Finance Midterm

True or False: After the end of the second year and all other factors remaining equal, a future value based on compound interest will exceed a future value based on simple interest.

T

Dimitri is willing to invest $45,000 for six years, and is an economically rational investor. He has identified three investment alternatives (X, Y, and Z) that vary in their method of calculating interest and in the annual interest rate offered. Since he can only make one investment during the six-year investment period, complete the following table and indicate whether Dimitri should invest in each of the investments. Determine the FV if: (X) 8% compound interest (Y) 10% compound interest (Z) 10% simple interest Which investment should he make?

(X) $71,049 (PV = -$45000, n = 6 years, i = 8%, solve FV) (Y) $79,720 (PV = -$45000, n = 6 years, i = 10%, solve FV) (Z) $72,000 (FV = PV + (PV*i*n) = 45000 + (45000*0.1*6)) Choose (Y) 10% compound interest

True or False: All other factors being equal, both the simple interest and the compound interest methods will not generate the amount of earned interest by the end of the first year.

F

An investor can invest money with a particular bank and earn a stated interest rate of 15.40%; however, interest will be compounded quarterly. What are the nominal, periodic, and effective interest rates for this investment opportunity?

Nominal: 15.4% Periodic: 3.85% Effective annual: 16.31%

Is the following an example of an uneven cash flow or annuity payment? Franklinia Venture Capital (FVC) invested in a budding entrepreneur's restaurant. The restaurant owner promises to pay FVC 10% of the profit each month for the next 10 years.

Uneven Cash Flow

On the basis of these ratings, bonds are classified along a continuum from the higher-rated investment-grade bonds down to the lower-rated junk bonds. Which of the following bonds is more likely to be classified as a junk bond? a. A bond with a B rating, an 11% yield, and a debt ratio of 60% b. A bond with a BBB rating, an 8% yield, and a debt ratio of 42%

a

You want to invest $20,000 and are looking for safe investment options. Your bank is offering you a certificate of deposit that pays a nominal rate of 14% that is compounded daily. What is the effective rate of return that you will earn from this investment? a. 15.024 b. 15.109 c. 14.930 d. 15.207

a

When the bond's coupon rate is less than the bondholder's required return, the bond's intrinsic value will be less than its par value, and the bond will trade at (a premium/a discount/par).

a discount

Assume that the variables i, n, and PV represent the interest rate, investment or deposit period, and present value of the amount deposited or invested, respectively. Which equation best represents the calculation of a future value (FV) using: Compound interest? a. FV=PV × (1+i)^n b. FV=(1+i)^n/PV c. FV=PV/(1+i)^n Simple interest? a. FV=PV × i × n b. FV=PV+(PV × i × n) c. FV=PV/(1 × i × n)

a, b

Suppose a new law made it more difficult to stage a hostile takeover. Which of the following groups would benefit the most? a. Bondholders b. Management c. The firm's customers

b

Acme Manufacturing Corporation pays an annual dividend rate of 11.80% on its preferred stock that currently returns 15.81% and has a par value of $100.00 per share. What is the value of Acme's preferred stock? a. $89.57 per share b. $111.95 per share c. $74.64 per share d. $100.00 per share

c

Which of the following statements is not true about mortgages? a. Mortgages are examples of amortized loans. b. The ending balance of an amortized loan contract will be zero. c. Mortgages always have a fixed nominal interest rate. d. The payment allocated toward principal in an amortized loan is the residual balance—that is, the difference between total payment and the interest due.

c

Which term is used to describe a call provision in which the issuer is prevented from calling a portion or the entire issue for several years during the early years of the bond issue? a. Sinking fund provision. b. Declining call provision. c. Deferred call provision.

c

Sydney is considering the purchase of 650 shares of the preferred stock of Universal Computer Corporation. The stock carries a par value of $100 per share and an annual dividend rate of 5.75%. Alternative investments of comparable risk are generating yields of 4.25%. Given this information, the per-share value of Universal Computer's preferred stock should be: a. $121.76 b. $169.11 c. $135.29 d. $101.47 Sydney has to postpone her purchase of Universal Computer's preferred shares for just over seven months. By the time she is ready to invest, the return on alternative investments of comparable risk has increased. She should expect the cost of her investment in Universal Computer's preferred shares to be _________ (more/less) expensive.

