Finc midterm 2 problems
This morning, you borrowed $9,500 at 7.65 percent annual interest. You are to repay the loan principal plus all of the loan interest in one lump sum four years from today. How much will you have to repay? A. $12,757.92 B. $12,808.13 C. $12,911.89 D. $13,006.08 E. $13,441.20
A. $12,757.92 FV = $9500 x (1 + .0765)^4
Your employer contributes $75 a week to your retirement plan. Assume that you work for your employer for another 20 years and that the applicable discount rate is 7.5 percent. Given these assumptions, what is this employee benefit worth to you today? A. $40,384.69 B. $42,618.46 C. $44,211.11 D. $44,306.16 E. $44,987.74
A. $40,384.69 APV= $75 x { 1-[ 1 /(1+.075/52)^(20x52)] ----------------------------------- (.075/52) }
What is the present value of $150,000 to be received 8 years from today if the discount rate is 11 percent? A. $65,088.97 B. $71,147.07 C. $74,141.41 D. $79,806.18 E. $83,291.06
A. $65,088.97 Present value = $150,000 × [1/1 + .11)^8] = $65,088.97
There are four pieces to an annuity present value. What are they?
the present value (PV) the periodic cash flow (C) the discount rate (r) the number of payments (t)
For each of the following compute the future value: Present Value Years Interest Rate Future Value $ 1,975 11 13% 6,734 7 9 81,346 14 12 192,050 8 6
$7,575.83 12,310.02 397,547.04 306,098.52
For each of the following compute the present value: Present Value Years Interest Rate Future Value 13 9% $15,451 4 7 51,557 29 24 886,073 40 35 550,164
$8404.32 21,914.85 38,172.72 26,950.37
Sqeekers Co. issued 15-year bonds a year ago at a coupon rate of 4.1 percent. The bonds make semiannual payments and have a par value of $1,100. If the YTM on these bonds is 4.5 percent, what is the current bond price?
$958.78
Solve for the unknown interest rate in each of the following: Present Value Years Interest Rate Future Value $181 4 $ 297 335 18 1080 48,000 19 185,382 40,353 25 531,618
13.18% 6.72 7.37 10.86
An investment offers $5500 per year for 15 years, with the first payment occurring on year from now. If required return is 6 percent, what is the value of the investment? What would the value be if the payments occurred for 40 years? For 75 years? Forever?
15 years- $53,417.37 40 years- $82,754.63 75 years- $90,507.16
A Japanese company has a bond outstanding that sells for 91.53 percent of its 100,000 par value. The bond has a coupon rate of 3.4 percent paid annually and matures in 16 years. What is the yield to maturity of this bond?
4.13%
At 7.3% interest how long does it take to double your money? Quadruple it?
9.84 years 19.68 years
Morristown Industries has an issue of preferred stock outstanding that pays a $12.60 dividend every year in perpetuity. What is the required return if this issue currently sells for $80 per share? A. 15.75 percent B. 16.72 percent C. 16.80 percent D. 16.86 percent E. 16.95 percent
A. 15.75 percent R = $12.60/$80 = 15.75 percent
Greenbrier Industrial Products' bonds have a 7.60 percent coupon and pay interest annually. The face value is $1,000 and the current market price is $1,062.50 per bond. The bonds mature in 16 years. What is the yield to maturity? A. 6.94 percent B. 7.22 percent C. 7.46 percent D. 7.71 percent E. 7.80 percent
A. 6.94 percent
An agent who arranges a transaction between a buyer and a seller of equity securities is called a: A. broker. B. floor trader. C. capitalist. D. principal. E. dealer.
A. broker
Which one of the following statements is correct? A. The capital gains yield is the annual rate of change in a stock's price. B. Preferred stocks have constant growth dividends. C. A constant dividend stock cannot be valued using the dividend growth model. D. The dividend growth model can be used to compute the current value of any stock. E. An increase in the required return will decrease the capital gains yield.
