year forever for your
heirs. The trust fund is going to be invested very conservatively so the expected rate of return
 is only 5.75 percent. How much money must you deposit today to fund this gift for your
heirs?

85. You just paid $750,000 for an annuity that will pay you and your heirs $42,000 a year forever.
What rate of return are you earning on this policy?

86. You grandfather won a lottery years ago. The value of his winnings at the time was $50,000.
He invested this money such that it will provide annual payments of $2,400 a year to his heirs
forever. What is the rate of return?

87. The preferred stock of Casco has a 6.25 percent dividend yield. The stock is currently priced at
$59.30 per share. What is the amount of the annual dividend?
C = $59.30 × 0.0625 = $3.71
88. Your credit card company charges you 1.65 percent interest per month. What is the annual
percentage rate on your account?
APR = 0.0165 × 12 = 19.80 percent
89. What is the annual percentage rate on a loan with a stated rate of 2.75 percent per quarter?
APR = 0.0275 × 4 = 11.00 percent
90. You are paying an effective annual rate of 18.974 percent on your credit card. The interest is
compounded monthly. What is the annual percentage rate on this account?

91. What is the effective annual rate if a bank charges you 8.25 percent compounded
quarterly?

92. Your credit card company quotes you a rate of 17.9 percent. Interest is billed monthly.
What is the actual rate of interest you are paying?
 93. The Pawn Shop loans money at an annual rate of 23 percent and compounds interest weekly.
What is the actual rate being charged on these loans?

94. You are considering two loans. The terms of the two loans are equivalent with the exception of
the interest rates. Loan A offers a rate of 7.75 percent, compounded daily. Loan B offers a rate of 8
percent, compounded semi-annually. Which loan should you select and why?
A. A; the effective annual rate is 8.06 percent.

95. You have $5,600 that you want to use to open a savings account. There are five banks located in
your area. The rates paid by banks A through E, respectively, are given below. Which bank should you
select if your goal is to maximize your interest income?
A. 4.57 percent, compounded semi-annually

EARA = 4.61 percent

Bank C offers the highest effective annual rate at 4.622 percent.

96. What is the effective annual rate of 14.9 percent compounded continuously?

97. What is the effective annual rate of 5.25 percent compounded continuously?
98. City Bank wants to appear competitive based on quoted loan rates and thus must offer a 7.75
percent annual percentage rate on its loans. What is the maximum rate the bank can actually earn
based on the quoted rate?

99. You are going to loan a friend $550 for one year at a 6 percent rate of interest, compounded
annually. How much additional interest could you have earned if you had compounded the
rate continuously rather than annually?

100. You are borrowing money today at 8.48 percent, compounded annually. You will repay the
principal plus all the interest in one lump sum of $12,800 two years from today. How much are
you borrowing?

101. This morning, you borrowed $9,500 at 8.9 percent annual interest. You are to repay the loan
principal plus all of the loan interest in one lump sum four years from today. How much will
you have to repay?

102. On this date last year, you borrowed $3,400. You have to repay the loan principal plus all of
the interest six years from today. The payment that is required at that time is $6,000. What is
the interest rate on this loan?

103. John's Auto Repair just took out a $52,000, 10-year, 8 percent, interest-only loan from the bank.
Payments are made annually. What is the amount of the loan payment in year 10?
 Payment in year 10 = $52,000 + ($52,000 × 0.08) = $56,160

104. On the day you entered college, you borrowed $18,000 on an interest-only, four-year loan at 5.25
percent from your local bank. Payments are to be paid annually. What is the amount of your loan
payment in year 2?
Payment in year 2 = $18,000 × 0.0525 = $945
105. On the day you entered college you borrowed $30,000 from your local bank. The terms of the
loan include an interest rate of 4.75 percent. The terms stipulate that the principal is due in full
one year after you graduate. Interest is to be paid annually at the end of each year. Assume that
you complete college in four years. How much total interest will you pay on this loan?
Total interest paid = $30,000 × 0.0475 × 5 = $7,125.00
106. You just acquired a mortgage in the amount of $249,500 at 6.75 percent interest, compounded
monthly. Equal payments are to be made at the end of each month for thirty years. How much
of the first loan payment is interest? (Assume each month is equal to 1/12 of a year.)