Financial Management Exam 1 - In Class Portion Flashcards
What is the ultimate goal in decision making for a financial manager, or one who is making financial decisions for a firm?
To maximize the value of the firm to its owners.
What is “agency problem” and when might it occur?
A conflict of interest that occurs when agents don’t fully represent the best interests of principals.
Does FUTURE VALUE increase or decrease with an increase in the following:
1) Present value
2) Rate of return
3) Time period of investment
4) Annuity payment amount
1) Increases
2) Increases
3) Increases
4) Increases
Does PRESENT VALUE increase or decrease with an increase in:
1) Future value
2) Rate of return
3) Time period of investment
4) Annuity payment amount
1) Increases
2) Decreases
3) Decreases
4) Increases
Does rate of return increase or decrease with an increase in:
1) Future value
2) Present value
3) Time period of investment
4) Annuity payment amount
1) Increase
2) Decrease
3) Increases
4) Decreases
Does the time period of an investment increase or decrease with an increase in:
1) Future value
2) Present value
3) Time period of investment
4) Annuity payment amount
1) Increase
2) Decreases
3) Increase
4) Decrease
Does the size of an annuity payment increase or decrease with an increase in:
1) Future value
2) Present value
3) Number of time periods
4) Rate of return
1) Increase
2) Decrease
3) Increase
4) Decrease
Difference of APR, EAR, Rate
APR: ignores compounding: takes RATE*NPERY = APR
EAR: adjust for compounding: actual interest you are either paying or earning.
Rate: is used for solving equations. (ex. 1% per quarter, 5% per month, 2% per day)
Annuity versus Perpetuity: How do they compare?
An annuity makes regular payments throughout a specific time frame but has an expiration date. Perpetuities make payments indefinitely.
Ordinary annuity versus Annuity due:
1) What is the difference between them
2) Which would have a higher PV
3) Which would have a higher FV
1) An ANNUITY DUE is an annuity with payment due or made at the beginning of the payment interval. In contrast, an ORDINARY ANNUITY generates payments at the end of the period.
2) Annuity Due
3) Annuity Due
What is the NPERY for various compounding styles?
Yearly - 1
Semiannually - 2
Quarterly - 4
Monthly - 12
Weekly - 52
Daily - 365
Does Present value increase or decrease with faster compounding frequency?
Decreases
Does Future value increase or decrease with faster compounding frequency?
Increases
Does an investor prefer a higher or lower compounding frequency?
Higher
Does a borrow prefer a higher or lower compounding frequency?
Lower
