FIN 420: Midterm

Which of the following organization forms accounts for the most revenue?

"C" corporation

Dagny Taggart has just purchased a home and taken out a $400,000 mortgage. The mortgage has a 30 year term with monthly payments and has an APR of 5.4%. The total amount of principal that Dagny will pay during the first month of her mortgage is closest to:

$446

Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost $250,000 per year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years. Boulderado's discount rate is 10%. The NPV for Boulderado's snowboard project is closest to:

$51,600

The effective annual rate for a credit card that charges a 19.5% APR compounded daily is closest to:

22.0%

At an annual interest rate of 7%, the present value of $5000 received in five years is closest to:

3565

Kampgrounds Inc. is considering purchasing a parcel of wilderness land near a popular historic site. Although this land will cost Kampgrounds $400,000 today, by renting out wilderness campsites on this land, Kampgrounds expects to make $35,000 at the end of every year indefinitely. If the appropriate discount rate is 8%, then the NPV of this new wilderness campsite is closest to: A) $50,000 B) -$50,000 C) $37,500 D) -$37,500

37,500

Which of the following statements is false?

For a risk-free project, the opportunity cost of capital will typically be greater than the interest rate of U.S. Treasury securities with a similar term (interest rates we observe in the market will vary based on quoting conventions, the term of investment, and risk; the investor's opportunity cost of capital is the best available expected return offered in the market on an investment of comparable risk and term of the cash flows being discounted; the opportunity cost of capital is the return the investor forgoes when the investor takes on a new investment)

The largest stock market in the world by volume is:

NASDAQ

You are trying to decided between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is:

NPV

Which of the following formulas regarding NPV is incorrect?

NPV + PV(benefits)= PV(costs); (NPV + costs = benefits, NPV=PV(all project cash flows))

Which of the following statements is false?

Not every stream of cash flows can be represented on a timeline (we refer to a series of cash flows lasting several periods as a stream of cash flows, a timeline is a linear representation of the timing of the (expected) cash flows, timelines are an important first step in organizing and then solving a financial problem

A limited liability company is essentially:

a limited partnership without a general partner

Which of the following statements is false?

credit spreads are high for bonds with high ratings (credit spreads fluctuate as perceptions regarding the probability of default change, investors pay less for bonds with credit risk than they would for otherwise identical default-free bonds, we refer to the difference between the yields of the corporate bonds and the Treasury yields as the default spread or credit spread)

Sovereign debt is:

debt issued by national governments

Which of the following statements is FALSE?

fundamentally, interest rates are determined by the federal reserve (the interest rates that banks offer on investments or charge on loans depends on the horizon of the investment or loan; the federal reserve determines very short - term interest rates through its influence on the federal funds rate, the interest rates that are quoted by banks and other financial institutions are nominal interest rates)

A _______ is when a rich individual or organization purchases a large fraction of the stock of a poorly performing firm and in doing so gets enough votes to replace the board of directors and the CEO.

hostile takeover

The distinguishing feature of a corporation is that:

it is a legally defined, artificial being, separate from its owners

The largest stock market in the world by market capitalization is:

the New York Stock Exchange

When using the internal rate of return (IRR) investment rule, we compare:

the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity

Due to a pre-existing contract, Recycle America Inc has the opportunity to acquire 10,000 pounds of scrap aluminum and 2500 pounds of scrap lead for $10,750. If the current market price for scrap aluminum is $0.83 per pound and the current market price for lead is $1.06 per pound, then the added benefit (cost) to you if you acquire this metal is:

$200

A project you are considering is expected to provide benefits worth $225,000 in one year. If the risk-free rate of interest is 8%, then the value of the benefit of this project today are closest to:

$208,333

Consider a zero coupon bond with 20 years to maturity. The price will this bond trade if the YTM is 6% is closest to:

$312

Suppose that a young couple has just had their first baby and they wish to insure that enough money will be available to pay for their child's college education. They decide to make deposits into an educational savings account on each of their daughter's birthdays, starting with her first birthday. Assume that the educational savings account will return a constant 7%. The parents deposit 2000 on their daughter's first birthday and plan to increase the size of their deposits by 5% each year. Assuming that the parents have already made the deposit for their daughter's 18th birthday, then the amount available for the daughter's college expenses on her 18th birthday is closest to:

$97,331

Your firm needs to invest in a new delivery truck. The life expectancy of the delivery truck is five years. You can purchase a new delivery truck for an upfront cost of $200,000, or you can lease a truck from the manufacturer for five years for a monthly lease payment of $4000 (paid at the end of each month). Your firm can borrow at 6.00% APR with quarterly compounding. The effective monthly discount rate on your firmʹs borrowings is closest to ________. A) 9.00% B) 7.45% C) 11.17% D) 9.31%

0.498%

If the risk - free rate of interest is 6%, then you should be indifferent between receiving $250 in one year or

235.85 today

Suppose you purchase a 20 year treasury bond with a 6% annual coupon ten years ago at par. Today the bond's yield to maturity has risen to 8% (EAR). If you sell this bond now, the internal rate of return you will earn on your investment will be closest to:

4.9%

If a investment providing a nominal return of 12.25% only offers a real rate of return of 5.70%, then the inflation rate is closest to:

6.20%

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $1112, then the YTM for the bond is closest to:

6.8%

Suppose a ten-year bond with semiannual coupons has a price of $1,071.06 and a yield to maturity of 7%. This bond's coupon rate is closest to:

8.0%

The British government has just issued a new consol bond that sells for 1000 euros and pays interest of 8%. The annual interest payment on the bond is?

