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Week 2
Basic Financial Tools: A Review
Homework Problems Chapter 18 and
19
Chapter 18
1. Which
of the following statements is CORRECT?
a. Time
lines cannot be constructed where some of the payments constitute an annuity
but
others
are unequal and thus are not part of the annuity.
b. A
time line is not meaningful unless all cash flows occur annually.
c. Time
lines are not useful for visualizing complex problems prior to doing actual
calculations.
d. Time
lines can be constructed to deal with situations where some of the cash flows
occur annually but others occur quarterly.
e. Time
lines can only be constructed for annuities where the payments occur at the end
of the periods, i.e., for ordinary annuities.
2. You
plan to analyze the value of a potential investment by calculating the sum of
the present values of its expected cash flows. Which of the following would
lower the calculated value of the
investment?
a. The
discount rate decreases.
b. The
cash flows are in the form of a deferred annuity, and they total to $100,000.
You
learn
that the annuity lasts for only 5 rather than 10 years, hence that each payment
is for
$20,000
rather than for $10,000.
c. The
discount rate increases.
d. The
riskiness of the investment’s cash flows decreases.
e. The
total amount of cash flows remains the same, but more of the cash flows are
received
in the earlier years and less are received in the later years.
3. Which
of the following statements is CORRECT?
a. If
some cash flows occur at the beginning of the periods while others occur at the
ends,
then we
have what the textbook defines as a variable annuity.
b. The
cash flows for an ordinary (or deferred) annuity all occur at the beginning of
the
periods.
c. If a
series of unequal cash flows occurs at regular intervals, such as once a year,
then the series is by definition an annuity.
d. The
cash flows for an annuity due must all occur at the ends of the periods.
e. The
cash flows for an annuity must all be equal, and they must occur at regular
intervals, such as once a year or once a month.
4. Your
bank account pays a 5% nominal rate of interest. The interest is compounded
quarterly.
Which of
the following statements is CORRECT?
a. The
periodic rate of interest is 5% and the effective rate of interest is also 5%.
b. The
periodic rate of interest is 1.25% and the effective rate of interest is 2.5%.
c. The
periodic rate of interest is 5% and the effective rate of interest is greater
than 5%.
d. The periodic
rate of interest is 1.25% and the effective rate of interest is greater than
5%.
e. The
periodic rate of interest is 2.5% and the effective rate of interest is 5%.
5. A
$250,000 loan is to be amortized over 8 years, with annual end-of-year payments.
Which of these statements is CORRECT?
a. The
proportion of interest versus principal repayment would be the same for each of
the 8 payments.
b. The
annual payments would be larger if the interest rate were lower.
c. If
the loan were amortized over 10 years rather than 8 years, and if the interest
rate were the same in either case, the first payment would include more dollars
of interest under the 8-year amortization plan.
d. The
proportion of each payment that represents interest as opposed to repayment of
Principal
would be lower if the interest rate were lower.
e. The
last payment would have a higher proportion of interest than the first payment.
Chapter 19
Homework
1. Operating leases often have terms that
include
a. full
amortization over the life of the lease.
b. very
high penalties if the lease is canceled.
c.
restrictions on how much the leased property can be used.
d. much
longer lease periods than for most financial leases.
e.
maintenance of the equipment by the lessor.
2. Which of the following statements is
most CORRECT?
a.
Capitalizing a lease means that the firm issues equity capital in proportion to
its current
capital
structure, in an amount sufficient to support the lease payment obligation.
b. The
fixed charges associated with a lease can be as high as, but never greater
than, the
fixed
payments associated with a loan.
c.
Capital, or financial, leases generally provide for maintenance by the lessor.
d. A key
difference between a capital lease and an operating lease is that with a capital
lease,
the lease payments provide the lessor with a return of the funds invested in
the
asset
plus a return on the invested funds, whereas with an operating lease the lessor
depends
on the residual value to realize a full return of and on the investment.
e. Firms
that use "off balance sheet" financing, such as leasing, would show
lower debt
ratios
if the effects of their leases were reflected in their financial statements.
3. Financial Accounting Standards Board
(FASB) Statement #13 requires that for an unqualified audit report, financial
(or capital) leases must be included in the balance sheet by reporting the
a.
residual value as a liability.
b.
present value of future lease payments as an asset and also showing this same
amount
as an
offsetting liability.
c.
undiscounted sum of future lease payments as an asset and as an offsetting
liability.
d.
undiscounted sum of future lease payments, less the residual value, as an asset
and as
an
offsetting liability.
e.
residual value as a fixed asset.
4. Heavy use of off-balance sheet lease
financing will tend to
a. make
a company appear less risky than it actually is because its stated debt ratio
will
appear
lower.
b.
affect a company's cash flows but not its degree of risk.
c. have
no effect on either cash flows or risk because the cash flows are already
reflected in
the
income statement.
d.
affect the lessee's cash flows but only due to tax effects.
e. make
a company appear more risky than it actually is because its stated debt ratio
will be
increased.
5. In the lease versus buy decision,
leasing is often preferable
a.
because, generally, no down payment is required, and there are no indirect
interest
costs.
b.
because lease obligations do not affect the firm's risk as seen by investors.
c.
because the lessee owns the property at the end of the least term.
d.
because the lessee may have greater flexibility in abandoning the project in
which the
leased
property is used than if the lessee bought and owned the asset.
e.
because it has no effect on the firm's ability to borrow to make other
investments.
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