A. the capital gains yield is the annual rate of change in a stock's price
You estimate that you will owe $42,800 in student loans by the time you graduate. The interest rate is 4.25 percent. If you want to have this debt paid in full within six years, how much must you pay each month? A. $611.09 B. $674.50 C. $714.28 D. $736.05 E. $742.50
B. $674.50 (C) $42,800 = C x { 1-[ 1 /(1+.0425/12)^(6x12)] ----------------------------------- (.0425/12) }
Miller Brothers Hardware paid an annual dividend of $0.95 per share last month. Today, the company announced that future dividends will be increasing by 2.6 percent annually. If you require a 13 percent rate of return, how much are you willing to pay to purchase one share of this stock today? A. $9.23 B. $9.37 C. $9.67 D. $9.72 E. $9.88
B. $9.37 Po= [$.95x(1+.026)] / (.13-.026)
Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is $1,000? A. $989.70 B. $991.47 C. $996.48 D. $1,002.60 E. $1,013.48
B. $991.47 P= [ (.075x1000)/2 ] x { 1-[1/(1+.0768/2)^(6x2)} + 1000 ------------------- ------------------------------ ------- 2 (.0768/2) [1+.0768/2]^(6x2)
Global Communications has a 7 percent, semiannual coupon bond outstanding with a current market price of $1,023.46. The bond has a par value of $1,000 and a yield to maturity of 6.72 percent. How many years is it until this bond matures? A. 12.26 years B. 12.53 years C. 18.49 years D. 24.37 years E. 25.05 years
B. 12.53 years
The next dividend payment by Hillside Markets will be $2.35 per share. The dividends are anticipated to maintain a 4.5 percent growth rate forever. The stock currently sells for $65 per share. What is the dividend yield? A. 3.20 percent B. 3.62 percent C. 3.81 percent D. 4.50 percent E. 4.81 percent
B. 3.62 percent dividend yield = $2.35/$65
Fifteen years ago, Jackson Supply set aside $130,000 in case of a financial emergency. Today, that account has increased in value to $330,592. What rate of interest is the firm earning on this money? A. 5.80 percent B. 6.42 percent C. 6.75 percent D. 7.28 percent E. 7.53 percent
B. 6.42 percent $330,592 = $130,000 × (1 + r)^15; r = 6.42 percent
Which of the following are negative covenants that might be found in a bond indenture? I. The company shall maintain a current ratio of 1.10 or better. II. No debt senior to this issue can be issued. III. The company cannot lease any major assets without approval by the lender. IV. The company must maintain the loan collateral in good working order. A. I and II only B. II and III only C. III and IV only D. II, III, and IV only E. I, II, and III only
B. II and III only
A bond that can be paid off early at the issuer's discretion is referred to as being which one of the following? A. zero coupon B. callable C. senior D. collateralized E. unsecured
B. callable
The interest rate risk premium is the: A. additional compensation paid to investors to offset rising prices. B. compensation investors demand for accepting interest rate risk. C. difference between the yield to maturity and the current yield. D. difference between the market interest rate and the coupon rate. E. difference between the coupon rate and the current yield
B. compensation investors demand for accepting interest rate risk
What is the model called that determines the present value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? A. zero growth B. dividend growth C. capital pricing D. earnings capitalization E. discounted dividend
B. dividend growth
The liquidity premium is compensation to investors for: A. purchasing a bond in the secondary market. B. the lack of an active market wherein a bond can be sold for its actual value. C. acquiring a bond with an unfavorable tax status. D. redeeming a bond prior to maturity. E. purchasing a bond that has defaulted on its coupon payments
B. the lack of an active market wherein a bond can be sold for its actual value
Atlas Insurance wants to sell you an annuity which will pay you $3,400 per quarter for 25 years. You want to earn a minimum rate of return of 6.5 percent. What is the most you are willing to pay as a lump sum today to buy this annuity? A. $151,008.24 B. $154,208.16 C. $167,489.11 D. $173,008.80 E. $178,927.59
C. $167,489.11 APV= $3400 x { 1-[ 1 /(1+.065/4)^(25x4)] ----------------------------------- (.065/4) }
Phil can afford $180 a month for 5 years for a car loan. If the interest rate is 8.6 percent, how much can he afford to borrow to purchase a car? A. $7,750.00 B. $8,348.03 C. $8,752.84 D. $9,266.67 E. $9,400.00
C. $8,752.84 APV= $180x { 1-[ 1 /(1+.086/12)^(5x12)] ----------------------------------- (.086/12) } =8,752.84
Gerold invested $6,200 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years? A. $8,710 B. $9,000 C. $9,300 D. $9,678 E. $10,099
