Fiance 320 Final Exam

The common stock of Federal Logistics is selling for $57.56 per share. The company pays a constant annual dividend and has a total return of 10.13 percent. What is the amount of the dividend?

Answer: $5.83 D = .1013 × $57.56 = $5.83

What is the principal amount of a bond that is repaid at the end of the loan term called?

Face value

Which one of the following features distinguishes an ordinary annuity from an annuity due?

Timing of the annuity payments

A broker is an agent who:

brings buyers and sellers together.

The written agreement that contains the specific details related to a bond issue is called the bond:

indenture.

The rate of return an investor earns on a bond prior to adjusting for inflation is called the:

nominal rate.

Tiger Trucking Company is considering a project that will produce cash inflows of $18,000 at the end of Year 1, $32,000 in Year 2, and $45,000 in Year 3. What is the present value of these cash inflows at a discount rate of 9 percent?

$78.195.78 PV = ($18,000 / 1.09) + ($32,000 / 1.092) + ($45,000 / 1.093) = $78,195.78

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

All available information

Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?

Amortized

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Annuity

Opulance Corp. common stock is selling for $44.25 a share and has a dividend yield of 1.9 percent. What is the dividend amount?

Answer: $0.84 Dividend =.019 × $44.25 = $.84

One year ago, you purchased 500 shares of stock for $22 a share. The stock pays $0.32 a share in dividends each year. Today, you sold your shares for $24.50 a share. What is your total dollar return on this investment?

Answer: $1,410 Total dollar return = 500 × ($24.50 −22 + 0.32) = $1,410

You want to purchase a new condominium that costs $325,000. Your plan is to pay 20 percent down in cash and finance the balance over 15 years at 4.1 percent. What will be your monthly mortgage payment including principal and interest?

Answer: $1,936.24 Amount financed = (1 − .20) × $325,000 = $260,000 = PV N = 180 I/Y = 0.34166667 PV = 260,000.00 PMT = ??? FV = 0 PMT = −1,936.24

Krystal plans to save $500 at the end of Year 1, $600 at the end of Year 2, and $800 at the end of Year 3. If she earns 2.8 percent on her savings, how much money will she have saved at the end of Year 3?

Answer: $1,945.19 FV = ($500 × 1.0282) + ($600 × 1.0281) + $800 = $1,945.19

Precision Engineering invested $95,000 at 5.5 percent interest, compounded annually for 2 years. How much interest did the company earn over this period of time?

Answer: $10,737.38 N = 2 I/Y = 5.5 PV = -95,000 PMT = 0 FV = ??? $105,737.38 $105,737.38 − 95,000 = $10,737.38

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

Answer: $12.16 P0 = ($1.62 × 1.021) / (.157 − .021) = $12.16

Gator Tires pays a constant annual dividend of $1.21 per share. How much are you willing to pay for one share if you require a rate of return of 9.3 percent?

Answer: $13.01 P = $1.21 / .093 = $13.01

Jorge is considering an investment that will pay $4,650 a year for five years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 9.0 percent?

Answer: $18,086.88 N = 5 I/Y = 9 PV = ??? PMT = 4,650.00 FV = 0 PV = −18,086.88

Bob can afford car payments of $365 per month for 5 years. If the interest rate is 4.9 percent, how much money can he afford to borrow?

Answer: $19,388.64 N = 60 I/Y = 0.40833333 PV = ??? PMT = −365.00 FV = 0 Sovle PV = 19,388.64

Use the following tax table to answer this question: Taxable Income Tax Rate $0-9,525 10% 9,525-38,700 12 38,700-82,500 22 82,500-157,500 24 157,500-200,000 32 200,000-500,000 35 500,000+ 37 Andrews Dried Fruit, LLC has taxable income of $630,000. How much does it owe in taxes?

Answer: $198,790

The 7.2 percent bond of Blackford, Inc. has a yield to maturity of 7.3 percent. The bond matures in seven years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment?

Answer: $36.00 Coupon payment = ($1,000 × .072) / 2 = $36.00

How much money does Yvette need to have in her retirement savings account today if she wishes to withdraw $36,000 a year for 30 years? She expects to earn an average rate of return of 8.25 percent.

Answer: $395,904.99 N = 30. I/Y = 8.25 PV= ???? PMT = 36,000.00 FV = 0 Solve in financial calculator PV = −395,904.99

Holly Farms has sales of $509,600, costs of $448,150, depreciation expense of $36,100, and interest paid of $12,400. The tax rate is 28 percent. How much net income did the firm earn for the period?

