Principles of Finance Final

An account today is credited with monthly interest thereby bringing the account balance to $6,600. The interest rate is 6.60% compounded monthly. You plan to make monthly withdrawals of $55 each. The first withdrawal is in exactly one month and the last in exactly 12 years. Find the account balance immediately after the last withdrawal.

$2,509

The company is expected to pay its dividend today of $1.26. One year ago they paid a dividend of $1.20. You expect dividends to continue to grow constantly at the same rate as the past year. You discount this stock at a rate of 11%. What is your assessment of the stock's price today according to the dividend growth model?

$22.05

The company today issues a 10-year $1,000 bond that has a 5.4% annual coupon rate (pays semiannual coupons). What is the total interest that the company expects to pay over the lifetime of the bond.

$540

Your parents contribute $180 monthly to a college savings plan for you that earns 5.4% compounded monthly. The first deposit was exactly 18 years ago. Find the account balance immediately after today's monthly deposit and crediting of interest.

$65,975

The company share price in the stock market is $42. The equity book value per share according to the balance sheet is $56. There are 540 million shares outstanding. What is the company's equity price to book ratio?

0.75

Consider the following project which costs $2,000 with a salvage value of zero in 4 years. The project will produce a new widget which will be sold for $135 and have variable costs of $95 per unit. The company has fixed costs of $3,000 and a required return on projects of 14.5%. If the company sells 200 units, what is the firm's degree of leverage?

1.6

Today is a day in May 2525 and a bond with an annual yield-to-maturity of 9.0% just yesterday paid a coupon. The bond matures in May 2543 and its quoted bond price is 130.03 percent of par (semiannual compounding). Find the coupon rate.

12.40%

You read that the company just paid $6.64 dividend per share and has a growth rate of 12%. You also read its share price is $140.76. You believe the constant growth dividend model applies perfectly to this properly valued stock. What is the required rate of return on this stick accord to the model?

17.29%

Today the company announces net income equals $12 million. They have 30 million shares outstanding and today's share price is $68.21. Find the company's price to earnings ratio.

171.0

In exactly 15 months a bill of $21,200 is due. Today you deposit money such that if the account earns a target rate of return of 8.90% per annum, compounded monthly, the bill is perfectly financed. No other deposits or withdrawals have been made. Your account actually accumulates $20,154. What was the actual average annual percentage rate?

4.8%

You wish to establish an endowment fund that will provide student financial aid awards every quarter, perpetually. To finance the scholarships, you will make a series of equal deposits into a savings account. The deposits will be made quarterly equal to the $1,200 each, with the first one today and the final one in 7 years. The first award is to be granted one quarter after the last deposit. The savings rate is 6.30%, compounded quarterly. How much is each award?

688

A company has a required return on equity of 16%, a yield to maturity of 6% on their bonds, and a tax rate of 35%. If the company's WACC is 12%, what is the weight of bonds in the company's capital structure?

7.92%

A corporation has 10,000 bonds outstanding with a $1,000 face value, and YTM of 8%. The company's 100,000 shares of preferred stock pay a $4 annual dividend, and sell for $40 per share. The company's 500,000 shares of common stock sell for $25 per share and have a beta of 1.5. The risk free rate is 4%, and the market return is 12%. Assuming a 40% tax rate, what is the company's WACC?

7.92%

A new product requires an initial investment of $2 million and will be depreciated to an expected salvage of zero over 5 years. The price of the new product is expected to be $25,000, and the variable cost per unit is $10,000. The fixed cost is $500,000. Assume a required return of 18%. What is the financial break-even point?

76 units

A stock you are buying today promises no dividends for a long time. In exactly 5 years the stock will pay its first dividend of $2.30. At that time you also believe the stock could be sold for $43.00. If today you can buy the stock for $28.95, what is your expected annual rate of return from buying today, receiving the dividend and selling in 5 years?

9.36%

Which statement best describes how sources or uses of funds relate to asset or liability accounts on the balance sheet?

A decrease in a liability account represents a use of funds

Which of the following is most accurate regarding the advantages and disadvantages of the methods used to compute a company's cost of equity?

A disadvantage of the Dividend Growth Model is that it is extremely sensitive to the estimated growth rate.

Consider the following cash flows for two mutually exclusive investments: t = 0 t=1 t=2 t=3 A -1900 657 829 962 B. -3060 322 450 3048 If the financial rate is 7.52%, which of the following is correct?

