finance exam ch 6-10

What is the future value of $3,325 per year for 20 years at an interest rate of 7.29 percent?

$140,705.09 FV = $3,325[(1.072920 − 1)/.0729] = $140,705.09

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

profitability index.

Protective covenants:

are primarily designed to protect bondholders.

Suppose D0 is $5.70, R is 10%, and g is 5%. What is the price per share today?

$119.70

You want to have $64,000 in your savings account 4 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 8.1 percent interest, what amount must you deposit each year?

$14,181.96 FVA = C{[(1 + r)t − 1]/r} $64,000 = $C[(1.0814 − 1)/.081] We can now solve this equation for the annuity payment. Doing so, we get: C = $64,000/4.51278 C = $14,181.96

If you put up $23,000 today in exchange for a 7.00 percent, 14-year annuity, what will the annual cash flow be?

$2,629.93 PVA = C({1 − [1/(1 + r)t]}/r ) PVA = $23,000 = $C{[1 − (1/1.0700)14 ]/.0700} We can now solve this equation for the annuity payment. Doing so, we get: C = $23,000/8.74547 C = $2,629.93

Brickhouse is expected to pay a dividend of $2.90 and $2.36 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.4 percent. What is the stock price today if the required return is 10.8 percent?

$31.39

You just won the $62.5 million Ultimate Lotto jackpot. Your winnings will be paid as $2,500,000 per year for the next 25 years. If the appropriate interest rate is 5.8 percent, what is the value of your windfall?

$32,574,855.64 PV = $2,500,000[(1 − 1/1.05825)/.058] = $32,574,855.64

Suppose we are interested in the price of a stock in five years, P5. We just paid a dividend of $2.20 and the growth rate is 4%. The required return is 12%. What is the price of the stock in five years?

$34.80

Thanh-Mi will receive $7,500 at the end of Year 2, $9,000 at the end of Year 3, and $12,500 at the end of Year 4. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent?

$36,121.08 FV = $7,500(1.084) + $9,000(1.083) + $12,500(1.082) FV = $36,121.08

If the current dividend (D0) is $3.00 and the growth rate is 6%. How much will the dividend be at Time 5?

$4.015

Howell Corporation deposited $12,000 in an investment account one year ago for the purpose of buying new equipment. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today and plans to purchase the equipment four years from today. Assuming an interest rate of 5.5 percent, how much cash will be available when the company is ready to buy the equipment?

$46,008.30 FV = $12,000(1.0555) + $15,000(1.0554) + $10,000(1.0553) FV = $46,008.30

Your grandparents would like to establish a trust fund that will pay you and your heirs $125,000 per year forever with the first payment one year from today. If the trust fund earns an annual return of 2.4 percent, how much must your grandparents deposit today?

$5,208,333.33

Prescott Bank offers you a $34,000, 8-year term loan at 10 percent annual interest. What will your annual loan payment be?

$6,373.10

You are considering a project with cash flows of $44,500, $18,000, and $33,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 8.1 percent?

$82,693 PV = $44,500/1.081 + $18,000/1.0812 + $33,000/1.0813 PV = $82,693

Weismann Company issued 16-year bonds a year ago at a coupon rate of 10 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 12 percent, what is the current bond price?

$862.35

Genova Corporation has a four year 10% annual coupon bond. The price of the bond is $956.12. The Yield to Maturity is 11.43%. What is the current yield on this bond?

10.46%

Warren Corporation is interested in a three-year, 11% annual coupon bond. A broker quotes a price of $930.35. What is the yield to Maturity?

14%

Guerilla Radio Broadcasting has a project available with the following cash flows : Year. Cash Flow 0. −$ 13,600 1 5,600 2 6,900 3 6,300 4 4,700 What is the payback period?

2.17 years

What is the IRR of the following set of cash flows? Year Cash Flow 0 −$ 9,645 1 4,600 2 3,500 3 6,200

21.3%

You want to have $75,000 in your savings account 12 years from now, and you're prepared to make equal annual deposits into the account at the end of each year. If the account pays 6.4 percent interest, what amount must you deposit each year?

4,342.99 FVA = C{[(1 + r)t − 1]/r} $75,000 = $C[(1.06412 − 1)/.064]

A stock is expected to maintain a constant dividend growth rate of 4.1 percent indefinitely. If the stock has a dividend yield of 5.4 percent, what is the required return on the stock?

9.5%

What are non-conventional cash flows?

A combination of cash outflows and inflows.

Which one of the following best describes Nasdaq?

Computer network of securities dealers

Chavez & Hwang just issued 15-year, 6.4 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Debenture

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at Time 0

In actual practice, managers most frequently use which two types of investment criteria?

Internal rate of return and net present value

All of the following are commonly cited reasons for using the Internal Rate of Return, except:

Multiple IRR's allow the company to choose the best one when evaluating projects.

The Payback Period Rule states that a company will accept a project if:

The calculated payback is less than a pre-specified number of years.

The Internal Rate of Return (IRR) represents which of the following:

The discount rate that makes the net present value equal to zero.

All of the following are disadvantages of the Payback Period, except:

The method incorporates the time value of money.

Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond?

The price of the bond will fall.

Assume the current market price of a bond exceeds its par value. Which one of these equations applies?

Yield to maturity < Coupon rate

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

You should accept the second offer because it has the larger net present value. Offer A: PV = $89,500 Offer B:PV = $35,000 + $70,000/1.1152PV = $91,305.17

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Zero coupon

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?

annual

A bond that is payable to whomever has physical possession of the bond is said to be in:

bearer form.

Mutually exclusive projects are best defined as competing projects that:

both require the total use of the same limited resource.

A bond has a face value of $1,000. It can be redeemed early at the issuer's discretion for $1,015, plus any accrued interest. The additional $15 is called the:

call premium.

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

common

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.

coupon

In response to a change in the market rate of interest, the price sensitivity of a bond increases as the:

coupon rate decreases and the time to maturity increases.

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

over-the-counter

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period.

Current Yield is the bond's annual coupon divided by its yield to maturity. (T/F)

false bonds annual coupon divided by its price

A perpetuity is defined as:

unending equal payments paid at equal time intervals.

Non-constant growth means ____________ growth rates over some finite length of time.

supernormal

A project has a net present value of zero. Given this information:

the project's cash inflows equal its cash outflows in current dollar terms.

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the:

yield to maturity.

A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present value?

−$11,748.69