FIN 301 Exam #2 (PSU)
A new machine costs $700, and will generate $300 in the first year, and $500 in the second year before it becomes obsolete in year three. The discount rate is 15%. What is the project's NPV?
$-61
If an investment costs $100 and generates cash flows of $40 for five years, the IRR of 29% implies an NPV of:
$0
Tina needs $100,000 a year for 25 years to retire comfortably, assuming she can earn an 8% return on her retirement portfolio, how much does she need to retire?
$1,067,477.62
If you borrow $5,000 for 3 years at a rate of 10%, how much will the principal balance on your loan reduce with your first payment (assume annual payments)?
$1,510.57
Nate invested $1,200,000 in Melco Crown. He held the stock for 6 years, and the stock returned 15% annually. How much money did Nate make before taxes?
$1,575,673
Pete borrowed $1 million from a bank at a 10% interest rate for a 30 year mortgage. What is his annual payment?
$106,079.25
Dale's investment in PPG has grown to $200,000 over a 5-year period. If the stock returned 11% annually over the past 5 years, how much did Dale originally purchase his investment for?
$118,690
You plan to invest $20,000 today and expect to earn 9% per year. How much money will you have at age 65 if you are now 43? (rounded to the nearest number)
$133,172
Your real estate advisor convinces you to buy a piece of land worth $300,000 with a payback period of 20 years. What will your annual cash flows be?
$15,000
If you borrow $25,000 for 10 years at a rate of 10%, how much will you pay in interest over the life of the loan (assume annual payments)?
$15,686.35
Suppose your investment returns are taxed at a 25% rate. If you invest $10,000 today and expect to earn a rate of return of 7%, what will your investment be worth in 10 years?
$16,680
Given a discount rate of 15%, what is the NPV of a capital project that costs $800 and generates $450 in cash flows for years 1 and 2 and $200 in cash flows for years 3 and 4?
$177
After graduating this May, Dale is planning on buying a new Ferrari for $250,000. He decides to finance his new car with a 5 year loan from Citibank with a 12% interest rate. His annual payment is $48,986. What will Dale's principal payment be at the end of the first year?
$18986
Travis took out a $225,000 home mortgage with 3.4% interest rate and equal annual payments. How much will he have to pay annually to repay the loan in 15 years?
$19,397
Randy plans to save $10,000 per month for retirement starting today. If he earns a 10% annual return (tax free), compounded monthly, how much will it be worth in ten years?
$2,048,449.79
10 Years ago you took out a 30-year mortgage to buy a house. Your annual payment is $18,162 and your current interest rate is 6%. Suppose you now want to refinance and still pay off the house in 20 years, how much principal do you still owe on the mortgage?
$208,316.71
Jim wants to buy a $500,000 house, he already has $10,000 saved. Assuming a 10% annual return and a 30% tax rate, how much will Jim need to save per year to have a 20% down payment in 3 years?
$27,295
New York Inc. recently bought a new machine for $300 million and expects cash flows generated from the investment in the next four years to be: $185 million, $203 million, $224 million, and $228 million. Using a discount rate of 15%, calculate the project's net present value (NPV).
$292 million
What payment would you need to make yearly into your savings account if you wanted $250,000 in 6 years, with a tax-rate of 20% and an average market return of 8.5%?
$35,126
On January 1 of this year, you invested $600 at a rate of 5% compounded quarterly. If your tax rate is 30%, what will the tax on your investment be at the end of the year? (rounded to the nearest dollar)
$39
If you plan to save $10,000 every year for retirement for 20 years. Assuming that you earn an 7.5% return on your investment, compounded annually, how much money will you have when you retire?
$433,047
You have an annuity with expected $50,000 payments each year for 20 years. If the discount rate is 8%, what is the present value of this annuity?
$490,907
Dale needs $10,000,000 in five years in order to buy his first yacht. If he can expect earn an interest rate of 13% for the next five years, how much does he need to invest today in order to purchase his yacht.
$5,427,599
On January 1 of this year, you invested $350 at a rate of 5% compounded annually. If your tax rate is 30%, what will the tax on your investment be at the end of the year?
$5.25
Your financial adviser tells you about an investment that will return 12% compounded annually. How much would you have to invest today to have $1,000,000 in 6 years?
