Problem Set # 6

28 Questions | Total Attempts: 88

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Problem Quizzes & Trivia

Debt & Equity, Calculating Interest, Calculating Dividends


Questions and Answers
  • 1. 
    An investor with excess cash is considering two possible investments. The first investment has an initial cost of $1,000, pays $100 per year for 10 years and then repays the original investment. The second investment also has an initial cost of $1,000, may pay $100 per year for an unlimited number of years and has an unpredictable future value. What kind of financial instrument is the second investment?
    • A. 

      An unsecured loan

    • B. 

      A bond

    • C. 

      Common stock

    • D. 

      Preferred stock

    • E. 

      None of the above

  • 2. 
    An investor with excess cash is considering two possible investments. The first investment has an initial cost of $1,000, pays $100 per year for 10 years and then repays the original investment. The second investment also has an initial cost of $1,000, may pay $100 per year for an unlimited number of years and has an unpredictable future value. If the investor chooses the second investment, what is the maximum risk the investor faces?
    • A. 

      Default risk only

    • B. 

      Opportunity cost only

    • C. 

      $1,000

    • D. 

      $2,000

    • E. 

      None of the above

  • 3. 
    A company signed a $5 million, 5% 10-year note. Where will this transaction appear on the cash flow statement?
    • A. 

      The operating section

    • B. 

      The financing section

    • C. 

      The investing section

    • D. 

      Both a and c

    • E. 

      None of the above

  • 4. 
    An investor with excess cash is considering two possible investments. The first investment has an initial cost of $1,000, pays $100 per year for 10 years and then repays the original investment. The second also has an initial cost of $1,000, may pay $100 per year for an unlimited number of years and has an unpredictable future value. What kind of finanacial instrument is the first investment?
    • A. 

      A mortage

    • B. 

      A bond

    • C. 

      Common Stock

    • D. 

      Preferred Stock

  • 5. 
    ___________ is paid at agreed upon times on any outstanding balance.
    • A. 

      The principle

    • B. 

      The price

    • C. 

      Par value

    • D. 

      Interest

    • E. 

      None of the above

  • 6. 
    An investor with excess cash is considering two possible investments. The first investment has an initial cost of $1,000, pays $100 per year for 10 years and then repays the original investment. The second investment also has an initial cost of $1,000, may pay $100 per year for an unlimited number of years and has an unpredictable future value. If the investor chooses the first investment, what is the maximum risk the investor faces?
    • A. 

      Default risk only

    • B. 

      Opportunity cost only

    • C. 

      $1,000

    • D. 

      Cannot be determined

    • E. 

      None of the above

  • 7. 
    A company borrows a total of $20 million dollars. The debt contract is initially sold in a public offering as 20,000 financial contracts promising payments of $1,000 due in 10 years. The company's borrowing is made using
    • A. 

      Common stock

    • B. 

      An unsecured loan

    • C. 

      A mortgage

    • D. 

      Bonds

  • 8. 
    A(n) ____________ is a promissory note to pay the principle and stated interest rate by a stipulated maturity date.
    • A. 

      Share of common stock

    • B. 

      Unsecured loan

    • C. 

      Mortgage

    • D. 

      Bond

    • E. 

      None of the above

  • 9. 
    The __________ is the amount of money borrowed.
    • A. 

      Principle

    • B. 

      Price

    • C. 

      Par value

    • D. 

      Interest

    • E. 

      None of the above

  • 10. 
    A(n) _____________ is a promissory note secured by pledges of property---where security means the lender obtains the rights to the property if the borrower defaults on the loan.
    • A. 

      Share of common stock

    • B. 

      Unsecured loan

    • C. 

      Mortgage

    • D. 

      Bond

    • E. 

      None of the above

  • 11. 
    An investor with excess cash would like to invest the cash to earn a return. He is considering two possible investments. The investments are financial instruments, both available on a secondary market. Instrument P includes an annual cash payment of $400 and a payment of $8,000 at the end of 10 years. Instrument Q, grants an ownership interest in a company, but does not confer voting rights. Instrument Q does not include any promised future cash flows, but does include a preference that gives the owner rights to any voluntary payments made before owners of other classes of investment. Instruments P and Q both require an initial investment of $8,000. Which of the following best describes the return the investor can earn on Instrument P?
    • A. 

      Interest

    • B. 

      Dividends

    • C. 

      Appreciation

    • D. 

      B and/or c

    • E. 

      None of the above

  • 12. 
    An investor with excess cash would like to invest the cash to earn a return. He is considering two possible investments. The investments are financial instruments, both available on a secondary market. Instrument P includes an annual cash payment of $400 and a payment of $8,000 at the end of 10 years. Instrument Q, grants an ownership interest in a company, but does not confer voting rights. Instrument Q does not include any promised future cash flows, but does include a preference that gives the owner rights to any voluntary payments made before owners of other classes of investment. Instruments P and Q both require an initial investment of $8,000. If the investor chooses Instrument P what risks does he face?
    • A. 

      Exchange rate risk

    • B. 

      Default risk

    • C. 

      Opportunity risk (opportunity cost)

    • D. 

      All of the above

    • E. 

