Question

Which one of the following is type of an agency cost?:

A. accepting an investment opportunity that will add value to the firm

B. increasing the quarterly dividend

C.	investing in a new project that creates firm value

D.	hiring auditors the company's financial statements

E.	closing a division of the firm that is operating at a loss

Tom invested $100 two years ago at 10 percent interest. The first year, he earned $10 interest on his $100 investment. He reinvested the $10. The second year, he earned $11 interest on his $110 investment. The extra $1 he earned in interest the second year is referred to as:

A.

interest.

B.	bonus interest.

C.	simple interest.

D.	interest on interest.

E.	future value interest.

By definition an ordinary annuity is:

A.	increasing payments paid for a definitive period of time

B.	increasing payments paid forever

C.	equal payments paid at regular intervals over a stated time period

D.	equal payments paid at regular intervals of time on an ongoing basis

E.	unequal payments that occur at set intervals for a limited period of time

Which one of the following describes a loan wherein payments are even (equal) in amount and include both interest and principal?  

A.	amortized loan

B.	modified loan

C.	balloon loan

D.	pure discount loan

E.	interest-only loan

There are two annuities that offer monthly payments of $1,500 for five years and pay 0.18 percent interest per month. Annuity A will pay you on the first of each month while annuity B will pay you on the last day of each month. Which one of the following statements is correct concerning these two annuities?  

A.	These two annuities have equal present values but unequal futures values at the end of year five.

B.	These two annuities have equal present values as of today and equal future values at the end of year five.

C.	Annuity B is an annuity due.

D.	Annuity A has a smaller future value than annuity B.

E.	Annuity B has a smaller present value than annuity A.

Answer 1

1. Type of an agency cost is

d. hiring auditors the company's financial statements- It is an example of direct agency cost, paying external auditors to assess the accuracy of the company’s financial statements.

Explanation- Agency costs are internal costs incurred due to the competing interests of shareholders and the management team.

2. d. The extra $1 he earned in interest the second year is referred to as interest on interest.

Explanation- Interest on interest is the interest that is earned when interest payments are reinvested.

3. C. equal payments paid at regular intervals over a stated time period.

The payments in an ordinary annuity occur at the end of each period. it is a series of payments having all payments are in the same amount, made at the same intervals of time and are made at the end of each period.

4. a. amortized loan

An amortized loan is a loan with scheduled periodic payments that are applied to both principal and interest