Financial Management Exam 2 Study Guide

PVA= $150({1-[1/(1+.037/12)^(4)(12)]}/(0.37)(12)) PVA= $6,682.99

A scholarship will pay you $150 at the end of each month for 4 years while you attend college. Discount rate of 3.7%, what are the payments worth to you on the day you enter college?

PMT=0 PV=$11,200 I/Y=6.6 FV=-$19,300 N= 8.51 years

You expect a payout from a Trust Fund in 4 years for $11,200. Plan to invest it in an annual rate of 6.6% until the account is worth $19,300. How many years do you have to wait?

Offer 1 PV= $89,500 Offer 2 PV= $35,000 + $70,000/1.115^2 = $91,305.17 Offer 2 is worth more

You receive the first offer of $89,500 cash today. You receive a second offer of $35,000 today and $70,000 in 2 years with a discount rate of 11.5%. What offer is worth more?

N=96 I/Y=.8 PMT=0 FV=-$16,000 PV= $7,445.76

You want to have $16,000 in 8 years for a dream vacation. You can earn an interest rate of .8% per month, much will you have to deposit today?

PV= $125,000/.045 PV= $2,777,778.00

You would like to provide $125,000 a year forever for your heirs. How much money must you deposit today with a 4.5% rate of return?

A stock currently sells for $59. The dividend yield is 3.8 percent and the dividend growth rate is 5.1 percent. What is the amount of the dividend to be paid in one year?

.038($59) = $2.24

Bond price = $27.50({1 − [1/(1 + .07/2)^10 × 2]}/(.07/2)) + $1,000/(1 + .07/2)^10 × 2 893.41

Werden Drilling offers 5.5 percent coupon bonds with semiannual payments and a yield to maturity of 7 percent. The bonds mature in 10 years. What is the market price per bond if the face value is $1,000?

N=10 I/Y=5.8 PV= -$3,058 PMT=0 FV= $5,373.96

What is the future value of $3,058 invested for 10 years at 5.8% compounded annually?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

Which of the following statements concerning interest rates is correct?

Time and present value are inversely related, all else held constant.

Which of the following statements defines a time value of money relationship?

PV=$17,200 N=36 I/Y=5.5/12 PMT= $519.37

You just obtained a loan for $17,200 with monthly payments for 3 years at 5.5% compounded monthly. What is the amount of each payment?

N=3 PV=-$3,050 PMT=0 FV=$3,800 I/Y= 7.6%

Three years ago you invested $3,050. Today, it is worth $3,800. What rate of interest did you earn?

The Red Bud Company pays a constant dividend of $2.60 a share. The company announced today that it will continue to do this for another 2 years after which time they will discontinue paying dividends permanently. What is one share of this stock worth today if the required rate of return is 8.2 percent?

$2.60/1.082 + $2.60/1.0822 = $4.62

Stoneheart Group is expected to pay a dividend of $3.19 next year. The company's dividend growth rate is expected to be 3.8 percent indefinitely and investors require a return of 11.8 percent on the company's stock. What is the stock price?

$3.19/(.118 - .038) = $39.88

The common stock of Eddie's Engines, Incorporated, sells for $44.78 a share. The stock is expected to pay a dividend of $3.20 per share next year. Eddie's has established a pattern of increasing their dividends by 5.3 percent annually and expects to continue doing so. What is the market rate of return on this stock?

$3.20/$44.78 + .053 = 0.1245, or 12.45%

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $3.20 a share. The company has promised to maintain a constant dividend. How much are you willing to pay for one share of this stock if you want to earn a return of 13.90 percent on your equity investments?

$3.20/.1390 = $23.02

Braxton's Cleaning Company stock is selling for $33.00 per share based on a required return of 11.4 percent. What is the next annual dividend if the growth rate in dividends is expected to be 4.4 percent indefinitely?

$33.00 = X/(.1140 − .0440) X= $2.31

Symon's Suppers Company has announced that it will pay a dividend of $4.19 per share one year from today. Additionally, the company expects to increase its dividend by 4.2 percent annually. The required return on the company's stock is 10.4 percent. What is the current share price?

$4.19/(.104 - .042) = $67.58

Asonia Company will pay a dividend of $4.30, $8.40, $11.25, and $13.40 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 9.9 percent on the company's stock, what is the stock price?

$4.30/(1 + .099) + $8.40/(1 + .099)2 + $11.25/(1 + .099)3 + $13.40/(1 + .099)4 P = $28.53

Kindzi Company has preferred stock outstanding that is expected to pay an annual dividend of $4.32 every year in perpetuity. If the required return is 4.29 percent, what is the current stock price?

