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IFA Exam Practice Midterm - Questions and Answers
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UU Introduction to Finance and Accounting - Midterm Practice Questions and Answers
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1. To calculate the present value of a growing perpetuity you can use PV = C / (r-g). Whatassumption do you need to make that allows this formula to work?
A. The discount rate r needs to be smaller than the interest rate.
B. The cash flow C needs to be positive.
C. The growth rate g needs to be nonnegative.
D. The discount rate r needs to be larger than the growth rate g.
Answer: D
2. Aparicio Apples has the opportunity to invest in a new orchard. The investment will cost
Aparicio $30 million and is expected to return a cash flow (starting next year) of $1.5 million
that is expected to grow by 1% annually forever after next year. What is the rate of return for
the investment that makes the NPV equal to zero?
A. 3%
B. 4%
C. 5%
D. 6%
1.5
Answer: D 𝑁𝑃𝑉 = 0 → 30 = 𝑟−0.01 → 𝑟 = 6%
3. Which of the following statements is correct?
A. Assets on the balance sheet include retained earnings.
B. Retained earnings includes common stock.
C. Assets equal liabilities plus shareholder’s equity.
D. Borrowing money is an investing activity.
Answer: C
1
, 4. Starblind Moisturizer will pay a dividend of $1.80 next year that is expected to grow by
12% annually after that. If Starblind’s discount rate is 16%, what is Starblind’s current share
price according to the dividend discount model?
A. $11.25
B. $15.00
C. $40.18
D. $45.00
𝐷𝑖𝑣1 1.8
Answer: D. 𝑃0 = = 0.16−0.12 = 45
𝑟−𝑔
5. The managers of a firm can maximize stockholder wealth by
A. Taking all projects with positive NPVs.
B. Taking all projects with NPVs greater than the cost of investment.
C. Taking all projects with NPVs greater than the present value of cash flows.
D. Taking only the highest NPV project each year.
Answer: A.
6. What is the present value of a four-year annuity of $100 per year that has a first payment
exactly two years from today if the discount rate is 9%?
A. $272.68
B. $297.22
C. $323.97
D. $388.97
Answer: B.
100 1
𝑃𝑉1 (𝐴𝑛𝑛𝑢𝑖𝑡𝑦) = (1 − ) = 323.98
0.09 1.094
𝑃𝑉1 323.98
𝑃𝑉0 = = = 297.22
1+𝑟 1.09
7. At the beginning of 2019, a corporation had assets of $270,000 and liabilities of
$160,000. During 2019, assets increased $25,000 and liabilities increased $5,000. What
was stockholders' equity at December 31, 2019?
a. $140,000.
b. $130,000.
c. $190,000.
d. $80,000.
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