c less Po = Do/kp = (0.0575*$100)/0.0425

Bond A allows the bond issuer to redeem it at a specified price prior to its normal maturity date. .This is a __________ (convertible/callable) bond. Bond B allows bondholders to convert it to shares of common stock. This is a(n) _________ (convertible bond/equipment trust certificate/investment-grade bond). Assume that Wellington Industries will issue either bond A or bond B in 90 days. The issues are identical except for their coupon rates and the characteristics described previously. Which bond should carry the higher coupon rate? Bond A Bond B

callable convertible bond Bond A

Natural Gas Producers Inc. (NGPI) has an issue of 7-year, 8% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 10%, and are noncallable. What is the current market price of NGPI's bonds? a. $767.24 b. $992.89 c. $1,128.29 d. $902.63 Are the bonds of Natural Gas Producers Inc. selling at a discount, at par, or at a premium? Discount Par Premium

d Discount FV = $1000 PMT = coupon rate * par = $80 n = 7 i = YTM (kd) = 10% solve for PV! YTM (kd) > coupon = discount YTM (kd) < coupon = premium YTM (kd) = coupon = par

National Transmissions Corp. is considering a new bond issue. While holding discussions with the company's bond underwriter, the CFO of National Transmissions suggested adding a convertibility provision to the issue's indenture. Everything else remaining constant, this change would be expected to __________ (decrease/increase) the coupon rate on the bond issue and decrease _____________ (prospective bondholders' risk exposure/risk exposure or operational burden on National Transmissions).

decrease, prospective bondholders' risk exposure

A bond issuer is said to be in __________ (liquidation/default/bankruptcy) if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue's restrictive covenants.

default

When the bond's coupon rate is greater to the bondholder's required return, the bond's intrinsic value will _________ (be less than/exceed/equal) its par value, and the bond will trade at a premium.

exceed

Consider the bond described in the prior question. You've heard that the rating agencies have downgraded the bond's rating. The yield on the bond is likely to _______ (decrease/increase).

increase

Suppose that there is high unemployment, which causes interest rates to fall, which in turn pulls the preferred stock's yield to 9.49%. The value of the preferred stock will ____________ (increase/decrease).

increase

The formula for the valuation of a share of preferred stock is P0 = Dp / kp. In this equation, the variable kp represents the ________ (tax rate on the investment/annual dividend rate of the share/required return on the investment).

required return on the investment

Remember, a bond's coupon rate partially determines the interest-based return that a bond ______ (might/will) pay, and a bondholder's required return reflects the return that a bondholder _______ (would like/is obligated) to receive from a given investment.

will, would like

An ordinary annuity selling at $11,930.70 today promises to make equal payments at the end of each year for the next twelve years (N). If the annuity's appropriate interest rate (i) remains at 9.50% during this time, the annual annuity payment (PMT) will be ________.

$1,708.33

You are planning to put $2,500 in the bank at the end of each year for the next five years in hopes that you will have enough money for a trip around the world. If you are investing at an annual interest rate of 6%, you'll have accumulated ________ at the end of five years.

$14,093

You just won the lottery. Congratulations! The jackpot is $85,000,000, paid in twelve equal annual payments. The first payment on the lottery jackpot will be made today. In present value terms, you really won $___________ —assuming annual interest rate of 9.50%. (Note: Round your intermediate calculations to the nearest whole number.)

$54,168,401.78 CALC - must be in BEG (paid today) PMT = $85,000,000/12 = $7,083,333 I = 9.5% N = 12 Solve for PV

Different forms of businesses have different characteristics. Which of the following characteristics belong to a limited liability company? Check all that apply. (1) Owners with limited liability and possibly significant input into daily management of the firm (2) Profits taxed only at the individual level, not at the business level (3) Ends when the owners die

1, 2

Maximizing shareholder wealth is considered to be a superior goal to either maximizing a firm's net profits or satisfying the interests of a firm's stakeholders. Which of the following reasons are used to justify this opinion? (1) It is theoretically possible to determine whether a particular decision and activity will increase or decrease the firm's shareholder wealth. (2) It provides for the use of an impersonal and objective device, a share's market price, to measure whether the goal has been met. (3) It explicitly considers the timing and the risk of the dividends and potential capital gains expected to be received by the firm's shareholders. (4) It can be manipulated by postponing or eliminating necessary expenditures in order to maximize the firm's net income.

1, 2, 3

Which of the following statements about annuities are true? Check all that apply. (1) An annuity due earns more interest than an ordinary annuity of equal time. (2) A perpetuity is a constant, infinite stream of equal cash flows that can be thought of as an infinite annuity. (3) Ordinary annuities make fixed payments at the end of each period for a certain time period. (4) An annuity due is an annuity that makes a payment at the end of each period for a certain time period

1, 2, 3

Which of the following are restrictive covenants often used to protect the firm's bond value and bondholder wealth? Check all that apply. (1)Provisions that limit the type of investments or divestments that the firm can undertake (2)Provisions that require issuing new debt securities whenever interest rates drop below 5% (3)Provisions that limit issuing new debt securities (4)Provisions that prohibit borrowing funds to pay dividends

1, 3, 4

Which of the following events contributed to the 2007 financial crisis? Check all that apply. (1) The federal government encouraged home ownership among low-income families by guaranteeing the majority of mortgage loans. (2) Many subprime borrowers were unable to make a down payment for their mortgage loans. (3) Along with sovereign wealth, foreign financial institutions and corporations were also investing money in the United States, making funds easily available in this country. (4) Homeowners who took out mortgages could also use their home equity as collateral to generate a home equity line of credit and use additional loans to fund discretionary spending.

