978-1259723223 Test Bank TBChap037 Part 1

Chapter 37 Financial Economics Answer Key

Multiple Choice Questions

1.

What are the two most important factors influencing investor preferences?

2.

Which of the following is an economic investment?

3.

Which of the following statements is true about buying an old factory?

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Blooms: Remember

D i f f i c u l t y : 01 Easy

Learning Objective: 37-01 Define financial economics and distinguish between economic

investment and financial investment.

Test Bank: I

T o p i c : Financial Investment

4.

Which of the following is both an economic and a financial investment?

5.

What is the difference between economic and financial investments?

6.

Isaiah just purchased a house built in 1986 that he expects will appreciate in value over time.

His purchase would be considered

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A.

an economic investment but not a financial investment.

B. a financial investment but not an economic investment.

C.

both an economic and a financial investment.

D.

neither an economic nor a financial investment.

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Remember

D i f f i c u l t y : 01 Easy

Learning Objective: 37-01 Define financial economics and distinguish between economic

investment and financial investment.

Test Bank: I

T o p i c : Financial Investment

7.

The idea that money has “time value” refers to the fact that

8.

According to the concept of the time value of money,

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T o p i c : Present Value

9.

Present value is best defined as the

10.

Which of the following statements best reflects the concept of present value?

11.

Compound interest

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12.

$200 invested at an annual interest rate of 5 percent will be worth how much at the end of

one year?

13.

$200 invested in a savings account paying an annual interest rate of 5 percent will be worth

how much at the end of five years, assuming all interest earned remains in the account?

14.

$500 invested at an annual interest rate of 8 percent will be worth how much at the end of

one year?

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written consent of McGraw-Hill Education.

A. $504

B. $508

C. $540

D. $580

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty: 02 Medium

Learning Objective: 37-02 Explain the time value of money and how compound interest can be

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

15.

$800 invested at an annually compounded interest rate of 6 percent will be worth how much

at the end of 10 years?

16.

Suppose that Betty takes out a loan for $300 at an annually compounded interest rate of 6

percent to be repaid after five years. How much will be required to pay off the loan at the end of

the five years?

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written consent of McGraw-Hill Education.

Difficulty: 02 Medium

Learning Objective: 37-02 Explain the time value of money and how compound interest can be

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

17.

Myrna borrows $500 at an annually compounded interest rate of 8 percent that she will

repay at the end of 10 years. How much will be required to pay off the loan at the end of 10

years?

18.

Alyssa is saving money for a vacation she wants to take five years from now. If the trip will

cost $1,000 and she puts her money into a savings account paying 4 percent interest,

compounded annually, how much would Alyssa need to deposit today to reach her goal without

making further deposits?

19.

What is the present value of $5,000 to be received 10 years from now if the interest rate is

10 percent?

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written consent of McGraw-Hill Education.

A. $1,927.72

B. $500

C. $4,545.45

D. $12,968.71

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty: 02 Medium

Learning Objective: 37-02 Explain the time value of money and how compound interest can be

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

20.

Calculate the present value of an asset worth $2,000 four years from now if the interest rate

is 6 percent.

21.

What is the present value of $500 to be received eight years from now if the interest rate is 5

percent?

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written consent of McGraw-Hill Education.

Learning Objective: 37-02 Explain the time value of money and how compound interest can be

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

22.

(Advanced analysis) Kara has $2,000 to invest today that she wants to grow to $3,000 in five

years. What annually compounded rate of interest would she have to earn to reach her goal?

23.

(Advanced analysis) Alex wants to have $800 saved up at the end of 10 years. If he deposits

$500 today, what annually compounded rate of interest would he have to earn to reach his goal?

24.

(Advanced analysis) Ricardo deposits $1,000 into his savings account. What rate of interest

would he have to earn on his savings for his deposit to be worth $2,000 in eight years?

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C.

10 percent

D.

10.4 percent

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty: 02 Medium

Learning Objective: 37-02 Explain the time value of money and how compound interest can be

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

25.

(Advanced analysis) Indy has $2,000 invested in a financial asset earning an annually

compounded interest rate of 6 percent. Approximately how many years will it take before Indy’s

investment is worth $5,000?

26.

(Advanced analysis) Susie has $500 invested in a financial asset earning an annually

compounded interest rate of 8 percent. If Susie plans to cash in the asset when it is worth $700,

about how long will she have to wait?

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written consent of McGraw-Hill Education.

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

27.

(Advanced analysis) Tani invests $100 in a financial asset earning an annually compounded

interest rate of 5 percent. In about how many years will her investment be worth $150?

28.

