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Mathematical Applications in Business and Finance

Description: Mathematical Applications in Business and Finance Quiz
Number of Questions: 15
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Tags: business mathematics finance mathematical applications
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A company sells a product for \$100. If the company's profit margin is 20%, what is the cost of producing the product?

  1. \$80

  2. \$120

  3. \$60

  4. \$140


Correct Option: A
Explanation:

Profit = Selling Price - Cost Price. Since the profit margin is 20%, the profit is 20% of the selling price, which is \$100 * 20% = \$20. Therefore, the cost of producing the product is \$100 - \$20 = \$80.

A company has a loan of \$100,000 with an annual interest rate of 5%. If the company makes monthly payments of \$1,000, how long will it take to pay off the loan?

  1. 10 years

  2. 15 years

  3. 12 years

  4. 8 years


Correct Option: C
Explanation:

The monthly interest rate is 5% / 12 = 0.42%. The monthly payment is \$1,000. The loan amount is \$100,000. Using the formula for the number of months to pay off a loan: Number of months = (Loan amount * Monthly interest rate) / Monthly payment, we get Number of months = (\$100,000 * 0.0042) / \$1,000 = 144 months. Therefore, it will take 144 / 12 = 12 years to pay off the loan.

A company's sales have been increasing at a rate of 10% per year. If the company's sales were \$1 million last year, what will be the company's sales in 5 years?

  1. \$1.61 million

  2. \$1.5 million

  3. \$1.7 million

  4. \$1.8 million


Correct Option: A
Explanation:

The sales in 5 years will be the sales last year multiplied by (1 + 10%)^5. Therefore, the sales in 5 years will be \$1 million * (1 + 0.1)^5 = \$1.61 million.

A company's stock price is currently \$100. If the company's stock price increases by 20% next year, what will be the company's stock price next year?

  1. \$120

  2. \$110

  3. \$130

  4. \$140


Correct Option: A
Explanation:

The stock price next year will be the current stock price multiplied by (1 + 20%). Therefore, the stock price next year will be \$100 * (1 + 0.2) = \$120.

A company has a bond with a face value of \$1,000 and a coupon rate of 5%. If the bond matures in 10 years, what is the bond's yield to maturity?

  1. 5%

  2. 4%

  3. 6%

  4. 7%


Correct Option: A
Explanation:

The yield to maturity is the annual rate of return that an investor will receive if they hold the bond until maturity. To calculate the yield to maturity, we can use the following formula: Yield to Maturity = (Coupon Payment + (Face Value - Current Price) / Number of Years to Maturity) / ((Face Value + Current Price) / 2). In this case, the coupon payment is \$1,000 * 5% = \$50, the face value is \$1,000, the current price is \$1,000, and the number of years to maturity is 10. Plugging these values into the formula, we get Yield to Maturity = (\$50 + (\$1,000 - \$1,000) / 10) / ((\$1,000 + \$1,000) / 2) = 5%. Therefore, the bond's yield to maturity is 5%.

A company has a project with an initial investment of \$100,000 and a net present value of \$20,000. If the company's cost of capital is 10%, what is the project's internal rate of return?

  1. 12%

  2. 15%

  3. 18%

  4. 20%


Correct Option: B
Explanation:

The internal rate of return (IRR) is the discount rate that makes the net present value of a project equal to zero. To calculate the IRR, we can use a financial calculator or a spreadsheet. In this case, the initial investment is \$100,000, the net present value is \$20,000, and the cost of capital is 10%. Using a financial calculator or a spreadsheet, we can find that the IRR is 15%. Therefore, the project's internal rate of return is 15%.

A company has a portfolio of stocks with a beta of 1.2. If the expected return on the market is 10%, what is the expected return on the company's portfolio?

  1. 12%

  2. 14%

  3. 16%

  4. 18%


Correct Option: A
Explanation:

The expected return on a portfolio is equal to the risk-free rate plus the beta of the portfolio multiplied by the expected return on the market. In this case, the risk-free rate is assumed to be 2%, the beta of the portfolio is 1.2, and the expected return on the market is 10%. Therefore, the expected return on the company's portfolio is 2% + 1.2 * 10% = 12%. Therefore, the expected return on the company's portfolio is 12%.

A company has a portfolio of bonds with a duration of 5 years. If the interest rate increases by 1%, what is the expected change in the value of the company's portfolio?

