CMBC191 ASSIGNMENT 2017

For questions 1-10; choose among the options A-E (Each question carries 1 Mark)
1. The primary goal of a publicly-owned firm interested in serving its stockholders should be to
a. Minimize the debt used by a firm.
b. Maximize expected EPS.
c. Minimize the chances of losses.
d. Maximize the stock price per share.
e. Maximize expected net income.

2. Which of the following mechanisms is not used by shareholders to get managers to act in
shareholder's best interests?
a. Threat of firing
b. Managerial compensation.
c. Golden parachute.
d. Threat of takeover.
e. Answers b and c above.

3. Which of the following is a reason why companies move into international operations?
a. To take advantage of lower production costs in regions of inexpensive labor.
b. To develop new markets for their finished products.
c. To better serve their primary customers.
d. Because important raw materials are located abroad.
e. All of the above.

4. Which of the following should be the primary goal pursued by the financial manager of a
firm?
a. Maximize net income (profits).
b. Maximize the firm's net worth, or book value.
c. Maximize dividends paid to common stockholders.
d. Minimize variable operating expenses.
e. Maximize the market value of the firm's stock.

5. Everything else equal, including firm size, dollar sales, type of product sold, and so forth, the
primary difference between the proprietorship and partnership business forms is that
a. a partnership has more owners than a proprietorship.
b. the combined personal liability associated with a partnership is significantly less than the
combined personal liability associated with a proprietorship.
c. a partnership generally is easier to form than a proprietorship.
d. the annual growth rate of a proprietorship is limited by law, whereas the growth rate of a
partnership is always potentially unlimited.
e. there are many more businesses that are formed as partnerships than proprietorships.

6. Given some amount to be received several years in the future, if the interest rate increases, the
present value of the future amount will
a. Be higher.
b. Be lower.
c. Stay the same.
d. Cannot tell.
e. Be variable.

7. You have determined the profitability of a planned project by finding the present value of all
the cash flows form that project. Which of the following would cause the project to look more
appealing in terms of the present value of those cash flows?
 a. The discount rate decreases.
b. The cash flows are extended over a longer period, but the total amount of the cash flows
remains the same.
c. The discount rate increases.
d. Answers b and c above.
e. Answers a and b above.

8. As the discount rate increases without limit, the present value of the future cash inflows
a. Gets larger without limit.
b. Stays unchanged.
c. Approaches zero.
d. Gets smaller without limit, i.e., approaches minus infinity.
e. Goes to ern.

9. Which of the following statements is most correct?

10. Why is the present value of an amount to be received (paid) in the future less than the future
amount?
a. Deflation causes investors to lose purchasing power when their dollars are invested for
greater than one year.
b. Investors could earn positive rates of return, so any amount invested today should grow to
a larger amount in the future.
c. Investments generally are not as good as those who sell them suggest, so investors usually
are not willing to pay full face value for such investments, thus the price is discounted.
d. Because investors are taxed on the income received from investments they never will buy
an investment for the amount expected to be received in the future.
e. None of the above is a correct answer.

For questions 11-15; show workings (Each question carries 4 Marks)

11. A recent advertisement in the financial section of a magazine carried the following claim:
"Invest your money with us at 14 percent, compounded annually, and we guarantee to double
your money sooner than you imagine." Ignoring taxes, how long would it take to double your
money at a simple rate of 14 percent, compounded annually?
a. Approximately 3.5 years
b. Approximately 5 years
c. Exactly 7 years
d. Approximately 10 years
e. Exactly 14 years

12. At an effective annual interest rate of 20 percent, how many years will it take a given amount
to triple in value? (Round to the closest year.)
a. 5
b. 8
c. 6
d. 10
e. 9
13. You deposited R1,000 in a savings account that pays 8 percent interest, compounded
quarterly, planning to use it to finish your last year in college. Eighteen months later, you
decide to go to the Rocky Mountains to become a ski instructor rather than continue in school,
so you close out your account. How much money will you receive?
a. R1,171
b. R1,126
c. R1,082
d. R1,163
e. R1,008

14. What is the future value of a 5-year ordinary annuity with annual payments of R200,
evaluated at a 15 percent interest rate?
a. R670.44
b. R842.91
c. R1,169.56
d. R1,522.64
e. R1,348.48

15. If a 5-year regular annuity has a present value of R1,000, and if the interest rate is 10 percent,
what is the amount of each annuity payment?
a. R240.42
b. R263.80
c. R300.20
d. R315.38
e. R346.87

For questions 16-20 choose TRUE or FALSE.

16. Risk is defined as the chance (probability) of observing outcomes that are greater than
expected, or favorable. Such outcomes are more desirable than observing less-than-expected
events, so the possibility that positive outcomes will occur must be emphasized when
evaluating risk.
17. Risk should not be a significant factor when making financial decision because all business
decisions involve predictions about the future, which is unknown. Thus, all decisions
automatically include some consideration of risk.
18. Risk is indicated by variability, whether the variability is considered positive or negative.
Both the positive and negative outcomes must be evaluated when considering risk because all
unexpected possibilities should be examined, even the positive ones.
19. A listing of all possible outcomes, or events, with a probability assigned to each is called a
probability distribution.
20. The expected rate of return of an asset will always equal one of the possible rates of return for
that asset.