1, 3, 4

Which of the following statements regarding the goal of profit maximization are true? (1) An exclusive focus on profit maximization can result in managers engaging in unethical and counterproductive activities—for example, indefinitely postponing equipment maintenance and employee training, exploiting workers, or bribing officials and purchasing managers in order to make sales. (2) It results in the maximization of shareholders' wealth. (3) Profit is the traditional metric used to gauge whether a business organization is successful. (4) It is popular goal because the fundamental objective of most business organizations is to make a profit, and profits are a major source that funds a firm's activities.

1, 3, 4

Which of the following are characteristics of a perpetuity? Check all that apply. (1) The present value of a perpetuity is calculated by dividing the amount of the payment by the investor's opportunity interest rate. (2) A perpetuity continues for a fixed time period. (3) The principal amount of a perpetuity is repaid as a lump-sum amount. (4) A perpetuity is a series of regularly timed, equal cash flows that is assumed to continue indefinitely into the future.

1, 4

Your friends suggest that you take a 15-year mortgage, because a 30-year mortgage is too long and you will pay a lot of money on interest. If your bank approves a 15-year, $900,000 loan at a fixed nominal interest rate of 12% (APR), then the difference in the monthly payment of the 15-year mortgage and 30-year mortgage will be $________?

1,544.00

Suppose you invested in the common stock of Green Sky Satellite Company. The company's shares currently trade on the NYSE at a price of $40.00 per share. Analysts predict that the company's share price will increase to $50.00 per share. In the first year of your purchase, you received a dividend of $4.00 per share. Based on your understanding of holding period returns (HPRs), answer the following questions, and round your final answer to two decimal places: 1. The ex ante percentage holding period on Green Sky Satellite's stock based on analysts expectations is_______. 2.Assuming that Green Sky Satellite's common stock is actually selling for $52.80 per share after one year, then the ex post percentage holding period is ________. 3.If, after one year, analysts expect that the market price of Green Sky Satellite Company's common stock will increase to $53.20 per share, then its ex ante percentage holding period return is _________. 4.The ex post percentage holding period if, after one year, Green Sky Satellite Company's common stock actually increases to $53.20 per share is ___________ .

1. Holding Period Return = ($50 - $40 + $4) / $40 = 35% 2. Holding Period Return = ($52.80 - $40 + $4) / $40 = 42% 3. Holding Period Return = ($53.20 - $40 + $4) / $40 = 43% 4. same as 3, 43%

Joshua inherited an annuity worth $3,362.56 from his uncle. The annuity will pay him three equal payments of $1,400 at the end of each year. The annuity fund is offering a return of ______% .

12.00

In general, there are four categories of real or opportunity costs incurred by shareholders designed to prevent, mitigate, or correct management-shareholder agency conflicts. They are: 1. Expenditures to minimize management's desire to act contrary to the best interests of shareholders 2. Expenditures to monitor management's activities 3. Expenditures to provide a bond against management dishonesty 4. The opportunity cost of lost profits Consider the following situation and identify both the category of the expenditure and the best device that might be used to prevent, reduce, or correct the agency conflict: A firm's vice president uses the company's private jet to take unauthorized personal trips on the weekends. What is the expenditure category? What is the most appropriate form of control device: a. Conduct internal audits of the aircraft log books to determine who is using the plane, when, and for what purpose. b. Purchase an insurance policy that protects against unauthorized use of the company's assets. c. Identify a competitor to take over the company.

2, a

To expand her portfolio, Genji recently purchased 400 shares of common stock in the American Power Corporation, a utility firm in Georgia. The current market price of APC's common stock is $20.85 per share. Genji's total wealth from her investment in American Power Corporation is __________.

400 shares x $20.85 = $8340.00

Joshua's friend, Jamie, wants to go to business school. While his father will share some of the expenses, Jamie still needs to put in the rest on his own. But Jamie has no money saved for it yet. According to his calculations, it will cost him $39,846 to complete the business program, including tuition, cost of living, and other expenses. He has decided to deposit $4,200 at the end of every year in a mutual fund, from which he expects to earn a fixed 10% rate of return. It will take approximately _______ years for Jamie to save enough money to go to business school.

7.00

If an investment of $40,000 is earning an interest rate of 4.00%, compounded annually, then it will take ______ years for this investment to reach a value of $53,679.69—assuming that no additional deposits or withdrawals are made during this time.