$506,321
Assuming a 6% discount rate, how much would you need to invest now to have $100,000 in 10 years with no additional investment?
$55,839.48
Chris is on Shark Tank pitching his brilliant business idea, which he is asking the sharks to invest $500,000 into. At one point, Mark Cuban asks him: "What do you project to make in the first 5 years?" Chris responds that in the first 5 years he projects his business to generate $100,000; $170,000; $280,000; $400,000; $600,000 respectively. Assuming a discount rate of 10%, what would Mark Cuban's NPV for this investment be?
$587,531
Bob has a goal to buy a $1.5 million beach house in 10 years. If he expects to make a 9% annual return, how much does he need to invest today to buy his beach house in 10 years?
$633,616.21
What is your ending balance using compound interest of an investment of $1,550 with an interest rate of 8.0% after 20 years?
$7,224.48
You buy a stock at $60 / share expect to earn a 14% return for the next 2 years, what do you expect the stock price will be in two years?
$77.98
If you need $60,000 a year for 25 years to retire comfortably, how much do you need in your retirement account in order to retire assuming you can make a 5% return on your investments?
$845,636.67
If Joe wants to pay cash for a $30,000 car in 3 years, how much does he need to save each year if he can earn a 5% tax-free rate of return?
$9,516
Assuming a discount rate of 13%, what is the NPV of a project that costs $40 and generates $15 for three years?
-5
Randy invested $87,000 in securities that had an annual return of 13%. When Randy sold his investment, the securities had a value of $295,327. How long did Randy hold the securities?
10 years
What is the SEC filing that public companies must issue annually?
10-K
Kevin's parents have $10,000 saved for his college education. His parents invested the $10,000 and it grew to $100,000 at the end of 20 years. What annual interest rate did they earn if we assume compounding interest?
12%
Suppose you have the choice between receiving $500 now, or $750 in 3 years. What discount rate would make these options worth the same to you?
14.47%
Mr.Wonderful needs $2,500,000 upon retirement in 10 years to live comfortably. He can invest $125,000 a year to his retirement. What interest rate would his investment need to earn in order for him to meet his goals?
14.7%
You invest $150 today and in 5 years you will have $300. Ignoring taxes, what is the annual return on your investment?
14.9%
What is the average first day return on IPO's?
15%
What is the fee structure of a typical Hedge Fund?
2% on assets under management, 20% on gains
A stock in the DJIA has a price of $30 and increases 10%, how many points would this add to the DJIA index?
3.0 Points
The current return on a 10-year U.S. Treasury note is 2%. If you were to invest today and assuming that rate stays fixed indefinitely, how long would it take you to double your investment? Ignore taxes.
36 years
Joe invested $75,000 in Kaiser Aluminum. When he sold the stock, his shares were worth a total value of $127,000 and the stock returned 13% annually. How long did Joe hold the stock?
4.3 years
At the beginning of the year, you invested $300 at a rate of 10% compounded annually. At the end of the year, you will have to pay a $12 tax on your investment. What is your tax rate?
40%
What is the payback period on an $50,000 investment that generates $10,000 in cash flow annually if the discount rate is 10%?
5.0 years
6 years ago, you invested $27,500. The investment has grown to $37,600. What is your average rate of return?
5.4%
Nittany Car Rentals just acquired a brand new BMW. The car cost $80,000 and will depreciate fully in 8 years. Given that the company makes $30,000 a year renting it out, what will the book rate of return be after 2 years?
50%
XYZ company is considering purchasing a new piece of equipment. The initial outlay for the equipment is $145,000. It will generate net incremental cash flows of $42,000 in Year 1, $51,000 in Year 2, and $72,000 in Year 3. What is the IRR of the project?
6.16%
Greg buys a house for $105,000 and rents it out for $15,000 a year. What is the payback period on his real estate investment?
7
What interest rate would you have to earn if you wanted to double an investment in 10 years?
7.2%
If you invest $2,300 today and after 20 years you have $12,890, what annual rate of return did you earn?
9%
If you invest $130 today and, in 5 years, you have $200 - what was your annually compounded interest? Ignore taxes.
