1. Which one of the following accounts belongs to net working capital?

A. plant and equipment

B. inventory

C. patent

D. common stock
2. Which one of the following statements concerning liquidity is correct?

A. If you sold an asset today, it was a liquid asset.

B. Trademarks and patents are highly liquid.

C. Balance sheet accounts are listed in order of decreasing liquidity.

D. The less liquidity a firm has, the lower the probability the firm will encounter financial
difficulties.

(A. If you sold an asset today, or quickly, that doesn’t mean the asset is liquid. An illiquid asset
could sell quickly for a very cheap price. Liquidity means you could covert this asset quickly,
easily, without a significant loss)
(B. Trademarks and patents are usually illiquid asset. It’s hard to evaluate the market value of
these intangible asset, thus hard to resell them quickly.)
(D. The less liquidity a firm has, the higher the probability that the firm will face financial
difficulties.)
3. Which one of these is a cash outflow from a corporation?

A. sale of an asset

B. sale of common stock

C. issuance of debt

D. dividend payment

 Cash Outflows Firms use cash to buy assets, pay off debt, repurchase stock, or pay
dividends. (Increase in asset, Decrease in liability or equity)
 Cash Inflows Firms obtain cash from selling assets, issuing debt, issuing equity, or
from operation profit (Decrease in asset, Increase in liability or equity)
4. The cash flow resulting from a firm's ongoing, normal business activities is referred to as the:

A. operating cash flow.

B. net capital spending.

C. additions to net working capital.

D. cash flow from financing activities

A. changes in the amount of net fixed capital

B. net working capital

C. depreciation

D. taxes

Operation CF =Net income + Non cash item (Depreciation) +/- change of Net working capital
(A. Change in the net fixed capital belong to the cash flow from INVESTING, not OPERATION.)
(B. An increase of net working capital would decrease the OCF. An increase of asset means an
increase of cash usage; thus it means cash outflow.)
(C. An increase of depreciation would increase OCF as the formula said.)
(D. Net income is the after-tax revenue. So higher tax would lower OCF.)

6. You plan to invest a MBA degree in 5 years. The tuition at that time will be around $50,000 in
total. How much do you need to put in your bank account today at the annual interest rate of
5%?
50000
= $39,176.31
(1 + 0.05) 5

7. You plan to invest $500 in the bank for 2 years. The annual interest rate in the first year is 10%;
however, as economics go well, the annual interest rate decreases to 5% in the next year. How
much will you receive after 2 years?

Recall that: FV = C0 ∗ (1 + 𝑟1 ) ∗ (1 + 𝑟2 );
𝑖𝑓 𝑟1 = 𝑟2 = 𝑟, 𝑡ℎ𝑒𝑛 𝐹𝑉 = C0 ∗ (1 + 𝑟)2
500 ∗ (1 + 0.1) ∗ (1 + 0.05) = $577.5

8. Your estimate that you will earn 15% (interest rate) every year for the next 30 years on an
investment that costs $5,000. What will be the value of the investment in 30 years?

FV30=5000*(1.15)30=331,058.8598
9. If we deposit $5,000 today in an account paying 7%, how long does it take to grow to $10,000
(double your investment)?

$10, 000  $5, 000  (1.07)T

$10, 000
(1.07)T  2
$5, 000

ln(1.07)T  ln(2)

ln(2)
T  10.24 years
ln(1.07)

Or: Rule of 72 says that 72/7=10.28 (this give you a rough number)

10. What is the future value in 6 years of $1,000 invested in an account with an annual interest rate
of 7.5% compounded semi-annually?

7.5% 26
FV6  1, 000  (1  )  1,555.45
2

11. Planning for your retirement, you decide you need to have $3 million 30 years from today. You
plan to make equal yearly payments 11 years from today in a retirement account that will earn
14%. (so 14% is the discount rate). What is the annual payment?

1 1
FV10  C  [ ATr 14%
20 ]  C   [1  ]
14% (1  0.14) 20

FV30  $3million  FV10  (1  14%) 20

FV30  $3million  {FV10 }  (1  14%) 20

 C  (6.623)  (13.743)
 C  (91.0249)

C  3, 000, 000 / (91.0249)  $32,958