Finance Exam 2 Lifa Huang

the P/E multiple approach is a ______ and easy way to estimate a stocks value. However P/E ratios ______ widely over time

fast, vary

A ________ _______ _________ is a yield curve that indicates that interest rates do not vary much at different maturities.

flat yield curve

The_________ the required return, the _________ the market value of bond.

higher, lower

Broadly speaking, ________ _______ are determined by the interaction of supply and demand.

interest rates

Debt is a ____________ financing or sourcing of cash.

Temporary

Calculate the future value of the annuity, assuming that it is (1) An ordinary annuity. (2) An annuity due. Annuity payment: $2,500 Interest rate: 8% Annuity length: 10 years

Ordinary: $36,216.41 Annuity Due: $39,113.72

If a perpetuity pays an annual cash flow of CF, starting one year from now, the present value of the cash flow stream is

PV=CF/i

when the Price (amount you pay for the bond) equals the Face or Par Value (when c=r) or when coupon rate = required return

Par Bond

equity is a ____________ financing or sourcing of cash.

Permanent

when the Price (amount you pay for the bond) is greater than the Face or Par Value (when c>r) or when coupon rate > required return

Premium Bond

Bond with $1,000 par value (FV) Maturing in 15 years (N) Bond's coupon rate is 7% (for PMT) Semi-annual coupon payment Bond's current Yield to Maturity is 7% What would you buy this Bond for?

$1,000.00

Bond with $1,000 par value (FV) Maturing in 15 years (N) Bond's coupon rate is 7% (for PMT) Semi-annual coupon payment Bond's current Yield to Maturity is 6.5% What would you buy this Bond for?

$1,047.45

Farber places $800 in a savings account paying 6% interest compounded annually. How much money will be in the account at the end of 5 years.

$1,070.58

A firm has an issue of $1,000 par value bonds with a 12 percent stated interest rate outstanding. The issue pays interest annually and has 10 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for ________ today.

$1,268.40

What is the value of an asset which pays $200 a year for the next 5 years and can be sold for $1,500 at the end of five years from now? Assume that the opportunity cost is 10 percent.

$1,689.54.

Frey Company, a shoe manufacturer, has been offered an opportunity to receive the following mixed stream of cash flows over the next 5 years. 1: 400 2: 800 3: 500 4: 400 5: 300 If the firm must earn at least 9% on its investments, what is the most it should pay for this opportunity?

$1,904.76

Jay borrows $50,000 at 10 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year loan payment is ________.

$15,773

You have $100 to invest. If you put the money into an account earning 5% interest. How much money will you have in 10 years if the account pays 5% simple interest?

$150

You have $100 to invest. If you put the money into an account earning 5% interest compounded annually, how much money will you have in 10 years?

$162.89

Lamar Company is expected to earn $2.60 per share next year (2024). Assuming an industry average P/E ratio of 7, the firms per share value would be

$18.20 per share

The dividend issued by the Lamar Company last year was $1.40 per share (D0). The historical annual growth rate (g) of Lamar Company dividends equals 7%. The Required Rate of Return in the capital market (r) is 15%.

$18.75 per share

You can deposit $10,000 into an account paying 9% annual interest either today or exactly 10 years from today. How much better off will you be at the end of 40 years if you decide to make the initial deposit today rather than 10 years from today?

$181,417.42 Future value (start today) 314,094.20 Future value (start in 10 years) 132,676.78

Ross Clark wishes to endow a chair in finance at his alma mater. The university indicated that it requires $200,000 per year to support the chair, and the endowment would earn 10% per year. To determine the amount Ross must give the university to fund the chair, we must determine the present value of a $200,000 perpetuity discounted at 10%

$2,000,000

Braden Company, a small producer of plastic toys, wants to determine the most it should pay to purchase a particular annuity. The annuity consists of cash flows of $700 at the end of each year for 5 years. The firm requires the annuity to provide a minimum return of 8%.

$2,794.90

To pay for her college education, Gina is saving $2,000 at the beginning of each year for the next eight years in a bank account paying 12 percent interest. How much will Gina have in that account at the end of 8th year?

$27,552

Braden Company, a small producer of plastic toys, wants to determine the most it should pay to purchase a particular annuity. The annuity consists of cash flows of $700 at the beginning of each year for 5 years. The firm requires the annuity to provide a minimum return of 8%.

$3,018.49

BEST Inc. has an expected dividend next year of $3.60 and investor's required return is 12 percent. Assuming the same dividend will be paid indefinitely, and a zero-growth rate of dividends. What is the value of the stock?

$30 per share

Fran Abrams wishes to determine how much money she will have at the end of 5 years if she chooses ordinary annuity with $1,000 periodic payment and it earns 7% annually.

$5,750.74

Fran Abrams wishes to determine how much money she will have at the end of 5 years if she chooses annuity due with $1,000 periodic payment and it earns 7% annually.

$6,153.29

To supplement your retirement in exactly 42 years, you estimate that you need to accumulate $220,000 exactly 42 years from today. You plan to make equal, end-of-year deposits into an account paying 8% annual interest. How large must the annual deposits be to create the $220,000 fund in 42 years?

