FI 320 Exam 2 MC Questions from book

Gator Tires pays a constant annual dividend of $1.21 per share. How much are you willing to pay for one share if you require a rate of return of 9.3 percent? $14.72 $13.01 $6.50 $1.39 $13.90

$13.01 P = $1.21 / .093 = $13.01

JLT is a mature manufacturing firm. The company just paid an annual dividend of $3.62, but management expects to reduce future payouts by 3.5 percent per year, indefinitely. What is this stock worth today at a required return of 12.5 percent? $21.42 $21.83 $20.24 $23.56 $20.02

$21.83 P0 = [$3.62 × (1 − .035)] / [.125 − (−.035)] = $21.83

River Rock, Inc., just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past 10 years and expects to continue doing so. What will a share of this stock be worth 6 years from now if the required return is 16 percent? $23.60 $24.65 $25.08 $25.50 $26.90

$24.65 P6 = ($2.80 × 1.0257) / (.16 − .025) = $24.65

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? $3,105.39 $3,197.32 $3,202.58 $3,294.51 $3,443.01

$3,197.32

You just won $17,500 and deposited your winnings into an account that pays 6.7 percent interest, compounded annually. How long will you have to wait until your winnings are worth $50,000? 15.1 years 15.31 years 15.52 years 15.73 years 16.19 years

16.19 years

What is the net present value of the following cash flows if the relevant discount rate is 11.4 percent? $4,887.26 $5,006.19 $8,215.46 $13,058.39 $18,519.71

4,887.26 NPV = −$32,400 + $10,620 / 1.114 + $15,800 / 1.1142 + (−$3,110 / 1.1143) + $26,600 / 1.1144NPV = $4,887.26

A bond has a $1,000 face value, a market price of $1,023.32, and pays interest payments of $54.00 every year. What is the coupon rate? 6.76 percent 4.50 percent 5.27 percent 5.40 percent 5.35 percent

5.40 percent Coupon rate = $54.00 / $1,000 = .054, or 5.40 percent

The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield? 7.35 percent 7.78 percent 9.23 percent 6.20 percent 4.49 percent

6.20 percent g = .1167 − ($2.64 / $48.30) = .0620, or 6.20 percent

The 6.3 percent, semi-annual coupon bonds of PE Engineers mature in 13 years and have a price quote of 99.2. These bonds have a current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield of _____ percent. 6.35; 6.32; 6.29 6.35; 6.39; 6.49 6.12; 6.36; 6.42 6.23; 6.20; 6.16 6.23; 6.36; 6.42

6.35; 6.39; 6.49 Current yield = (.063 × $1,000) / (.992 ×$1,000)Current yield = .0635, or 6.35 percent

Lisa has $1,000 in cash today. Which one of the following investment options is most apt to double her money? 6 percent interest for 3 years 12 percent interest for 5 years 7 percent interest for 9 years 8 percent interest for 9 years 6 percent interest for 10 years

8% interest for 9 years

The net present value of an investment represents the difference between the investment's: cash inflows and outflows. cost and its net profit. cost and its market value. cash flows and its profits. assets and liabilities.

Cost and its market value

The price of a stock at Year 3 can be expressed as: D0 / (R + g4). D0 × (1 + R)5. D1 × (1 + R)5. D4 / (R - g). D5 / (R - g).

D4 / (R-g)

Jamie earned $14 in interest on her savings account last year. She has decided to leave the $14 in her account so that she can earn interest on the $14 this year. The interest earned on last year's interest earnings is called: simple interest. complex interest. accrued interest. interest on interest. discounted interest.

Interest on Interest

Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? Internal rate of return Payback Average accounting rate of return Net present value Profitability index

Net Present Value

On which one of the following dates do dividends become a liability of the issuer for accounting purposes? irst day of the fiscal year in which the dividend is expected to be paid Twelve months prior to the expected dividend payment date On the date the board declares the dividend On the date the company announces the dividend to the public On the date of payment

On the date the board declared the divdend

What condition must exist if a bond's coupon rate is to equal both the bond's current yield and its yield to maturity? Assume the market rate of interest for this bond is positive. The clean price of the bond must equal the bond's dirty price. The bond must be a zero coupon bond and mature in exactly one year. The market price must exceed the par value by the value of one year's interest. The bond must be priced at par. There is no condition under which this can occur.

The bond must be priced at par

What is the market called that facilitates the sale of shares between individual investors? Primary Proxy Secondary Inside Initial

Secondary

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? One of the time periods within the investment period has a cash flow equal to zero. The initial cash flow is negative. The investment has cash inflows that occur after the required payback period. The investment is mutually exclusive with another investment of a different size. The cash flows are conventional.

The investment is mutually exclusive with another investment of a different size.

Vulcan, Inc., has 7 percent coupon bonds on the market that have 13 years left to maturity. The bonds make annual payments and have a par value of $1,000. If the YTM on these bonds is 8.4 percent, what is the current bond price?

The price of any bond is the PV of the interest payments, plus the PV of the par value. Notice this problem assumes an annual coupon. The price of the bond will be: P = $70({1 - [1/(1 + .084)]13}/.084) + $1,000[1/(1 + .084)13] P = $891.74

Your coin collection contains fifty 1952 silver dollars. If your grandparents purchased them for their face value when they were new, how much will your collection be worth when you retire in 2063, assuming they appreciate at an annual rate of 4.8 percent?

To find the FV of a lump sum, we use: FV = PV(1 + r)tFV = $50(1.048)111FV = $9,100.65

You have just received notification that you have won the $1 million first prize in the Centennial Lottery. However, the prize will be awarded on your 100th birthday (assuming you're around to collect), 80 years from now. What is the present value of your windfall if the appropriate discount rate is 8.45 percent?

To find the PV of a lump sum, we use: PV = FV/(1 + r)tPV = $1,000,000/(1.0845)80PV = $1,519.27

An investment has an initial cost of $2.7 million and net income of $189,400, $178,600, and $172,500 for Years 1 to 3. This investment will be depreciated by $900,000 a year over the three-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 12.5 percent? Why or why not? Yes, because the AAR is 12.5 percent Yes, because the AAR is less than 12.5 percent Yes, because the AAR is greater than 12.5 percent No, because the AAR is greater than 12.5 percent No, because the AAR is less than 12.5 percent

Yes, because the AAR is greater than 12.5 percent

A semiannual 5.4 percent coupon bond currently sells for par value. What is the maturity on this bond? The bond must mature in one year. The bond could have any maturity date. The bond must be maturing today. The bond must mature in 10 years. The bond must be a perpetual security.

the bond could have any maturity date Since the bond sells for par, the maturity is indeterminate.

When valuing a stock using the constant-growth model, D1 represents the: expected difference in the stock price over the next year. expected stock price in one year. last annual dividend paid. the next expected annual dividend. discount rate.

the next expected annual dividend.

All else held constant, the present value of a bond increases when the: coupon rate decreases. yield to maturity decreases. current yield increases. time to maturity of a premium bond decreases. time to maturity of a zero coupon bond increases.

yield to maturity decreases

If an investment is producing a return that is equal to the required return, the investment's net present value will be: positive. greater than the project's initial investment. zero. equal to the project's net profit. less than, or equal to, zero.

zero