FIN3250 Final

PQR Corporation's stock price is $40 per share today. The return required by investors is 20% and the anticipated dividend growth rate is 0. What is DIV1? •$9.60• $8.00• $8.80• $12.50

$8.00 P0 = DIV1/(r - g) DIV1=(.20-0)*40 DIV1= 8.00

If the APY is 15%, what is the APR with semiannual compounding? 13.5563% 14.476% also 15.0% 15.5563%

14.47 use equation for EAR-APR

8,200,000

4,900,000 7,940,000 8,200,000 9,700,000

An 11-year annuity will pay $7,000 per year at the end of each year. If the recipient of the annuity payments puts each one in a bank account earning a 2% yearly interest rate (2% EAR), what will be the amount in her account immediately after she deposits the eleventh and final payment? 79,387.42 85,181.01 87,236.97 91,247.53

85,181.01 find fv

The riskless interest rate is 2% and the market risk premium is 6%. You can put money in an investment with a beta of 2 on which you expect a return of 13%. Should you do it?• A) Yes, because 13% is less than 14%. •B) Yes, because12% is less than 13%. •C) No, because13% is less than 14%. •D) No, because12% is less than 13%.

•C) No, because13% is less than 14%. 2% + 2(6%) = 14% 13%<14% costs more

Shareholders' equity is $6.4 million at the beginning of the year and $7.1 million at the end of the year. Net income for the year is $1.6 million and shareholder dividends are $1 million. What is the cash flow to shareholders? $.8 million $.9 million $1 million $1.1 million

$.9 million cash flow to shareholders

What is the present value today of a perpetuity of $1,000 per year, if the first payment is one year from today and the EAR is 10%? $8,000 $9,000 $10,000 $11,000

$10,000 P/r

What is the present value today of a perpetuity of $1,000 per year, if the first payment is today and the EAR is 10%? $8,000 $9,000 $10,000 $11,000

$11,000 no clue

1. A project requires an initial investment of $3,500 and generates cash flows of $900 per year for 11 years. The first $900 cash flow is at time 1. Should you accept the project if your required return is 3%? •Yes, the net present value is $4,827.36. •Yes, the net present value is $8,327.36. •No, the net present value is - $4,827.36. •No, the net present value is $8,327.36.

0 FV 900 PMT 11 N 3 I/Y CPT PV, Get-8,327.36 NPV= 8,327.36 -3,500 =4,287.36 Yes, the net present value is $4,827.36.

If a company has one million shares outstanding, with a share price of $50, and its debt has a market value of $40 million, what is the market value of all of the company's assets? $40 million $50 million $90 million $100 million

$90 million add them up

Three bonds are identical except for their coupons and prices. Bond A has a 4% coupon and a price of $920; bond B has an 8% coupon and a price of $940; and bond C has a 7% coupon. What should be the price of bond C? •$925 •$930 •$935 •$937.50

$935 7% = 4%x + 8%(1 - x) 7 = 4x + 8(1 - x) 7= 4x + 8 - 8x- 1 = -4x X = ¼(920) +(1-¼)(940) = 935

The YTM quoted for a semiannual coupon bond is 4%. Which of the following is the effective annual interest rate to be earned by an investor who buys the bond now and holds it until maturity? •(1.02^2) - 1 •.04 •.02 •.08

(1.02^2) - 1 compounding

Your bank credits a 3% interest rate every 3 months. Which of the following is the APY? 3% 6% (1.03)^4 - 1 4.12

(1.03)^4 - 1 pr to ear

If the real interest rate is 6.3% and the nominal interest rate is 11.2%, which of the following is an expression for the inflation rate based on the exact formula? •(1.112/1.063) - 1 •.112 - .063 •.063 - .112 •1.112/1.063

(1.112/1.063) - 1 (1+nominal)=(1+real)(1+inflaion)

30. You have a portfolio of 3 stocks (A, B, and C). You have equally weighted all three (you have invested the same amount in each stock). A's beta is 1.2, B's beta is 1.5, and C's beta is 1.8. What is the beta of the portfolio? •0 •1 •1.4 •1.5

(1.2 + 1.5 + 1.8)/3 = 1.5

Which of the following is the present value today of a perpetuity that pays $5,000 each year,forever, if the first payment is five years from today and the yearly interest rate (EAR) is 7%? 5,000/7 5,000/.07 (5,000/.07) x (1/1.07^5) (5,000/.07) x (1/1.07^4)

(5,000/.07) x (1/1.07^4) perp and present value

4. An investment project costs $20,000 today and has annual cash flows of $4,200 per year for six years. The first cash flow is one year from today. Find the profitability index if the interest rate is 10% per year. •.915 •.937 •.984 •1.037

0 FV 4200 PMT 6 N 10 I/Y CPT PV, get -18,292.09 18,292.09/20,000 = .915 •.915

38. The riskless interest rate is 2% and the market risk premium is 6%. You will perform an experiment to test a risky new invention of yours. If your experiment is successful you will have a single cash flow of $500 million in three years, but if it is unsuccessful, you will have no future cash flows. What is the fair time value of money to use to evaluate your project? •2% •More than 2% but less than 8% •8% •More than 8%

2% its all unique risks it doesn't count only market risk matters of B

40. The riskless interest rate is 2% and the market risk premium is 5%. You can put money in an investment with a beta of 2 on which you expect a return of 13%. Should you do it? •Yes, because 10% is less than 13%. •Yes, because 12% is less than 13%. •No, because 10% is less than 13%. •No, because 12% is less than 13%.

2% + 2(5%) = 12% •Yes, because 12% is less than 13%.