$4.32/.0429 = $100.70

McKerley Corporation has preferred stock outstanding that will pay an annual dividend of $4.60 per share with the first dividend exactly 14 years from today. If the required return is 3.78 percent, what is the current price of the stock?

$4.60/.0378 = $121.69... $121.69/(1 + .0378)13 = $75.13

The stock in Up-Towne Movers is selling for $44.40 per share. Investors have a required return of 11 percent and expect the dividends to grow at 3.5 percent indefinitely. What was the dividend the company just paid?

$44.40 = D1/(.1100 − .0350)D1 = $3.33 D0 = $3.33/(1 + .0350)D0 = $3.22

Weisbro and Sons common stock sells for $52 a share and pays an annual dividend that increases by 4.4 percent annually. The market rate of return on this stock is 10.1 percent. What is the amount of the last dividend paid by Weisbro and Sons?

$52 = [D0 × (1 + .044)]/(.1010 - .044).... = $2.84

Knightmare, Incorporated, will pay a dividend of $7.15, $9.95, and $13.15 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 11.4 percent on the company's stock. What is the current stock price?

$7.15/(1 + .114) + $9.95/(1 + .114)2 + $13.15/(1 + .114)3P = $23.95

Stana, Incorporated, has preferred stock outstanding that sells for $99.81 per share. If the required return is 3.93 percent, what is the annual dividend?

$99.81 × .0393 = $3.92

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.67 a share. The following dividends will be $.72, $.87, and $1.17 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.7 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 11 percent?

($1.17 × 1.037)/(.11 - .037) = $16.62 P0 = $.67/1.11 + $.72/1.112 + $.87/1.113 + $1.17/1.114 + $16.62/1.114 = $13.54

You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 3.1 percent indefinitely. The company just paid a dividend of $3.86 and you feel that the required return on the stock is 12.5 percent. What is the price per share of the company's stock?

(3.86*1.031) / .125-.031 = 42.34

A stock currently sells for $58. The dividend yield is 3.6 percent and the dividend growth rate is 4.9 percent. What is the amount of the dividend that was just paid?

.036($58) = $2.09.... $2.09/(1 + .049) = $1.99

N=10*2 PV=-989.40 PMT=35 FV=1000 I/Y=3.575 YTM = 2(3.575%) = 7.15% r = 1.0715/1.022 − 1 r = .0484, or 4.84%

A $1,000 face value bond has a coupon rate of 7 percent, a market price of $989.40, and 10 years left to maturity. Interest is paid semiannually. If the inflation rate is 2.2 percent, what is the yield to maturity when expressed in real terms?

Bond price = $30({1 − [1/(1 + .055/2)^(13)^(2)]}/(.055/2)) + $1,000/(1 + .055/2)^(13)^(2)Bond price = $1,046.01 Bond price = $30({1 − [1/(1 + .057/2)^(13)^(2)]}/(.057/2)) + $1,000/(1 +.057/2)^(13)^(2)Bond price = $1,027.28 ($1,027.28 − 1,046.01)/$1,046.01 or -1.79%

A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

Perpetuity

A Canadian Consol is best categorized as an?

maturity

A bond's principal is repaid on the ________ date.

coupon

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.

face value

Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:

N=11 I/Y=5.6 PV=-$3,400 FV= $6,191.30

Five years form today, you plan to invest $3,400 for 11 additional year at 5.6% compounded annually. How much money will you have in 16 years from today?

N=11*2 PV=-986 PMT=34 FV=1000 I/Y=3.4922 1.034922^2 − 1 .0711, or 7.11%

Goldfarb Paints has 6.8 percent coupon bonds on the market with 11 years left to maturity. The bonds make semiannual payments and currently sell for 98.6 percent of par. What is the effective annual yield?

FVA= $10,000[(1.045^4 - 1)/.045] FVA= $42,789.91 $75,000 - $42,789.91 =$32,218.09 $32,218.09/1.045^4 FVA= $27,016.84

JS has a liability of $75,000 due 4 years from today. His company deposits an additional $10,000 at the end of each of the 4 years with a 4.5% interest rate. How much does the firm need to deposit today to pay this debt?

Bond price = $901.98 = C({1 − [1/(1 + .076/2)^13 × 2]}/(.076/2)) + $1,000/(1 + .076/2)^13 × 2 C = $32.00 ($32)(2)/$1,000 .0640, or 6.40%

Nazarian's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate?

I/Y=13.2 PV=-548 PMT=65 FV=1000 N=17.84

Rao Investments has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?

market price

The current yield is defined as the annual interest on a bond divided by the:

Annual Percentage Rate (APR)

The interest rate that is most commonly quoted by a Tender is referred to as the?

Railway Cabooses just paid its annual dividend of $3.30 per share. The company has been reducing the dividends by 12.1 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 14 percent?

