Question

If your company acquires a large long-term debt, what is the corresponding change to the balance...

If your company acquires a large long-term debt, what is the corresponding change to the balance sheet?

A. Assets (cash) decrease and liabilities (LT debt) increase.

B. Assets (cash) increase and liabilities (LT debt) increase.

C. Assets (cash) increase and liabilities (LT debt) decrease.

D. Assets (cash) decrease and liabilities (LT debt) decrease.

You invest all the money you earned during your summer sales job (a total of $45,000) into the stock of a company that produces fat and carb-free Cheetos. The company stock is expected to earn a 14% annual return; however, 5 years later it is only worth $20,000. Turns out there wasn't as much demand for fat and carb-free Cheetos as you had hoped. What is the annual rate of return on your investment?

A. -10%

B. -15%

C. -20%

D. -25%

You invest $6,000 per year for 20 years. Earning 8% annual return, how much money do you have at the end of the 20 years?

A. $437,625

B. $324,545

C. $122,688

D. $274,572

You are trying to choose between two investments:

A - Invest $2,400 per year for 10 years, earning an 8% annual rate of interest. OR,

B - Invest $200 per month for 10 years, earning 8% annual rate of interest.

Which of the following is most correct?

A. There is no way to tell which investment has the higher future value

B. Investment A has the higher future value.

C. Investment B has the higher future value.

D. Investments A and B have identical future values.

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Homework Answers

Answer #1

QUESTION 1 - Option B

Since, new long term debt is increasing, the liabilities side (particularly the Long term liability on balance sheet) would increase. Whenever the liabilities increase, there is a corresponding increase in an asset as well (unless no other liability is decreasing). SO, when the long term debt increases, assets (in particular cash) also increase. (You get a loan amount from bank, so you get cash, but that cash is a liability)

QUESTION 2 - Option B

We will use the time value of money concept to find the rate of return.

FV = PV * (1 + r)n

20000 = 45000 * (1 + r)5

r = -14.99% = -15%

QUESTION 3 - Option D

Again using TVM function, to calculate the future value of an annuity, the formula is:

FV = 274,571.8

Hence, option D is answer

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