3. You are given the following cash flows: Year 0: -10,000 Year 1 2,000 Year 2: 6,000 Calculate the profitability index using a 5% required rate of return. •.634 •.693 •.701 •.735

2,000/1.05 + 6,000/(1.05)^2 = 7,346.94. 7,346.94/10,000 = .735 •.735

You put $1,000 in a bank account over a period of 13 years, during which time it grows to 1,347.96. What EAR does the bank credit? 1.2359% 1.8417% 1.9872% 2.3234%

2.3234% find%

Which of the following is an expression for the present value today of a payment of $200 to be made two years from today and a payment of $400 to be made 5 years from today if the time value of money is 5% per year (5% EAR)? 200/1.05^2 + 400/1.05^5 200/1.05 ^2+ 400/1.05^4 200/1.05 ^2x 400/1.05^5 600/1.05^3.5

200/1.05^2 + 400/1.05^5

An annuity pays $1,500 per month for 48 months. The first payment is one month from today. If the APR is 15% with monthly compounding, find the present value today of this annuity. 53,897.22 54,942.87 55,093.12 55,421.22

53,897.22 make sure to compound

2. You are considering a project that will generate cash flows of +$6,000 today, +$3,000 one year from today, and -$12,000 two years from today. If your required return is 13%, should you accept the project? •Yes, the net present value is $742.89 •Yes, the net present value is -$742.89 •No, the net present value is $742.89. •No, the net present value is -$742.89.

6,000/(1.13)^0 + 3,000/(1.13)^1 - 12,000/(1.132)^2 = 6,000 + 2,654.87 - 9,397.76 = -742.89 •No, the net present value is -$742.89.

Betty wants to put $600 each year, at the end of the year, for ten years, into an account that pays 3.5% interest (APY). Which of the following is the amount that will be in her account immediately after the last payment? 7,038.84 7,924.27 8,351.86 8,531.86

7,038.84 solve for fv

Dividends for the Buford Humidifier Corporation are expected to be $6 per share one year from today. Investors demand a 12% rate of return. The price per share is expected to be $80 immediately after the $6 dividend is paid. Which of the following should be the share price today? •((6 + 80)/1.12) + (80/1.12^2) •((6 + 8)/1.12) + (80/1.12^2) •86/1.12 •6 + (86/1.12)

86/1.12 (6 + 80)/1.12

The EAR is 4.5% and you want to find the present value of an annuity with 10 semiannual payments of $50 each. The first payment will be six months from today. Which of the following can you enter into your financial calculator to find the present value today of this annuity correctly, according to the method that we learned in class? 0 FV -50 PMT 4.500 I/Y 10 N, CPT PV 0 FV -50 PMT 2.250 I/Y 10 N, CPT PV 0 FV -50 PMT 2.225 I/Y 10 N, CPT PV 0 FV -50 PMT 4.500 I/Y 5 N, CPT PV

0 FV -50 PMT 2.225 I/Y 10 N, CPT PV half of the month half of the payment EAR to perodic

A bank account offers a guaranteed rate of return of 2%. What are the beta of the account and the standard deviation of the return of the account? •0, 0 •0, .02 •0, .0004 •.0004, .0004

0,0 no risk its a sure thing

23. There is a 10% chance that investment A will have a 5% rate of return, a 40% chance that it will have a 7% rate of return, and a 50% chance that it will have a 9% rate of retun. Which of the following is the expected rate of return for investment A? •.074 •.076 •.078 •.08

1 x .05 = .005 .4 x .07 = .028 .5 x .09 = .045 total .078

You have cash flows of +$1,000 (you receive $1,000) at time 0, and -$1,300 (you pay $1,300) at time 1. If the interest rate is 7%, what is the NPV of the project? •-300 •-214.95 •214.95 •300

1,000 - 1,300/1.07 = -214.95 •-214.95

Dividends for Tie Siding Storage Corporation are expected to be $6 per share one year from today and $10 per share two years from today. Thereafter they will grow by 3% each year forever. Investors demand a 12% rate of return. Which of the following is an expression for the stock price at time 1, immediately after the dividend of $6 is paid? •(10 + 6)/.09 •(10 + 6)/.03 •(10 + 6)/.02 •10/.09

10/.09 P0 = DIV1/(r - g)

You borrow $45,000 today. The loan is to be repaid in five equal annual payments of 11,270.54 each, the first of which will be one year from today, at 8% EAR .Approximately how much of the principal is repaid with the first payment? 11,270.54 - 45,000(1.08) 45,000(.08) 45,000(1.08) 11,270.54 - 45,000(.08)

11,270.54 - 45,000(.08)

What would you expect to pay for a stock with a 10% rate of return and a negative 7% dividend growth rate if the next yearly dividend, to be paid one year from today, is 11.37? •11.37//(.1 - .07) •-11.37/(.1 - .07) •11.37/(.1 + .07) •11.37(.1 - .07)/(.1 + .07)

11.37/(.1 + .07)

31. Pine Bluffs Corporation has a beta of 1.5 and its stockholders expect a return of 11% on their investment. Cody Corporation has a beta of 2 and its stockholders expect a return of 14% on their investment. If the stocks are appropriately priced, what are the risk-free interest rate and the market risk premium? •.08, .03 •.11, .14 •.02, .06 •.03, .06

14 = rf + 2MRP .11 = rf + 1.5MRP .03 = 0 + .5MRP MRP = .06 .14 = rf + 2(.06) .14 = rf + .12 rf = .14 -.12 rf = .02

Which of the following is the present value today of eight yearly payments of $2,000 each, if the first payment is one year from today and the EAR is 3%? 12,987.23 13,291.14 14,039.38 16,035.27

14,039.38 Pv annuity

What would you expect to pay for a stock with a 12% required rate of return and a 10% rate of dividend growth if the next yearly dividend is $15 and is about to be paid? •16.5/(.12 - .1) •15 + (15/(.12 - .1)) •15 + (16.5/(.12 - .1))• 15/(.12 - .1)