[$3.30 × [1 + (- .121)]]/[.14 - (- .121)] = $11.11

A perpetuity comprised of $100 monthly payments is worth more than an annuity comprised of $100 monthly payments, given an interest rates are equal.

Which one of the following statements related to annuities and perpetuities is correct?

Simple Interest: $1,360 + ($1,360 x .03 x 4) = $1,523.20 Compound Interest: $1,360 x (1.03)^4 = $1,530.69 $1,523.20 - $1,530.69 = $7.49

Beatrice invests $1,360 in an account that pays 3% interest. How much more could she have earned over a 4-year period if the interest had been compounded annually?

Bond price = $28.75({1 − [1/(1 + .0832/2)^10 × 2]}/(.0832/2)) + $1,000/(1 + .0832/2)^10 × 2 827.81

Levrier Lighting has 5.75 percent coupon bonds outstanding that mature in 10 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 8.32 percent?

I/Y=6.72/2 PV=-1023.46 PMT=35 FV=1000 N=25.052/2 or 12.53

MentonCo has 7 percent, semiannual coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature?

Bond price = $51({1 − [1/(1 + .082/2)^(19)^(2)]}/(.082/2)) + $1,000/(1 + .082/2)^(19)^(2) $1,190.93

Syed Development issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM is 8.2 percent, what is the current bond price?

Effective Annual Rate (EAR)

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is?

yield to maturity

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the:

$111 + ($111 x .05 x 5) = $138.75

Thomas invests $111 in an account that pays 5% simple interest. How much money will he have at the end of 5 years?

PMT=60 PV=$3,200 I/Y=.129 FV=0 N= 79.66 months = 6.64 years

Today, you borrowed $3,200 on a credit card that charges 12.9% interest rate compounded monthly. How long will it take you to pay it off with monthly payments of $60?

N=3 I/Y=1.9 PV=-$58,900 FV= $62,321

Today, your dream car costs $58,900. You feel that the price will increase at an annual rate of 1.9%. If you wait 3 years to buy, how much will it cost?

PVA= $218,000/1.145 + $224,000/1.145^2 +$238/1.145^3 PV= $519,799.59

Turquoise Tours can generate cash flows of $218,000, $224,000 & $238,000 over the next 3 years. Desired rate of return is 14.5%. What is the maximum Excellent Yachting should pay today to acquire the business?

FVA= Money[(Rate)^years - 1)/Rate] = $1,575[1.063^25-1)/.063 FVA= $90,152.04

What is the future value of $1,575 deposited at the end of each year for 25 years? Interest rate of 6.3% compounded annually?

N=2 I/Y=6 PMT=0 FV=-$12,450 PV= $11,080.46

What is the present value of $12,450 to be received 2 years from today if the discount rate is 6%?

The Bell Weather Company is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 16 percent a year for the next 4 years and then decreasing the growth rate to 4 percent per year. The company just paid its annual dividend in the amount of $2.30 per share. What is the current value of one share of this stock if the required rate of return is 7.80 percent?

($2.30 × 1.164 × 1.04)/(0.078 - 0.04) = $113.97 P0 = ($2.30 × 1.16)/1.078 + ($2.30 × 1.162)/1.0782 + ($2.30 × 1.163)/1.0783 + ($2.30 × 1.164)/1.0784 + $113.97/1.0784 = $95.49

FV= $7,500(1.08^4) + $9,000(1.08^3) + $12,500(1.08^2) FV= $36,121.08

Thanh will receive $7,500 at the end of year 2, $9,000 at the end of year 3, and $12,500 and the end of year 4. What is the future value at the end of year 6 with an interest rate of 8%?

Bank 1: N= 17.22 Bank 2: N= 14.68 17.22 - 14.68 = 2.54 years

You currently have $6,100. Bank 1 has an annual interest rate of 7.2% and Bank 2 has an annual interest rate of 8.5%. How many fewer years will it take to rach $20,200 at Bank 2?

N=3 I/Y=3.8 PMT=0 FV=-$25,000 PV= $22,353.62

You need to have $25,000 for a down payment on a house in 3 years. Annual interest rate of 3.8%, how much will you have to deposit today?

N=7(25-18) PMT=0 PV=-$10,200 FV=$15,000 I/Y= 5.7%

You purchased a bond for $2,500. In 25 years the bond will be worth $15,000. It is 18 years after you purchased the bond and you can sell it today for $10,200. What annual rate of return will you earn from today?

Santa Klaus Toys just paid a dividend of $1.90 per share. The required return is 10.5 percent and the perpetual dividend growth rate is 2.8 percent. What price should this stock sell for five years from today?

[$1.90(1 + .028)6]/(.105 − .028) X= $29.12