7.50

You've decided to buy a house that is valued at $1 million. You have $100,000 to use as a down payment on the house, and want to take out a mortgage for the remainder of the purchase price. Your bank has approved your $900,000 mortgage, and is offering a standard 30-year mortgage at a 12% fixed nominal interest rate (called the loan's annual percentage rate or APR). Under this loan proposal, your mortgage payment will be $_______ per month.

9,257.51 i = 12%; n = 30 years; m = 12 months/year PV = -$900,000 I/Y = i/m = 12% / 12 = 1% N = n*m = 30*12 = 360

What is true regarding the goal of profit maximization? (1) An important disadvantage of this goal is that it tends to force financial managers to focus on the firm's short-term, rather than long-term, performance. (2) An important disadvantage of this goal is that it tends to ignore the timing and duration of the firm's expected returns. (3) An important disadvantage of this goal is that it tends to induce some financial managers to engage in activities that can harm the firm's long-term performance. (4) An important disadvantage of this goal is that it tends to ignore change effects in the firm's risk level.

All of the below

Is the following an example of an uneven cash flow or annuity payment? You have committed to deposit $600 in a fixed interest-bearing account every quarter for four years.

Annuity Payment

Is the following an example of an uneven cash flow or annuity payment? You recently moved to a new apartment and signed a contract to pay monthly rent to your landlord for a year.

Annuity Payment

Erik, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Alison, is willing to sell 1,500 shares of the same stock. Unfortunately, Erik and Alison don't know one another, and must complete their transactions using the stock exchange's market-making dealer. XYZ's market-maker is willing to sell her shares for $32.70 per share and purchase additional shares for 31.25 per share. Determine the: Bid Price: Ask Price: Bid-Ask Spread:

Bid Price: $31.25 Ask Price: $32.70 Bid-Ask Price: $1.45

Erik, a trader, wants to buy 1,000 shares of XYZ stock, while a second trader, Alison, is willing to sell 1,500 shares of the same stock. Unfortunately, Erik and Alison don't know one another, and must complete their transactions using the stock exchange's market-making dealer. XYZ's market-maker is willing to sell her shares for $32.70 per share and purchase additional shares for 31.25 per share. If the market-maker is willing to purchase the entire block of 1,500 shares from Alison and, from that block, resell 1,000 shares to Erik, then the market-maker's net profit from Erik's transaction—excluding any inventory effects—will be _______.

Bid-Ask Price: $1.45 x 1,000 shares = $1,450 (Also difference between bid price x # of shares and ask price x # of shares)

Description of Transaction: Long-term mortgage-backed securities are traded between investors and issuers. What type of market? (Money markets/Capital markets)

Capital markets

Determine the type of financial institution: (Credit unions, pension funds, or life insurance companies) These institutions are owned by their members so that these members can loan funds among themselves. Some members deposit and save their funds, while other members borrow deposited funds.

Credit unions

Correctly identify the method of transfer being described: (Direct Transfer, Transfer through an Investment Banking House, or Transfer through a Financial Intermediary) Dominic is in the process of starting a new business, Sanger Machine Company. He is borrowing money from his family, relatives, and friends to raise the firm's initial operating income.

Direct Transfer

True or False: The existence of financial middlemen and financial intermediaries decreases the efficiency of the financial markets.

False

Depositors earn an interest rate of 6.0% annually at the Hack Wellington Bank. The bank charges borrowers an interest rate of 15.0%. These transactions are considered to be secondary claims, but they take place in the primary markets. Hack Wellington Bank's earnings (expressed as a percentage) from this transaction will be ______.

Interest Rate Spread = Loan Rate - Savings Rate 15% - 6% = 9%

Determine the type of financial institution: (Finance companies, mutual funds, or real estate investment trusts) They collect a pool of funds from investors for the purpose of diversifying risk, earning interest or dividends, and/or generating profits from the investments' increased value.

Mutual funds

Determine the type of financial institution: (Commercial banks, Savings and loan associations, or Investment banks) These government-chartered institutions accept deposits from savers and use the pool of deposits to provide loans, usually fixed-rate mortgages, to borrowers.

Savings and loan associations

Description of Transaction: An investor holding 3,000 shares of stock of Strata Corp. sells them to another investor. What type of market? (Secondary markets/Primary markets)

Secondary markets

True or False: Everything else held constant, an account that earns compound interest will grow more quickly than an otherwise identical account that earns simple interest.

T

Correctly identify the method of transfer being described: (Direct Transfer, Transfer through an Investment Banking House, or Transfer through a Financial Intermediary) Genji purchases shares in a mutual fund that invests in technology companies.

