True/False (1point each)
1. The sole proprietor has unlimited liability; his or her total investment in the business, but not his or her personal assets, can be taken to satisfy creditors.
2. Time-value of money is based on the belief that a dollar that will be received at some future date is worth more than a dollar today.
3. Holders of equity have claims on both income and assets that are secondary to the claims of creditors.
4. The possibility that the issuer of a bond will not pay the contractual interest or principal payments as scheduled is called maturity risk.
5. The breakeven point in dollars can be computed by dividing the contribution margin into the fixed operating costs.
Multiple-choice (1point each)
6. The ________ is the extent of an asset’s risk. It is found by subtracting the pessimistic outcome from the optimistic outcome
b) Standard deviation
c) Probability distribution
7. ________ measure(s) the risk of a capital budgeting project by estimating the NPVs associated with the optimistic, most likely, and pessimistic cash flow estimates
b) risk-adjusted discount rates
c) sensitivity analysis
d) multiple regression analysis
8. If a firm uses an aggressive financing strategy,
a) it increases return and increases risk.
b) it increases return and decreases risk.
c) it decreases return and increases risk.
d) it decreases return and decreases risk.
9. The two major sources of short-term financing are
a) a line of credit and accounts payable.
b) accounts payable and accruals.
c) a line of credit and accruals.
d) accounts receivable and notes payable.
10. At the operating breakeven point, ________ equals zero.
a) sales revenue
b) fixed operating costs
c) variable operating costs
d) earnings before interest and taxes
11. Xiao Li wishes to accumulate $50,000 by the end of 10 years by making equal annual end-of-year deposits over the next 10 years. If Xiao Li can earn 5 percent on her investments, how much must she deposit at the end of each year?
12. Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest rate. The original principal amount was
13. Hewitt Packing Company has an issue of $1,000 par value bonds with a 14 percent annual coupon interest rate. The issue has ten years remaining to the maturity date. Bonds of similar risk are currently selling to yield a 12 percent rate of return. The current value of each Hewitt bond is ________.
d) $1,113.00 $70(11.470) $1,000(.312) $1,113
14. Yong Importers, an Asian import company, is evaluating two mutually exclusive projects, A and B. The relevant cash flows for each project are given in the table below. The cost of capital for use in evaluating each of these equally risky projects is 10 percent.
Project A Project B
Initial Investment $350,000 $425,000
Year Cash Inflows (CF)
1 $140,000 $175,000
2 165,000 150,000
3 190,000 125,000
The NPVs of projects A and B are ________.
A) $95,066 and $56,386, respectively.
B) $56,386 and $95,066, respectively.
C) -$56,386 and -$95,066, respectively.
D) none of the above.