FIN 2303 Final Exam
Last year Bradley Corp's sales were $525 million. If sales grow at 10.5% per year, how large (in millions) will they be 8 years later?
$1,166.96 million
Suppose you are buying your first condo fr $180,000 and you will make a $15,000 down payment. You have arranged to finance the remainder with a 30 year, monthly payment, amortized mortgage at a 6.5% nominal interest rate, with the first payment due in one month. What will your payments be?
$1042.91
Scott buys a used car by paying $2500 down and $200 a month for 5 years. If the interest rate is 14% compounded monthly, what is the purchase price of the car?
$11,095.40
Your uncle has $1,375,000 and wants to retire. He expects to live for another 25 years and to earn 7.5% on his invested funds. How much could he withdraw at the end of each of the next 25 years and end up with zero in the account?
$123,352.17
What's the present value of $17,500 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?
$14,008.93
Pace Co. borrowed $25,000 at a rate of 7.25%, simple interest, with interest paid at the end of each month. The bank uses a 360 day year. How much interest would Pace have to pay in a 30 day month?
$151.04
How much is needed to establish a scholarship fund paying a scholarship of $1000 each half year if the endowment can be invested at 10% compounded semiannually? And the first scholarship will be provided immediately?
$21,000
You just deposited $8,000 in a bank that pays a 4% nominal interest rate, compounding quarterly. If you also add another $5000 to the account one year from now and another $7500 to the account 2 years from now, how much will be in the account three years from now?
$22,233.41
You plan to borrow $39,000 at a 7.5% annual interest rate. The terms require you to amortize the loan with 7 equal end of year payments. How much interest would you be paying in year 2?
$2592.13
An investment offers to pay $4000 every year for 9 years. If the discount rate is 5% per annum, how much is the investment worth today?
$28,431.29
Consider a perpetuity of $250 per year that begins eight years from now. If the appropriate interest rate is 5% per year, what is the present value of this perpetuity?
$3,553.41
Jason wishes to save money to provide for his retirement. Beginning one year from now, he will begin depositing the same fixed amoutn each year for the next 30 years into a retirement savings account. Starting one year after making his final deposit, he will withdraw $10,000 annually for each of the following 25 years. Assume that the retirement fund earns 12% annually over both the period that he is depositing money and the period he makes withdrawals. For Jason to have sufficient funds in his account to fund his retirement, how much should he deposit annually?
$325
Consider an annuity that pays $400 every quarter for 5 years. The first payment begins 2 years from now. If the interest rate is 16% compounded quarterly, what is the present value of this annuity, today?
$4,131.01
You plan to save $150 at the beginning of every month for two years so that you have enough money to use as a down payment for a new car. If interest is 18% compounded monthly, how much money would you have accumulated by the end of two years?
$4,359.45
You want to go to Europe 5 years from now, and you can save $7300 per year, beginning one year from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these conditions, how much would you have just after you make the 5th deposit, 5 years from now?
$43,255.22
Your sister turned 35 today, and she is planning to save $50,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund that's expected to provide a return of 7.5% per year. She plans to retire 30 years from today, when she turns 65, and she expects to live for another 25 years after retirement, to age 90. Under these assumptions, how much can she spend each year after she retires? Her first withdrawal will be made at the end of her first retirement year.
$463,801.49
Jose now has $500. How much would he have after 6 years if he leaves it invested at 5.1% with annual compounding?
$673.89
Suppose a state of New York bond will pay $1000 ten years from now. If the going interest rate on these 10 year bonds is 3.1%, how much is the bond worth today?
$736.91
What's the present value of a perpetuity that pays $3,900 per year if the appropriate interest rate is 5%?
$78,000
Suppose you deposited $8000 in a bank account that pays 5.25% with daily compounding based on a 360 day year. How much would be in the account after 8 months, assuming each month has 30 days?
$8,284.94
Suppose you calculate the present value of an ordinary annuity and find present value to be equal to $7606.08. If the relevant discount rate is 10%, what would the present value of the same cash flows be, if they were treated as annuity due instead.
$8,366.69
You want to quit your job and go back to school for a law degree 4 years from now, and you plan to save $2100 per year, beginning immediately. You will make 4 deposits in an account that pays 5.7% interest. Under these assumptions, how much will you have 4 years from today?
$9,667.20
macroeconomic factors that influence interest rate levels
- federal reserve policy - federal budget deficits or surpluses - international factors - level of business activity
four factors that determine the cost of money
- production opportunities - time preference of consumption - risk - inflation
Riverside bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest bank also offers to lend you the $50,000, but it will charge an annual rate of 6.2%, with no interest due until the end of the year. How much higher or lower if the effective annual rate charged by midwest versus the rate charged by riverside?
