ESSENTIALS OF CORPORATE FINANCE ROSS
ESSENTIAL STUDY QUESTIONS AND ANSWERS
◉ Centre Bank pays 2.5 percent interest, compounded annually, on
its savings accounts. Country Bank pays 2.5 percent simple interest
on its savings accounts. You want to deposit sufficient funds today so
that you will have $1,500 in your account 2 years from today. The
amount you must deposit today:
a) is the same regardless of which bank you choose because they
both pay compound interest
b) will be greater if you invest with Centre bank
c) will be greater if you invest with Country bank
d) is the same regardless of which bank you choose because the time
period is the same for both banks
e) is the same regardless of which bank you choose because they
both pay simple interest.
Answer: c) will be greater if you invest with Country bank
◉ t or f: a dollar received today is worth more than a dollar received
in the future, assuming a positive interest rate.
Answer: true
◉ responsible for managing financing, working capital, investor
relations and risk.
,Answer: treasurer
◉ responsible for managing accounting and auditing.
Answer: controller
◉ which one of the following best matches the primary goal of
financial management?
a) transforming fixed costs into variable costs
b) increasing traffic flow within the firm's stores
c) increasing the dollar amount of each sale
d) maximizing shareholders' wealth
e) increasing the firm's current profit.
Answer: d) maximizing shareholders' wealth
◉ What do we call the possible conflict of interest between
shareholders and management?.
Answer: agency problem
◉ t or f: the Sarbanes-Oxley Act requires a company's CEO and CFO
to certify that their firm's financial statements are accurate.
Answer: true
,◉ Which of the following types of securities has the lowest or no
priority in a bankruptcy proceeding?
a) straight bond
b) preferred stock
c) common stock
d) senior debt
e) convertible bond.
Answer: c) common stock
◉ One year ago, you purchased 100 shares of stock. This morning
you sold those shares and realized a total return of 8.2 percent.
Given this information, you know for sure the:
a) stock increased in value over the past year
b) stock paid a dividend
c) dividend yield is greater than zero
d) stock price increased by 8.2% over the last year
e) sum of the dividend and the capital gains yield is 8.2%.
Answer: e) sum of the dividend and the capital gains yield is 8.2%
◉ Which of the following will increase the future value of a lump
sum investment?
I. Increasing the Interest rate
II. Decreasing the interest rate
, III. Increasing the time period
IV. Decreasing the amount of the lump sum investment.
Answer: I and III only
◉ you just purchased a parcel of land for $75,000. If you expect to
earn a 6% annual rate of return on it, how much do you expect to be
able to sell it for in 15 years?.
Answer: $179,741.86
◉ Ten years ago an account was opened with an investment of
$4000. Its balance is now $7000. If interest was compounded
annually, what interest rate was earned on the account?.
Answer: .0576
FV= PV*(1+r)^n
r= (FV/PV)^(1/n) -1
◉ The interest rate used to compute the present value of a future
cash flow is called the:.
Answer: discount rate
◉ How much would $1 million due in 100 years be worth today if
the discount rate were 15%?.
ESSENTIAL STUDY QUESTIONS AND ANSWERS
◉ Centre Bank pays 2.5 percent interest, compounded annually, on
its savings accounts. Country Bank pays 2.5 percent simple interest
on its savings accounts. You want to deposit sufficient funds today so
that you will have $1,500 in your account 2 years from today. The
amount you must deposit today:
a) is the same regardless of which bank you choose because they
both pay compound interest
b) will be greater if you invest with Centre bank
c) will be greater if you invest with Country bank
d) is the same regardless of which bank you choose because the time
period is the same for both banks
e) is the same regardless of which bank you choose because they
both pay simple interest.
Answer: c) will be greater if you invest with Country bank
◉ t or f: a dollar received today is worth more than a dollar received
in the future, assuming a positive interest rate.
Answer: true
◉ responsible for managing financing, working capital, investor
relations and risk.
,Answer: treasurer
◉ responsible for managing accounting and auditing.
Answer: controller
◉ which one of the following best matches the primary goal of
financial management?
a) transforming fixed costs into variable costs
b) increasing traffic flow within the firm's stores
c) increasing the dollar amount of each sale
d) maximizing shareholders' wealth
e) increasing the firm's current profit.
Answer: d) maximizing shareholders' wealth
◉ What do we call the possible conflict of interest between
shareholders and management?.
Answer: agency problem
◉ t or f: the Sarbanes-Oxley Act requires a company's CEO and CFO
to certify that their firm's financial statements are accurate.
Answer: true
,◉ Which of the following types of securities has the lowest or no
priority in a bankruptcy proceeding?
a) straight bond
b) preferred stock
c) common stock
d) senior debt
e) convertible bond.
Answer: c) common stock
◉ One year ago, you purchased 100 shares of stock. This morning
you sold those shares and realized a total return of 8.2 percent.
Given this information, you know for sure the:
a) stock increased in value over the past year
b) stock paid a dividend
c) dividend yield is greater than zero
d) stock price increased by 8.2% over the last year
e) sum of the dividend and the capital gains yield is 8.2%.
Answer: e) sum of the dividend and the capital gains yield is 8.2%
◉ Which of the following will increase the future value of a lump
sum investment?
I. Increasing the Interest rate
II. Decreasing the interest rate
, III. Increasing the time period
IV. Decreasing the amount of the lump sum investment.
Answer: I and III only
◉ you just purchased a parcel of land for $75,000. If you expect to
earn a 6% annual rate of return on it, how much do you expect to be
able to sell it for in 15 years?.
Answer: $179,741.86
◉ Ten years ago an account was opened with an investment of
$4000. Its balance is now $7000. If interest was compounded
annually, what interest rate was earned on the account?.
Answer: .0576
FV= PV*(1+r)^n
r= (FV/PV)^(1/n) -1
◉ The interest rate used to compute the present value of a future
cash flow is called the:.
Answer: discount rate
◉ How much would $1 million due in 100 years be worth today if
the discount rate were 15%?.
