MBA Finance Final

World Travel 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?

12.53 years

TL Lumber is evaluating a project with cash flows of −$12,800, $7,400, $11,600, and −$3,200 for Years 0 to 3, respectively. Given an interest rate of 8 percent, what is the MIRR using the discounted approach?

14.36%

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called?

face value

Treasury bonds are:

generally issued as semiannual coupon bonds

Callable bonds generally:

have a sinking fund provision

Generally speaking, which of the following best correspond to a wide frequency distribution?

high standard deviation, large risk premium

Real rates are defined as nominal rates that have been adjusted for which of the following?

inflation

Net present value:

is the best method of analyzing mutually exclusive projects

Standard deviation is a measure of which one of the following?

volatility

The secondary market is best defined as the market:

where outstanding shares of stock are resold

You want to buy a new sports car for $55,000. The contract is in the form of a 60-month annuity due at an APR of 5.6 percent, compounded monthly. What will be your monthly payment?

$1,048.21

Sara wants to establish a trust fund to provide $75,000 in scholarships each year and earn a fixed 6.15 percent rate of return. How much money must she contribute to the fund assuming that only the interest income is distributed?

$1,219,512

Phil can afford $240 a month for five years for a car loan. If the interest rate is 8.5 percent, how much can he afford to borrow to purchase a car?

$11,697.88

You borrowed $185,000 for 30 years to buy a house. The interest rate is 4.35 percent, compounded monthly. If you pay all of your monthly payments as agreed, how much total interest will you pay on this mortgage? (Round the monthly payment to the nearest whole cent.)

$146,542

John's Auto Repair just obtained an interest-only loan of $35,000 with annual payments for 10 years and an interest rate of 8 percent. What is the amount of the loan payment in Year 8?

$2,800.00

One year ago, you purchased a stock at a price of $43.20 per share. The stock pays quarterly dividends of $.18 per share. Today, the stock is selling for $45.36 per share. What is your capital gain on this investment?

$2.16

You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars?

$21,705

A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680, $19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of 12 percent?

$219.41

Sue just purchased an annuity that will pay $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent?

$266,498

New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a dividend of $.25 per share for two years. After that, the company plans on paying a constant $.75 a share annual dividend indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8 percent?

$3.56

Rosina plans on saving $2,000 a year and expects to earn an annual rate of 6.9 percent. How much will she have in her account at the end of 37 years?

$313,274.38

You just settled an insurance claim that calls for increasing payments over a 10-year period. The first payment will be paid one year from now in the amount of $5,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments?

$41,422.89

An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent, compounded quarterly, what is the most you are willing to pay as a lump sum today to obtain this annuity?

$44,591.11

A preferred stock sells for $63.60 a share and provides a return of 8.40 percent. What is the amount of the dividend per share?

$5.34

Your grandmother will be gifting you $150 at the end of each month for four years while you attend college. At a discount rate of 3.7 percent, what are these payments worth to you on the day you enter college?

$6,682.99

Racing Motors wants to save $825,000 to buy some new equipment three years from now. The plan is to set aside an equal amount of money on the first day of each quarter starting today. How much does the company need to save each quarter to achieve its goal if it can earn 4.45 percent on its savings?

$63,932.91

Sweatshirts Ltd. is downsizing. The company paid an annual dividend of $4.20 last year and has announced plans to lower the dividend by 25 percent each year. Once the dividend amount becomes zero, the company will go out of business. You have a required rate of return of 18 percent on this particular stock. What are your shares in this firm worth today on a per share basis?

$7.33

Nadine is retiring today and has $96,000 in her retirement savings. She expects to earn 5.5 percent, compounded monthly. How much can she withdraw from her retirement savings each month if she plans to spend her last penny 18 years from now?

$701.10

What is the future value of $1,575 a year for 25 years at 6.3 percent interest, compounded annually?

$90,152.04

A project has an initial cost of $384,200 and cash inflows of $187,636, $93,496, $103,802, and $92,556, for Years 1 to 4, respectively. What is the NPV of this project if the discount rate is infinite?

-$384,200

Last year, you purchased 400 shares of Analog stock for $12.92 a share. You have received a total of $136 in dividends and $4,301 in proceeds from selling the shares. What is your capital gains yield on this stock?

-16.78%

What is the amount of the risk premium on a U.S. Treasury bill if the risk-free rate is 3.1 percent, the inflation rate is 2.6 percent, and the market rate of return is 7.4 percent?

0%

An investment project costs $10,200 and has annual cash flows of $6,500 for 3 years. If the discount rate is 13 percent, what is the discounted payback period?

1.87 years

Your insurance agent is trying to sell you an annuity that costs $50,000 today. By buying this annuity, your agent promises that you will receive payments of $250 a month for the next 20 years. What is the rate of return on this investment?