-.50%
Suppose the yield on a 10 year T bond is currently 5.05% and that on a 10 year treasury infltaed protected security (TIPS) is 3%. Suppose further that the MRP on a 10 year T bond is .9%, that no MRP is required on a TIPS, and that no liquidity premium is required on any T bond. Given this info, whar is the expected average rate of inflation over the next 10 years?
1.15%
Suppose 10 year T bonds have a yield of 5.3% and 10 year corporate bonds yield 7.1%. Also, corporate bonds have a .25% liquidity premium versus a zero-liquidity premium for T bonds, and the maturity risk premium on both treasury and corporate bonds is 1.15%/ What is the default rick premium on corporate bonds?
1.55%
Bob has $2500 invested in a bank that pays 6.6% annually. How long will it take for his funds to double?
10.85 years
Your aunt has $340,000 invested at 6.5%, and she plans to retire. She wants to withdraw $40,000 at the beginning of each year, starting immediately. How many years will it take to exhaust her funds?
11.61
What's the rate of return you would earn if you paid $2,880 for a perpetuity that pays $85 per year?
2.95%
Mastercard and other credit card issuers must by law print the annual percentage rate on their monthly statements. If the APR is stated to be 19.25%, with interest paid monthly, what is the card's EFF%?
21.04%
Your friend just won the lottery. She has the choice of receiving $10,800,000 today or a 20 year annuity of $1,050,000, with the first payment coming one year from today. What rate of return is built into the annuity?
7.38%
Suppose the US treasury offers to sell you a bond for $687.25. No payments will be made until the bond matures 5 years from now, at which time it will be redeemed for $1000. What interest rate would you earn if you bought this bond at the offer price?
7.79%
Suppose your bank pays 12% interest compounded annually. What is the effective rate you would earn over a 5 year period?
76.23%
suppose the real risk free rate is 3%, the average expected future inflation rate is 6%, and a maturity risk premium of .10% per year to maturity applies, where t is the number of years to maturity. What rate of return would you expect on a 2 year treasury security?
9.8%
Your father paid $10,000 (CF at t=0) for an investment that promises to pay $750 at the end of each of the next 5 years, then an additional lump sum payment of $11,500 at the end of the 5th year. What is the expected rate of return on this investment?
9.96%
Which of the following would be considered an agency conflict?
Bill chooses to pursue risky investment for company's funds because his compensation will substantially rise if it succeeds
which of the following is a primary market transaction?
IBM issues 2,000,000 shares of new stock and sells them to the public through an investment banker
Which of the following is an example of an investing decision?
Nike opening a new Nike Air Manufacturing Innovation facility in Arizona in 2019
which of the following is an example of a money market instrument?
US treasury bills
Stock options help to mitigate agency problems between shareholders and managers by...
aligning the interest of managers with those of shareholders
what is finance?
any decision that involves money
which of the following is an example of a financing decision?
apple's issuing bonds (debt) in 2013
The future value formula for an ordinary annuity gives you a value...
at the same point in time as the last payment
What is the more formal name used for describing the corporate-finance decision concerning which projects to invest in?
capital budgeting decision
A movie about a young corporate manager choosing the best way to raise money from investors for his firm would most likely involve which subfield of finance?
corporate finance
which of the following could explain why a business might choose to operate as a corporation rather than as a proprietorship or a partnership?
corporations generally find it easier to raise large amounts of capital
which of the following would be most likely to lead to a higher level of interest rates in the economy?
corporations step up their expansion plans and thus increase their demand for capital
in august 2000, enron's share price was over $90. based on the discussion we had in class which of the following statements is true?
enron's intrinsic stock value was less than its market price during this time
a larger bid ask spread means that the dealer will realize a lower profit
false
derivative transactions are designed to increase risk and are used almost exclusively by speculators who are looking to capture high returns
false
if the MRP equals zero, the T bond yield curve must be flat
false
if the MRP is greater than zero, the T bond yield curve must be upward sloping
false
it is easier to transfer one's ownership in a partnership than in a corporation
false
market efficiency implies that no one can beat the market in the short or long term
false
market efficiency implies that stock prices can never deviate from their instrinsic values
false
private markets are those like the NYSE, where transactions are handled by members of the organization, while public markets are those like the NASDAQ, where anyone can make transactions
false
research has shown that on average IPO stocks tend to generate superior returns in the long run
false
An advantage of the corporate form of organization is that corporations are generally less highly regulated than proprietorships and partnerships.
false!
