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## 03 Jan You deposit \$500 today in a savings account that pays 3.5% interest

11. You deposit \$500 today in a savings account that pays 3.5% interest, compounded annually. How much will your account be worth at the end of 10 years?

A. \$733.51 B. \$613.61 C. \$867.52 D. \$705.30 E. \$599.50

12. You sold a car and accepted a note with the following cash flow stream as your payment. What was the effective price you received for the car assuming an interest rate of 18.5%? CFs: \$0 \$1,000 \$2,000 \$2,000 \$2,000 0 1 2 3 4

A. \$5,515.75 B. \$4,394.66 C. \$4,484.35 D. \$3,363.26 E. \$4,708.57

13. Suppose a bank offers to lend you \$10,000 for 1 year on a loan contract that calls for you to make interest payments of \$320.00 at the end of each quarter and then pay off the principal amount at the end of the year. What is the effective annual rate on the loan?

A. 12.62% B. 12.35% C. 13.43% D. 15.71% E. 13.83% 14. You plan to borrow \$45,000 at a 7.5% annual interest rate.

The terms require you to amortize the loan with 7 equal end-of-year payments. How much interest would you be paying in Year 2? A. \$2,273.10 B. \$2,990.92 C. \$2,931.11 D. \$3,080.65 E. \$3,110.56 15. Which of the following statements is CORRECT?

A. One drawback of forming a corporation is that you lose the limited liability that you would otherwise receive as a sole proprietor.

B. Since in bankruptcy they must be paid in full before stockholders receive anything, corporate bondholders generally prefer to see corporate managers invest in high risk/high return projects rather than low risk/low return projects.

C. Potential conflicts between stockholders and bondholders are increased if a firm's bonds are convertible into its common stock.

D. One advantage of operating a business as a corporation is that stockholders can deduct their pro rata share of the taxes the firm pays, thereby eliminating the double taxation investors would face in a partnership.

E. Since bondholders receive fixed payments, they do not share in the gains if risky projects turn out to be highly successful. However, they do share in the losses if risky projects fail and drive the firm into bankruptcy. Therefore, bondholders generally prefer to see corporate managers invest in low risk/low return projects rather than high risk/high return projects.

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