Answer: $9,324 Net income = ($509,600 − 448,150 − 36,100 − 12,400)(1 − .28) = $9,324

The 5.3 percent bond of Dominic Cyle Parts has a face value of $1,000, a maturity of 12 years, semiannual interest payments, and a yield to maturity of 6.12 percent. What is the current market price of the bond?

Answer: $931.01 N = 24 I/Y = 3.06 PV = ??? PMT = 26.5 FV = 1,000.00 PV = 931.01

Gently Used Goods has cash of $2,950, inventory of $28,470, fixed assets of $9,860, accounts payable of $11,900, and accounts receivable of $4,660. What is the cash ratio?

Answer: .25 Cash ratio = $2,950 / $11,900 = .25

Assume that over the past 88 years, U.S. Treasury bills had an average return of 3.5 percent as compared to 6.1 percent on long-term government bonds. During this same time period, assume inflation averaged 3.0 percent. What was the average nominal risk premium on the long-term government bonds?

Answer: 2.6 percent Nominal risk premium = 6.1 percent − 3.5 percent = 2.6 percent

One year ago, LaTresa purchased 300 shares of Outland Co. stock for $7,092. The stock does not pay any regular dividends but it did pay a special dividend of $.43 a share last week. This morning, she sold her shares for $24.05 a share. What was the total percentage return on this investment?

Answer: 3.55 percent Total return = [$24.05 − ($7,092 / 300) + $.43)] / ($7,092 / 300) = .0355, or 3.55 percent

Sweet Treats pays a constant annual dividend of $2.38 a share and currently sells for $52.60 a share. What is the rate of return?

Answer: 4.52 percent R = $2.38 / $52.60 = .0452, or 4.52 percent

The 7 percent semiannual coupon bonds of Over The Counter, Inc., are selling for $1,102.25. The bonds have a face value of $1,000 and mature in 18 years. What is the yield to maturity?

Answer: 6.06 percent N = 36 I/Y = ??? PV = −1,102.25 PMT = 35 FV = 1,000.00 Solve in calculator I/Y =3.030 3.030% × 2 = 6.06%

A 15-year, annual coupon bond is priced at $984.56. The bond has a $1,000 face value and a yield to maturity of 6.5 percent. What is the coupon rate?

Answer: 6.34 percent N =15 I/Y =6.5 PV = −984.56 PMT = ???? FV= 1,000.00 PMT = $63.36 Coupon rate = $63.369 / $1,000 = .0634, or 6.34 percent

Over the past six years, a stock had annual returns of 12 percent, −3 percent, 2 percent, 4 percent, 9 percent, and 14 percent, respectively. What is the standard deviation of these returns?

Answer: 6.47 percent Average return = (.12 − .03 + .02 + .04 + .09 + .14) / 6 = .06333σ2 = [(.12 − .06333)2 + (−.03 − .06333)2 + (.02 − .06333)2 + (.04 − .06333)2 + (.09 − .071667)2 + (.14 − .06333)2] / (6 − 1) = .004187σ = .004187.5 = .0647, or 6.47 percent

One year ago, you bought a stock for $37.25 per share. You received a dividend of $1.27 per share last month and sold the stock today for $39.75 per share. What is the capital gains yield on this investment?

Answer: 6.71 percent Capital gains yield = ($39.75 − 37.25) / $37.25 = .0671, or 6.71 percent

A bond has a $1,000 face value, a market price of $989, and pays interest payments of $69.50 every year. What is the coupon rate?

Answer: 6.95 percent Coupon rate = $69.50 / $1,000 = .0695, or 6.95 percent

Which one of the following terms is defined as the total tax paid divided by the total taxable income?

Average tax rate

Builder's Outlet just hired a new chief financial officer. To get a feel for the company, she wants to compare the firm's sales and costs over the past three years to determine if any trends are present and also determine where the firm might need to make changes. Which one of the following statements will best suit her purposes?

Common-size income statement

cash or stock payments to shareholders.

Dividends

Which one of the following is the hypothesis that securities markets are efficient?

Efficient markets hypothesis

A real rate of return is defined as a rate that has been adjusted for which one of the following?

Inflation

Newly issued securities are sold to investors in which one of the following markets? A. Proxy B. Stated value C. Inside D. Secondary E. Primary

Primary

On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

Risk premium

What is the market called that facilitates the sale of shares between individual investors?

Secondary

The rate of return on which one of the following has a risk premium of 0%?

U.S. Treasury bills

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are:

a perpetuity.

Tomas earned $89 in interest on his savings account last year and has decided to leave the $89 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called:

compounding.

A bond's annual interest divided by its face value is referred to as the:

coupon rate.

Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:

effective annual rate.

When valuing a stock using the constant-growth model, D1 represents the:

the next expected annual dividend.

The standard deviation measures the _____ of a security's returns over time.

volatility