15 + (16.5/(.12 - .1)) second year 15*105% = 16.5

A perpetuity pays $15,000 at the end of each year for 10 years, and then pays $10,000 per year, forever. If the APY is 10%, what is the present value today of this perpetuity? 15000[1/.1 - 1/(.1(1.1 ^10))] 10,000[ 1/.1 - 1/(.1(1.1 ^10))] 15,000[ 1/.1 - 1/(.1(1.1^10 ))] + 10,000/.1 5,000[ 1/.1 - 1/(.1(1.1 ^10))] + 10,000/.1

15,000- 10,000= 5,000 Perpituity of 10,000 5,000[ 1/.1 - 1/(.1(1.1 ^10))] + 10,000/.1 question

To find your monthly payment on a $200,000 mortgage you have entered the following in your financial calculator: 200000 PV 0 FV 180 N .5 I/Y CPT PMT. To find the balance after two years, which of the following can you then enter? 156 N CPT PV 24 N CPT PV 24 N CPT PMT 200000 PV 1687.71 PMT 156 N .5 I/Y CPT FV

156 N CPT PV because this takes the first 2 years of payments out of the totals pv is 182510 after 2 years find payment first

Which of the following could you enter in your financial calculator to find out how many years it would take to double your money at a 12% APR with monthly compounding? 2 FV -1 PV 0 PMT 1 I/Y CPT N, then divide the answer by 12. 2 FV -1 PV 0 PMT 1 I/Y CPT N,. 2 FV 1 PV 0 PMT 1 I/Y CPT N, then divide the answer by 12 2 FV 1 PV 0 PMT 1 I/Y CPT N.

2 FV -1 PV 0 PMT 1 I/Y CPT N, then divide the answer by 12. bo this because of arp -1 because of confusing

ABC Corporation will pay a dividend of $3 next year and $5 the following year. If dividends thereafter increase by 3% per year and investors want a 9% yearly rate of return, which of the following is the stock price today? •$65.97 •$79.20 •$84.13 •$87.50

2 years solve for the 3% increas p1= 5/.09-.03= 83.33 3/1.09+83.33/1.09=79.20 [3 + 5/(.09 - .03)]/1.09 = 79.20

Which of the following best describes preferred stock and preferred shareholders? •Most companies allow preferred shareholders to vote in all elections for company directors. •Preferred dividends are guaranteed to be paid. •Preferred dividend amounts are expected to change each year. •If the preferred dividends are cumulative, preferred shareholders have better protection.

If the preferred dividends are cumulative, preferred shareholders have better protection.

24. The risk of a nationwide depression is what kind of risk? •Unique risk •Minor risk •Market risk •Noneconomic risk

Market risk

You can reduce the amount of income tax that you pay by investing in which kind of bonds? •Municipal bonds •Floating rate bonds •Zero-coupon bonds •Corporate bonds

Municipal bonds

A project costs $1,000 today and generates cash flows of +$80 per year forever. The first cash flow is one year from today. What is the internal rate of return? •-6% •6% •8% •10%

PV = P/r 80/r - 1,000 = 0 r = .08 8%

Lenny charges you 8% each month, with monthly compounding, on any money that helends you. What is Lenny's APY? .66667% 8% 96% 152%

PV to EAR 152%

(5,430,000 - 4,480,000) - (5,000,000 - 4,300,000)

Which of the following equals change in net working capital for the year 2018? (5,430,000 -5,000,000) (12,730,000 - 5,430,000) (5,430,000 - 4,480,000) - (5,000,000 - 4,300,000) (5,430,000 - 12,730,000)

1,180,000 equation

Which of the following equals net capital spending for the year 2018? 640,000 970,000 1,180,000 1,340,0002

You will receive an annuity with monthly payments of $100. The first payment is 37 months from today and the last payment is 240 months from today. What is the total number of payments that you will receive? 201 202 203 204

fence post 240-37+1

You make payments of $100 per month for thirty years, and there is an APR of 12% with monthly compounding. Which of the following is the future value of these payments immediately after the last one is made? 100(1.12^30 - 1)/.12 100(1.12 ^360- 1)/.12 100(1.01 ^30- 1)/.01 100(1.01^360 - 1)/.01

fv = 100(1.01^360 - 1)/.01 30*12 = 360 .12/12= .1

Which of the following would be an example of a direct agency cost? Refusing, for personal reasons, to take a risk that would have a reasonable risk/benefittradeoff from a corporaon's shareholders' point of view A seasoned equity offering leasing a corporate jet to fly a short distances direct cash payment needed for an agency office

leasing a corporate jet to fly a short distances

A perpetuity makes payments of $1,000 every year, starting today, and the yearly interest rate is 5%. $1,000/05 is an expression for the present value of the annuity at what me? one year ago today one year from today five years from today

one year ago

Which of the following describes partnerships but not corporations? limited liability double taxation sharing of gains and losses by all partners separaon of management and ownership

sharing of gains and losses by all partners

Bond A is a 10-year bond that makes semiannual coupon payments, quotes a coupon rate of 8%, and can be bought today at par. Find the percentage change in the price of bond A if the quoted interest rates suddenly go up by 1%. •-6.5% •-3.2% •2.7% •5.6%

solve for % 1000 FV -1000 PV 20 N 40 PMT, %= 4 (4% every 6 months is 8% APR, + 1% is 9%, or 4.5% every 6 months.) then 1000 FV PV? 20 N 40 PMT %4 4.5 I/Y, CPT PV, get 934.96 (934.96 - 1,000)/1,000 = -.065 since rates go up bonds price go down