9.0%
1. A company is planning to invest in a project that requires initial capital investment of $10.0 million. The project is expected to generate the following cash flows: Year 1: $3.0 million Year 2: $4.0 million Year 3: $3.0 million Year 4: $2.6 million What is the NPV of the project given a discount rate of 6.5%? A) $848,126 B) $4,600,000 C) $2,463,884 D) $4,255,000 E) $3,491,890
A
Which of the following is NOT true about high frequency trading? A. Positions are still long term B. May pose new risks to the financial system C. Employs highly quantitative algorithms to take advantage of market data D. Accounts for 50% of stock trading
A
Which of the following transactions would take place in the Primary securities market? A. An investor buys an IPO stock through an investment bank. B. An investor buys a stock from another investor. C. An institution buys a stock from another institution. D. An investor opens a Roth IRA account at an investment bank. E. An investor buys a municipal bond from an institution.
A
Which statement is true when evaluating the bid / ask spreads? A. Sellers of shares look for the highest bid price B. Sellers of shares look for the lowest ask price C. Buyers of shares look for the largest bid / ask spread D. Buyers of shares look for the highest ask price E. Buyers of shares look for the lowest bid price
A
Which is an example of insider trading?
A retail investor buying shares based on non-public information he heard from a friend
Which of the following statements about the Financial Life Cycle is true?
Access to capital markets is one of the primary reasons for a company to issue an IPO
Which of the following hedge fund strategies historically has the highest return? A. Multi-strategy B. Activist C. Convertible arbitrage D. Event Driven E. Managed Futures
Activist
Why did AIG get bailed out while Lehman Brothers did not?
All other major financial firms would have gone bust due to the threat of systemic risk
A breakdown of level payments over a long period of time is known as a
Amortization schedule
Which of the following would increase revenues for a mutual fund?
An increase in assets under management
Which of the following transactions would take place in the primary securities market?
An investor buys an IPO stock through an investment bank.
Matt and Sara both borrow $30,000 for 8 years. Matt's interest rate is 4.75%, while Sara's is 6.5%. How much more will Sara pay in total interest over the 8 year loan than Matt if they both make annual payments? A. $4,095 B. $2,658 C. $5,013 D. $851 E. $115
B
Ross wants to buy a new car in 10 years and estimates that he will need $50,000 to purchase the vehicle of his choice. How much will he have to save annually given that he is in the 30% tax bracket and estimates to earn 6.0% in the market? Link to Handout A) $3,969 B) $4,126 C) $6,333 D) $3,800 E) $5,000
B
Which of the following does NOT qualify as a cash outflow? A. Mortgage payment B. Dividend earned from investments C. Debt expense D. Legal expenses
B
Which of the following is NOT one of the steps of the open auction system? A. Order wired to the broker in the exchange B. Broker ignores the trade unless the spread is favorable C. Floor broker takes the order to the trading specialist D. Floor broker executes the trade with either the stock's designated market maker or another floor broker E. Floor broker reports trade
B
Which of the following is an example of a capital budgeting decision? A.Raising debt versus equity due to the tax shield benefits B. Investing in a new factory C. Maintaining a current ratio of at least 1.5 D. A company issuing an IPO E. A company changing its credit terms
B
The following statement would be considered which of the following choices? Sell 1000 shares of Ford stock at $20 A. Market order B. Limit order C. Dealer order D. Brokerage order E. Bid order
B. Limit Order
Which of the following is a factor that promotes well-functioning financial markets?
Borrowers and investors are held accountable.
If you determine the DCF value of an investment and that value is higher than the current price of that investment, what would you do based on the decision rule?
Buy it
Which of the following is CERTAINLY true regarding interest rates? A. Increases in interest rates lead to increases in stock prices. B. Increases in interest rates lead to increases in bond prices. C. Increases in interest rates lead to decreases in bond prices. D. The effect of a change in interest rates on bond and stock prices is unknown. E. Interest rates do not affect stock or bond prices.
C
Which of the following is true concerning the difference between simple and compound interest? A. With compound interest, interest is earned only on the original investment whereas with simple interest, interest is earned on interest. B. Simple interest always leads to a higher ending investment value when compared to compound interest. C. With simple interest, interest is earned only on the original investment whereas with compound interest, interest is earned on both the original investment and the accumulated interest. D. With compound interest, the assumption is that interest earned on the original investment is not reinvested. With simple interest, interest is reinvested. E. Simple interest and compound interest always lead to the same ending investment value so there is no difference between the two methods.
