FINC 301 Midterm Review

What is the future value of $1,200 a year for 40 years at 8 percent interest? Assume annual compounding.

$310,868

Sessler Manufacturers made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.75 a share. Secondly, all dividends after that will decrease by 1.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock today if you require a 14 percent rate of return?

11.29

Al's Sport Store has sales of $897,400, costs of goods sold of $628,300, inventory of $208,400, and accounts receivable of $74,100. How many days, on average, does it take the firm to sell its inventory assuming that all sales are on credit?

121.07 days Inventory turnover = $628,300/$208,400 = 3.014875 Days in inventory = 365/3.014875 = 121.07 days

The common stock of Textile Mills pays an annual dividend of $1.65 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 12 percent annual return?

13.75

Great Lakes Health Care common stock offers an expected total return of 9.2 percent. The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent per year. What is the dividend yield?

6.60

The bonds issued by Stainless Tubs bear an 8 percent coupon, payable semiannually. The bonds mature in 11 years and have a $1,000 face value. Currently, the bonds sell for $952. What is the yield to maturity?

8.69 percent

Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

967.24

Which one of the following is an underlying assumption of the dividend growth model?

A stock's value is equal to the discounted present value of the future cash flows which it generates

How is the principal amount of an interest-only loan repaid?

The principal is repaid in a lump sum at the end of the loan period

Winston Co. has a dividend-paying stock with a total return for the year of -6.5 percent. Which one of the following must be true?

The stock has a negative capital gains yield

Atlas Entertainment has 15-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

in a registered form

Real rates are defined as nominal rates that have been adjusted for which of the following?

inflation

"Cat" bonds are primarily designed to help:

insurance companies fund excessive claims

The current yield is defined as the annual interest on a bond divided by which one of the following?

market price

The items included in an indenture that limit certain actions of the issuer in order to protect bondholder's interests are referred to as the

protective covenants

Which one of the following accurately defines a perpetuity?

unending equal payments paid at equal time intervals

Your father invested a lump sum 26 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?

$17,444.86 Present value = $51,480.79 × [1/(1 + .0425)26] = $17,444.86

You just won the grand prize in a national writing contest! As your prize, you will receive $2,000 a month for ten years. If you can earn 7 percent on your money, what is this prize worth to you today?

$172,252.71

Today, you earn a salary of $36,000. What will be your annual salary twelve years from now if you earn annual raises of 3.6 percent?

$55,032.54 Future value = $36,000 × (1 + .036)12 = $55,032.54

A sinking fund is managed by a trustee for which one of the following purposes?

early bond redemption

Why should financial managers strive to maximize the current value per share of the existing stock?

because they have been hired to represent the interests of the current shareholders

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity

a discount; less than

Which form of business structure is most associated with agency problems?

corporation

An agent who maintains an inventory from which he or she buys and sells securities is called a:

dealer

Your grandmother has promised to give you $5,000 when you graduate from college. She is expecting you to graduate two years from now. What happens to the present value of this gift if you delay your graduation by one year and graduate three years from now?

decreases

Which one of the following is computed by dividing next year's annual dividend by the current stock price?

dividend yield

A bond that has only one payment, which occurs at maturity, defines which one of the following?

zero coupon