27. Stock A has a return of 10% in good times (60% chance) and 5% in bad times (40% chance). If the expected return on stock A is 8%, which of the following is an expression for the variance of the return on stock A? •((.1 - .08) x .5)^2 + ((.05 - .08) x .5)^2 •((.1 - .08) x .6)^2 + ((.05 - .08) x .4)^2 •((.1 - .08)^2 x .5) + ((.05 - .08)^2 x .5) •((.1 - .08^)2 x .6) + ((.05 - .08)^2 x .4)

•((.1 - .08)^2 x .6) + ((.05 - .08)^2 x .4)

The price today for a bond with annual coupon payments is $1,043.87 and the price in one year will be $1,021.23. The next coupon, payable in one year, is $50. Which of the following will give the yearly rate of return on the bond over the coming year? •(50 + 1043.87 - 1021.23)/1021.23 •(50 + 1021.23 - 1043.87)/1000 •(50 + 1021.23 - 1043.87)/1043.87 •(50 + 1043.87 - 1021.23)/1000

•(50 + 1021.23 - 1043.87)/1043.87 (coupon + next year's price - this year's price)/this year's price

Seven directors are being elected to the board of UVW Corporation, which has 560,000 shares outstanding. Cumulative voting rules apply. To guarantee that a director of your choosing will be elected, how many shares must you own? •(560,000/2) + 1 •(560,000/(7+1)) + 1 •560,000/2 •560,000/(8 + 1)

•(560,000/(7+1)) + 1 from note card

28. In the expression rA = rf + betaA(rm - rf), where rArefers to the expected return on asset A, the market risk premium would be which of the following? •beta(rm - rf) •(rm - rf) •rm •The other three choices are incorrect.

•(rm - rf)

A thirty-year bond with $1,000 face amount and 7% annual coupons was issued 30 years ago. You bought the bond 25 years ago, immediately after a coupon was paid, for a price of $982.71, and you sold it six years ago, immediately after a coupon was paid, for a price of $970.64. What can you enter to find your yearly rate of return over the period when you held the bond? •((25 x70) + (970.64 - 982.71))/(25 x 982.71) •((19 x70) + (970.64 - 982.71))/(19 x 982.71) •-982.71 PV 970.64 FV 70 PMT 19 N CPT I/Y •982.71 PV -970.64 FV 70 PMT 19 N CPT I/Y

•-982.71 PV 970.64 FV 70 PMT 19 N CPT I/Y

You own a bond with a 5% yearly coupon and the market interest rate is 4%. If the market interest rate stays at 4% during the coming year, the expression (coupon + next year's price - this year's price)/this year's price will equal which of the following? •0 •.04 •.05 •More than .05

•.04 because it stays the same

2. If the real interest rate is 6.3% and the nominal interest rate is 11.2%, which of the following is an expression for the inflation rate based on the approximate formula? •(1.112/1.063) - 1 •.112 - .063 •.063 - .112• 1.112/1.063

•.112 - .063 Nominal=Real+ inflation

18. You need a new conveyor system for your plant. System A has high initial cost ($24,000 today) and will cost $2,000 per year, a the end of each year for six years, to operate. If the required rate of return is 11%, how can you calculate the total present value cost of system A? •0 FV 2000 PMT 6 N 11 I/Y, CPT PV, get -8,461. 24,000 - 8,461 = 15,539. •6 x 2,000 + 24,000 = 36,000 •0 FV 2000 PMT 6 N 11 I/Y, CPT PV, get -8,461. 24,000 + 8,461 = 32,461. •24,000 - (6 x 2,000) = 12,000

•0 FV 2000 PMT 6 N 11 I/Y, CPT PV, get -8,461. 24,000 + 8,461 = 32,461. explane

1. A bond with 6% semiannual coupons and 17 years until maturity is priced today for a YTM of 5%. What can you enter in your financial calculator to find the price today? •1000 FV 30 PMT 34 N 2.5 I/Y, CPT PV •1000 FV 60 PMT 17 N 2.5 I/Y, CPT PV •1000 FV 30 PMT 17 N 5 I/Y, CPT PV •1000 FV 60 PMT 34 N 5 I/Y, CPT PV

•1000 FV 30 PMT 34 N 2.5 I/Y, CPT PV .60 of 1000= 60 /2 payments a year =30 17*2 payments a year= 34

LMN Corporation will pay its first dividend of $40 in ten years, and dividends thereafter will increase by 4% per year. If investors require a 14% rate of return, what is the price per share today? $47.16 •$128.97 •$123.00 •$200.00

$123.00 P9=40/(.14 - .04) = 400, 400/(1.14^9)= 123

Your bank credits a 4% yearly interest rate (EAR). You have $10,000 in your account now. If you make no further deposits or withdrawals, how much will be in your account after 15 years? $11,297.14 $14,986.45 $17,237.92 $18,009.44

$18,009.44

Cindy has $5,000 in her bank account today, and she wishes to put in $200 per year, at the end of each year, until her account balance is $16,000. If the bank credits a 1% APY, which of the following can she enter to find out how long it will take her to reach her goal of $16,000? -5,000 PV -200 PMT 1 I/Y 16,000 FV, CPT 5,000 PV -200 PMT 1 I/Y 16,000 FV, CPT N 5,000 PV -200 PMT 1 I/Y 16,000 FV, CPT N -5,000 PV 200 PMT 1 I/Y -16,000 FV, CPT N

-5,000 PV -200 PMT 1 I/Y 16,000 FV, CPT

Your car loan requires payments of $250 per month for the first year and $450 per month during the second year. The APR is 6%, with monthly compounding, and payments begin one month after the car is purchased. You begin to calculate the present value of the loan by entering the following in your financial calculator :0 FV -450 PMT 12 N .5 I/Y CPT PV. Your financial calculator then gives you the value of 5228.52. Which of the following can you then enter in your financial calculator to find the initial amount of the loan? 5228.52 FV -250 PMT 12 N .5 I/Y, CPT PV 5228.52 FV -450 PMT 12 N .5 I/Y, CPT PV -5228.52 FV -250 PMT 12 N .5 I/Y, CPT PV -5228.52 FV -450 PMT 12 N .5 I/Y, CPT PV

