28 Questions
| Total Attempts: 88

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