ACCOUNTING 333 CHAPTER 4 PRACTICE QUIZ

ACCOUNTING 333 CHAPTER 4 PRACTICE QUIZ The value of a firm is best defined as the: o sum of all of the firm's future cash flows. o current year's cash flow times (1 + g). o current year's cash flow divided by r. o total present value of all of the firm's future cash flows. o current year's cash flows divided by (g - r). 2. Given a firm with positive annual cash flows, which one of the following will increase the current value of that firm? o Increasing the annual growth rate of the cash flows o Increasing the discount rate o Decreasing the amount of each cash flow o Decreasing the life of the firm o Increasing either the growth rate of the cash flows or the discount rate 3. Which one of the following would have the greatest value assuming each has Year 1 annual cash flows of $100 and a discount rate of 8 percent, compounded annually? o Perpetuity o Annuity o Growing perpetuity o Growing annuity o Growing perpetuity or growing annuity, as they would have equal values 4. Jennings Lumber just paid an annual dividend of $1.20 a share. The dividend is expected to increase by 2 percent annually and the applicable discount rate is 13 percent. Which one of these is the correct formula for computing the current value of this stock? o $1.20 + [$1.20/1.13 + .02] o ($1.20 × 1.02)/1.13 o ($1.20 × 1.02)/.13 o ($1.20 × 1.02)/(.13 - .02) o $1.20 + ($1.20 × 1.02)/(.13 - .02) 5. By federal law, lenders must disclose which one of these? o APR, excluding fees or other noninterest charges o EAR, excluding fees or other noninterest charges o APR, including fees and other noninterest charges o EAR, including fees and other noninterest charges o both the APR and EAR, excluding fees and other charges