C. $9,300 Ending value = $6,200 + ($6,200 × .05 × 10) = $9,300
How much are you willing to pay for one share of Jumbo Trout stock if the company just paid a $0.70 annual dividend, the dividends increase by 2.5 percent annually, and you require a 10 percent rate of return? A. $9.29 B. $9.33 C. $9.57 D. $9.53 E. $9.59
C. $9.57
Some time ago, Julie purchased eleven acres of land costing $36,900. Today, that land is valued at $214,800. How long has she owned this land if the price of the land has been increasing at 10.5 percent per year? A. 13.33 years B. 16.98 years C. 17.64 years D. 19.29 years E. 21.08 years
C. 17.64 years $214,800 = $36,900 × (1 + .105)^t; t = 17.64 years
The preferred stock of Rail Lines, Inc., pays an annual dividend of $12.25 and sells for $59.70 a share. What is the rate of return on this security? A. 19.38 percent B. 19.63 percent C. 20.52 percent D. 20.72 percent E. 20.84 percent
C. 20.52 percent R = $12.25/$59.70 = 20.52 percent
Blackwell bonds have a face value of $1,000 and are currently quoted at 98.4. The bonds have a 5 percent coupon rate. What is the current yield on these bonds? A. 4.67 percent B. 4.78 percent C. 5.08 percent D. 5.33 percent E. 5.54 percent
C. 5.08 percent current yield = (.05x1000) / (.0984x1000)
You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner. A. I only B. II only C. I and III only D. I and IV only E. II and III only
C. I and III only
3. You are considering two projects with the following cash flows: Project X Project Y Year 1 $9,000 $7,000 Year 2 8,000 7,500 Year 3 7,500 8,000 Year 4 7,000 9,000 Which of the following statements are true concerning these two projects? I. Both projects have the same future value at the end of year 4, given a positive rate of return. II. Both projects have the same future value given a zero rate of return. III. Project X has a higher present value than Project Y, given a positive discount rate. IV. Project Y has a higher present value than Project X, given a positive discount rate. A. II only B. I and III only C. II and III only D. II and IV only E. I, II, and IV only
C. II and III only
Bonds issued by the U.S. government: A. are considered to be free of interest rate risk. B. generally have higher coupons than those issued by an individual state. C. are considered to be free of default risk. D. pay interest that is exempt from federal income taxes. E. are called "munis".
C. are considered to be free of default risk
A bond that is payable to whomever has physical possession of the bond is said to be in: A. new-issue condition. B. registered form. C. bearer form. D. debenture status. E. collateral status
C. bearer form
An ordinary annuity is best defined by which one of the following? A. increasing payments paid for a definitive period of time B. increasing payments paid forever C. equal payments paid at regular intervals over a stated time period D. equal payments paid at regular intervals of time on an ongoing basis E. unequal payments that occur at set intervals for a limited period of time
C. equal payments paid forever
A bond's coupon rate is equal to the annual interest divided by which one of the following? A. call price B. current price C. face value D. clean price E. dirty price
C. face value
Municipal bonds: A. are totally risk-free. B. generally have higher coupon rates than corporate bonds. C. pay interest that is federally tax-free. D. are rarely callable. E. are free of default-risk
C. pay interest that is federally tax-free
Sara invested $500 six years ago at 5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $500 investment. Which type of interest is Sara earning? A. free interest B. complex interest C. simple interest D. interest on interest E. compound interest
C. simple interest
Green Roof Inns is preparing a bond offering with a 6 percent, semiannual coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines. B. The bonds will pay 10 interest payments of $60 each. C. The bonds will sell at a premium if the market rate is 5.5 percent. D. The bonds will initially sell for $1,030 each. E. The final payment will be in the amount of $1,060
C. the bonds will sell at a premium if the market rate is 5.5 percent
Which one of the following statements concerning interest rates is correct? A. Savers would prefer annual compounding over monthly compounding. B. The effective annual rate decreases as the number of compounding periods per year increases. C. The effective annual rate equals the annual percentage rate when interest is compounded annually. D. Borrowers would prefer monthly compounding over annual compounding. E. For any positive rate of interest, the effective annual rate will always exceed the annual percentage rate.