C
You want to invest just enough today to have $2,000,000 in 25 years. Your bank will pay you 4.3% a year. Assume there is no tax on interest. How much must you put into the bank today? Link to Handout A) $68,814 B) $101,259 C) $698,107 D) $474,709 E) $37,100
C
What is the largest options exchange in the world?
Chicago Board Options Exchange
Which of the following financial institutions is both on the sell side and buy side?
Commercial banks
Which is NOT part of an S-1 filing?
Competitor benchmarking
A company is planning to invest in a project that requires initial capital investment of $2,500,000. The project is expected to generate the following cash flows: Year 1: $1,000,000; Year 2: $500,000; Year 3: $950,000; Year 4: $750,000. What is the IRR of the project? Link to Handout A) 26.7% B) 6.7% C) 8.3% D) 10.9% E) 5.5%
D
If you are buying a stock, which of the following ask prices is the most attractive? A) 20.60 - 20.80 B) 20.59 - 20.79 C) 20.90 - 20.95 D) 20.58 - 20.77 E) 20.53 - 20.78
D
The Glass-Steagall Act A. was passed after the great depression B.forced the separation of commercial and investment banking activies C. was signed into law by President Franklin D. Roosevelt D. All of the Above
D
Which of the following is TRUE regarding the calculation of NPV (Net Present Value)? A. NPV does not use Net Income or Net Cash Flow in its calculation B. NPV uses Net Income in its calculation rather than Net Cash Flow C.NPV uses both Net Income and Net Cash Flow in its calculation D. NPV uses Net Cash Flow in its calculation rather than Net Income E. An initial outlay of cash has no effect on NPV
D
Which would you NOT expect when markets are functioning well? A. More innovation B. Stronger economic growth C. Better Liquidity D. Dissatisfied consumers E. Better products
D
A Trader Who Makes a Market in One or More Securities and is Charged with Maintaining a Fair and Orderly Market is known as:
Designated Market Maker
Which is true about Hedge Funds? A. Anyone can invest in Hedge Funds B. They are hedged against market risks C. Their primary strategy is to invest in only stocks D. All Hedge Funds are Ponzi Schemes E. Hedge Funds are very illiquid investments
E
Which of the following does capital budgeting NOT estimate regarding a project's incremental cash flows? A.Timing of incremental cash flows B.Amount of incremental cash flows C. Risks of incremental cash flows D.Present value of incremental cash flows vs. initial costs E. Future value of incremental cash flows vs. initial costs
E
Which of the following industries is NOT affected by the financial markets? A.Housing B. Government C. Insurance D. Retirement E. They are all affected by the financial markets
E
Which of the following is DEFINITELY true about discounted cash flows? A. If interest rates rise but stay below the coupon rate of a bond, the bonds value will not change B If a projections for cash flow in the long term rise, the value will rise faster than if short term cash flow projections rise C. The value of a loan with a fixed amortization schedule will not change if interest rates change because payments are fixed D. When interest rates increase the amortization schedule on a loan changes and value increases E. If interest rates decline, the value of a bond will increase even though actual future cash flows don't change
E
You invest $700,000 now at 7% annual interest in a Roth IRA (tax-free). Approximately how long will it take you to double your money? Link to Handout A) 4 Years B) 7 Years C) 8 Years D) 9 Years E) 10 Years
E
You plan to invest $20,000 in a Roth IRA (tax free) per year. You expect to earn 6% per year. How much money will you have at age 60 if you are 45 now? (rounded to the nearest number) A) $385,088 B) $225,000 C) $35,948 D) $240,000 E) $465,519
E
Which of the following actions is illegal insider trading?
Employees buy stock in their company after the CEO tells them non-public information.
The present value of an investment is based on ________, discounted for risk and timing.
Expected cash flows
Dealers Earn a Commission or a Fee for Trades
False
In an investment, the after-tax return is the product of the interest rate and the tax rate.
False
True or False: A $30 cash inflow 3 years from now is worth less than a $30 cash inflow 5 years from now.
False
True or False: A customer buying stock from a dealer will buy at the bid and sell at the ask.
False
True or False: A higher discount rate will increase the present value of an annuity.
