Corp Finance Exam 2

Precision Engineering invested $95,000 at 5.5 percent interest, compounded annually for 2 years. How much interest did the company earn over this period of time?

$105,737.38 − 95,000 = $10,737.38

You have $8,500 and will invest the money at an interest rate of .28 percent per month until the account is worth $14,200. How many years do you have to wait until you reach your target account value?

$14,200 = $8,500(1.0028)t t = 183.53 months Years to wait = 183.53/12 = 15.29 years. Finding number of years

You expect to receive a payout from a trust fund in 5 years. The payout will be for $11,400. You plan to invest the money at an annual rate of 6.2 percent until the account is worth $19,600. How many years do you have to wait from today?

$19,600 = $11,400(1.062)t t = 9.01 years Years to wait = 9.01 + 5 = 14.01 years

You are due to receive a lump-sum payment of $1,675 in two years. If you could invest that money at 5.3 percent interest for four years, how much would it be worth six years from now?

$2,059.34

Bob bought some land costing $16,090. Today, that same land is valued at $46,217. How long has Bob owned this land if the price of land has been increasing at 6 percent per year?

$46,217 = $16,090 × 1.06t2.87241 = 1.06^t t = ln 2.87241 / ln1.06t = 1.05515 / 0.05827t = 18.11 years

You expect to receive $3,700 upon your graduation and will invest your windfall at an interest rate of .55 percent per quarter until the account is worth $5,200. How many years do you have to wait until you reach your target account value?

$5,200 = $3,700(1.0055)t t = 62.05 quarters Years to wait = 62.05/4 = 15.51 years

Beatrice invests $1,470 in an account that pays 3 percent simple interest. How much more could she have earned over a 4-year period if the interest had been compounded annually?

$8.10

Today, Georgia is investing $24,000 at 5.5 percent, compounded annually, for 6 years. How much additional income could she earn if she had invested this amount at 6.5 percent, compounded annually?

-24,000 = PV ; find FV

You are due to receive a lump-sum payment of $1,350 in four years and an additional lump-sum payment of $1,450 in five years. Assuming a discount rate of 2.0 percent interest, what would be the value of the payments today?

1,247.19 + 1,313.31 = 2,560.50 (PV PV = Those numbers (PV values are the ones needed to find.)

You are due to receive a lump-sum payment of $1,750 in three years and an additional lump-sum payment of $1,850 in five years. Assuming a discount rate of 3.0 percent interest, what would be the value of the payments today?

1,601.5 + 1,595.83 = 3,197.32 Finding PV ; when finding PV the number inserted is negative

Jorge is considering an investment that will pay $4,650 a year for five years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 9.0 percent?

5(N) 9(I/Y) (-18,086.88) (PV) - finding 4650 (PMT) 0(FV)

You want to borrow $3,600 for 36 months and can afford monthly payments of $110, but no more. Assuming monthly compounding, what is the highest APR rate you can afford?

6.29 percent .52% × 12 = 6.29%

Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?

APR = 1.00 × 12 = 12 percent

The Sarbanes-Oxley Act in 2002 was primarily prompted by which one of the following from the 1990s?

Corporate accounting and financial fraud

A stock currently sells for $55. The dividend yield is 3.3 percent and the dividend growth rate is 4.6 percent. What is the amount of the dividend that was just paid?

D1 = .033($55) = $1.82 D0 = $1.82/(1 + .046) = $1.74

For the past six years, the stock price of Slippery Rock Mining has been increasing at a rate of 8.4 percent per year. Currently, the stock is selling for $82 per share and has a required return of 10.3 percent. What is the dividend yield?

Dividend yield = 10.3% − 8.4% = 1.9%

Which one of the following can be classified as an annuity but not as a perpetuity?

Equal annual payments for life

Which one of the following is a capital structure decision?

Establishing the preferred debt-equity level

Retirement Investment Advisors, Inc., has just offered you an annual interest rate of 4.2 percent until you retire in 40 years. You believe that interest rates will increase over the next year and you would be offered 4.8 percent per year one year from today. If you plan to deposit $12,000 into the account either this year or next year, how much more will you have when you retire if you wait one year to make your deposit?

FV = $12,000 × 1.042^40 = $62,214.27 FV = $12,000 × 1.048^39 = $74,691.52 Difference = $74,691.52 − 62,214.27 = $12,477.25

You are going to deposit $3,500 in an account that pays .61 percent interest per quarter. How much will you have in 7 years?

FV = $3,500 × 1.0061^28 = $4,149.73

Anne plans to save $40 a week, starting next week, for ten years and earn a rate of return of 4.6 percent, compounded weekly. After the ten years, she will discontinue saving and invest her account at 6.5 percent, compounded annually. How long from now will it be before she has accumulated a total of $50,000?