C. the effective annual rate decreases as the number of compounding periods per year increases
12. The preferred stock of Casco has a 5.48 percent dividend yield. The stock is currently priced at $59.30 per share. What is the amount of the annual dividend? A. $2.80 B. $2.95 C. $3.10 D. $3.25 E. $3.40
D. $3.25 C = $59.30 × 0.0548 = $3.25
11. You just paid $750,000 for an annuity that will pay you and your heirs $45,000 a year forever. What rate of return are you earning on this policy? A. 5.25 percent B. 5.50 percent C. 5.75 percent D. 6.00 percent E. 6.25 percent
D. 6.00 percent r= $45,000/$750,000=6.00 percent
Denver Shoppes will pay an annual dividend of $1.46 a share next year with future dividends increasing by 4.2 percent annually. What is the market rate of return if the stock is currently selling for $42.10 a share? A. 6.55 percent B. 7.13 percent C. 7.46 percent D. 7.67 percent E. 8.29 percent
D. 7.67 percent $42.10= $1.46/ (R-.042)
An increase in which of the following will increase the current value of a stock according to the dividend growth model? I. dividend amount II. number of future dividends, provided the current number is less than infinite III. discount rate IV. dividend growth rate A. I and II only B. III and IV only C. I, II, and III only D. I, II, and IV only E. I, II, III, and IV
D. I, II, and IV only
What is the relationship between present value and future value interest factors? A. The present value and future value factors are equal to each other. B. The present value factor is the exponent of the future value factor. C. The future value factor is the exponent of the present value factor. D. The factors are reciprocals of each other. E. There is no relationship between these two factors.
D. The factors are reciprocals of each other
Which one of the following transactions occurs in the primary market? A. purchase of 500 shares of GE stock from a current shareholder B. gift of 100 shares of stock to a charitable organization C. gift of 200 shares of stock by a mother to her daughter D. a purchase of newly issued stock from AT&T E. IBM's purchase of GE stock
D. a purchase of newly issued stock from AT&T
Which one of following is the rate at which a stock's price is expected to appreciate? A. current yield B. total return C. dividend yield D. capital gains yield E. coupon rate
D. capital gains yield
The Walthers Company has a semi-annual coupon bond outstanding. An increase in the market rate of interest will have which one of the following effects on this bond? A. increase the coupon rate B. decrease the coupon rate C. increase the market price D. decrease the market price E. increase the time period
D. decrease the market price
A zero coupon bond: A. is sold at a large premium. B. pays interest that is tax deductible to the issuer when paid. C. can only be issued by the U.S. Treasury. D. has more interest rate risk than a comparable coupon bond. E. provides no taxable income to the bondholder until the bond matures
D. has more interest rate risk than a comparable coupon bond
The secondary market is best defined by which one of the following? A. market in which subordinated shares are issued and resold B. market conducted solely by brokers C. mrket dominated by dealers D. market where outstanding shares of stock are resold E. market where warrants are offered and sold
D. market where outstanding shares of stock are resold
A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan. A. amortized B. continuous C. balloon D. pure discount E. interest-only
D. pure discount
The entire repayment of which one of the following loans is computed simply by computing a single future value? A. interest-only loan B. balloon loan C. amortized loan D. pure discount loan E. bullet loan
D. pure discount loan
Currently, the bond market requires a return of 11.6 percent on the 10-year bonds issued by Winston Industries. The 11.6 percent is referred to as which one of the following? A. coupon rate B. face rate C. call rate D. yield to maturity E. coupon rate
D. yield to maturity
What is the future value of $7,189 invested for 23 years at 9.25 percent compounded annually? A. $22,483.60 B. $27,890.87 C. $38,991.07 D. $51,009.13 E. $54,999.88
E. $54,999.88 Future value = $7,189 × (1 + .0925)^23 = $54,999.88