Transfer through a Financial Intermediary

Correctly identify the method of transfer being described: (Direct Transfer, Transfer through an Investment Banking House, or Transfer through a Financial Intermediary) Blake runs a digital printing company and is looking to acquire a company that specializes in personalized marketing products. Blake hires a boutique investment bank to scout for a target firm for a potential acquisition and manage the funds for the transactions in the acquisition.

Transfer through an Investment Banking House

Along with the concept of efficiency of markets, academicians and researchers around the world also believe that investors are not always rational. Investor behavior and perception affect the performance of securities in the markets. This field of study is called behavioral finance. Based on this statement, True or False: To cut his or her losses, a rational investor will sell a stock if its value is decreasing.

True

True or False: Financial intermediaries charge higher interest on the loans they make than they pay to depositors to guarantee the liquidity and safety of securities.

True

Is the following an example of an uneven cash flow or annuity payment? SOE Corp. hires an average of 10 people every year and matches the contribution of each employee toward his or her retirement fund.

Uneven Cash Flow

Eric wants to invest in government securities that promise to pay $1,000 at maturity. The opportunity cost (interest rate) of holding the security is 9.60%. Assuming that both investments have equal risk and Eric's investment time horizon is flexible, which of the following investment options will exhibit the lower price? a. An investment that matures in six years b. An investment that matures in five years

a

Five years ago, Li created a plant-care business that grew, stocked, and maintained fresh plants in office buildings throughout Denver. Over time, The Green Zone Inc. (TGZ) has grown from a proprietorship into a corporation, now reaching far beyond Denver. To finance and support this growth, TGZ issued shares that were sold to TGZ employees, Li's family members, and selected outsiders. Li is TGZ's chairman of the board of directors and CEO, but he is no longer the largest shareholder. At the latest annual meeting, two mutually exclusive proposals were placed on the ballot for discussion and vote. The first was put forth by Li and TGZ's management team, and the second was proposed by a small group of other shareholders. Both groups are adamantly opposed to the other group's proposal, even though both proposals would likely have the same effect on TGZ's value and riskiness. Does an agency conflict exist between TGZ's management and the small group of opposing shareholders? a. No; although an agency relationship exists between TGZ's management—including Li as TGZ's chairman and CEO and the firm's shareholders—there is no agency conflict, because no expropriation or wasting of the shareholders' wealth has occurred. b. No; Li was the original owner of TGZ, so he would always be sensitive to the concerns of the firm's current owners (shareholders) and would not engage in an agency conflict. c. Yes; any conflict or disagreement between the firm's managers and its shareholders constitutes an agency conflict. d. Yes; an agency relationship exists, and an agency relationship always gives rise to agency conflicts, regardless of the actual behavior of the participants.

a

The actual goals pursued by the firm's financial managers may not attempt to maximize the firm's shareholder wealth because: a. The firm's managers and shareholders have different motives and desires b .The firm's managers would rather focus on the firm's short-term, rather than its long-term, performance. c. The firm's managers fear bondholders and other creditors more than they fear shareholders. d. The firm's managers consider the goal of maximizing shareholder wealth to be discriminatory against the concerns and objectives of other stakeholders.

a

The most theoretically sound goal of financial management should be: a. maximizing the firm's shareholder wealth value b. maximizing the firm's bondholder wealth c. maximizing the firm's management wealth d. maximizing the firm's profits

a

Which of the following firms would have likely performed better during a financial crisis? a. Firms that lowered debt in their capital structure b. Firms that increased the leverage in their balance sheet and invested in projects that did not add value to the firm

a

Which of the following is true about finding the present value of cash flows? a. Finding the present value of cash flows tells you how much you need to invest today so that it grows to a given future amount at a specified rate of return. b. Finding the present value of cash flows tells you what a cash flow will be worth in future years at a specified rate of return.

a

Which of the following is true about present value calculations? a. Other things remaining equal, the present value of a future cash flow decreases if the discount rate increases. b. Other things remaining equal, the present value of a future cash flow increases if the discount rate increases.

a

Katie had a high monthly food bill before she decided to cook at home every day in order to reduce her expenses. She starts to save $1,060 every year and plans to renovate her kitchen. She deposits the money in her savings account at the end of each year and earns 11% annual interest. Katie's savings are an example of an annuity. If Katie decides to renovate her kitchen, how much would she have in her savings account at the end of six years? a. $8,387.63 b. $9,310.27 c. $4,484.37 d. $7,129.49 If Katie deposits the money at the beginning of every year and everything else remains the same, she will save ______ by the end of six years.

a, $9,310.27 CALC PMT = $1060 i = 11% n = 6 solve for FV switch to beg (second PMT second enter)

To prevent, reduce, or correct these conflicts between their managers and themselves, shareholders often have to incur additional real costs called ___________ (agency/conflict resolution) costs.

agency

Suppose you take out a loan. The process in which your liability will be gradually eliminated through regular payments over time is called ___________ (amortization/capital recovery).