FV = $40 × ({[1 + (.046 / 52)]520 − 1} / (.046 / 52)) = $26,395.74 FV = $50,000 = $26,395.74 × (1 + .065)t t = 10.32 years Total time = 10 + 10.32 = 20.32 years

You are scheduled to receive $5,000 in two years. When you receive it, you will invest it at 6.5 percent per year. How much will your investment be worth eight years from now?

Future value = $5,000 × (1 + .065)^(8 − 2) = $7,295.71

Travis invests $5,500 today into a retirement account. He expects to earn 9.2 percent, compounded annually, on his money for the next 13 years. After that, he wants to be more conservative, so only expects to earn 6 percent, compounded annually. How much money will he have in his account when he retires 25 years from now, assuming this is the only deposit he makes into the account?Future value

Future value = $5,500 × (1 + .092)^13 × (1 + .06)^(25−13) = $34,747.80

Ten years ago, you deposited $5,500 into an account. Five years ago, you added an additional $2,500 to this account. You earned 6.5 percent, compounded annually, for the first 5 years and 5.0 percent, compounded annually, for the last 5 years. How much money do you have in your account today?

Future value = {[$5,500 ×(1 + .065)5] + $2,500} ×(1 + .05)5 = $12,808.09

Asonia Co. will pay a dividend of $5.30, $9.40, $12.25, and $14.25 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 9.8 percent on the company's stock, what is the stock price?

P = $5.30/(1 + .098) + $9.40/(1 + .098)2 + $12.25/(1 + .098)3 + $14.25/(1 + .098)4 P = $31.68

Symon's Suppers Co. has announced that it will pay a dividend of $4.27 per share one year from today. Additionally, the company expects to increase its dividend by 4.6 percent annually. The required return on the company's stock is 10.8 percent. What is the current share price?

P0 = $4.27/(.108 - .046) = $68.87

Graphical Designs is offering 15-15 preferred stock. The stock will pay an annual dividend of $15 with the first dividend payment occurring 15 years from today. The required return on this stock is 4.25 percent. What is the price of the stock today?

P14 = $15.00/.0425 = $352.94 P0 = $352.94/1.042514 P0 = $197.08

Mariota Corp. just paid a dividend of $4.40 per share on its stock. The dividend growth rate is expected to be 3.1 forever and investors require a return of 13.8 percent on this stock. What will the stock price be in 6 years?

P6 = [$4.40(1.0310)^7]/(.1380 − .0310) = $50.92

You want to have $14,500 in 6 years for a dream vacation. If you can earn an interest rate of .7 percent per month, how much will you have to deposit today?

PV = $14,500/1.007^6×12 = $8,774.98

A company has a pension liability of $390,000,000 that it must pay in 24 in years. If it can earn an annual interest rate of 3.5 percent, how much must it deposit today to fund this liability?

PV = $390,000,000/1.035^24 = $170,803,282.22

You want to have $89,000 in 18 years to help your child attend college. If you can earn an annual interest rate of 4.5 percent, how much will you have to deposit today?

PV = $89,000/1.045^18 = $40,299.23

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?

Required return = 4.1% + 5.4% = 9.5%

You want a seat on the board of directors of Four Keys, Inc. The company has 205,000 shares of stock outstanding and the stock sells for $66 per share. There are currently 3 seats up for election. The company uses straight voting. How many shares do you need to guarantee that you will be elected to the board?

Shares necessary = 205,000/2 + 1 = 102,501 shares

You want a seat on the board of directors of Four Keys, Inc. The company has 315,000 shares of stock outstanding and the stock sells for $46 per share. There are currently 4 seats up for election. If the company uses cumulative voting, how many shares do you need to guarantee that you will be elected to the board?

Shares necessary = {[1/(1 + 4)] × 315,000} + 1 = 63,001 shares

Which one of the following is a correct statement, all else held constant?

The future value is directly related to the interest rate.

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 6.3 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase?

To compute the initial loan amount, you must use a monthly interest rate.

Both you and your older brother would like to have $28,500 in 14 in years. Because of your success in this class, you feel that you are a more savvy investor than your brother and will be able to earn an annual return of 10.5 percent compared to your brother's 8.7 percent. How much less than your brother will you have to deposit today?

You: PV = $28,500/1.10514 = $7,043.25 Brother: PV = $28,500/1.08714 = $8,864.03 Difference = $8,864.03 − $7,043.25 = $1,820.78

Perpetuities have:

equal payments and an infinite life

The primary goal of financial management is most associated with increasing the:

market value of the firm.

Limited liability companies are primarily designed to:

provide limited liability while avoiding double taxation