FIN601 - Sample Questions and Problems -

(8/1/01)

1. Which of the following statements is true?

a. Depreciation is a noncash revenue.
b. Depreciation is a noncash expense.
c. Net income is equal to retained earnings minus dividends paid.
d. Retained earnings are equal to net income plus dividends.

2. Which of the following statements is true?

If the compounding period is less one year,
a. stated annual interest rate is the same as effective annual interest rate.
b. effective annual rate is greater than stated rate.
c. effective annual rate is less than stated rate.
d. effective annual rate is either greater than or equal to stated rate.

3. You hold a winning ticket from your state lottery. It entitles the bearer to receive payments of $50,000 at the end of each year for the next 20 years. Given that you know about the time value of money and the discount rate is positive, you should be able to sell this ticket for

a. $1 million.
b. more than $1 million.
c. less than $1 million.
d. none of the above.

4. Capital surplus on a balance sheet refers to:

a. the stock's par value.
b. last year's retained earnings.
c. book value per share.
d. the amount received in excess of par value.

5. ABC, Inc. considers an investment in a project. Initial investment in year zero is $6,000. The asset has a 3-year life, will generate $3,000 in year one, $2,000 in year two, and $2,000 in year three. The discount rate is 9%.

a. Calculate the NPV.
b. Calculate the IRR.

Answer

1.B;
2.B;
3.C;
4.D;
5. a.NPV=-$19.98; b. IRR=8.8%


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