amortization

Agency conflicts are a special example of a conflict of interest; specifically, they are created by the relationship between ___________(an employee and a supervisor/an agent and a principal) , and result from inconsistencies or disputes between the interests and motivations of the different parties. The magnitude of these conflicts may be made larger or smaller by the environment in which they occur and the availability of techniques or events to prevent, reduce, or rectify them.

an agent and a principal

When payments are made at the beginning of each period, you will treat them as __________ (a perpetuity/an ordinary annuity/an annuity due).

an annuity due

Ethics deals with questions of right or wrong behavior. Which of the following behaviors involves ethical—as opposed to unethical—decision making? a. While considering the purchase of an expensive piece of equipment, a firm's purchasing manager recommends that the purchase be made from his cousin's firm rather than from one of two other vendors offering the identical equipment at lower prices. b. While planning for an upcoming company audit, a manager insists on hiring an external auditing firm to audit the company's financial statements. c. While interviewing prospective applicants for a manager-trainee position, the company's recruiter makes sexually suggestive remarks to the applicants and recommends hiring only the good-looking candidates. d. While riding in a taxi, a loan officer with the Fifth County Bank finds a briefcase containing the confidential and proprietary lending policies of a competing bank. Instead of returning the briefcase, she keeps the competing bank's information and distributes it at the next loan application review meeting.

b

If a security currently worth $12,800 will be worth $16,843.93 seven years in the future, what is the implied interest rate the investor will earn on the security—assuming that no additional deposits or withdrawals are made? a. 3.20% b. 4.00% c. 7.60% d. 0.19%

b

Most executives believe that they and their firms behave in an ethical manner and that it is in their best interests to do so. How can a firm's ethical conduct increase its long-term profitability? a. Ethical corporate behavior attracts managers who believe that greed is good and that to succeed they should be prepared to do absolutely anything necessary for the firm to make a profit. b. Ethical corporate behavior builds public trust and encourages the use of good corporate governance. Both increase the likelihood that creditors and investors will want to invest in the firm, which in turn increases the availability of financial capital.

b

The bid-ask spread in a dealer market represents the profit that a dealer would make on a transaction involving a security. Which of the following statements best describes the bid-ask spread? a. The difference between the closing price of the security and the opening price of the security on the day of the transaction b. The difference between the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it c. The sum of the price at which a dealer is willing to buy a security and the price at which a dealer is willing to sell it

b

Which of the following actions will help ease agency conflicts and better align managers' objectives with the firm's shareholder wealth? a. Pay the manager a large base salary with a huge stock option package that matures on a single date. b. Pay the manager a combination of salary and stock options (phased in over several years) that reward him or her for consistently increasing shareholder wealth.

b

Which of the following investments that pay $19,000 in 14 years will have a higher price today? a. The security that earns an interest rate of 10.50%. b. The security that earns an interest rate of 7.00%.

b

Which of the following is an example of an annuity? a. A job contract that pays an hourly wage based on the work done on a particular day b. A job contract that pays a regular monthly salary for three years

b

Which of the following statements is true—assuming that no additional deposits or withdrawals are made? a. If you invest $5 today at 15% annual compound interest for 82.3753 years, you'll end up with $100,001. b. If you invest $1 today at 15% annual compound interest for 82.3753 years, you'll end up with $100,001.

b

It is likely that you won't like the prospect of paying more money each month, but if you do take out a 15-year mortgage, you will make far fewer payments and will pay a lot less in interest. How much more total interest will you pay over the life of the loan if you take out a 30-year mortgage instead of a 15-year mortgage? a. $1,638,349.52 b. $1,388,431.80 c. $1,777,192.70 d. $1,916,035.88

b 15 year: $10,801.51*(180 months) = $1,944,271.80 - $900,000 loan = $1,044,271.81 30 year: $9,257.51*(360 months) = $3,332,703.60 - $900,000 loan = $2,432,703.60 Diff = $1,044,271.81 - $2,432,703.60 = $1,388,431.80

Suppose you decide to deposit $20,000 in a savings account that pays a nominal rate of 10%, but interest is compounded daily. Based on a 365-day year, how much would you have in the account after six months? (Hint: To calculate the number of days, divide the number of months by 12 and multiply by 365.)(Note: Do not round your intermediate calculations.) a. $20,815.03 b. $21,025.28 c. $21,445.79 d. $21,866.29

b I/Y = 10%/365 = 0.027397% N = 365*(6/12) = 182.5 PV = -$20,000 Solve for FV

A pharmaceutical company announces that it has received Federal Drug Administration approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $4.50, but insiders know that, with this new drug, earnings will increase and drive the EPS to $5.00. What will happen when the company releases its next earnings report? a. The stock price will not change, because the market already incorporated that information in the stock price when the announcement was made. b. There will be some volatility in the stock price when the earnings report is released; it is difficult to determine the impact on the stock price. c. The stock price will increase and settle at a new equilibrium level.