Choose A because the NPV is greater by $121

Your company is analyzing purchase of a machine costing $5,900 today. The investment promises to add $18,500 to sales one year from today, $14,500 two years from today, and $18,000 three years from today. Incremental cash costs should consume 75% of the incremental sales. The tax rate is 30% and the company's financing rate is 8.2%. The investment cost is depreciated to zero over 3-year straight-line schedule. What is the projects net present value? What is the projects internal rate of return?

NPV= 3262 IRR= 37.19%

Banks advertise loans so that you'll borrow money from them and pay them interest. They also advertise deposits so that you'll open an account with them and they'll pay you interest. Which statement below most likely describes the relationship between the effective annual rate (EAR) and the average annual percentage rate (APR)?

None of the above are correct.

Three years ago your return was 4%. Two years ago your return was 14%. One year ago your return was -11%. Which statement is correct?

The geometric average return is 1.81% and the annual arithmetic average return is 2.3%.

Two stocks, A and B, possess the following characteristics. beta standard deviation stock A 1.08 0.12 stock B 1.00 0.18 When unsystematic risk is perfectly diversifiable then which statement about the security risk premium is most accurate?

stock A has the highest required risk premium because its beta is largest.

You want to add an additional stock to your portfolio and are considering two alternatives. For stock A, the expected return is 14.20% and the beta is 1.62. For stock B, the expected return is 8.40% and the beta is 0.46. The risk free rate is 4.6% and the expected return on the market portfolio is 11.6%. According to the Capital Asset Pricing Model, which statement about adding these securities to your portfolio is most accurate?

Add only stock B since its expected return is the only one to exceed its required return.

Which one statement about the legal form os business is most consistent?

An advantage of the corporation is that they raise capital more easily.

Which of the following statements is most accurate regarding agency problems?

An agency problem likely occurs when there is a conflict of interest between owners and agents

Suppose two alternative investments promise cash flows streams that possess equal lives. Further, suppose the simple sum (adding up the cash flows) is the same for each investment. Given a positive interest rate, which investment has the smallest present value?

An investment which generates most cash flows at the end of its life.

Which of the following is NOT accurate regarding evaluating NPV estimates and break-even analysis?

Cash break-even point is sales volume at which NI=0

Based on the information below, by how much did the company's cash change? Increase in Inventory $450 Decrease in Accounts Payable $150 Increase in Notes Payable. $500 Decrease in Accounts Receivable $120

Cash increased by $20

Which of the following is NOT true regarding a firm's dividends?

Dividends are a liability of the firm

Which statement about bond prices is most accurate?

For a discount bond the coupon rate is less than the yield-to-maturity.

Which of the following is NOT true regarding the time value of money?

For two investments with the same future payoff no intermediate payments and the same time to maturity, the one with the lower rate costs less today.

Which of the following statements regarding the efficient market hypothesis is NOT accurate?

Strong form implies that technical analysis will not lead to abnormal returns

The company's price one year ago was $13.00 and the price today is $14.80. Over the past year, you received a $0.84 dividend. Choose the most accurate statement.

The capital gains yield is 13.85% and the total return is 20.31%

XYZ Corporation is considering a new product line. They believe the new product can be sold for $10 per unit and will have the following demand over the next 3 years: 10,000 units in year 1, 15,000 in year 2 and 17,000 in year three. The incremental costs of these products will consume 50% of the sale price. The new line will require a machine be purchased today for $60,000 and depreciated using the straight line method over the life of the machine with a salvage value of zero. The project will utilize $30,000 in net working capital and the company's tax rate is 30%. Which of the following are true regarding the project's relevant cash flows for year 0, 1, 2, 3.

The company's cash flow is year 1 is $41,000

Today is a day in May 2525 and a bond with a coupon rate of 8.0% just yesterday paid a coupon. The bond matures in November 2540 and its quoted bond price is 118.03 percent of par (semiannual compounding). Find the yield to maturity (YTM) and current yield.

The current yield is 6.78% and the YTM is 6.18%

Which characteristic best describes the Treasury yield curve?

The curve normally begins with a steep upward slope that flattens to the right.

Which statement is most consistent with the Net present value (NPV) and Internal rate of return concepts?

Two choice, B and C are correct

The dividend growth model equated a stock's intrinsic value (theoretical price) to the discounted sum of the constant growth dividend stream. The relationship between the dividend growth rate (g) and the discount rate (r) is very important. Which statements accurately describes that relationship?

When g exceeds r then the stock's intrinsic value is negative, meaning the stock is worthless.