-5228.52 FV -250 PMT 12 N .5 I/Y, CPT PV - because that's how much you paid total 450 first 250 second

You want to repay a car loan of $8,000 in four yearly payments. The periodic (quarterly)interest rate is 2%. Which of the following can you enter in your financial calculator to find the yearly payment amount? -8000 PV 0 FV 4 N 8.2432 I/Y, CPT PMT -8000 PV 0 FV 4 N 8 I/Y, CPT PMT -8000 PV 0 FV 4 N 2 I/Y, CPT PMT -8000 PV 0 FV 16 N 2 I/Y, CPT PMT

-8000 PV 0 FV 4 N 8.2432 I/Y, CPT PMT pr to ear

ABC Corporation's current stock price is $60 per share, the dividend payable at the end of this year is $3, and investors require a 7% rate of return. Which of the following is the anticipated yearly dividend growth rate? •(60/.07) - .03 •(60/.07) + .03 •.07 - (3/60) •(3/60) + .07

.07 - (3/60) r = DIV1/P0 + g

Dividends for ABC Corporation are expected to be $5 per share one year from today, $3 per share two years from today, and $7 per share five years from today. Thereafter they are expected to grow by 3% per year. If investors demand a 9% rate of return, you calculate the price today of the stock as: 5/(1 + A) + 3/((1 + A)^2) + [7/(.09 - .03)]/((1 + A)^B) What are the values of A and B? •A is .09; B is 4 •A is .03; B is 4 •A is .09; B is 5 •A is .03; B is 5

A is .09; B is 4

The current year's dividend yield for a stock is given by which of the following? •DIV1/P0 •DIV0/P0 •DIV1/P1 •DIV0/P0

DIV1/P0

Which of the following is most likely to be true of a convertible bond issued by the MNO Corporation? •It becomes more valuable when MNO Corporation's stock price goes up. •It becomes more valuable when MNO Corporation's stock price goes down. •It should have a lower price than an otherwise similar bond without a conversion feature. •The corporation that issued the bond will have the right to decide when or if the bond is converted.

It becomes more valuable when MNO Corporation's stock price goes up.

Linda puts 12,000 per year, at the end of the year, for ten years, into an investment account that credits a 4% EAR. Cindy puts a certain amount at the end of each month, also for ten years, into an investment account that also credits a 4% EAR. If that balance in Linda's account after ten years is the same as the balance in Cindy's account, which of the following must be true of Cindy's monthly payment ? It is less than $1.000. It equals $1,000. It is more than $1,000 .From the information given, we do not know whether it is more than or less than $1,000.

It is less than $1.000 the interest is compounded more frequently monthly

You own a callable bond. Under which of the following circumstances is it most likely to be called? •It is most likely to be called if market interest rates go up. •It is most likely to be called if market interest rates remain unchanged. •It is equally likely to be called no matter what happens to market interest rates. •It is most likely to be called if market interest rates go down.

It is most likely to be called if market interest rates go down. they call when you are losing money

You have taken out a 200,000 30-year mortgage with monthly payments. Which of the following is most likely to be true of the outstanding balance after exactly 180 (one-half of360) payments have been made? It will be $200,000 or more. It will be less than $200,000 but more than $100,000 It will be $100,000. It will be less than $100,000.

It will be less than $200,000 but more than $100,000 you pay in more interest and less principle early on

16. A term-17project costs $1,000 today and generates cash flows of +$100 per year forever. The first cash flow is one year from today. What is the NPV at a required rate of return of 10%? •250 •1,000 •0 •-250

PV = P/r 100/.1 - 1,000 = 0 •0

21. The probability of good times is .5 and the probability of bad times is .5. Investment A has a return of 10% in good times and 0% in bad times. Investment B has a return of 0% in good times and 10% in bad times. If you invest $1,000 in A and $1,000 in B, what is the standard deviation of the overall return of your portfolio? •-.05 •0 •+.05 •+.1

Portfolio return in good times (10% + 0%)/2 = 5% Portfolio return in bad times (0% + 10%)/2 = 5% =0 no risk

You will receive payments of $1,000 per year, beginning six years from today. The last payment will be seventeen years from today. The EAR is 1%. Which of the following is an expression for the present value today of these payments? 1,000[1/.01 - 1/(.01(1.01)^12)] x (1/1.01)^5 1,000[1/.01 - 1/(.01(1.01))^12)] x (1/1.01)^6 1,000[1/.01 - 1/(.01(1.01))^13)] x (1/1.01)^5 1,000[1/.01 - 1/(.01(1.01)^13))] x (1/1.01)^6

Pv of annuity and then pv of the 5 years before dormant

Jones currently has $19,000 in her savings account. She would like to have $20,000 saved at the end of eight years for a down payment on a house. The interest rate is 5%each year, and to find what equal annual deposits she must make at the end of each of the next eight years in order to achieve her goal, she enters the following in her financial calculator: -19000 PV 20000 FV 8 N 5 I/Y CPT PMT. The number that her calculator gives her is 845.28.How should she interpret this? She needs to add $845.28 to her account each year to reach her goal. She needs to add a single payment of $845.28 to reach her goal. She can withdraw $845.28 each year and still reach her goal. She will have $845.28 too much in her account at the end of eight years.