The dividend growth model: I. assumes that dividends increase at a constant rate forever. II. can be used to compute a stock price at any point in time. III. can be used to value zero-growth stocks. IV. requires the growth rate to be less than the required return. A. I and III only B. II and IV only C. I, III, and IV only D. I, II, and IV only E. I, II, III, and IV
E. I, II, III, and IV
A bond has a market price that exceeds its face value. Which of the following features currently apply to this bond? I. discounted price II. premium price III. yield-to-maturity that exceeds the coupon rate IV. yield-to-maturity that is less than the coupon rate A. III only B. I and III only C. I and IV only D. II and III only E. II and IV only
E. II and IV only
Sue and Neal are twins. Sue invests $5,000 at 7 percent when she is 25 years old. Neal invests $5,000 at 7 percent when he is 30 years old. Both investments compound interest annually. Both Sue and Neal retire at age 60. Which one of the following statements is correct assuming that neither Sue nor Neal has withdrawn any money from their accounts? A. Sue will have less money when she retires than Neal. B. Neal will earn more interest on interest than Sue. C. Neal will earn more compound interest than Sue. D. If both Sue and Neal wait to age 70 to retire, then they will have equal amounts of savings. E. Sue will have more money than Neal as long as they retire at the same time
E. Sue will have more money than Neal as long as they retire at the same time
Which one of the following statements correctly states a relationship? A. Time and future values are inversely related, all else held constant. B. Interest rates and time are positively related, all else held constant. C. An increase in the discount rate increases the present value, given positive rates. D. An increase in time increases the future value given a zero rate of interest. E. Time and present value are inversely related, all else held constant.
E. Time and present value are inversely related, all esle held constant
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: A. trustee relationships. B. bylaws. C. legal bounds. D. "plain vanilla" conditions. E. protective covenants
E. protective covenants
Who owns the NYSE? A. NYSE members B. specialists C. dealers D. floor brokers E. shareholders
E. shareholders
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the: A. equilibrium. B. premium. C. discount. D. call price. E. spread
E. spread
An indenture is: A. another name for a bond's coupon. B. the written record of all the holders of a bond issue. C. a bond that is past its maturity date but has yet to be repaid. D. a bond that is secured by the inventory held by the bond's issuer. E. the legal agreement between the bond issuer and the bondholders
E. the legal agreement between the bond issuer and the bondholders
Which one of the following statements is correct? A. The risk-free rate represents the change in purchasing power. B. Any return greater than the inflation rate represents the risk premium. C. Historical real rates of return must be positive. D. Nominal rates exceed real rates by the amount of the risk-free rate. E. The real rate must be less than the nominal rate given a positive rate of inflation
E. the real rate must be less than the nominal rate given a positive rate of inflation
You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? A. altering B. cumulative voting C. straight voting D. indenture agreement E. voting by proxy
E. voting by proxy
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? Why?
Price and yield move in opposite directions; if interest rates rise, the price of the bond will fall. This is because the fixed coupon payments determined by the fixed coupon rate are not as valuable when interest rates rise- hence, the price of the bond decreases
The Maybe Pay Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $40,000 per year forever. If the required return on this investment is 5.1 percent, how much will you pay for the policy?
The cash flow is a perpetuity so we use the equation PV=C/r PV=$40,000/.051= $784,313.73
For the company in the previous problem, what is the dividend yield? what is the expected capital gains yield?
