Finance 220

What is the Present Value of $8530 to be received 4 years from today if the discount rate is 2.50% with quarterly compounding periods?

7720.67

A bond matures in exactly 12 years. It has a par value of $1,000, a coupon rate of 5.6%, and makes two interest payments per year. If the market rate of interest were to be 5.8%, what would the value of the bond be?

983

The legal document that contains all agreements between the bond issuer and bond holders is call the:

Indenture

Bond ratings are broken down into two fundamental categories. These are:

Investment grade and Speculative grade

5. An example of the application of the comparables method of stock valuation would be the use of the P/E multiple to value a company.

True

You buy a house and finance it with a $250,000 30-year mortgage loan that requires equal payments at the end of each month. Your APR is set at 5.4%. What would be the amount of each of your monthly payments? Use Excel's PMT() function.

1403.83

You are offered an annuity that pays $2,000 annually at the end of each of the next 10 years. If the discount rate is 4%, what should be the price (value) of the annuity today?

16221.79

If the annuity described in problem 1 were to offer payments at the beginning of each year, what would the price (value) have been?

16870.66

You invested $10300 and in 5 years it grew to $11800. What annual rate of return (APR) must you have earned. Assume quarterly compounding.

2.87

You invested $11800 and in 7 years it grew to $14400. What annual rate of return (APR) must you have earned. Assume annual compounding.

2.89

You win the lottery! You have a choice of either receiving $275,000 today, or $20,000 at the end of each of the next 20 years. If you took the lump sum payment, how much money would you be sacrificing assuming an APR discount rate of 2.8%? This involves comparing the PV of each option.

28126.84

A 0-coupon bond is issued with 30 years to maturity. It has a par value of $1,000 and makes no cash interest payments. The market rate for a bond with similar features and risks is 3.75%. What would be the issue price for this bond?

328

At age 66 you begin receiving monthly (m=12) social security payments of $2,100 at the end of each month. If you expect to live until age 86 (20 more years), and the discount rate is 3.2%, what is the present value of your social security benefit?

371,903.35

You buy a bond for $1024.75. The bond has 20 years to maturity, makes two payments per year at a coupon rate of 4.5%, and has a par value of $1,000. However, the bond is callable after 10 years, and if called pays a 'call premium' equal to a single interest payment. Given the price you've paid for the bond, what is the Yield To Call (YTC) you'll earn on the bond if you hold it to the call date? (Hint: Use the RATE function)

4.37%

What is the Present Value of $5220 to be received 10 years from today if the discount rate is 2.50%?

4077.86

You invest $5240 in a savings account earning 2.90% with annual compounding. How many years will it take for that amount to grow to $18800. Round your answer to the nearest whole number.

45

You invest $5540 in a savings account earning 2.60% with monthly compounding. How many years will it take for that amount to grow to $18600. Round your answer to the nearest whole number.

47

You have a credit card balance of $1,800. You can only afford to make the minimum payment of $30 - which is due at the end of each month. The the APR on the credit card is 18%, how many years will it take you to pay off the card balance? Round to the nearest number of whole years. Use Excel's NPER() function.

5

What will be the Future Value of $4430 9 years from today if the interest rate earned is 2.30% with monthly compounding periods?

5447.74

Your grandfather offers you a choice of $7,000 to be received 2 years from today, or $8,000 to be received 7 years from today. If your best option for investing these funds is a bank account paying 2.6% with monthly compounding, which of the below is true? a. You should take the $7,000 2 years from today. The Present Value of that option is $6,650. b. You should take the $8,000 7 years from today. The Present Value of that option is $6,684. c. You should take the $7,000 2 years from today. The Present Value of that option is $6,686. d. You should take the $8,000 7 years from today. The Present Value of that option is $6,670.

D 6670.12

A firm has two projects from which it is choosing. The firm should always select the project with the shortest Payback Period.

False

A firm is considering only 2 projects, both of which have positive a NPV. The firm only has enough capital to invest in one project. The firm should select the project with the lowest NPV.

False

A project's NPV is calculated by summing the future incremental cash flows of the project, and subtracting the amount of the required initial investment.

False

Depreciation Expense has no impact on the incremental cash flows related to any given project because it is a non-cash expense.

False

If the market interest rate is higher than the coupon rate of a bond, the bond will sell at a premium.

False

In the non-constant growth dividend model, the portion of the analysis in which the dividend is assumed to grow at a constant rate forever is called the Analysis Period.

False

The Profitability Index is calculated by summing all of the future estimated cash inflows generated by the project, and dividing that sum by the required investment amount.

False

The formula for the stock price using the dividend model, constant growth assumption is = [most recent dividend / (Required Rate of Return - dividend growth rate)]

False

Using the dividend model is an example of relative stock valuation.

False

You have a choice of bank A or bank B at which to deposit your savings of $5,000. At bank A it will take 12 years for your savings to grow to $12,000, while at bank Bit would take 13 years to grow to that same amount. Bank B must be offering a higher interest rate than bank A.

False

You will receive a lump sum of $12,500 eight years from now. The Present Value of that lump sum increases as the discount rate used to calculate the Present Value increases.

False

using the CAPM, the Required rate of Return is equal to Rf x (MRP x Beta)

False

The U.S. tax code has a system of accelerated depreciation referred to as:

MACRS

Which of the below implies necessarily that a project is profitable?

The project's IRR is greater than the firm's WACC

A call option allows the issuer of a bond to force the redemption of the bond (final repayment of principal) before its maturity date. An issuer will most likely exercise this option when market interest rates have decreased and are significantly lower that the bond coupon rate.

True

A firm's WACC is often referred to as the 'hurdle rate' for new project profitability. All new projects must earn at least the firm WACC in order to add value to the company.

True

Bank A offers a higher interest rate than Bank B. If you want to deposit a single amount of money today and have it grow to $10,000 in 5 years, you would have to deposit more money in Bank B than you would have to in Bank A in order to achieve your goal.

True

Free Cash Flow is calculated in the same manner as is Cash Flow From Assets - it is the same value.

True

If a project has a positive NPV, the project IRR will exceed the firm's WACC.

True

The Required Rate of Return for a firm's stock is calculated with the CAPM. That Rate is also used as the Cost of Equity when calculating that firm's WACC.

True

The formula for the constant growth dividend model implies that the return on a stock is composed of its dividend yield and dividend growth rate.

True

The formula for the stock price using the dividend model with the non-growth assumption is = [ most recent dividend / Required Rate of Return]

True

The interest earned on a municipal bond is exempt from (Federal) income taxes.

True

The rate of growth in the horizon period is assumed to be lower than it is in the analysis period.

True

When using the Free Cash Flow method, the value of the entire firm is calculated. The amount of any LT debt must be subtracted from that value prior to calculating the stock's intrinsic value.

True

When using the Free Cash Flow model, the firm's WACC is the appropriate discount rate to use.

True

While the capital budgeting measures are easy to calculate, their results are only as good as the estimates of the future cash inflows provided as input.

True

While the payback period is not a measure based on the time value of money, a shorter payback period implies a less risky project (all else remaining the same)

True