False
True or False: A venture capital firm would invest in a company in the early stages if it knew its return would be 10% when it exited the investment once it IPOs in 10 years.
False
True or False: An example of a secondary market is when an investment bank distributes securities to financial institutions during an IPO.
False
True or False: An order to buy or sell at the best available price as soon as the order reaches the exchange is known as a limit order.
False
True or False: An over-the-counter market is a physical location where you can trade securities, hence the term - over the counter.
False
True or False: As market interest rates rise, the value of bonds rise as well.
False
True or False: Discount rates are generally negative numbers.
False
True or False: Floor trading is considerably more profitable and efficient than electronic trading.
False
True or False: Hedge Funds cater to novice investors, who have a few thousand dollars to invest.
False
True or False: If Samantha can earn a 5% tax-free interest rate or pay a 30% tax rate on an 8% return, she should invest in the tax free option because it provides a higher tax-adjusted return.
False
True or False: If a new machine costs $100 thousand and NPV of the project is $50 thousand, a manager would reject this project because cost is greater than NPV.
False
True or False: Investment A and B have the same future value and discount rate; however, investment A has a holding period of 6 years (n=6) while investment B has a holding period of 4 years (n=4). Given that information, investment B has a lower present value than investment A.
False
True or False: Investors can invest in Hedge Funds with ample liquidity. That is, investors can take their funds out whenever they want to.
False
True or False: Level cash flows tend to vary based on the short-term interest rate set by the Federal Reserve as well as the yield on U.S. Government bonds.
False
True or False: Money Market funds invest primarily in equity securities.
False
True or False: More frequent compounding is bad for investors because it leads to higher costs and lowers their overall return.
False
True or False: Most Dark Pool trading is done by retail investors.
False
True or False: The "A" round of financing is considered lower risk than an IPO.
False
True or False: The DCF determines the PRICE of an investment while the market determines the VALUE of that investment.
False
True or False: The trading floor on the NYSE is just as busy today as it was in the 1960s.
False
True or False: The value of any project is simply equal to the initial investment amount. If that amount is reasonable, then it is a good investment.
False
True or False: Typically, a company attempts to raise capital via securities offerings before it puts any owners capital into the business.
False
True or False: When using the profitability index, accept the project with the highest score and then continue to go lower. If the only options that are left are to invest in a venture with a negative PI, you should still invest.
False
You just won the lottery. If you had the choice to receive $100,000 now or $150,000 in five years, you would prefer the $100,000 now. Assume an interest rate of 8%.
False
....... funding are funds that accommodate growth.
First Round
Jack puts $100 into a savings account that earns 5% (tax-free) interest compounded annually. The amount that Jack will have in the account in 5 years is known as
Future Value
Which was a successful IPO?
Which of the following is TRUE about Venture Capital Financing?
IPOs backed by Venture Capital have higher long-term returns
In an investment, which of the following is taxed?
Interest earned
As CFO of Nittany Co., Dale examines the internal rate of return for various project proposals and decides which ones are the best to invest in. His minimum required rate of return is 15% and he finds a project with a projected IRR of 30%. What should Dale do?
Invest in the project
A company's investment rule when using the calculated Net Present Value of a project is:
Invest in the project if the NPV is positive.
Which of the following is a sell side institution?
Investment Bank
Which institution is considered a sell side institution?
Investment banks
Which of the following is true regarding the stock and debt markets?
Investors seeking higher returns invest in stocks
Assuming you borrow $10,000 for 5 years at 7%, and interest rates increase to 8%, what happens to the value of your loan?
It decreases by $262.15
What is true about the Glass Steagall Act?
It forced the separation of investment banking and commercial banking activities.
_________ funding occurs when mature company's are funding major expansion projects or new product developments
Late Stage
Shares of Apple are currently trading at approximately $129. Placing an order to buying 1000 shares BUT only when the stock price hits $125 is known as a
Limit Order
The primary assets of commercial banks are ___________.
Loans, Bonds, & Bills
Hedge Funds and Mutual Funds intermediate between ___________.
Markets & Investors
According to the financial life cycle, which of the following is the first source of capital for a business?
Owner's Capital
As CEO of a real estate development company, you are looking at two possible construction projects. Project A has a NPV of $300,000 and costs $450,000. Project B has a NPV of $80,000 and costs $100,000. According to the profitability index, which project should you choose?