c

Daniel and Ashley equally own and manage A New Beginning (ANB), a store that sells preowned clothing and furniture. Daniel is responsible for ANB's back-office activities, and Ashley staffs the store and makes deliveries to customers. Both have equal decision-making authority and, under the terms of their partnership agreement, both are prohibited from making personal purchases using company funds without prior approval of the other partner. Daniel, without Ashley's knowledge, used the company's bank account recently to purchase a new sports car. Daniel has acknowledged that the car will not be used to support the business. Is this a potential agency conflict between Daniel and Ashley? a. No; Daniel and Ashley are both authorized to spend ANB's money, so no conflict of interest can occur. b. Yes; it should have been Ashley who purchased the car. c. Yes; Daniel is misappropriating some of Ashley's wealth by unilaterally purchasing a nonbusiness asset using ANB's funds. d. No; Daniel and Ashley co-own and co-manage ANB and have a partnership agreement that makes them equal, so an agency conflict cannot exist.

c

Ethan and Lafayette run a law firm in downtown Phoenix. The firm has debt of $100,000, but Ethan and Lafayette will not be held personally liable for the firm's debts. This is an example of: a. a corporation. b. a partnership. c. an LLP/LLC. d. a proprietorship

c

Identify the form of capital market efficiency under the efficient market hypothesis based on this statement: Current market prices reflect all relevant information, whether it is known publicly or privately. This statement is consistent with: a. Weak-form efficiency b. Semistrong-form efficiency c. Strong-form efficiency

c

Lafayette and his uncle started a software development company. Without his uncle's knowledge, Lafayette illegally used another company's code to meet the needs of a client. The resulting lawsuit closed the business and bankrupted both Lafayette and his uncle. This is an example of: a. an LLP/LLC. b. a proprietorship. c. a partnership. d. a corporation.

c

You decided to deposit your money in the bank at the beginning of the year instead of the end of the same year, but now you are making payments of $2,750 at an annual interest rate of 5%. How much money will you have available at the end of six years? a. $19,795 b. $20,983 c. $19,641 d. $15,874

c

Suppose Addison had deposited another $800 into a savings account at a second bank at the same time. The second bank also pays a nominal (or stated) interest rate of 8.2% but with quarterly compounding. Keeping everything else constant, how much money will Addison have in her account at this bank in five years? a. $165.60 b. $867.64 c. $1,200.47 d. $106.51

c i = 8.2%, m = 4 (quarters), n = 5 years CALC I/Y = i/m = 8.2% / 4 = 2.05% N = n*m = 5*4 = 20 PV = -$800 solve for FV!

A bond's ___________ (call premium/convertible provision/call provision) gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions.

call provision

The process for converting present values into future values is called ___________ (discounting/compounding ). This process requires knowledge of the values of three of four time-value-of-money variables. Which of the following is not one of these variables? a. The trend between the present and future values of an investment b. The interest rate (i) that could be earned by deposited funds c. The duration of the deposit (n) d. The present value (PV) of the amount deposited

compounding a

Nicole is 25 years old and plans to go on a three-year world tour three years from now. She wants to make a lump-sum deposit today and earn interest so that she can withdraw $10,000 each year for the three years she's on her trip. She expects to earn an annual rate of return of 7% from her investment, and she will make withdrawals at the end of each of the three years she'll be traveling. How much money should Nicole invest today for her world tour? (Note: Round intermediate calculation to two decimal places.) a. $24,292.37 b. $24,758.81 c. $23,793.28 d. $21,422.23

d

Which feature of a bond contract allows the issuer to redeem bonds under specified terms prior to maturity? a. Put provision b. Sinking fund provision c. Deferred call provision d. Call provision

d

You have the opportunity to invest in several annuities. Which of the following 10-year annuities has the greatest present value (PV)? Assume that all annuities earn the same positive interest rate. a. An annuity that pays $500 at the beginning of every six months b. An annuity that pays $1,000 at the end of each year c. An annuity that pays $500 at the end of every six months d. An annuity that pays $1,000 at the beginning of each year

d

Now, assume that Addison's savings institution modifies the terms of her account and agrees to pay 8.2% in compound interest on her $800 balance. All other things being equal, how much money will Addison have in her account in five years? a. $1,128.00 b. $97.28 c. $865.60 d. $1,186.39

d CALC! PV = -$800 I = 8.2% n = 5 solve for FV

Addison deposited $800 in a savings account at her bank. Her account will earn an annual simple interest rate of 8.2%. If she makes no additional deposits or withdrawals, how much money will she have in her account in five years? a. $1,186.39 b. $870.98 c. $165.60 d. $1,128.00

d I = PV x i x n I = $800 x 8.2% x 5 I = $328 FV = PV + I FV = $800 + $328 FV = $1128

