FIN 3010 Homework Chapters 5-8

A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield?

5.21

Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest annually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the current yield?

5.43

In relation to bonds, which one of the following terms has the same meaning as the term "crossover"?

5B

Vegan Delite stock is valued at $124.20 a share. The company pays a constant annual dividend of $8.80 per share. What is the total return on this stock?

7.09 percent

Smiley Industrial Goods has bonds on the market making annual payments, with 13 years to maturity, and selling for $1,095. At this price, the bonds yield 6.4 percent. What must the coupon rate be on these bonds? -6.67 percent -6.84 percent -7.23 percent -7.50 percent -7.83 percent

7.50 percent

Whitts BBQ would like to issue some 10-year, semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds?

9.50 percent To sell bonds at par, the coupon rate must be set equal to the yield to maturity on comparable bonds, which in this case is 9.50 percent.

The Toy Chest pays an annual dividend of $4.80 per share and sells for $93.20 a share based on a market rate of return of 15 percent. What is the capital gains yield?

9.85 percent

A bond has a par value of $1,000, a current yield of 7.5 percent, and semiannual interest payments. The bond quote is 98.6. What is the amount of each coupon payment?

$36.98

Suppose you know that a company's stock currently sells for $75 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

$4.91

Kris will receive $800 a month for the next 5 years from an insurance settlement. The interest rate is 4 percent, compounded monthly, for the first 2 years and 5 percent, compounded monthly, for the final 3 years. What is this settlement worth to him today?

$43,066.22

The Glass Ceiling paid an annual dividend of $2.20 per share last year. Management just announced that future dividends will increase by 2.8 percent annually. What is the amount of the expected dividend in year 5?

2.53

Janice plans to save $75 a month, starting today, for 20 years. Kate plans to save $80 a month for 20 years, starting one month from today. Both Janice and Kate expect to earn an average return of 5.5 percent on their savings. At the end of the 20 years, Kate will have approximately _____ more than Janice.

A. $2,028.39

The Donut Hut has sales of $68,000, current assets of $11,300, net income of $5,100, net fixed assets of $54,900, total debt of $23,800, and dividends of $800. What is the sustainable growth rate?

Answer: 11.29%

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain?

A. Interest-only

At the end of this month, Les will start saving $150 a month for retirement through his company's retirement plan. His employer will contribute an additional $0.50 for every $1.00 that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5 percent on his retirement savings, how much will Les have in his retirement account 30 years from now?

$566,190.22

Which one of the following cannot be computed?

B. Future value of a perpetuity

Which of the following will increase the present value of an annuity, all else held constant? I. Increase in the number of payments II. Increase in the interest rate III. Decrease in the interest rate IV. Decrease in the payment amount

B. I and III only

McClary Tires just decided to save money each year for the next four years to help fund a new building. If it earns 6.5 percent on its savings, how much will the firm have saved at the end of year 4? End of Year Amount Saved 1 $20,000 2 $24,000 3 $28,000 4 $32,000

D. $113,200.39 FV = ($20,000 × 1.065^3) + ($24,000 × 1.065^2) + ($28,000 × 1.065^1) + $32,000 = $113,200.39

Sinking funds may be used to purchase bonds in:

the open market

A note is a(n):

unsecured debt that is generally payable within the next 10 years

The written agreement that contains the specific details related to a bond issue is called the bond:

indenture

A real rate of return is defined as a rate that has been adjusted for which one of the following? Inflation Interest rate risk Taxes Liquidity Default risk

inflation

The R in the Fisher effect formula represents the: current yield. real return. coupon rate. inflation rate. nominal return.

nominal return

A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?

14.56 percent

Swan Lake Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 12 percent. What is the dividend growth rate?

3.47

Arts and Crafts Warehouse wants to issue 15-year, zero coupon bonds that yield 7.5 percent. What price should it charge for these bonds if the face value is $1,000? (Assume semi-annual compounding.)

331.40

Letitia borrowed $6,000 from her bank two years ago. The loan term is four years. Each year, she must repay the bank $1,500 plus the annual interest. Which type of loan does she have?

A. Amortized

Which one of the following is the annuity present value formula?