$723.10

Shrell Industries, a cabinet manufacturer, expects to receive the following mixed stream of cash flows over the next 5 years from one of its small customers. 1: 11,500 2: 14,000 3: 12,900 4: 16,000 5: 18,000 If the firm expects to earn at least 8% on its investments, how much will it accumulate by the end of year 5 if it immediately invests these cash flows when they are received?

$83,608.15

Shrell Industries, a cabinet manufacturer, expects to receive the following mixed stream of cash flows over the next 5 years from one of its small customers. If the firm expects to earn at least 8% on its investments, how much will it accumulate by the end of year 5 if it immediately invests these cash flows when they are received? (hint: take 2-step approach as we discussed in class) End of year Cash flow 1 11,000 2 12,500 3 16,000 4 12,900 5 10,000

$83,608.15

a firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ____ today.

$840.67

Pam Valenti has an opportunity to receive $1,700 eight year from now. If she can earn 8% on her investments in the normal course of events, what is the most she should pay now for this opportunity?

$918.46

Bond with $1,000 par value (FV) Maturing in 10 years (N) Bond's coupon rate is 6% (for PMT) Annual coupon payment Bond's current Yield to Maturity is 6.5% What is current value of the Bond (PV)?

$964.06

how to calculate the nominal rate of interest

1 + nominal interest rate = (1 + real interest rate) x (1 + inflation rate)

Nico Nelson, a management trainee at a large New York-based bank, is trying to estimate the real rate of return expected by investors. He notes that the 3-month T-bill currently yields 3 percent and has decided to use the consumer price index as a proxy for expected inflation. What is the estimated real rate of interest if the CPI is currently 2 percent?

1%

What are the 3 key inputs of the valuation process

1. Future cash flows (cash inflows minus cash outflows over the life of the asset) 2. Timing of the future cash flows (how long the asset is held, when each cash flow occurs) 3. A measure of risk, which determines the required return (total return from the asset)

Factors can influence the interest/return rates:

1. Inflation 2. The relationship between risk and return 3. Liquidity Preference

What is the rate of return on an investment of $16,278 if the company expects to receive $3,000 end of each year for the next 10 years?

13%

1) The future value of $100 received today and deposited at 6 percent for four years is ________. A) $126 B) $ 79 C) $124 D) $116

A

If a United States Savings bond can be purchased for $29.50 and has a maturity value of $100 at the end of 25 years, what is the annual rate of return on the bond? A) 5 percent B) 6 percent C) 7 percent D) 8 percent

A

___________ _______ are a share of common stock that a firms corporate charter allows it to issue

Authorized shares

Emmy Inc. has an expected dividend next year of $5.60 per share, a growth rate of dividends of 10 percent, and a required return of 20 percent. The value of a share of Emmy Inc.'s common stock is ________. A) $28.00 B) $56.00 C) $22.40 D) $18.67

B

If the coupon rate of a bond is equal to its required rate of return, then ________. A) the current value is not equal to par value B) the current value is equal to par value C) the maturity value is equal to par value D) the current value is equal to maturity value

B

The key inputs to the valuation process include ________. A) cash flow and risk B) cash flow, cash flow timing, and risk C) cash flows and discount rate D) returns, discount rate, and risk

B

Which of the following is a difference between common stock and bonds? A) Bondholders have a voice in management; common stockholders do not. B) Bondholders have a senior claim on assets and income relative to stockholders. C) Stocks have a stated maturity but bonds do not. D) Dividend paid to stockholders is tax-deductible but interest paid to bondholders are not.

B

A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 11 percent, the firm's bond will sell for ________ today. A) $1,000 B) $716.67 C) $840.73 D) $1,123.33

C

Adam borrows $4,500 at 12 percent annually compounded interest to be repaid in four equal annual installments. The actual end-of-year payment is ________. A) $ 942 B) $1,125 C) $1,482 D) $2,641

C

What are those three key inputs to the valuation process?

Cash flow, timing of cash flow, and required return

______________ _______________ who are sometimes referred to as residual owners or residual claimants, are the true owners of the firm.

Common Stockholders

What are the difference and similarity between liquidation value and book value approaches?

Comparatively, liquidation value is more realistic; both ignore the future profitability of the firm.

What is the difference between coupon rate and YTM?

Coupon rate is provided by issuers, YTM is required by investors

what is the value of an asset?

Present Value (PV) of all expected future cash flows

Bill plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Bill can earn 12 percent on his contributions, how much will he have at the end of the twentieth year? A) $19,292 B) $14,938 C) $40,000 D) $144,104

D

when the Price (amount you pay for the bond) is less than the Face or Par Value or when coupon rate < required return

Discount Bond

What are future cash flows from equity?

Dividend and capital gain, both are not guaranteed

________________ ______________ to a firm' s stockholders are not tax-deductible.

Dividend payments

_______________ are the payment from the earnings to the firm' s shareholders and are declared and paid at the discretion of the company 's board of directors.

Dividends

How to calculate Stock Price Per Share

Firm's Expected EPS × Industry or Competitors' P/E

____________ _____________ to debt holders are treated as tax-deductible expenses by the issuing firm.

Interest payments

What is the relation between Bond Values and Required Returns (interest rate)?