A local bank's advertising reads: "Give us $40,000 today, and we'll pay you $800 every year forever." If you plan to live forever, what annual interest rate will you earn on your deposit? a. 1.80% b. 2.40% c. 3.20% d. 2.00% Oops! When you went in to make your deposit, the bank representative said the amount of required deposit reported in the advertisement was incorrect and should have read $60,000. This revision, which will _________ (increase/reduce) the interest rate earned on your deposited funds, will adjust your earned interest rate to ______% .

d, reduce, 1.33%

The concept of market efficiency underpins almost all financial theory and decision models. When financial markets are efficient, the price of a security—such as a share of a particular corporation's common stock—should be ________ (equal to/more than) the present value estimate of the firm's expected cash flows discounted by its appropriate rate of return (also called the intrinsic value of the stock).

equal to

The degree of market efficiency affects investors and market participants, as well as financial managers. When markets are efficient and information is immediately reflected in market prices, the required return on a security should be (equal to/greater than) the expected return on the security.

equal to

Theoretically, the saving investment cycle shows that in an economy as a whole, the actual savings for a given period of time must be ________ (less than/greater than/equal to) the actual investments.

equal to

If you are calculating returns that have already been realized, the returns would be called ________ (ex ante/ex post) returns.

ex post

A bond's ________ (yield to maturity/face or maturity value/coupon payment) is generally $1,000 and represents the amount borrowed from the bond's first purchaser.

face or maturity value

While the agency conflicts between managers and shareholders tend to receive the most press, they are not the only agency conflict affecting the modern corporation. Another equally important agency conflict is sometimes observed between a firm's common shareholders and its bondholders. As before, the basis of this conflict is divergent concerns and motives. In general, bondholders purchase corporate securities that provide a ________ (fixed/variable) return, whereas shareholders purchase shares that are likely to provide a return that fluctuates with the riskiness of the firm.

fixed

If the coupon interest rate is 4.375% for the first six months and changes to a rate equal to the 10-year Treasury bond rate plus 1.3% thereafter, the bond is called a ___________ (fixed/floating) rate bond.

floating

An asset bubble occurs when the asset sells for a ________ (lower/higher) value than its fundamental value. The real estate bubble in the United States, which grew as the demand for housing increased in the early 2000s, is considered to be one cause of the 2007 crisis.

higher

In addition, potential bondholders may require a ______ (higher/lower) interest rate on the firm's soon-to-be-issued bond as compensation for the risks that cannot be adequately protected against using the restrictive covenants.

higher

Two years have passed since Genji purchased her 400 common shares in the American Power Corporation. The market price of the company's shares is now $22.94 per share. As a result, Genji's wealth from her investment in APC has ____________ (increased/decreased/not changed) by ________ , assuming that everything else remains constant. (original share at $20.85 per share)

increased, $836.00 [(400 shares x $22.94) - (400 shares x $20.85)] OR ($22.94 - $20.85) x 400 shares

If managers undertake projects that decrease the riskiness of the firm and its cash flows, then the wealth of the firm's bondholders will be _________ (decreased/increased) , while that of the firm's shareholders will be _________ (increased/decreased).

increased, decreased

It is generally recognized that the spending habits of individuals changes over their lives. In general, young adults tend to spend more than they earn, while older working adults tend to spend ________ (more/less). To accommodate their spending habits, young adults tend to rely on funds raised from _________ (savings/borrowing). Retired adults, in contrast, tend to rely on _________ (current borrowing/past savings) to cover the frequent shortage between their current expenditures and their current incomes.

less, borrowing, past savings

According to finance theory, firms should attempt to _____________ (maximize/minimize) the long-term price of the firm's __________(common stock/long-term debt). The benefit to this objective is that it provides the best financial outcome for the firm's shareholders.

maximize, common stock

For example, in businesses managed by professional managers, managers frequently have less financial and emotional commitment to the business than the firm's owners (the firm's common shareholders). The _____________ (merging/separation) of ownership and management and the _____________ (usurping/delegation) of decision making by the owners to the professional managers create an environment in which these conflicts can take root.

separation, delegation

Investments and loans base their interest calculations on one of two possible methods: the _________ (simple/complex) interest and the __________ (compound/uncomplicated) interest methods. Both methods apply three variables—the amount of principal, the interest rate, and the investment or deposit period—to the amount deposited or invested in order to compute the amount of interest. However, the two methods differ in their relationship between the variables.

simple, compound

A bond contract feature that requires the issuer to retire a specified portion of the bond issue each year is called a __________ (call provision/sinking fund provision/convertible provision).

sinking fund provision