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Finance for Business Study Guide

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Northwest Bank pays a quoted annual (nominal) interest rate of 4.75%. However, it pays interest (compouned) daily using a 365-day year. What is the effective annual rate of return (APY)? A. 4.75% B. 4.86% C. 5.02% D. 3.61%

14) You have $10,000 to invest. You do not want to take any risk, so you will put the funds in a savings account at the local bank. Of the following choices, which one will produce the largest sum at the end of 22 years? A. An account that compounds interest annually B. An account that compounds interest monthly C. An account that compounds interest daily D. An account that compounds interest quarterly

15) When George Washington was president of the United States in 1797, his salary was $25,000. If you assume an annual rate of inflation of 2.5%, how much would his salary have been in 1997? A. $1,025,000 B. $3,489,097 C. $954,719 D. $4,085,920 E. $2,525,548

16) Which of the following is NOT a basic function of a budget? A. Budgets indicate the need for future financing. B. Budgets allow for performance evaluation. C. Budgets provide the basis for corrective action when actual figures differ from the budgeted figures. D. Budgets compare historical costs of the firm with its current cost performance.

17) Which of the following statements about the percent-of-sales method of financial forecasting is true? A. It is the least commonly used method of financial forecasting. B. It projects all liabilities as a fixed percentage of sales. C. It is a much more precise method of financial forecasting than a cash budget would be. D. It involves estimating the level of an expense, asset, or liability for a future period as a percent of the forecast for sales revenues.

18) The primary purpose of a cash budget is to: A. determine the level of investment in current and fixed assets. B. determine the estimated income tax for the year. C. determine

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