Inverse relationship: The higher the required return, the lower the market value of bond.

________________ value per share is the actual amount per share of common stock that would be received if all of the firm's assets were sold for their market value, liabilities (including preferred stock) were paid, and any remaining money were divided among the common stockholders

Liquidation

______________ _________ ____ ________ is more realistic than book value because it is based on current market values of the firm's assets.

Liquidation value per share

Calculate the present value of the annuity, assuming that it is (1) An ordinary annuity. (2) An annuity due. Annuity payment: $12,000 Interest rate: 7% Annuity length: 3 years

Ordinary: $31,491.79 Annuity Due: $33,696.22

Which of the following generally do NOT change over the life of the bond -The coupon interest rate -Yield to Maturity -The bond's par value, or face value -Bond Price -The bond's maturity date

The coupon interest rate, The bond's maturity date, The bond's par value, or face value

In comparing an ordinary annuity and an annuity due, which of the following is true?

The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity

___________ ________ are issued shares of common stock held by the firm. Often these shares have been repurchased by the firm

Treasury Stock

The value of an asset is determined by discounting the expected cash flows back to its present value, using an appropriate discount rate. T/F

True

________________ is the process that links risk and return to determine the worth or value of any asset (physical or financial).

Valuation

Which of the following generally change over the life of the bond -The coupon interest rate -Yield to Maturity -The bond's par value, or face value -Bond Price -The bond's maturity date

Yield to Maturity, Bond Price

cash inflow

a cash receipt (a positive value)

cash outflow

a payment, cost, or deposit (a negative value)

An annuity

a series of equal cash flows received or paid at regular intervals

bonds regular annual/semi-annual interest payments are called ____________ _____________

coupon payments

The value of the bond will approach its par value as the passage of time brings the bond's maturity date closer.

debt

Consists of cash funds provided by the firm's owners (investors or stockholders), buying ownership, that are "repaid" subject only to the firm's performance.

equity

An _____________ _______ ________ is a downward-sloping yield curve indicates that short-term interest rates are generally higher than long-term interest rates. (an indicator of recession? pessimistic outlook, fly to quality)

inverted yield curve

__________ _________ shares of common stock that have been put into circulation

issued shares

Market segmentation theory suggests that the market for _______ is segmented on the basis of maturity and that the supply of and demand for loans within each segment determine its prevailing interest rate; the slope of the yield curve is determined by the general relationship between the prevailing rates in each market segment (short term, moderate-term, long-term).

loans

• If downward sloping, may use _________-_______ funds

long term

Liquidity preference theory suggests that ________ _______ rates are generally higher than ________ ________ rates (hence, the yield curve is upward sloping or normal) because investors perceive short - term investments to be more liquid and less risky than long - term investments. Borrowers must offer higher rates on long -term bonds to entice investors away from their preferred short -term securities.

long term, short term

Common Stockholders are assured of only one thing: that they cannot _______ any more than they have invested in the firm.

lose

The tax deductibility of interest __________ the corporation's cost of debt financing, further causing it to be ___________ than the cost of equity financing.

lowers, lower

a _________ slope foreshadows a recession

negative

Equity has _____ maturity date and ________ has to be repaid by the firm.

no, never

The ____________ _______ ____ __________ is the actual rate of interest charged by the supplier of funds and paid by the demander. (e.g., quoted rate by a bank)

nominal rate of interest

A ___________ ________ _________ is an upward-sloping yield curve indicates that long-term interest rates are generally higher than short-term interest rates. (e.g., economy grow, high inflation rate)

normal yield curve

Generally each share of common stock entitles its holder to _____ vote in the election of directors and on special issues

one

_________________ _______ are issued shares of common stock held by investors (both private and public)

outstanding shares

formula for issued shares

outstanding shares+treasury stock

The value of the bond will approach its ______ __________ as the passage of time brings the bond's maturity date closer.

par value

A _____________ is an annuity with an infinite life, providing continual annual cash flow.

perpetuity

a ___________ slope foreshadows an economic boom

positive

a __________ _________________ is a statement transferring the votes of a stockholder to another party

proxy statement

The ________ rate is typically the nominal rate of interest on a three-month U.S. Treasury bill.

risk-free

If upward sloping, may use ________-_______ funds

short-term

Term Structure of Interest Rates is the relationship between the maturity and rate of return for bonds with ____________ levels of risk. (e.g., treasury securities)

similar

present value

the value of a cash flow at the beginning of a period, "today" for example.

future value

the value of a cash flow at the end of a specific period or time, for example the value "one year from today"

The yield curve in an economic period where higher future inflation is expected would be ________.

upward sloping

As residual owners, common stockholders receive _________ _____ ________ after all other claims on the firm's income and assets have been satisfied

what is left (residual)

The ________ is the compound annual rate of interest earned on a debt security purchased on a given date and held to maturity.

yield to maturity

The ________ ____ _________ is the rate of return that investors earn if they buy a bond at a specific price and hold it until maturity. (Assumes that the issuer makes all scheduled interest and principal payments as promised.)

yield to maturity (YTM)