      B and c only

  • 13. 
    An investor with excess cash would like to invest the cash to earn a return. He is considering two possible investments. The investments are financial instruments, both available on a secondary market. Instrument P includes an annual cash payment of $400 and a payment of $8,000 at the end of 10 years. Instrument Q, grants an ownership interest in a company, but does not confer voting rights. Instrument Q does not include any promised future cash flows, but does include a preference that gives the owner rights to any voluntary payments made before owners of other classes of investment. Instruments P and Q both require an initial investment of $8,000. If the investor chooses Intrument P what is the maximum amount he risks losing?
    • A. 

      $12,000

    • B. 

      $8,000

    • C. 

      $4,000

    • D. 

      The amount cannot be calculated

    • E. 

      None of the above

  • 14. 
    Xeon Company raised funds by selling financial contracts on the open market. The 20,000 contracts were sold as a discount for $980. Each contract pays $50 a year for 10 years until the contract matures. At that time, the holder receives $1,000. What kind of instrument did Xeon use to raise funds, and what is the name of the return on investment that will be earned by contract holders?
    • A. 

      Unsecured loans, interest

    • B. 

      Bonds, interest

    • C. 

      Unsecured loans, dividends

    • D. 

      Bonds, dividends

    • E. 

      None of the above

  • 15. 
    A company borrows a total of $20 million dollars. The debt contract promises equal payments for a period of 20 years. The contract is secured by prime real estate property. The company's borrowing is made using
    • A. 

      Common stock

    • B. 

      An unsecured loan

    • C. 

      A mortgage

    • D. 

      Bonds

    • E. 

      None of the above

  • 16. 
    On September 1, 2003, Baruck Co. borrowed on a $1,350,000 note payable from State Bank. The note bears interest at 10% and is payable in three equal annual principle payments of $450,000. The first annual payment for interest and principle was made September 1, 2004. What is the total amount of cash Barcuk Co. will pay on September 1, 2005?
    • A. 

      $540,000

    • B. 

      $495,000

    • C. 

      $90,000

    • D. 

      $45,000

    • E. 

      None of the above

  • 17. 
    A company borrowed $100,000 from a bank, promising to pay it back at the end of 3 years and to pay 10% interest annually. How much is the total cash payment that will be made at the end of the third year?
    • A. 

      $110,000

    • B. 

      $10,000

    • C. 

      $30,000

    • D. 

      $130,000

    • E. 

      None of the above

  • 18. 
    A company borrowed $120,000 from a bank, promising to pay it back in three equal principle payments over 3 years and to pay 10% interest annually. How much is the total cash payment that will be made at the end of the third year?
    • A. 

      $52,000

    • B. 

      $48,000

    • C. 

      $44,000

    • D. 

      $40,000

    • E. 

      None of the above

  • 19. 
    A company borrowed $120,000 from a bank, promising to pay it back in three equal principle payments over 3 years and to pay 10% interest anually. How much is the total cash payment that will be made at the end of the second year?
    • A. 

      $52,000

    • B. 

      $48,000

    • C. 

      $44,000

    • D. 

      $40,000

    • E. 

      None of the above

  • 20. 
    On September 1, 2003, Baruck Co. borrowed on a $1,350,000 note payable from State Bank. The note bears interest at 10% and is payable in three equal annual principle payments of $450,000. The first annual payment for interest and principle was made on September 4, 2004. What is the total amount of cash Baruck Co. will pay on September 1, 2006?
    • A. 

      $540,000

    • B. 

      $495,000

    • C. 

      $90,000

    • D. 

      $45,000

    • E. 

      None of the above

  • 21. 
    On January 1, 2004, Belsalt Inc. borrowed on a $1,600,000 note payable from State Bank. The note bears interest at 10% and is payable in four equal annual principle payments of $400,000. What is the total amount of cash Besalt Inc. will pay on January 1, 2007?
    • A. 

      $520,000

    • B. 

      $480,000

    • C. 

      $120,000

    • D. 

      $80,000

    • E. 

      None of the above

  • 22. 
    A company borrowed $500,000 from a bank, promising to pay it back at the end of 5 years and to pay 5% interest annually. How much is the total cash payment that will be made at the end of the third year?
    • A. 

      $125,000

    • B. 

      $100,000

    • C. 

      $25,000

    • D. 

      $0

    • E. 

      none of the above

  • 23. 
    A company borrows $150,000 from a bank, promising to make three equal payments (after 1, 2, and 3 years) and to pay 5% interest per year. How much is the total cash payment the company makes at the end of year 2?
    • A. 

      $5,000

    • B. 

      $50,000

    • C. 

      $55,000

    • D. 

      $112,500

    • E. 

      None of the above

  • 24. 
    A company has two classes of stock. 2,000 shares of $50 par cumulative, 5% preferred stock and 10,000 shares of $1 par common stock are outstanding. The board of directors declares a $15,000 dividend. If dividends are in arrears for 2 years, how much is the dividend per share of common stock?
    • A. 

      $0

    • B. 

      $1.00

    • C. 

      $2.50

    • D. 

      $7.50

    • E. 

      None of the above

  • 25. 
    A company has two classes of stock. 4,000 shares of $50 par cumulative, 5% preferred stock and 10,000 shares of $1 par common stock are outstanding. The board of directors declares a $25,000 dividend. If dividends are in arrears for 1 year, how much is the dividend per share of common stock?
    • A. 

      $0.50

    • B. 

      $1.50

    • C. 

      $2.50

    • D. 

      $5.00

    • E. 

      None of the above