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Fundamentals of Finance Questions

Please answer the following questions:

Part 1:

1. Read the following passage: “Companies usually buy ( a) assets. These include both
tangible assets such as ( b) and intangible assets such as ( c). To pay for these assets, they
sell ( d) assets such as ( e). The decision about which assets to buy is usually termed the
( f ) or ( g) decision. The decision about how to raise the money is usually termed the
( h) decision.” Now fit each of the following terms into the most appropriate space: financing,
real, bonds, investment, executive airplanes, financial, capital budgeting, brand names.

2. Which of the following are real assets, and which are financial?

a. A share of stock.

b. A personal IOU.

c.A trademark.

d.A factory.

e.Undeveloped land.

f. The balance in the firm’s checking account.

g. An experienced and hardworking sales force.

h. A corporate bond.

3. Vocabulary test. Explain the differences between:

a. Real and financial assets

b. Capital budgeting and financing decisions.

c. Closely held and public corporations.

d. Limited and unlimited liability.

4. Which of the following statements always apply to corporations?

a.Unlimited liability.

b.Limited life.

c. Ownership can be transferred without affecting operations.

d. Managers can be fired with no effect on ownership.

5. Which of the following statements more accurately describe the treasurer than the

a. Responsible for investing the firm’s spare cash.

b. Responsible for arranging any issue of common stock.

c. Responsible for the company’s tax affairs.

6. In most large corporations, ownership and management are separated. What are the main
implications of this separation?

Part 2:

1. At an interest rate of 12%, the six-year discount factor is .507. How many dollars is $.507
worth in six years if invested at 12%?

2. If the PV of $139 is $125, what is the discount factor?

3. If the cost of capital is 9%, what is the PV of $374 paid in year 9?

4. A project produces a cash flow of $432 in year 1, $137 in year 2, and $797 in year 3. If the
cost of capital is 15%, what is the project’s PV?

5. If you invest $100 at an interest rate of 15%, how much will you have at the end of eight years?

6. An investment costs $1,548 and pays $138 in perpetuity. If the interest rate is 9%, what is
the NPV?


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