FIN354 - FINANCIAL MANAGEMENT PRACTICE TEST 1
QUESTIONS AND ACCURATE ANSWERS
1. What is the goal of financial management?: Maximize shareholder wealth
2. What ratio measures the ability of the firm to satisfy its short
term obliga-tions as they come due?: Current ratio
3. You are offered a zero-coupon bond with a $1,000 face value and
5 years left to maturity. If the required return on the bond is 8%,
what is the most you should pay for this bond?: $680.58 (FV: 1000, PMT: 0, I/Y: 8,
N:5, PV: 680.58)
4. Which financial ratio measures the effectiveness of management
in gener-ating returns to common stockholders with its available
assets?: Return to assets
5. How much do you have to invest today at an annual rate of 8%,
if you need to have $5,000 six years from today?: $3,150.85 (FV: 5000, PMT: 0,
I/Y: 8, N:6, PV: 3150.85)
6. You set up a college fund in which you pay $2,000 each year at
the *END* of the year. How much money will you have accumulated
in the fund after 18 years, if your fund earns 7% compounded annually?:
$67,998.07 (PV: 0, PMT: 2000, I/Y: 7, N:18, FV: 67998.07)
7. Which of the following statements are TRUE?
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,FIN354 - FINANCIAL MANAGEMENT PRACTICE TEST 1
QUESTIONS AND ACCURATE ANSWERS
Statement I: As you increase the interest rate, the future value of
an invest-ment increases.
Statement II: As you increase the length of the investment (to
receive some lump sum), the present value of the investment
increases.
Statement III: The present value of an ordinary annuity is larger
than the present value of an annuity due. (all else equal): Statement I
only
8. In general, the more debt a firm uses in relation to its total assets:
the greater the financial leverage it uses.
9. The Sarbanes-Oxley Act of 2002: requires that the CEO and CFO of large companies
to personally certify their firms' financial statements.
10. Bavarian Sausage just issued a 10-year 12% coupon bond.
The face value of the bond is $1,000 and the bond makes ANNUAL
coupon payments. If the bond is trading at $967.25, what is the
bond's yield to maturity?: 12.59% (FV: 1000, PV: 967.25, PMT: 120, N:10, I/Y:
12.59)
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, FIN354 - FINANCIAL MANAGEMENT PRACTICE TEST 1
QUESTIONS AND ACCURATE ANSWERS
11. Of the following bonds, which one has the highest degree of
interest rate risk?: 20 year 8% bond
12. What is the present value of these cash flows, if the
discount rate is 10% annually?
End of year Cash flow
1 $2,500
2 $3,000
3 $1,250
4 $3,500
5 $1,250
6 $4,530
7 $2,350: $12,620.90
CF0: 0
CF1: 2500
CF2: 3000
CF3: 1250
CF4: 3500
CF5: 1250
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QUESTIONS AND ACCURATE ANSWERS
1. What is the goal of financial management?: Maximize shareholder wealth
2. What ratio measures the ability of the firm to satisfy its short
term obliga-tions as they come due?: Current ratio
3. You are offered a zero-coupon bond with a $1,000 face value and
5 years left to maturity. If the required return on the bond is 8%,
what is the most you should pay for this bond?: $680.58 (FV: 1000, PMT: 0, I/Y: 8,
N:5, PV: 680.58)
4. Which financial ratio measures the effectiveness of management
in gener-ating returns to common stockholders with its available
assets?: Return to assets
5. How much do you have to invest today at an annual rate of 8%,
if you need to have $5,000 six years from today?: $3,150.85 (FV: 5000, PMT: 0,
I/Y: 8, N:6, PV: 3150.85)
6. You set up a college fund in which you pay $2,000 each year at
the *END* of the year. How much money will you have accumulated
in the fund after 18 years, if your fund earns 7% compounded annually?:
$67,998.07 (PV: 0, PMT: 2000, I/Y: 7, N:18, FV: 67998.07)
7. Which of the following statements are TRUE?
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21
,FIN354 - FINANCIAL MANAGEMENT PRACTICE TEST 1
QUESTIONS AND ACCURATE ANSWERS
Statement I: As you increase the interest rate, the future value of
an invest-ment increases.
Statement II: As you increase the length of the investment (to
receive some lump sum), the present value of the investment
increases.
Statement III: The present value of an ordinary annuity is larger
than the present value of an annuity due. (all else equal): Statement I
only
8. In general, the more debt a firm uses in relation to its total assets:
the greater the financial leverage it uses.
9. The Sarbanes-Oxley Act of 2002: requires that the CEO and CFO of large companies
to personally certify their firms' financial statements.
10. Bavarian Sausage just issued a 10-year 12% coupon bond.
The face value of the bond is $1,000 and the bond makes ANNUAL
coupon payments. If the bond is trading at $967.25, what is the
bond's yield to maturity?: 12.59% (FV: 1000, PV: 967.25, PMT: 120, N:10, I/Y:
12.59)
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21
, FIN354 - FINANCIAL MANAGEMENT PRACTICE TEST 1
QUESTIONS AND ACCURATE ANSWERS
11. Of the following bonds, which one has the highest degree of
interest rate risk?: 20 year 8% bond
12. What is the present value of these cash flows, if the
discount rate is 10% annually?
End of year Cash flow
1 $2,500
2 $3,000
3 $1,250
4 $3,500
5 $1,250
6 $4,530
7 $2,350: $12,620.90
CF0: 0
CF1: 2500
CF2: 3000
CF3: 1250
CF4: 3500
CF5: 1250
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