What concept describes how quickly an investment increases in value when interest is paid

not only on the original amount invested, but also on the accumulated interest payments?

29.

Which of the following equations shows how much X dollars will be worth if invested at an

annual interest rate i for t years, if interest is compounded annually?

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AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty: 02 Medium

Learning Objective: 37-02 Explain the time value of money and how compound interest can be

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

30.

If i is the interest rate and X is the number of dollars to be received after t years, the formula

to calculate the present value of a future payment is

31.

The formula for present value allows investors to

32.

The price of an asset should

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A.

exactly equal the total present value of all of the asset’s future payments.

B.

exactly equal the total future value of all of the asset’s future payments.

C.

approximately equal X(1 + i)t, where X is the value of the asset, i is the interest rate, and t is

the number of years.

D.

exactly equal the total present and future value of all of the asset’s future payments.

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty: 02 Medium

Learning Objective: 37-02 Explain the time value of money and how compound interest can be

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

33.

The present value of a future amount of money will be greater the

34.

The present value of a future amount of money will be greater the

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written consent of McGraw-Hill Education.

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

35.

Suppose that Clint wins a lottery jackpot of $300 million. He can receive it over the next 30

years in annual payments of $10 million, or he can receive a lump sum of $100 million

immediately. Assuming that taxes are not a consideration, should Clint take his winnings as a

lump sum?

36.

Lottery winners who take the lump-sum payouts instead of payments spread out over many

years

37.

Professional athletes attempting only to maximize income will defer larger salaries if

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written consent of McGraw-Hill Education.

A.

deferred payouts are adjusted upward to compensate for forgone interest.

B.

it increases the team’s chance to win.

C.

there is no chance of inflation.

D.

it allows them to stay in a city and not to have to move their family.

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty: 02 Medium

Learning Objective: 37-02 Explain the time value of money and how compound interest can be

used to calculate the present value of any future amount of money.

Test Bank: I

T o p i c : Present Value

38.

The Hazards, a professional baseball team, want to sign pitcher Alex McScoob to a two-year

contract but, because of salary cap limitations, can only pay $8 million for the first year (Alex’s

market value is $10 million per year). The Hazards offer to pay $8 million in year 1 and $13

million in year 2.

Should Alex sign the contract?

39.

Which of the following is not common to all investments?

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Learning Objective: 37-03 Identify and distinguish between the most common financial

investments: stocks, bonds, and mutual funds.

Test Bank: I

T o p i c : Some Popular Investments

40.

Which of the following is common to all investments?

41.

Ownership of a single corporation is represented by what investment?

42.

A stockholder owning 5 percent of a company’s stock

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AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Remember

D i f f i c u l t y : 01 Easy

Learning Objective: 37-03 Identify and distinguish between the most common financial

investments: stocks, bonds, and mutual funds.

Test Bank: I

T o p i c : Some Popular Investments

43.

The maximum amount of money that company shareholders can lose on their investment in

the corporation is

44.

If a corporation goes bankrupt,

45.

Limited liability rules

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written consent of McGraw-Hill Education.

A.

mean that bankrupt companies owe nothing to corporate bondholders.

B.

discourage investment in corporate stock.

C.

help prevent corporate fraud.

D. encourage stock investing by limiting shareholder risk of loss.

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Remember

D i f f i c u l t y : 01 Easy

Learning Objective: 37-03 Identify and distinguish between the most common financial

investments: stocks, bonds, and mutual funds.

Test Bank: I

T o p i c : Some Popular Investments

46.

Payments to shareholders from corporate profits are known as

47.

When shares of stock are sold for more than the price at which they were purchased, the

difference received by the seller is referred to as

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Test Bank: I

T o p i c : Some Popular Investments

48.

Owners of stock can receive from their shares; sellers of stock can receive from selling their

shares.

49.

The current share price of a corporation’s stock is determined by the

50.

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.

Every year he has received, from company profits, $1 for each share he owns. If Indy sells all his

shares at a price of $30 per share, he will receive a

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written consent of McGraw-Hill Education.

AACSB: Knowledge Application

A c c e s s i b i l i t y : Keyboard Navigation

Blooms: Understand

Difficulty: 02 Medium

Learning Objective: 37-04 Relate how percentage rates of return provide a common

framework for comparing assets and explain why asset prices and rates of return are inversely

related.

Test Bank: I

T o p i c : Calculating Investment Returns

51.

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.

Every year he has received, from company profits, $1 for each share he owns. If Indy holds his

shares for five years, he

52.

Indy owns 100 shares of stock in Pet Mart Corporation that he purchased for $20 per share.

Every year he has received, from company profits, $1 for each share he owns. Indy should

necessarily sell his stock if