She can withdraw $845.28 each year and still reach her goal. since the number is positive she will have 845.28 extra a year

7. Which of the following is not considered to be an incremental cost for capital budgeting? •Changes in working capital •Sunk costs •Lost sales on competing lines •Add-on sales

Sunk costs

A bank credits a 5% APR with monthly compounding on accounts. Which of the following is true? The EAR is 5%. The EAR is less than the APR. The EAR is less than the APY. The APY is more than 5%

The APY is more than 5% Apy = 5.11%

A couple will retire in 50 years. They plan to spend $40,000 a year in retirement, which should last 30 years. (Assume that each $40,000 payment is at the end of the year.) They believe that they can earn 10% a year on their retirement savings. You want to help them decide how much to save. You start by entering 0 FV -40000 PMT30 N 10 I/Y CPT PV in your financial calculator. The number that your calculator then gives you represents which of the following? The yearly payment that they need to make at the end of each year for 50 years The amount of each yearly payment that they need to make at the beginning of each year for fifty years he amount of money that needs to be in their account immediately before they take the first retirement payment of $40,000 The amount of money that needs to be in their account one year before they take their first retirement payment of $40,000

The amount of money that needs to be in their account one year before they take their first retirement payment of $40,000

Which of the following is typically true of the monthly payments on a mortgage The early payments are mostly return of principal, while the later payments are mostly interest. Each payment includes the same amount of interest as every other payment. Each payment includes the same principal repayment as every other payment. The earlier payments have more interest, and the later payments have more principal.

The earlier payments have more interest, and the later payments have more principal.

9. Which of the following must be true for us to be sure that the IRR rule is giving a correct answer? •The IRR rule always leads to the correct choice. •The only requirements are that the first cash flow must be positive and all others must be negative. •The only requirements are that the first cash flow must be negative and that projects must be independent. •The first cash flow must be negative, the remaining cash flows must be positive, and projects must be independent.

The first cash flow must be negative, the remaining cash flows must be positive, and projects must be independent.

6. A firm is considering an investment in a new manufacturing plant. The site is already owned by the company, but existing buildings would need to be demolished. Which of the following should be treated as incremental cash flows? •The market value of the site •The cost of a new access road put in last year •Future depreciation of the new plant •Allocated overhead

The market value of the site

A taxable corporate bond promises a yield to maturity of 4%, and a municipal bond of the same maturity and risk promises a return of 3%. Which bond would an investor with a 28% marginal tax rate prefer? •The corporate bond, because 3% is more than 2.88%. •The corporate bond, because 3% is less than 4%. •The municipal bond, because 3% is more than 2.88%. •The municipal bond, because 3% is less than 4%.

The municipal bond, because 3% is more than 2.88%. 4%(1 - .28) = 2.88%

Which of the following most accurately describes dual class shares? •The introduction of dual class shares is an effective way to eliminate agency problems. •Dual class shares are more popular in the United States than in other countries. •The owners of the shares with more voting rights might take advantage of the other shareholders. •Regulators in the United States want more firms to adopt dual class shares.

The owners of the shares with more voting rights might take advantage of the other shareholders.

Pat uses his financial calculator to find the present value of an annuity with yearly payments. The yearly interest rate is 7%. He enters it into his financial calculator as .07. Which of the following is most likely to b true? The present value will be too high . The present value will be wrong unless he changes the sign on from positive to negave. The present value will be correct. None of the other answers is correct.

The present value will be too high

Which of the following is the correct formula for cash flow to creditors? interest expense plus ending long-term debt minus beginning long-term debt interest expense only interest expense mulplied by one minus the marginal tax rate interest expense plus beginning long-term debt minus ending long-term debt

interest expense plus beginning long-term debt minus ending long-term debt beg ltd - end ltd + intrest

If you believe that stock markets are efficient, which of the following statements about orangutans are you most likely to believe? •The stocks that orangutans choose perform as well as other stocks because orangutans are good at evaluating companies. •The stocks that orangutans choose perform as well as other stocks because human financial analysts are good at evaluating companies. •The stocks that orangutans choose consistently do poorly. •The stocks that orangutans choose do well only if the orangutans are fed a healthy diet.

the stocks that orangutans choose perform as well as other stocks because human financial analysts are good at evaluating companies.

A thirty-year bond with $1,000 face amount and 6% annual coupons was issued thirty years ago. You bought the bond twelve years ago, immediately after a coupon was paid, when the market interest rate on such bonds was 4%, and you sold it eight years ago, immediately after a coupon was paid, when the market interest rate was 5%. What can you enter into your financial calculator to find out how much you sold the bond for? •1000 FV 8 N 4 I/Y 60 PMT, CPT PV •1000 FV 4 N 5 I/Y 60 PMT, CPT PV •1000 FV 4 N 4 I/Y 60 PMT, CPT PV •1000 FV 8 N 5 I/Y 60 PMT, CPT PV

•1000 FV 8 N 5 I/Y 60 PMT, CPT PV

15. A project requires you to spend $70,000 today and you immediately receive $85,000. There are no other cash flows. If the EAR is 10%, what is the NPV of this project? •-15,000 •-2,272 •2,272 •15,000

•15,000

The current yield on bond B, which has semiannual coupons, is 8.0% and the bond was sold at par three years ago, when the YTM on similar bonds was 7.0%. If there are 17 years left until maturity and you want to use your financial calculator to find the YTM to an investor who buys the bond today, what will you enter as PMT? •35 •40 •70 •80

•35 1000*.07/2= 35 ????

