Chapter I Financial Management Function

And Chapter II Time Value of Money

Homework I (Deadline: May 6, 2023)
I. Multiple Choice Questions
1. In relation to the financial management of a company, which of the following provides the best
definition of a firm’s primary financial objective?
A) To achieve long‐term growth in earnings
B) To maximise the level of annual dividends
C) To maximise the wealth of its ordinary shareholder
D) To maximise the level of annual profits
Answer:
Explanation:

2. Which THREE of the following are the main types of decision facing the financial manager
in a company?
A) Income decision
B) Investment decision
C) Dividend decision
D) Financing decision
E) Appraisal decision
F) Budget decision
Answer:
Explanation:

5. The agency problem is a driving force behind the growing importance attached to sound corporate
governance. In this context, who are the agents?
A Customers
B Shareholders
C Managers
D Auditors
Answer:

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Explanation:

6. Which of the following would you expect to be the responsibility of financial management?
A Producing annual accounts.
B Producing monthly management accounts.
C Advising on investment in non‐current assets.
D Deciding pay rates for staff.
Answer:
Explanation:

7. An investment of $200 is to be made today. What is the value of the investment after three years if
the interest rate is 12%?
Answer:

8. What is the PV of $115,000 receivable in nine years' time if r = 6%?

Answer:

9. A payment of $2,000 is to be made every year for 4 years, the first payment occurring in one year’s
time. The interest rate is 11%. What is the PV of the annuity?

Answer:

10. Calculate the present value of the following, assuming a discount rate of 12%.
(1) $5,000 received in one year's time and for ever
(2) $5,000 received in one year's time, then growing by 1.5% per year in perpetuity

Answer:

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11. Isaac only has $1,090 today but needs $1,979 to buy a new computer. How long will he have to
wait to buy the computer if he earns 5.4% compounded annually on his savings? Assume the price of
the computer remains constant.
Answer:

12. Stephen claims that he invested $6,000 six years ago and that this investment is worth $28,700
today. For this to be true, what annual rate of return did he have to earn? Assume the interest
compounded annually.
Answer:

13. McClary Tires plans to save $20,000, $25,000, $27,500, and $30,000 at the end of each year for
Years 1 to 4, respectively. If it earns 3.3% on its savings, how much will the firm have saved at the
end of Year 4?
Answer:

14. Capstone Investments is considering a project that will produce cash inflows of $11,000 at the
end of Year 1, $24,000 in Year 2, and $36,000 in Year 3. What is the present value of these cash
inflows at a discount rate of 12%?
Answer:

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15. You would like to establish a trust fund that would provide annual scholarships of $100,000
forever. How much would you have to deposit today in one lump sum to achieve this goal if you can
earn a guaranteed 4.5% rate of return?
Answer:

16. Eric is considering an investment that will pay $8,200 a year for five years, starting one year from
today. What is the maximum amount he should pay for this investment if he desires a rate of return
of 11.2%?
Answer:

17. Uptown Insurance offers an annuity due with semi-annual payments for 25 years at 6% interest.
The annuity costs $200,000 today. What is the amount of each annuity payment?
Answer:

18. Kurt wants to have $835,000 in an investment account six years from now. The account will pay
0.67% interest per month. If he saves money every month, starting one month from now, how much
will he have to save each month to reach his goal?
Answer:

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19. Karley’s setting aside $32,000 each quarter, starting today, for the next three years for an
expansion project. How much money will the firm have at the end of the three years if it can earn an
average of 5.45% on its savings?
Answer:

20. You estimate that you will need about $100,000 to send your child to college in 10 years. You
have about $45,000 now. If you can earn 18 percent per year, will you make it? At what rate will you
just reach your goal?
Answer: