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Business Finance Online Quiz Questions & Solutions

Quiz 1 Gangemi e-book: Chapter 1 Introduction To Business Finance, Chapter 2 Financial Mathematics – Introduction, & Chapter 3 Financial Mathematics – Annuities. Lecture Notes: Topic 1 Introduction To Business/Corporate Finance, & Topic 2 Financial Mathematics/Time Value of Money Parts 1 & 2.

Correct Answer: a. Capital structure Capital Structure:  

The mix of funding obtained from capital markets. The proportional holdings of debt and equity.

See Gangemi e-book – Chapter 1 Introduction To Business Finance, Section 1.4.3., pp. 11 – 12; See Lecture notes – Topic 1 Introduction To Business/Corporate Finance, Slides 13 & 14.

Correct Answer: a. Primary Primary market: 

Involves the original sale of securities (IPOs to raise finance).

See Gangemi e-book – Chapter 1 Introduction To Business Finance, Highlight 1.1. , p. 10; See Lecture notes – Topic 1 Introduction To Business/Corporate Finance, Slide 5.

Correct Answer: d. Time-value of money Time-value of money: 

Money is able to earn a return so, ceteris paribus, a dollar today is worth more than a dollar at some future date.



There is a trade-off between the size of an investment’s cash-flow and when the cash- flow is received.

See Gangemi e-book – Chapter 1 Introduction To Business Finance, Section 1.5.2. , p. 14; & Chapter 2 Financial Mathematics - Introduction, Section 2.1. , p. 17; See Lecture notes – Topic 1 Introduction To Business/Corporate Finance, Slide 16; & Topic 2 Financial Mathematic/Time Value of Money Part 1, Slide 3.

Correct Answer: a. Simple interest pays interest only on principle whereas compound interest also pays interest on interest.

Simple Interest: 

If the Bank pays you simple interest on a deposit the interest payment each period will be the same and will be the interest rate times the initial amount.



Simple interest refers to interest earned only on the original capital investment amount.

See Gangemi e-book – Chapter 2 Financial Mathematics - Introduction, Section 2.2. , p. 18; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 5. Compound Interest: 

If the bank pays you compound interest you will receive interest payments not just on the initial amount but also on previous interest payments.



Compound interest refers to interest earned on both the initial capital investment and on the interest reinvested from prior periods (i.e. earning interest on interest).

See Gangemi e-book – Chapter 2 Financial Mathematics - Introduction, Section 2.3. , pp. 19 - 21; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 7.

Correct Answer: a. The value at some point in the future of a present amount invested at some interest rate.

Future Value: 

FVn – Future value – the price/value of the asset/investment at some future specified time (Tn)

See Gangemi e-book – Chapter 2 Financial Mathematics - Introduction, Section 2.3.1. , p. 20; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 4.

Correct Answer: a. 8.00% Present Value: 

PV0 – Present value – the price/value of the asset/investment now (at time period zero (T 0))



For a given number of periods, the higher the interest rate the lower the present value (or the lower the interest rate the higher the present value)

See Gangemi e-book – Chapter 2 Financial Mathematics - Introduction, Section 2.4. , pp. 23 - 25; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 4 & Slide 15.

Correct Answer: b. The capital structure decision Capital Structure:  

The mix of funding obtained from capital markets. The proportional holdings of debt and equity.

See Gangemi e-book – Chapter 1 Introduction To Business Finance, Section 1.4.3., pp. 11 – 12; See Lecture notes – Topic 1 Introduction To Business/Corporate Finance, Slides 13 & 14.

Correct Answer: d. $0 Over one period there is no difference between the future amountamount invested at either simple interest or compound interest because with only one period there is no chance for the investment to have earned any interest on interest (as occurs with compounding of interest), and interest has only been earned on the original amount invested, regardless of whether simple or compound interest is being used. However, if we wish to know future value over any period greater than one period, then, ceteris paribus, future value will always be higher with compounding of interest because with compounding interest is earned on both the original amount invested as well as any interest previously earned, whereas with simple interest interest is only earned on the original amount invested. Simple Interest: 

If the Bank pays you simple interest on a deposit the interest payment each period will be the same and will be the interest rate times the initial amount.



Simple interest refers to interest earned only on the original capital investment amount.

See Gangemi e-book – Chapter 2 Financial Mathematics - Introduction, Section 2.2. , p. 18; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 5. Compound Interest: 

If the bank pays you compound interest you will receive interest payments not just on the initial amount but also on previous interest payments.



Compound interest refers to interest earned on both the initial capital investment and on the interest reinvested from prior periods (i.e. earning interest on interest).

See Gangemi e-book – Chapter 2 Financial Mathematics - Introduction, Section 2.3. , pp. 19 - 21; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 7.

Correct Answer: a. Amortised loan Amortised Loan: 

An amortised loan requires the borrower to repay both the principal and interest over time.

See Gangemi e-book – Chapter 3 Financial Mathematics - Annuities, Section 3.8. , p. 43; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 2, Slide 20.

Correct Answer: d. Statements b and c are correct Repayment of a Loan: In Business Finance we assume, unless the question states otherwise, that the repayment of a loan is an ordinarory annuity stream: 

Ordinary annuity - A series of constant cash-flows occurring at the end of each period for some fixed number of periods and commencing at the end of the first period (i.e. commencing at T1).

See Gangemi e-book – Chapter 3 Financial Mathematics - Annuities, Section 3.1.1. , p. 29; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 25. We also assume, unless the question states otherwise, that a loan is an amortised loan: 

An amortised loan requires the borrower to repay both the principal and interest over time.

See Gangemi e-book – Chapter 3 Financial Mathematics - Annuities, Section 3.8. , p. 43; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 2, Slide 20.

So, since we are assuming an amortised loan, this means that with each payment, part of the loan is being paid off and part of the payment goes towards paying interest; in the next period, because some of the loan was paid off in the previous period, less of the loan is outstanding, so slightly more of the payment goes to paying off the loan, and slightly less goes to paying interest. And by the time of the last payment, almost all the payment pays off the remaining balance of the loan and very little of the payment goes towards paying interest.

Correct Answer: c. Interest-only Interest-Only Loan: 

An interest only loan requires the borrower to pay interest each period and to repay the entire principal at some point in the future (so a bond or debenture is an interest-only loan)

See Gangemi e-book – Chapter 3 Financial Mathematics - Annuities, Section 3.8. , p. 42; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 2, Slide 20.

Correct Answer: b. The mix of funding obtained from capital markets, in terms of proportional holdings of equity and liabilities. Financing Decision: 

The mix of funding obtained from capital markets.



The proportional holdings of debt and equity.



Addressed via analysis of capital structure.

See Gangemi e-book – Chapter 1 Introduction To Business Finance , Section 1.4.3., p. 11; See Lecture notes – Topic 1 Introduction To Business/Corporate finance, Slide 13.

Correct Answer: a. The capital budgeting decision Capital Budgeting Decision: 

The way in which funds that have been raised are used in productive/real activities.



The investment/capital budgeting decision deals with the evaluation of investment opportunities.



The objective is to generate a return to investors.

See Gangemi e-book – Chapter 1 Introduction To Business Finance , Section 1.4.2., p. 11; See Lecture notes – Topic 1 Introduction To Business/Corporate finance, Slides 11 & 12.

Correct Answer: b. The process of selecting from a set of projects available for investment. Capital Budgeting Process: 

The way in which funds that have been raised are used in productive/real activities.



The investment/capital budgeting decision deals with the evaluation of investment opportunities.



The objective is to generate a return to investors.

See Gangemi e-book – Chapter 1 Introduction To Business Finance , Section 1.4.2., p. 11; See Lecture notes – Topic 1 Introduction To Business/Corporate finance, Slides 11 & 12.

Correct Answer: d. Financing and Investment decision Financing Decision: 

The mix of funding obtained from capital markets.



The proportional holdings of debt and equity.



Addressed via analysis of capital structure.

See Gangemi e-book – Chapter 1 Introduction To Business Finance , Section 1.4.3., p. 11; See Lecture notes – Topic 1 Introduction To Business/Corporate finance, Slide 13. Investment Decision: 

The way in which funds that have been raised are used in productive/real activities.



The investment/capital budgeting decision deals with the evaluation of investment opportunities.



The objective is to generate a return to investors.

See Gangemi e-book – Chapter 1 Introduction To Business Finance , Section 1.4.2., p. 11; See Lecture notes – Topic 1 Introduction To Business/Corporate finance, Slides 11 & 12.

Correct Answer: $100,225.12 Future Value of An Ordinary Annuity See Gangemi e-book – Chapter 3 Financial Mathematics – Annuities, Section 3.2.1., pp. 32 & 33; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 27 & 28.

Correct Answer: $215.88 Future Value of An Annuity Due See Gangemi e-book – Chapter 3 Financial Mathematics – Annuities, Section 3.3.1., p. 35; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 2, Slides 7 & 8.

Correct Answer: $206,473.68 Future Value of A Single Sum With Simple Interest (less original amount invested). See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.2., p. 18; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 5.

Correct Answer: $36.38 Present Value of A Single Sum. See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.4., pp. 23 - 25; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 12 - 15.

Correct Answer: $139,315.90 Present Value of A Perpetuity. See Gangemi e-book – Chapter 3 Financial Mathematics – Annuities, Section 3.5., p. 39; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 2, Slides 12 - 13.

Correct Answer: $179.74 Future Value of A Single Sum with 1. Compound Interest (less) 2. Simple Interest. Future Value of A Single Sum With Compound Interest See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.3.1., pp. 20 - 21; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 8 - 11. Future Value of A Single Sum With Simple Interest See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.2.., p. 18; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 5.

Correct Answer: $266,336.54 Future Value of An Ordinary Annuity (finding unknown PMT) See Gangemi e-book – Chapter 3 Financial Mathematics – Annuities, Section 3.2.1., pp. 31 - 33; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 27 - 28.

Correct Answer: $4,304.80 Present Value of A Single Sum See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.4., pp. 23 - 25; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 12 - 15.

Correct Answer: $3,667.37 Present Value of An Ordinary Annuity See Gangemi e-book – Chapter 3 Financial Mathematics – Annuities, Section 3.2.2., pp. 32 - 33; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 29 - 30.

Correct Answer: $4,023.54 Present Value of An Annuity Due See Gangemi e-book – Chapter 3 Financial Mathematics – Annuities, Section 3.3.2., pp. 35 - 36; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 2, Slides 4 - 6.

Correct Answer: $8,988.74 Future Value of A Single Sum With Simple Interest See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.2.., p. 18; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 5.

Correct Answer: $9,723.29 Future Value of A Single Sum See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.3.1., pp. 20 - 21; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 8 - 11.

Correct Answer: d. $1,400 invested at 12% p.a. simple interest Future Value of A Single Sum With 1. (a., b., c.) Compound Interest, & 2. (d.) Simple Interest Future Value of A Single Sum With Compound Interest

See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.3.1., pp. 20 - 21; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 8 - 11. Future Value of A Single Sum With Simple Interest See Gangemi e-book – Chapter 2 Financial Mathematics – Introduction, Section 2.2.., p. 18; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 5.

Correct Answer: False See Gangemi e-book – Chapter 1 – Introduction To Business Finance, Section 1.3.1., p. 10; See Lecture notes – Topic 1 Introduction To Business/Corporate Finance, Slides 6 & 7.

Correct Answer: True See Gangemi e-book – Chapter 1 – Introduction To Business Finance, Section 1.3.2., p. 10; See Lecture notes – Topic 1 Introduction To Business/Corporate Finance, Slides 7 & 8.

Correct Answer: True See Gangemi e-book – Chapter 2 – Financial Mathematics - Introduction, Section 2.3.2., pp. 21 - 22;

See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 11.

Correct Answer: False Ordinary Annuity: 

Ordinary annuity - A series of constant cash-flows occurring at the end of each period for some fixed number of periods and commencing at the end of the first period (i.e. commencing at T1).

See Gangemi e-book – Chapter 3 – Financial Mathematics - Annuities, Section 3.1.1., p. 29; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slide 25.

Correct Answer: True Future Value of A Single Sum: See Gangemi e-book – Chapter 2 – Financial Mathematics - Introduction, Section 2.3.1., pp. 20 - 21; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 1, Slides 8 - 11.

Correct Answer: False Effective Interest Rate:



The effective annual interest rate (EFF) is the equivalent annual interest rate when interest is quoted as compounding more than once per year.

See Gangemi e-book – Chapter 3 – Financial Mathematics - Annuities, Section 3.7., pp. 41 - 42; See Lecture notes – Topic 2 Financial Mathematics/Time Value of Money Part 2, Slides 16 - 19.

Correct Answer: False Capital Structure Decision:  

The mix of funding obtained from capital markets. The proportional holdings of debt and equity.

See Gangemi e-book – Chapter 1 Introduction To Business Finance, Section 1.4.3., pp. 11 – 12; See Lecture notes – Topic 1 Introduction To Business/Corporate Finance, Slides 13 & 14.

Correct Answer: False Main Corporate Objective: Maximise the Market Value of Firm (or Maximise the Wealth of the Owners (Shareholders) of the Firm) See Gangemi e-book – Chapter 1 – Introduction To Business Finance, Section 1.3.1., p. 10; See Lecture notes – Topic 1 Introduction To Business/Corporate Finance, Slides 6 & 7....