33. Cash flow forecasts for the expansion of a company's current business are -100 at year zero and + 15 each in years 1 - 10. The company's beta is 1.4. The risk-free rate is 4% and the expected return on the market is 12%. To calculate the present value of the cash flows in your financial calculator, which of the following do you use for the interest rate? •4% + 1.4(12% - 4%) •4% + 1.4(12%) •12% •1.4(12%)

•4% + 1.4(12% - 4%)

CDE Corporation's next yearly dividend on its preferred stock is $20 per share, payable one year from today. If investors demand a 5% yearly rate of return, what is the price per share today for the preferred stock? •40/(.1 - .02) •40/1.1 •40 + 40/(.1 - .02) •400

•400 P0 = DIV1/(r - g) 20/.05 perferd stock g=0

A bond with 7% annual coupons and nine years left to maturity has a price of $1100. What is the YTM? •4.21% •5.56% •3.93% •5.07%

•5.56% Solve for % 1000 FV 70 PMT -1100 PV 9 N CPT I/Y, get5.56

The current yield on Bond B, which has semiannual coupons, is 5.4%, and the bond was sold at par three years ago, when the YTM on similar bonds was 5.2%. There are now seventeen years until maturity. What can you enter in your calculator to find the price of the bond •54/.052 •52/.054 •1000 FV 27 PMT 34 N 5.2 I/Y, CPT PV •1000 FV 26 PMT 34 N 5.4 I/Y, CPT PV

•52/.054 Current yield= coupon price/ price(pv) Yearly coupon $52, CY = .054 = coupon/price, 52/price = .054 52 = .054*price 52/.054 = price

19. Pat is considering a project whose cash flows will be +100 at time zero and -150 at time one. If Pat uses the IRR rule with a 12% required rate of return to evaluate the project, what will she decide to do? •Accept the project, because 50% is more than 12%. •Reject the project, because -50% is less than 12%. •Reject the project, because the first cash flow is negative. •Reject the project, because 50% is more than 12%.

•Accept the project, because 50% is more than 12%. (150-100)/100

XYZ Corporation's target structure is 60% debt and 40% equity. The required return on debt is 5% and the required return on equity is 12%. The tax rate is 20%. Which of the following is an expression for XYZ Corporation's WACC? •A) (.4 x .12) + ((.6 x .05) x .2) •B) (.4 x .12) + ((.6 x .05) x .8) •C) ((.4 x .12) + (.6 x .05)) x .2 •D) ((.4 x .12) + (.6 x .05)) x .8

•B) (.4 x .12) + ((.6 x .05) x .8)

26. Why does CAPM treat unique risk and market risk differently? •Because market risk gets a tax break. •Because unique risk gets a tax break. •Because investors can eliminate unique risk by diversifying. •Because investors can eliminate market risk by diversifying.

•Because investors can eliminate unique risk by diversifying.

Bonds A, B, and C are yearly coupon bonds priced for a YTM of 5%. A and B have 5% coupons and C has a 4% coupon. A and C have the same maturity date, but B's maturity date is ten years longer. Which of the bonds has the lowest price? •B •A and C •C •A and B

•C is a discount bond because its smaller

37. Investment A has a 5% rate of return in good times and a 2% rate of return in bad times; investment B has a 7% rate of return in good times and a 1% rate of return in bad times. The probability of good times is 60% and the probability of bad times is 40%. To find the standard deviation of a portfolio invested 30% in A and 70% in B, which of the following could be the first calculation that you would do? •Find the expected return of A. •Find the standard deviation of B. •Calculate .6(.05) + .4(.07). •Calculate .3(.05) + .7(.07).

•Calculate .3(.05) + .7(.07).

20. You use the internal rate of return to evaluate project A, which has a 14.5% IRR, and project B, which has a 16% IRR. The required rate of return is 17% and the projects are mutually exclusive. What do you do? •Choose both project A and project B, because they are mutually exclusive. •Choose only project B, because they are mutually exclusive. •Choose only project A, because they are mutually exclusive. •Choose neither project.

•Choose neither project.

Why doesn't the sinking fund method of paying back corporate debt usually involve the creation of an actual fund? •IRS regulations often treat the funds as unsubstantiated liabilities for depreciation purposes. •Corporations often receive a lower rate on their investments than the interest rate that they must pay to borrow money. •Most corporations do not have enough money to accomplish this. •Most corporations always roll over all debt when it matures.

•Corporations often receive a lower rate on their investments than the interest rate that they must pay to borrow money.

Which of the following is true of a fully diversified portfolio?•Diversification eliminates all risk. •Diversification eliminates all unique risk. •Diversification eliminates all market risk. •Diversification eliminates all positively correlated risk.

•Diversification eliminates all unique risk.

A 15-year bond with 12% semiannual coupons is priced for a YTM of 11%. How do you find the current yield? •Enter 1000 FV 60 PMT 30 N 5.5 I/Y into your financial calculator, then divide 120 by the answer that you get (making it a positive number). •Enter 1000 FV 120 PMT 30 N 11 I/Y into your financial calculator, then divide 120 by the answer that you get (making it a positive number). •Enter 1000 FV 60 PMT 15 N 5.5 I/Y into your financial calculator, then divide 120 by the answer that you get (making it a positive number). •Enter 1000 FV 120 PMT 30 N 11 I/Y into your financial calculator, then divide 110 by the answer that you get (making it a positive number).

•Enter 1000 FV 60 PMT 30 N 5.5 I/Y into your financial calculator, then divide 120 by the answer that you get (making it a positive number). Pmt= 1000*.12/ 2 payments N= 15*2 payments %= 11/2 payments Current yield= coupon price/ price(pv)

29. Stock A has a return of 10% in good times (60% chance) and 5% in bad times (40% chance). If the expected return on stock A is 8%, which of the following is true of the standard deviation of the return on stock A? •It is equal to the square root of the mean of the return on stock A. •It is equal to the square root of the variance of the return on stock A. •It is equal to zero. •It is equal to the mean plus the square root of the variance of the return on stock A.

•It is equal to the square root of the variance of the return on stock A

BC Corporation's WACC is 14%. I wants to undertake a new project that has higher beta than its other projects. Which of the following is true of the time value of money it should use to evaluate the new project? •It is much less than 14%. •It is less than, but close to, 14% .•It is 14%. •It is more than 14%.