80 euros

You are interest in purchasing a new automobile that costs 35,000. The dealership offers you a special financing rate of 6% APR (0.5%) per month for 48 months. Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to:

822

Which of the following is NOT a valid time value of money function in Excel?

I (PMT, FV, and NPER are)

Which of the following statements is FALSE?

When interest on a loan is tax deductible, the effective after-tax rate is pi symbol x (1-r) (all borrowers, besides the U.S. Treasury, have some risk of default, interest rates vary with the investment horizon, when we refer to the "risk-free interest rate," we mean the rate on U.S. Treasuries

The Sisyphean Company has a bond outstanding with a face value of $1000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8% and that the coupon payments are to be made semiannually. Assuming the appropriate YTM on the Sisyphean bond is 7.5%, then this bond will trade at:

a premium

What type of company trades on a organized stock exchange?

a public company

You are considering investing in a start up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%. The decision you should take regarding this project is...

accept the project since the IRR > 20%

You overhear your manager saying that she plans to book an Ocean - view room on her upcoming trip to Miami for a meeting. You know that the interior rooms are much less expensive and that your manager is traveling at the Company's expense. This use of additional funds comes about as a result of:

an agency problem

The Principal - Agent Problem arises:

because of the separation of ownership and control in a corporation and because managers have little incentive to work in the interest of shareholders when this means working against their own self-interest

Which of the following statements is false?

bond traders typically quote bond prices rather than bond yields (treasury bills are zero-coupon bonds, the yield to maturity is typically stated as an annual rate by multiplying the calculated YTM by the number of coupon payment per year, thereby converting it to an APR, zero-coupon bonds always trade at a discount)

Which of the following statements is false?

debt issues with a low-priority claim in bankruptcy will have a better rating than issues from the same company that have higher priority in bankruptcy (bonds in the top four categories are often referred to as investment grade bonds, a bond's rating depends on the risk of bankruptcy as well as the bondholder's ability to lay claim to the firm's assets in the event of a bankruptcy, bond ratings encourage widespread investor participation and relatively liquid markets)

An exception to the key difference between sovereign default and corporate bonds is:

member states of the EMU

Which of the following statements is false?

prices of bonds with lower durations are more sensitive to interest rate changes (the sensitivity of a bond's price changes in interest rates is the bond's duration, coupon bonds may trade at a discount, at a premium, or at par; when a bond is trading at a discount, the price increases between coupons will exceed the drop when a coupon is paid, so the bond's price will rise and its discount will decline as time passes)

An agency problem can be alleviated by?

requiring all firms to be sole proprietorships and compensating managers in such a way that acting in the best interest of shareholders is also in the best interest of managers

If shareholders are unhappy with a CEO's performance, they are most likely to:

sell their shares

Which of the following statements is FALSE?

the ability to deduct the interest expense increases the effective after-tax interest rate paid on the loan (interest rates vary based on the identity of the borrower, for loans to borrowers other than the U.S. Treasury, the stated interest rate is the maximum amount that investors will receive, the equivalent after-tax interest rate is r-(symbol x r)

Which of the following statements is false?

the annual percentage rate indicates the amount of interest including the effect of compounding (the effective annual rate indicates the amount of interest that will be earned at the end of one year; because interest rates may be quoted for different time intervals, it is often necessary to adjust the interest rate to a time period that matches that of our cash flows, the annual percentage rate indicates the amount of simple interest earned in one year)

The person charged with running the corporation by instituting the rules and policies set by the board of directors is called

the chief executive officer

Which of the following statements is FALSE?

the profitability index can be easily adapted for determining the correct investment decisions when multiple resource constraints exist (the profitability index is the ratio of value created to resources consumed, the profitability index measures the "bang for your buck", the profitability index measures the value created in terms of NPV per unit of resource consumed)

Which of the following statements is FALSE?

the simplest investment rule is the NPV investment rule (if you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate, by setting the NPV equal to zero and solving for r, we find the IRR, the IRR investment rule will identify the correct decision many, but not all, situations)

The discount rate that sets the present value of the promised bond payments equal to the current market price of the bond is called:

the yield to maturity

When choosing between projects, an alternative to comparing their IRRS is:

to compute the incremental IRR, which tells us the discount rate at which it becomes profitable to switch from one project to the other

Which of the following statements is FALSE?

we cannot separate a firm's investment decision from the decision of how to finance the investment (in normal markets, trading securities neither creates nor destroys value; financial transactions are not sources of value, but merely serve to adjust the timing and risk of the cash flows to best suit the needs of the firm or its investors, the NPV of trading a security in a normal market is zero)

If you buy shares of Coca-Cola on the secondary market

you buy the shares from another investor who decided to sell the shares

Which of the following organization forms for a business does NOT avoid double taxation?

"C" corporation