Financial Management - Exam 2

Bob plans to fund his individual retirement account (IRA) with the maximum contribution of $5,000 at the end of each year for the next 15 years. If Bob can earn 10 percent on his contributions, how much will he have at the end of the fifteenth year? A) $144,104 B) $158,862 C) $38,030 D) $14,938

B) $158,862

Darlene wishes to accumulate $50,000 by the end of 10 years by making equal annual end-of-year deposits over the next 10 years. If Darlene can earn 5 percent on her investments, how much must she deposit at the end of each year? A) $5,000 B) $3,975 C) $4,513 D) $6,475

B) $3,975

$100 is received at the end of year 1, $200 is received at the end of year 2, and $300 is received at the end of year 3. If the opportunity cost is 12 percent, their combined present value today is __________. A) $600 B) $462 C) $1,245 D) $1,536

B) $462

Nico Corporation's common stock is expected to pay a dividend of $3.00 forever and currently sells for $21.42. What is the required rate of return? A) 10% B) 12% C) 13% D) 14%

B) 12%

Indicate which of the following is true about annuities. A) An ordinary annuity is an equal payment paid or received at the end of each period, that increases by an equal amount each period. B) An annuity due is an equal payment paid or received at the beginning of each period. C) An ordinary annuity is an equal payment paid or received at the beginning of each period. D) An annuity due is a payment paid or received at the beginning of each period, that increases by an equal amount each period.

B) An annuity due is an equal payment paid or received at the beginning of each period.

A feature that gives the issuer the opportunity to repurchase bonds at a stated price prior to maturity is called A) stock purchase warrants. B) call feature. C) conversion feature. D) None of the above.

B) call feature.

A downward-sloping yield curve that indicates generally cheaper long-term borrowing costs than short-term borrowing costs is called A) normal yield curve. B) inverted yield curve. C) flat yield curve. D) none of the above.

B) inverted yield curve.

A college received a contribution to its endowment fund of $2 million. They can never touch the principal, but they can use the earnings. At an assumed interest rate of 9.5 percent, how much can the college earn to help its operations each year? A) $95,000 B) $19,000 C) $190,000 D) $18,000

C) $190,000

A firm has an outstanding issue of 1,000 shares of preferred stock with a $100 par value and an 8 percent annual dividend. The firm also has 5,000 shares of common stock outstanding. If the stock is cumulative and the board of directors has passed the preferred dividend for the prior two years, how much must the preferred stockholders be paid prior to paying dividends to common stockholders? A) $ 8,000 B) $16,000 C) $24,000 D) $25,000

C) $24,000

A firm has experienced a constant annual rate of dividend growth of 3 percent on its common stock and expects the dividend per share in the coming year to be $2.70. The firm can earn 12 percent on similar risk investments. The value of the firm's common stock is _____. A) $22.50/share B) $9/share C) $30/share D) $90/share

C) $30/share

The present value of $500 received four years from now if your opportunity cost is 8 percent (paid semiannually) is __________. A) $684 B) $456 C) $365 D) $500

C) $365

What is the current price of a $1000 par value bond maturing in 10 years with a coupon rate of 14 percent, paid semiannually, that has a YTM of 15 percent? A) $1,050 B) $604 C) $949 D) $1,088

C) $949

What is the yield to maturity, to the nearest percent, for the following bond: current price is $908, coupon rate is 11 percent, $1,000 par value, interest paid annually, eight years to maturity? A) 14 percent B) 11 percent C) 13 percent D) 12 percent

C) 13 percent

If the required return is less than the coupon rate, a bond will sell at A) par. B) a discount. C) a premium. D) book value.

C) a premium.

As a form of financing, equity capital A) has priority over bonds. B) has a maturity date. C) is only liquidated in bankruptcy. D) is temporary.

C) is only liquidated in bankruptcy.

A firm has an issue of $1,000 par value bonds with a 9 percent stated interest rate outstanding. The issue pays interest annually and has 20 years remaining to its maturity date. If bonds of similar risk are currently earning 8 percent, the firm's bond will sell for __________ today. A) $1,000 B) $716.67 C) $840.67 D) $1,098.18

D) $1,098.18

At year end, Tangshan China Company balance sheet shows 1,000,000 shares of common stock outstanding. Next year, Tangshan is projecting that it will have net income of $1.5 million. If the average PE multiple in Tangshan's industry is 15, what should be the price of Tangshan's stock? A) $15.00 B) $22.50 C) $52.50 D) $75.00

D) $75.00

Corporate bonds typically have A) a face value of $5,000. B) a market price of $1,000. C) a specified coupon rate paid annually. D) a par value of $1,000.

D) a par value of $1,000.

Shares of stock that have been repurchased by the corporation are called A) authorized. B) issued. C) outstanding. D) treasury shares.

D) treasury shares.

Marion makes annual end of year payments of $6,260.96 on a five year loan with an 8 percent interest rate. The original principal amount was A) $25,000. B) $20,000. C) $31,000. D) $30,000.

A) $25,000.

If a United States Savings bond can be purchased for $14.60 and has a maturity value at the end of 25 years of $100, what is the annual rate of return on the bond? A) 8 percent B) 9 percent C) 7 percent D) 6 percent

A) 8 percent

If expected return is above the required return on an asset, rational investors will A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return. B) sell the asset, which will drive the price down and cause the expected return to reach the level of the required return. C) sell the asset, which will drive the price up and cause the expected return to reach the level of the required return. D) buy the asset, since price is expected to decrease.

A) buy the asset, which will drive the price up and cause expected return to reach the level of the required return.

Generally, long-term loans have higher interest rates than short-term loans because of A) the general expectation of higher future rates of inflation. B) greater demand for short-term rather than long-term loans relative to the supply of such loans. C) lender preferences for longer-term, less liquid loans. D) all of the above.

A) the general expectation of higher future rates of inflation.

A group formed by an investment banker to share the financial risk associated with underwriting new securities is a(n) A) underwriting syndicate. B) selling group. C) investment banking consortium. D) broker pool.

A) underwriting syndicate.

As the interest rate increases for any given period, the future value of an amount will A) decrease. B) remain unchanged. C) increase. D) move toward 1.

c) increase