Given a set future value, which of the following will contribute to a lower present value?
higher discount rate
when an investment pays only simple interest, this means...
interest is earned only on the original investment
The primary goal of the financial manager should be to...
maximize stock price
Suppose you start a partnership with your best friend. Each of you contribute $5000 in capital. Unfortunately, the business goes bankrupt and there is still an outstanding debt of $20,000 that needs to be settled. Based on this information which of the following statements is incorrect?
neither of you are liable for this debt
exactly a week ago, Merck Inc announced to the public that it faces a decline in earnings as a result of which it expected to pay $25 million less in dividends for each of the next 5 years than it had previously intended. if the stock market market is efficient, and no other information arrives after the initial announcement, how will Merck's stock price react today to this news?
no reaction
Which of the following is an example of a financial management decision?
of apple.. development of iphone in 2007, issuing bonds in 2013, starting to pay dividends in 2012
which of the following is an example of a capital market instrument?
preferred stock
Suppose the US treasury issued $50 billion of short-term securities and sold them to the public. other things held constant, what would be the most likely effect on short term securities' prices and interest rates?
prices would decline and interest rates would rise
Relaxant Inc operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements in correct?
relaxant's shareholders (the ex-partners) will now be exposed to less liability
money markets are markets for____________
short term debt securities such as treasury bills and commerical paper
Assume that the rate on a 1 year bond is now 6%, but all investors expect 1 year rates to be 7% one year from now and then to rise to 8% two years from now. Assume also that the pure expectations theory holds, hence the MRP equals zero. Which of the following statements is correct?
the interest rate today on a 3 year bond should be approx. 7%
Which of the following actions would be likely to encourage a firm's managers to make decisions that are in the best interest of shareholders?
the percentage of the firm's stock that is held by institutional investors such as mutual funds, pension funds, and hedge funds rather than by small individual investors rises from 10% to 80%
Your bank account pays a 6% nominal rate of interest. The interest is compounded quarterly. Which of the following statements is correct?
the periodic rate of interest is 1.5% and the effective rate of interest is greater than 6%
You are considering two equally risky annuities, each of which pays $5000 per year for 10 years. Investment ORD is an ordinary annuity, while investment DUE is an annuit due. Which of the following is correct?
the present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD
A $50,000 loan is to be amortized over 7 years, with annual end of year payments. Which of these statements is correct?
the proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower
In the forseeable future, the real risk free rate of interest, r*, is expected to remain at 3%, inflation is expected to steadily increase, and the maturity risk premium is expected to be .1(t - 1)%, where t is the number of years until the bond matures. Given this info, which of the following statements is correct?
the yield curve must be upward sloping
BOTH NASDAQ dealers and "specialists" on the NYSE hold inventories of stocks
true
If a firm's board of directors wants to maximize value for its stockholders in general (as opposed to some specific stockholders), it should design an executive compensation system whose focus is on the firm's long term value
true
If inflation is expected to increase in the future and the maturity risk premium is greater than zero, the treasury bond yield curve must be upward sloping
true
One of the disadvantages of a proprietorship is that the proprietor is exposed to unlimited liability
true
Partnerships and proprietorships generally have a tax advantage over corporations
true
The "yield curve" shows the relationship between bonds' maturities and their yields.
true
The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.
true
a financial intermediary is a corporation that takes funds from investors and then provides those funds to those who need capital. a bank that takes in demand deposits and then uses that money to make long-term mortgage loans is one example of a financial intermediary
true
capital market instruments include both long term debt and common stocks
true
hedge funds are not as highly regulated as most other types of financial institutions. the justification for this light regulation is that only "sophisticated" investors are permitted to invest in these funds, and these investors supposedly can do any necessary "due diligence" on their own rather than have it done by the SEC or some other regular
true
if a corporation elects to be taxed as an S corporation, then it can avoid the corporate tax. however, its stockholders will have to pay personal taxes on the firm's net income
true
in order to maximize its shareholders' value, a firm's management must attempt to maximize the stock price in the long run, or the stock's "intrinsic value", NOT on a specific date
true
it is usually easier to transfer ownership in a corporation than a partnership
true
one of the four most fundamental factors that affect the cost of money is the availability of production opportunities and their expected rates of return. if production opportunities are relatively good, then interest rates will tend to be relatively high, other things held constant
true
the NYSE operates as an auction market, whereas NASDAQ is an example of a dealer market
true
the board of directors is the highest ranking body in a corporation, and the chairman of the board is the highest ranking individual. the CEO generally works under the board and its chairman, and the board generally has the authority to remove the CEO under certain conditions
true
the market price of a share should increase if the perceived future cash flows of the stock increase and the perceived risk of those future cash flows decrease
true
the primary operating goal of a publicly owened firm trying to best serve its stockholders should be to
use a well structed managerial compensation package to reduce conflicts that may exist between stockholders and managers
Are partners in a limited partnership personally responsible for the partnership's debt?
yes, but only general partners
