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Anna Lesik
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Universidad de Barcelona

3rd course: Financial Management Professor: Altina Sebastián González

Exercises 1: The Financial Function and Concepts Review

1. Shareholders of a corporation may be, among others,


a. individuals.
b. individuals and pension funds.
c. pension funds.
d. individuals, pension funds, and insurance companies

2. Generally, a corporation is owned by its


a. managers.
b. board of directors and shareholders.
c. shareholders.
d. managers, board of directors, and shareholders.

3. A corporation, potentially, has infinite life because it


a. is a legal entity.
b. has the same ownership and management.
c. has limited liability.
d. is closely regulated.

4. Which of the following assets is tangible?


a. ExxonMobil's corporate headquarters building
b. Apple Inc.'s trademark
c. Hewlett-Packard's most recent printer patent
d. Microsoft's technical expertise

5. Which of the following types of assets are intangible?


a. Production machinery
b. Factories
c. Trademarks
d. Office equipment

6. A firm's investment decision is also called its


a. financing decision.
b. liquidity decision.
c. capital budgeting decision.
d. leasing decision.

7. Which of the following is not a financial asset?


a. Common stock
b. Bank loans
c. Preferred stock
d. Buildings

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8. The following groups are some of the claimants to a firm's income stream
a. shareholders and bondholders only.
b. shareholders, bondholders, and employees only.
c. shareholders, bondholders, employees, and management only.
d. shareholders, bondholders, employees, management, and government

9. The financial goal of a corporation is to:


a. maximize profits.
b. maximize sales.
c. maximize the value of the firm for the stakeholders.
d. maximize managers' benefits.

10. The firm's purchase of real assets is also referred to as the


a. capital structure decision.
b. CFO decision.
c. financing decision.
d. capital investment decision.

11. The sale of financial assets by a corporation is also referred to as the


a. capital budgeting decision.
b. CFO decision.
c. financing decision.
d. investment decision.

12. The choice of the proper mixture of debt and equity, used to finance a corporation, is also referred
to as the
a. capital budgeting decision.
b. capital structure decision.
c. investment decision.
d. liquidity decision.

13. The present value of $100 expected two years from today at a discount rate of 6 percent is
a. $112.36.
b. $106.00.
c. $100.00.
d. $89.00.

14. If the present value of $250 expected one year from today is $200, what is the one-year discount
rate?
a. 10 percent
b. 20 percent
c. 25 percent
d. 30 percent

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15. Which of the following statements regarding the NPV rule and the rate of return rule is false?
a. Accept a project if its NPV > 0.
b. Reject a project if the NPV < 0.
c. Accept a project if its rate of return > 0.
d. Accept a project if its rate of return > opportunity cost of capital.

16. An initial investment of $500 produces a cash flow of $550 one year from today. Calculate the
rate of return on the project.
a. 10 percent
b. 15 percent
c. 20 percent
d. 25 percent

17. According to the net present value rule, an investment in a project should be made if the
a. net present value is greater than the cost of investment.
b. net present value is greater than the present value of cash flows.
c. net present value is positive.
d. net present value is negative.

18. You deposit $4,000 each year into a retirement account paying 8% interest. How much will you
have in 25 years when you retire?
a. $108.000
b. $292.423,76
c. $684.847,52
d. None of the previous answer is correct

19. At an interest rate of 10 percent, which of the following sequences of cash flows should you
prefer?

PROJECTS YEAR 1 YEAR 2 YEAR 3

A $500 $300 $100


B $100 $300 $500
C $300 $300 $300
D Any of the above as they all add up to $900
a. Option A
b. Option B
c. Option C
d. Option D

20. Which of the following statements regarding the net present value rule and the rate of return rule
is false?
a. Accept a project if NPV > cost of investment.
b. Accept a project if NPV is positive.
c. Accept a project if return on investment exceeds the rate of return on an equivalent-risk
investment in the financial market.
d. Reject a project if NPV is negative.

This means that a project is considered financially worthwhile


if its expected return is higher than the return you could earn -3-
on an investment with a similar level of risk in the financial
market.
21. You would like to have enough money saved after your retirement such that you and your heirs can
receive $100,000 per year in perpetuity. How much would you need to have saved at the time of
your retirement in order to achieve this goal? (Assume that the perpetuity payments start one year
after the date of your retirement. The annual interest rate is 12.5 percent.)
a. $1,000,000
b. $10,000,000 Text
c. $800,000
d. $1,125,000

22. What is the present value of a six-year $5,000 per year annuity at a discount rate of 10 percent?
a. $21,776.30
b. $3,371.91
c. $16,760.78
d. $18,327.82

23. Which of the following sentences is not true (false):


a. The rate of return, discount rate, hurdle rate, and opportunity cost of capital all have the same
meaning
b. The rate of return on a safe investment is generally low and the rate of return on a risky
investment is generally high.
c. In the amortization of a mortgage loan with equal payments, the fraction of each payment
devoted to interest steadily increases over time and the fraction devoted to reducing the loan
balance decreases steadily.
d. Generally, one should accept investments that offer rates of return in excess of their opportunity
costs of capital.

24. Julio Company is considering the purchase of a new bubble packaging machine. If the machine
provides $20,000 annual savings for 10 years and can be sold for $50,000 at the end of the period,
what is the present value of the machine investment at a 9% interest rate with savings realized at
year end?
149474

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