  1. 5%

  2. 10%

  3. 15%

  4. 20%


Correct Option: A
Explanation:

The expected change in the value of a bond portfolio when the interest rate changes is equal to the duration of the portfolio multiplied by the change in the interest rate. In this case, the duration of the portfolio is 5 years and the interest rate increases by 1%. Therefore, the expected change in the value of the company's portfolio is 5 years * 1% = 5%. Therefore, the expected change in the value of the company's portfolio is 5%.

A company has a project with a payback period of 3 years. If the initial investment in the project is \$100,000 and the annual cash flows are \$40,000, what is the project's profitability index?

  1. 1.33

  2. 1.67

  3. 2.00

  4. 2.33


Correct Option: A
Explanation:

The profitability index (PI) is a measure of the profitability of a project. It is calculated by dividing the present value of the future cash flows by the initial investment. In this case, the initial investment is \$100,000, the annual cash flows are \$40,000, and the payback period is 3 years. Using a financial calculator or a spreadsheet, we can find that the present value of the future cash flows is \$133,000. Therefore, the profitability index is \$133,000 / \$100,000 = 1.33. Therefore, the project's profitability index is 1.33.

A company has a project with a net present value of \$100,000 and an internal rate of return of 12%. If the company's cost of capital is 10%, should the company accept or reject the project?

  1. Accept

  2. Reject

  3. More information is needed


Correct Option: A
Explanation:

The net present value (NPV) of a project is the difference between the present value of the future cash flows and the initial investment. The internal rate of return (IRR) of a project is the discount rate that makes the NPV of the project equal to zero. In this case, the NPV of the project is \$100,000 and the IRR of the project is 12%. The company's cost of capital is 10%. Since the IRR of the project is greater than the company's cost of capital, the company should accept the project.

A company has a project with an initial investment of \$100,000 and a payback period of 5 years. If the annual cash flows are \$25,000, what is the project's average accounting return?

  1. 20%

  2. 25%

  3. 30%

  4. 35%


Correct Option: A
Explanation:

The average accounting return (AAR) of a project is calculated by dividing the average annual net income by the initial investment. In this case, the initial investment is \$100,000 and the annual cash flows are \$25,000. The average annual net income is \$25,000 - \$100,000 / 5 = \$5,000. Therefore, the average accounting return is \$5,000 / \$100,000 = 20%. Therefore, the project's average accounting return is 20%.

A company has a project with an initial investment of \$100,000 and a net present value of \$20,000. If the company's cost of capital is 10%, what is the project's profitability index?

  1. 1.2

  2. 1.4

  3. 1.6

  4. 1.8


Correct Option: A
Explanation:

The profitability index (PI) of a project is calculated by dividing the present value of the future cash flows by the initial investment. In this case, the initial investment is \$100,000 and the net present value is \$20,000. Therefore, the profitability index is \$20,000 / \$100,000 = 1.2. Therefore, the project's profitability index is 1.2.

A company has a project with an initial investment of \$100,000 and a payback period of 4 years. If the annual cash flows are \$30,000, what is the project's average accounting return?

  1. 20%

  2. 25%

  3. 30%

  4. 35%


Correct Option: B
Explanation:

The average accounting return (AAR) of a project is calculated by dividing the average annual net income by the initial investment. In this case, the initial investment is \$100,000 and the annual cash flows are \$30,000. The average annual net income is \$30,000 - \$100,000 / 4 = \$7,500. Therefore, the average accounting return is \$7,500 / \$100,000 = 25%. Therefore, the project's average accounting return is 25%.

A company has a project with an initial investment of \$100,000 and a net present value of \$30,000. If the company's cost of capital is 10%, what is the project's internal rate of return?

  1. 12%

  2. 14%

  3. 16%

  4. 18%


Correct Option: B
Explanation:

The internal rate of return (IRR) of a project is the discount rate that makes the net present value of the project equal to zero. In this case, the initial investment is \$100,000 and the net present value is \$30,000. Using a financial calculator or a spreadsheet, we can find that the IRR of the project is 14%. Therefore, the project's internal rate of return is 14%.

A company has a project with an initial investment of \$100,000 and a payback period of 3 years. If the annual cash flows are \$40,000, what is the project's profitability index?

  1. 1.33

  2. 1.67

  3. 2.00

  4. 2.33


Correct Option: B
Explanation:

The profitability index (PI) of a project is calculated by dividing the present value of the future cash flows by the initial investment. In this case, the initial investment is \$100,000 and the annual cash flows are \$40,000. Using a financial calculator or a spreadsheet, we can find that the present value of the future cash flows is \$167,000. Therefore, the profitability index is \$167,000 / \$100,000 = 1.67. Therefore, the project's profitability index is 1.67.

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