•It is more than 14%. higher Beta= more risk

10. Which of the following is true of the net present value of a project? •The sign (+ or - ) of the NPV is unimportant. •It must be greater than the profitability index. •It represents the amount of money that you earn by doing the project. •It is impossible for an NPV to be greater than the initial investment in a project.

•It represents the amount of money that you earn by doing the project.

36. Which of the following best describes the security market line? •It shows how a security's variance and standard deviation are related. •It shows which projects have positive NPV and which have negative NPV. •It shows how return and market risk are related according to CAPM. •It shows how debt and equity are related according to WACC.

•It shows how return and market risk are related according to CAPM.

Pat uses her financial calculator to find the price of a ten-year bond based on a 5% market interest rate. She then recalculates the price based on a 4% market interest rate. Which of the following will be true of the price that she calculates based on the 4% market interest rate? •It will be lower than the price calculated with the 5% interest rate. •It will be higher than the price calculated with the 5% interest rate. •It will be the same as the price calculated with the 5% interest rate. •It is not possible to determine whether the price based on the 4% interest rate or the price based on the 5% interest rate will be higher.

•It will be higher than the price calculated with the 5% interest rate. when interest rates go down bond prices go up

A bond's yield to maturity is higher than its current yield. Which of the following must be true? •The bond sells at a premium. •The coupon rate is higher than the yield to maturity. •Its price is lower than its face amount. •The coupon rate is higher than the current yield.

•Its price is lower than its face amount. Discount Bonds YTM>CY> coupon rate

. The risk-free rate is 4% and the market risk premium is 6%. For each of the following businesses, state whether the expected return should be 4%, more than 4%, or less than 4%: 1. An automobile manufacturer 2. A bad debt counseling service 3 A business that collects contributions from investors all over the country and invests them in lottery tickets. •More than, less than, equal •More than, less than, more than •More than, more than, more than •More than, more than, more than

•More than, less than, equal

13. You decide to build a hot dog stand on land you have recently inherited on Times Square. The NPV of the cash flows from the hot dog stand itself is $50,000, but by opening the stand, you lose the ability to sell the land for $2 million. When you decide whether to build the stand, what should you use as the NPV of the project, and what should you decide? •Yes, NPV is $50,000. •Yes, NPV is 1,950,000. •No, NPV is -$50,000. •No, NPV is - $1,950,000.

•No, NPV is - $1,950,000. no math

You believe in weak form efficiency. Which of the following do you believe that you can use to outperform the stock market? •Any information, public or private •Only private information or public information other than past stock prices •Only insider information •All public information

•Only private information or public information other than past stock prices

The profitability index for a project is equal to one. This is equivalent to which of the following? •The IRR is equal to zero. •The IRR is equal to one. •The NPV is equal to zero. •The NPV is equal to one.

•The NPV is equal to zero.

5. Which of the following is true of the NPV method and the IRR method? •The IRR method gives better answers than the NPV method if the first cash flow is positive. •The IRR method gives a better answer than the NPV method if you are comparing two projects with different sizes. •The IRR method always gives the right answer. •The NPV method always gives the right answer.

•The NPV method always gives the right answer.

25. In the expression rA = rf +betaA(rm - rf), where rA refers to the expected return on asset A, beta A would be which of the following? •The riskless interest rate •The expected overall return on the market •The overall beta for the market •The beta for asset A

•The beta for asset A

The current yield on a bond is greater than the yield to maturity. Which of the following must be true? •The coupon rate is greater than the yield to maturity. •The current yield is greater than the coupon rate. •The face amount is greater than the par value. •The par value is greater than the maturity value

•The coupon rate is greater than the yield to maturity Premium Bonds YTM<CY<coupon rate

39. Investment A has a 5% rate of return in good times and a 2% rate of return in bad times; investment B has a 7% rate of return in good times and a 1% rate of return in bad times. The probability of good times is 80% and the probability of bad times is 20%. Which of the following is true of the returns for investment A and investment B? •They are positively correlated. •They are negatively correlated. •They are uncorrelated. •From the information given it is impossible to determine whether they are positively correlated, negatively correlated, or uncorrelated.

•They are positively correlated. because they rely mostly on good times for success

34. In our example of the umbrella stand and the sunglasses stand, which of the following describes the correlation of the two businesses' profits? •They were positively correlated. •They were negatively correlated. •They were uncorrelated but not independent. •They were uncorrelated and independent.

•They were negatively correlated.

Which of the following four items did we discuss in class in connection with financial bubbles •Warrant options •Baseball cards •Hummel figurines •Tulips

•Tulips

8. A project requires you to invest $10,000 at the end of each year for seven years. You will receive $14,000 at the end of each of the following twenty years. The required return is 12%. Pat finds the net present value of the project by doing the following computations :0 FV -10000 PMT 7 N 12 I/Y, CPT PV, answer 45637.57 0 FV 14000 PMT 20 N 12 I//Y, CPT PV, answer -104572.21NPV = 104,572,21 - 45,637.57 = 58,934.64 What is wrong with Pat's final NPV value of +58,934.64? •Both wrong present value for payments of $14,000 and wrong signs •Wrong signs •Wrong present value for payments of $14,000 •Nothing is wrong. Pat's answer is correct

•Wrong present value for payments of $14,000 pv should be at the beginning of the period 104572.21/(1.12)^7

11. If you use one of the capital budgeting methods, which of the following is a situation where you are most likely to find multiple answers? •You use the NPV method and you have to solve a quadratic equation. •You use the IRR method and you have to solve a quadratic equation. •The NPV method and the IRR method are equally likely to require you to solve a quadratic equation. •Neither the IRR method nor the NPV method could possibly produce multiple answers

•You use the IRR method and you have to solve a quadratic equation.