FIN201 TEST 1 WITH CORRECT ANSWERS 2024

T/F - Sole Proprietorship is the most common form of business ownership - correct answer T T/F - A Sole Proprietor may have to sell personal assets to pay off company debts - correct answer T T/F - Sole Proprietorship has unlimited liability - correct answer T When you the words Capital Market in a MCQ question should you think Long Term or Short Term? - correct answer Long Term T/F - Does this describe a Capital Market - A financial relationship created by institutions and arrangements that allows suppliers and demanders of long-term funds to make transactions - correct answer T T/F - Does this describe a Capital Market - A market that allocates funds to their most productive uses as result of competition among wealthy investors - correct answer F T/F - Does this describe a Money Market - A financial relationship created by institutions and arrangements that allows suppliers and demanders of short-term funds to make transactions - correct answer T If all things being equal, in which of the following forms of business would the possibility of an agency problem be the greatest? 1) A sole proprietorship 2) A foreign corporation that is publicly traded 3) A foreign corp with concentrated ownership (relatively few owners) 4) A partnership in which all partners share management and decision making responsibilities equally - correct answer Which problem does this describe - managers not acting in the interest of the shareholders - correct answer Agency problem Is the agency problem more likely to occur in a public company or partnership or sole proprietorship? - correct answer Public company Is the agency problem more likely to occur in a public company or public company with few shareholders? - correct answer Public company Which of the following should be the primary goal of a financial manager? 1) Maximize steady growth in sales and profit 2) Maximize company efficiency and minimize operational costs 3) Maximize the current dividend per share of existing shares 4) Maximize the current share price value of existing shares - correct answer 4) Maximize the current share price value of existing shares FV or PV - Theo purchases new furniture by borrowing R15000 using the stores credit plan. - correct answer PV Exam Question - "Theo purchases new furniture by borrowing R15000 using the stores credit plan. The credit plan charges 18% interest, compounded monthly, and the loan is to be repaid within 3 years. How much of the first payment goes towards interest?" - What type of question is and what do you write on the exam paper next to the question as a reminder. - correct answer The fact that they are looking for interest means that this is a Amortization question. Write Amort next to the question. Exam Question - "Theo purchases new furniture by borrowing R15000 using the stores credit plan. The credit plan charges 18% interest, compounded monthly, and the loan is to be repaid within 3 years. How much of the first payment goes towards interest?" - Solve for PMT and then solve for Amort interest - correct answer PMT=542.29 Amort Interest = 225 "A junior account wishes to buy a house, buy she can only afford monthly payments of R1000. A 20 year loan is available at 15% interest, compounded monthly. If she can make a R10000 down payment, what is the price of the most expensive that she can afford to purchase?" - What are the steps and what is the answer? - correct answer 1) Solve PV (this is what bank is willing to lend her) = R75942.28 2) Add deposit to loan = 75,942.28 + 10,000 = 85,942.28 "A junior account wishes to buy a house, buy she can only afford monthly payments of R1000. A 20 year loan is available at 15% interest, compounded monthly. If she can make a R10000 down payment, what is the price of the most expensive that she can afford to purchase?" - how do you treat "down payments" in time value for money questions? - correct answer Keep them to the side, they are not to be used as inputs into Time Value for Money calculations but are used as the final step to answering the question. In this case, you solve for PV (what the bank is willing to loan) and then add down payment to the loan to get the max house price that this person can afford. The annual cost to maintain horse stables is R20000. If interest is 8%, how much must be set aside to pay maintenance in perpetuity? - correct answer 20,000/0.08=250,000 If the appropriate interest rate is 10%, what is the present value of the following cash flow stream? End of Year 1: 2500 Y2: 3000 Y3: 5000 - correct answer Net PV = 8508.64