1.88

The common stock of Air Express had annual returns of 11.7 percent, 8.8 percent, 16.7 percent, and −7.9 percent over the last four years, respectively. What is the standard deviation of these returns?

10.66%

Home Services common stock offers an expected total return of 14.56 percent. The last annual dividend was $2.27 a share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield?

12.46%

Based on the past 13 years, Westerfield Industrial Supply's common stock has yielded an arithmetic average rate of return of 12.6 percent. The geometric average return for the same period was 11.8 percent. What is the estimated return on this stock for the next three years according to Blume's formula?

12.47%

It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period?

2.67 years

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ____ quarter(s) of dividends when the next dividend is paid.

3

You just paid $480,000 for an annuity that will pay you and your heirs $15,000 a year forever. What rate of return are you earning on this policy?

3.125%

A stock had returns of 12.4 percent, 16.6 percent, 10.2 percent, 19.0 percent, −15.7 percent, and 6.3 percent over the last six years. What is the geometric average return on the stock for this period?

7.46%

First City Bank offers an APR of 7.65 percent on its loans. What is the maximum rate the bank can actually earn based on the quoted rate?

7.95%

A preferred stock pays an annual dividend of $5.40 and sells for $63.20 a share. What is the rate of return?

8.54%

You are preparing to make monthly payments of $100, beginning at the end of this month, into an account that pays 5 percent interest, compounded monthly. How many payments will you have made when your account balance reaches $10,000?

83.77

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate.

Option B has a higher present value at Time 0

Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?

Project A only

Which one of the following statements is a correct reflection of the U.S. financial markets for the period 1926-2016?

U.S Treasury bills had an annual return in excess of 10 percent in three or more years

You are considering two mutually exclusive projects. Project A has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?

accept project A and reject project B

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate

The return earned in an average year over a multiyear period is called the _____ average return.

arithmetic

Which one of the following is the price at which a dealer will sell a bond?

asked price

A bond that is payable to whomever has physical possession of the bond is said to be in:

bearer form

A $1,000 face value bond can be redeemed early at the issuer's discretion for $1,030, plus any accrued interest. The additional $30 is called the:

call premium

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk

Which one of the following statements related to corporate dividends is correct?

corporate shareholders may receive a tax break on a portion of their dividend income

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

coupon

Which one of the following relationships applies to a par value bond?

coupon rate = current yield = yield to maturity

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

determining the amount of the dividend to be paid per share

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

discount rate

Which one of these statements related to discounted payback is correct?

discounted payback is biased towards short term projects

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the _____ rate.

effective annual

Assume all stock prices fairly reflect all of the available information on those stocks. Which one of the following terms best defines the stock market under these conditions?

efficient capital market

An ordinary annuity is best defined as:

equal payments paid at the end of regular intervals over a stated time period

A discount bond's coupon rate is equal to the annual interest divided by the:

face value

A stock had annual returns of 5.3 percent, −2.7 percent, 16.2 percent, and 13.6 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year?

less than 16% but more than 2.5%

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

modified internal rate of returin that exceeds the required return

If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive

The profitability index is most closely related to which one of the following?

net present value

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?

over the counter

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions?

payback

The length of time a firm must wait to recoup the money it has invested in a project is called the:

payback period

Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

primary

The primary purpose of Blume's formula is to:

project future rates of return

A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) _____ loan.

pure discount

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?

reject project A and accept project B

The Green Fiddle is considering a project with sales of $86,800 a year for the next four years. The profit margin is 6 percent, the project cost is $97,500, and depreciation is straight-line to a zero book value over the life of the project. The required accounting return is 10.8 percent. This project should be _____ because the AAR is _____ percent.

rejected; 10.68

The dividend growth model:

requires the growth rate to be less than the required return

The excess return is computed as the:

return on a risky security minus the risk free rate

You are aware that your neighbor trades stocks based on confidential information he overhears at his workplace. This information is not available to the general public. This neighbor continually brags to you about the profits he earns on these trades. Given this, you would tend to argue that the financial markets are at best _____ form efficient.

semistrong

Which one of the following categories of securities had the highest average annual return for the period 1926-2016?

small company stocks

The historical record for the period 1926-2016 supports which one of the following statements?

small company stocks have lost as much as 50% and gained as much as 100% in a single year

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

spread

You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected?

straight

Inside information has the least value when financial markets are:

strong form efficient

The internal rate of return is:

tedious to compute without the use of either a financial calculator or a computer

Which one of the following statements related to the internal rate of return (IRR) is correct?

the IRR is equal to the required return when the net present value is equal to zero

The net present value of a project will increase if:

the aftertax salvage value of the fixed assets increase

A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20?

the current yeild exceeds the coupon rate

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?

the stock has a negative capital gains yield

The rate of return on which type of security is normally used as the risk-free rate of return?

treasury bills

A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not?

yes, the IRR exceeds the required return

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

yield to maturity

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

zero coupon