Principles of Managerial Finance Midterm Test Questions with Correct Answers Graded A+
Future Value - Answers The value at a given future date of an amount placed on deposit today and
earning interest at a specified rate.
Present Value - Answers The current dollar value of a future amount; the amount of money that would
have to be invested today at a given interest rate over a specified period to equal the future amount.
Lump Sum - Answers A cash flow that has no equal cash flow in any adjacent time period
Annuity - Answers A stream of equal periodic cash flows over a specified time period. These cash flows
can be inflows of returns on investments or outflows of funds invested to earn future returns.
Ordinary Annuity - Answers An annuity for which the cash flow occurs at the end of each period
Annuity Due - Answers An annuity for which the cash flow occurs at the beginning of each period.
Discount Rate - Answers The interest rate used to find the PV
Reinvestment Rate - Answers The interest rate used to find the FV
Portfolio - Answers A collection or group of assets
Risk - Answers A measure of the uncertainty surrounding the return that an investment will earn or,
more formally, the variability of returns associated with a given asset.
Rational Investor - Answers Someone who wants the most return for least amount of risk.
Standard Deviation - Answers The most common statistical indicator of an asset's risk; it measures the
dispersion around the expected value
Coefficient of variation (CV) - Answers A measure of risk per unit of return (want low)
Sharp Ratio (SR) - Answers A measure of return per unit of risk (want high)
Covariance - Answers Mean of the product of the deviations
Correlation - Answers A statistical measure of the relationship between any two series of numbers
Beta - Answers Risk of security relative to the market, a measure of nondiversifiable risk
Cost of Capital - Answers Represents the firm's cost of financing and is the minimum rate of return that a
project must earn to increase firm value.
Flotation costs - Answers The total costs of issuing and selling a security
Component Costs of Capital - Answers Debt, Preferred Stock, Common Stock, Retained Earnings
Debt Financing - Answers The after tax cost of debt
Future Value - Answers The value at a given future date of an amount placed on deposit today and
earning interest at a specified rate.
Present Value - Answers The current dollar value of a future amount; the amount of money that would
have to be invested today at a given interest rate over a specified period to equal the future amount.
Lump Sum - Answers A cash flow that has no equal cash flow in any adjacent time period
Annuity - Answers A stream of equal periodic cash flows over a specified time period. These cash flows
can be inflows of returns on investments or outflows of funds invested to earn future returns.
Ordinary Annuity - Answers An annuity for which the cash flow occurs at the end of each period
Annuity Due - Answers An annuity for which the cash flow occurs at the beginning of each period.
Discount Rate - Answers The interest rate used to find the PV
Reinvestment Rate - Answers The interest rate used to find the FV
Portfolio - Answers A collection or group of assets
Risk - Answers A measure of the uncertainty surrounding the return that an investment will earn or,
more formally, the variability of returns associated with a given asset.
Rational Investor - Answers Someone who wants the most return for least amount of risk.
Standard Deviation - Answers The most common statistical indicator of an asset's risk; it measures the
dispersion around the expected value
Coefficient of variation (CV) - Answers A measure of risk per unit of return (want low)
Sharp Ratio (SR) - Answers A measure of return per unit of risk (want high)
Covariance - Answers Mean of the product of the deviations
Correlation - Answers A statistical measure of the relationship between any two series of numbers
Beta - Answers Risk of security relative to the market, a measure of nondiversifiable risk
Cost of Capital - Answers Represents the firm's cost of financing and is the minimum rate of return that a
project must earn to increase firm value.
Flotation costs - Answers The total costs of issuing and selling a security
Component Costs of Capital - Answers Debt, Preferred Stock, Common Stock, Retained Earnings
Debt Financing - Answers The after tax cost of debt