The dividend yield is the dividend next year divided by the current price, so the dividend yield is: dividend yield=D,/Po 2.04/37 5.51% The capital gains yield, or percentage increase in the stock price, is the same as the dividend growth rate so it is 4.5 %
Moraine, Inc. has an issue of preferred stock outstanding that pays a $3.50 dividend every year in perpetuity. If this issue currently sells for $85 per share, what is the required return?
The price of a share of preferred stock is the dividend divided by the required return. This is the same equation as the constant growth model, with a dividend growth rate of zero percent. Remember, most preferred stock pays a fixed dividend, so the growth rate is zero. Using this equation, we find the price per share of the preferred stock is: R= D/Po R= $3.50/$85 R= 4.12%
What is the payback period for the following set of cash flows? Year Cash Flow 0 -$7600 1 1900 2 2900 3 2300 4 1700
To calculate the payback period, we need to find the time that the project has recovered its initial investment. After three years, the project has created: $1900 + 2900 +2300=$7100 in cash flows. The project still needs to create another: $7600-7100=$500 in cash flows. During the fourth year, the cash flows from the project will be $1700. So, the payback period will be three years, plus what we still need to make dividend by what we will make during the fourth year. The payback period is: payback= 3 + ($500/$1700) = 3.29 years
The next dividend payment by Halestrom, Inc. will be $2.04 per share. The dividends are anticipated to maintain a growth rate of 4.5 percent forever. If the stock currently sells for $37 per share, what is the required return?
Use the constant growth model and solve the equation for R R= (D,/Po) +g R= ($2.04/$37) + .045 10.01%
You are analyzing a proposed project and have compiled the following information: Year Cash flow 0 -$135,000 1 $ 28,600 2 $ 65,500 3 $ 71,900 Required payback period 3 years Required return 8.50 percent What is the present value of the proposed project? a. $3,289.86 b. $3,313.29 c. $4,289.06 d. $4,713.71
a. $3289.86
You are analyzing a proposed project and have compiled the following information: Year Cash flow 0 -$135,000 1 $ 28,600 2 $ 65,500 3 $ 71,900 Required payback period 3 years Required return 8.50 percent Should the project be accepted based on the internal rate of return (IRR)? Why or why not? a. yes; The project IRR is greater than the required return. b. yes; The project IRR is equal to zero. c. no; The project IRR is greater than the required return. d. no; The project IRR is greater than zero.
a. yes; the project IRR is greater than the required return
Huggins Co. has identified an investment project with the following cash flows. If the discount rate is 10 percent, what is the present value of these cash flows? What is the present value at 18 percent? 24 percent? Year Cash Flow 1 $680 2 810 3 940 4 1150
at 10%- $2,779.30 at 18%- $2,322.27 at 24%- $2,054.62
Which of the following statements are correct concerning the internal rate of return (IRR)? I. IRR is used to determine which one of two mutually exclusive projects should be accepted. II. IRR is the discount rate that makes the net present value equal to zero. III. There can be multiple IRRs if the cash flows are unconventional. IV. You should accept a project when the IRR is less than the required return. a. I and III only b. II and IV only c. II and III only d. I and II only
c. II and III only
You are evaluating projects that are independent and have conventional cash flows. Rank each of the following analysis methods in order of preference from a financial viewpoint in relation to these projects. List the most valuable method first. I. internal rate of return II. payback III average accounting return IV. net present value a. IV, II, III, I b. II, IV, III, I c. IV, I, II, III d. III, IV, I, II
c. IV, I, II, III
Which one of the following statements is correct? a. The payback period is also referred to as the benefit-cost ratio. b. The internal rate of return can be reliably used for all independent projects. c. The profitability index is used when the investment funds are limited. d. The net present value should not be used to rank mutually exclusive projects.
c. the profitability index is used when the investment funds are limited
You should accept a project when the: a. net present value is negative. b. profitability index is positive. c. payback period exceeds the required period. d. AAR is greater than the required return.
d. AAr is greater than the required return