A. C × {{1 - [1/(1 + r)t]}/r}

Which one of the following statements is correct? A. From a legal perspective, preferred stock is a form of corporate equity. B. All classes of stock must have equal voting rights per share. C.Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions. D. Dividends are tax-free income for individual investors. E. Shareholders prefer noncumulative dividends over cumulative dividends.

A. From a legal perspective, preferred stock is a form of corporate equity

Billingsley, Inc. is borrowing $60,000 for five years at an APR of 8 percent. The principal is to be repaid in equal annual payments over the life of the loan with interest paid annually. Payments will be made at the end of each year. What is the total payment due for year 3 of this loan?

B. $14,880

You have an outstanding loan with an EAR of 14.6 percent. What is the APR if interest is compounded monthly?

B. 13.71 percent

Belk Department Store charges a daily rate of 0.01 percent on its store credit cards. What interest rate is the company required by law to report to potential customers?

B. 36.50 percent APR = 0.01 percent × 365 = 36.50 percent

Your grandfather started his own business 52 years ago. He opened a savings account at the end of his third month of business and contributed $x. Every three months since then, he faithfully saved another $x. His savings account has earned an average rate of 4.5 percent annually. Today, his account is valued at $364,209.11. How much did your grandfather save every three months?

D. $443.13

Popeye's Fried Chicken just took out an 8 percent interest-only loan of $50,000 for three years. Payments are to be made at the end of each year. What is the amount of the payment that will be due at the end of year 3?

D. $54,000.00 Payment Year 3 = $50,000 + ($50,000 × 0.08) = $54,000

A new financial services company just opened in your town. To attract customers, it is offering a "9-11" loan special. The company will lend $9 today in exchange for a payment of $11 one year from today. What is the APR on this loan?

D. 22.22 percent FV = $9 × (1 + r)^1 = $11; r = 22.22 percent

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

D. Equal annual payments for life

Chandler Tire Co. is trying to decide which one of two projects it should accept. Both projects have the same start-up costs. Project 1 will produce annual cash flows of $52,000 a year for six years. Project 2 will produce cash flows of $48,000 a year for eight years. The company requires a 15 percent rate of return. Which project should the company select and why?

D. Project 2, because the present value of the cash inflows exceeds those of Project 1 by $18,598.33

You want to buy a new sports coupe for $84,600, and the finance office at the dealership has quoted you a 7.1 percent APR loan for 48 months to buy the car. What will your monthly payments be? What is the effective annual rate on this loan?

E. $2,029.78; 7.34 percent

PayDay Loans is offering a special on one-year loans. The company will loan you $5,000 today in exchange for one payment of $5,900 one year from now. What is the APR on this loan?

E. 18.00 percent FV = $5,900 = $5,000 × (1 + APR)1; APR = 18 percent

The Townhouse Galleries offers credit to its customers at a rate of 1.6 percent per month. What is the effective annual rate of this credit offer?

E. 20.98 percent EAR = (1 + 0.016)^12 - 1 = 20.98 percent

Cindy is taking out a loan today. The cash amount that she will receive today is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?

E. Pure discount

refers to the relationship between nominal returns, real returns and inflation

Fisher effect

The term structure of interest rates is affected by which of the following? I. Interest rate risk premium II. Real rate of interest III. Default risk premium IV. Inflation premium

I, II, and IV only

Kate owns a stock with a market price of $31 per share. This stock pays a constant annual dividend of $0.60 per share. If the price of the stock suddenly increases to $36 a share, you would expect the:

II

Given an interest rate of 5.85 percent per year, what is the value at year t = 8 of a perpetual stream of $2,500 payments that begin at year t = 25?

PV t = 24 = $2,500/0.0585 = $42,735.04; PV t = 8 = $42,735.04/(1 + 0.0585)^16 = $17,208.00

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?

Perpetuity

A bond has a make-whole call provision. Given this, you know that the: bond will always sell at par. call premium must equal the annual coupon payment. call price is directly related to the market rate of interest. call price is inversely related to the market rate of interest. bond must be a zero coupon bond.

call price is inversely related to the market rate of interest.

Many of the smaller sell orders sent to the floor of the NYSE are:

electronically transmitted

What is the market called that allows shareholders to resell their shares to other investors?

secondary

Which one of the following bonds is most apt to have the smallest liquidity premium?

treasury bill