Project B
A secondary offering is when shares are issued by a
Public Firm
What is the primary role of the S.E.C. (Securities Exchange Commission)?
Regulator of security markets
When would corporate executives not be allowed to trade on their own stock?
Right before earnings announcements.
Robert and Rosie both invested $7,500 5 years ago. They both earned a 15% return, however Robert earned a simple return of 15% and Rosie earned a compounded return of 15%. How did this difference in compounding affect their investments' value today?
Rosie will have $1,960 more than Robert.
_________ funding occurs with maturing companies where an merger, IPO, or leveraged buyout is a viable option.
Second Round
Which of the following Venture Capital funding rounds would you expect to require the greatest return? Seed/Startup fund A round B round C round There is no difference between them
Seed/Startup Fund
John won the lottery and has the option to receive a lump sum of $5,000,000 now or receive a $500,000 annuity every year for the next 25 years. Assuming John can earn a 10% return on his money, what would you advise him to do?
Take the lump sum bc it is worth $461,480 more than the annuity.
Which will be worth more in 20 years: $150 invested today at a rate of 9% $12 invested every year at a rate of 12%
The $12 invested every year will be worth $23.97 more in 15 years
What is the following is true about the Dow Jones Industrial Average (DJIA)?
The DIJA weights stocks by their market price.
A project should be rejected if its internal rate of return does not exceed:
The established hurdle rate
Which of the following is true regarding Venture Capital firms?
The exit for most VC investments is an initial public offering
Which of the following is true about Initial Public Offerings (IPOs)?
The long-term adjusted performance of IPOs is negative
Which of the following is TRUE regarding financial institutions?
The primary revenues sources for insurance companies are insurance premiums and the income from investments that insurance companies earn by investing this premium income.
What is true about the designated market maker?
The primary role of the designated market maker is to hold inventory and to buy and sell shares
Which of the following is TRUE regarding investment intermediaries?
The risk associated with bond funds generally falls between the risks associated with stock and money market funds.
If an investment's interest is compounded semi-annually rather than annually, what will be the result on the interest earned from the investment?
The semi-annual compounding investment will earn more interest because interest will be earned on previous interest payments more often
What is a major factor in a commercial bank's lending margin?
The steepness and shape of the yield curve
Which of the following statements about financial institutions is true?
The three general types of mutual funds include money market funds, bond funds, and stock funds.
If you own a zero coupon bond that will pay $100,000 in 5 years and market interest rates for similar bonds fall from 8% to 6%, what happens to the value of your bond?
The value will increase by $6,667.50
What is the role of a designated market maker?
To ensure that there is a continuous market for shares
What is one of the primary roles of the SEC?
To protect investors from securities fraud.
Nittany Medical Center is looking to buy a new X-Ray machine worth $200,000. It estimates that it will generate an annual income of $50,000. The hospital's Board of Directors has instituted a rule that requires the minimum Book Rate of Return upon acquisition to be 20%. According to this criteria, you decide that the machine is a good investment.
True
The interest of a bond is paid semiannually.
True
True or False: A commercial bank is both a buy side and sell side financial institution
True
True or False: A trader or dealer will make money by buying at the bid and selling at the ask.
True
True or False: Assuming a 10% discount rate, you would have to invest $77,108.66 now in order to have $200,000 at the end of 10 years.
True
True or False: Equity products have higher margins than fixed income products
True
True or False: Hedge funds fee structure is 2 and 20. That is, Hedge Funds earn 2% on total assets under management in addition to 20% of all the profits.
True
True or False: Money market funds invest in short-term debt instruments, such as treasuries, CDs, and commercial paper
True
True or False: Owners Capital is the initial funds that an owner puts into his/her company.
True
True or False: Secondary offerings and seasoned offerings are the same thing.
True
True or False: Venture-backed IPOs traditionally do better than non-venture-backed IPOs.
True
Which of the following is a primary disadvantage to investing in a hedge fund?
illiquidity
A Red Herring is........
the preliminary prospectus provided to investors before the IPO.
Which of the following are the primary factors in discounting an investment's expected cash flows?
time & risk
Which of the following is true concerning the difference between simple and compound interest?
with simple interest, the assumption is that interest earned on the original investment is not reinvested. With compound interest, interest is reinvested.