fin 300 exam 2

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

dirty price.

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):

floor broker.

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

Home Products common stock sells for $36.84 a share and has a market rate of return of 15.8 percent. The company just paid an annual dividend of $1.61 per share. What is the dividend growth rate?

$36.84 = [$1.61(1 + g)/(.158 − g)g = .1095, or 10.95%

The semiannual, 8-year bonds of Alto Music are selling at par and have an effective annual yield of 8.6285 percent. What is the amount of each interest payment if the face value of the bonds is $1,000?

$42.25

A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000?

$5,073.11

Roy's Welding common stock sells for $58.49 a share and pays an annual dividend that increases by 1.3 percent annually. The market rate of return on this stock is 12.6 percent. What is the amount of the last dividend paid?

$58.49 = [D0(1.013)]/(.126 − .013)D0 = $6.52

Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000?

$929.42

The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:

.05/(1 − t*) = .07.

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

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity?

5.18

Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?

8.62 percent

Colin is analyzing a 3-year project that has an initial cost of $199,800. This cost will be depreciated straight-line to zero over three years. The projected annual net income for the three years is $11,600, $15,900, and $17,200. If the discount rate is 12 percent, what is the average accounting rate of return?

AAR = [($11,600 + 15,900 + 17,200)/3]/[($199,800 + 0)/2]AAR = .1491, or 14.91%

Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?

Accept Project B and reject Project A based on the NPVs

You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond?

Accrued interest = (.0625)($1,000)(1/2)(2/6)Accrued interest = $10.42Clean price = $1,119 − 10.42Clean price = $1,108.58

You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $13 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,954,300, $2,007,600, $1,976,000, and $1,429,500 over these four years, respectively, what is the project's average accounting return (AAR)? (Do

Average net income = ($1,954,300 + 2,007,600 + 1,976,000 + 1,429,500)/4 = $1,841,850 And the average book value is: Average book value = ($13,000,000 + 0)/2 = $6,500,000 So, the AAR for this project is: AAR = Average net income/Average book valueAAR = $1,841,850/$6,500,000AAR = .2834, or 28.34%

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms?

Debenture

Which one of the following best describes NASDAQ?

Computer network of securities dealers

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at time zero

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

Inflation

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?

Liquidity

Which of the following are advantages of the payback method of project analysis?

Liquidity bias, ease of use

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?

NPV = 0 = −$38,000 + $12,300/(1 + IRR) + $24,200/(1 + IRR)2 + $16,100/(1 + IRR)3IRR = .1738, or 17.38% Yes; The IRR exceeds the required return

A project will produce cash inflows of $5,400 a year for 3 years with a final cash inflow of $2,400 in Year 4. The project's initial cost is $13,400. What is the net present value if the required rate of return is 14.2 percent?

NPV = −$13,400 + $5,400([1 − (1/1.1423)]/.142) + $2,400/(1.142)4NPV = $505.92

Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which project(s) should be accepted and why?

NPVA = −$47,500 + $25,300/1.147+ $37,100/1.1472+ $22,000/1.1473NPVA = $17,336.57NPVB = −$47,500 + $43,600/1.149 + $19,800/1.1492+ $10,400/1.1493NPVB = $12,299.79 Project A, because it has the larger NPV.

Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?

NPVA = −$82,000 + $34,000{[1 −(1/1.1173)]/.117}NPVA = $85.10NPVB = −$82,000 + $115,000/1.1173NPVB = $516.03NPVA = −$82,000 + $34,000{[1 −(1/1.1353)]/.135}NPVA = −$2,397.49NPVB = −$82,000 + $115,000/1.1353NPVB = −$3,347.91 Accept B at 11.7 percent and neither at 13.5 percent

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon 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

Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 10.75 percent, what is the current share price?

P0 = $13/1.1075 + $9/1.10752 + $6/1.10753 + $2.75/1.10754 + $50.22/1.10754P0 = $58.70

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $14 per share 10 years from today and will increase the dividend by 6 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

P0 = $175.00/1.149P0 = $53.81

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price?

P0 = $2.08(12.7)P0 = $26.42

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $10.15, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of 15 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

P0 = D0(1 + g)/(R − g)P0 = $10.15(1 − .04)/[.15 − (−.04)]P0 = $51.28

Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.90, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 14 percent on this stock, what will you pay for a share today?

P0 = D0(1 + g)/(R − g)P0 = $9.90(1 − .05)/[.14 − (−.05)]P0 = $49.50

A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year?

P1 = $1.63(1.026)(11.7)P1 = $19.57

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share. What is this stock worth today at a discount rate of 11.7 percent?

P3 = $1.60/.117P3 = $13.68 P0 = $1.45/1.117 + $1.50/1.1172 + ($1.53 + 13.68)/1.1173P0 = $13.41

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?

P3 = $1.90/.146P3= $13.01 P0 = $1.48/1.146 + $1.60/1.1462 + ($1.75 + 13.01)/1.1463P0 = $12.32

JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of $309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively. Should the project be accepted based on discounted payback if the required payback period is 2.5 years?

PV = $47,000/1.1522 + $198,000/1.1523 + $226,000/1.1524PV = $293,248.02

Assume a project has cash flows of −$54,300, $18,200, $37,300, and $14,300 for Years 0 to 3, respectively. What is the profitability index given a required return of 12.6 percent?

PVInflows = $18,200/1.126 + $37,300/1.1262 + $14,300/1.1263PVInflows = $55,599.30PI = $55,599.30/$54,300PI = 1.02

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?

Payback = 3 + ($6,900 − 850 − 2,400 − 3,100)/$4,100Payback = 3.13 years

Which two methods of project analysis are the most biased towards short-term projects?

Payback and discounted payback

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

Bedeker, Inc., has an issue of preferred stock outstanding that pays a $4.75 dividend every year in perpetuity. If this issue currently sells for $98 per share, what is the required return? (

R = D/P0R = $4.75/$98R = .0485, or 4.85%

Bedeker, Inc., has an issue of preferred stock outstanding that pays a $5.55 dividend every year in perpetuity. If this issue currently sells for $92 per share, what is the required return?

R = D/P0R = $5.55/$92R = .0603, or 6.03%

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?

Voting by proxy

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Yield to maturity < Coupon rate

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount; less than

A bond is quoted at a price of $1,011. This price is referred to as the:

clean price.

The interest rate risk premium is the:

compensation investors demand for accepting interest rate risk.

Recently, you discovered a convertible, callable bond with a semiannual coupon of 5 percent. If you purchase this bond you will have the right to:

convert the bond into equity shares.

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.

Interest rates that include an inflation premium are referred to as:

nominal rates.

Say you own an asset that had a total return last year of 10.5 percent. If the inflation rate last year was 4.5 percent, what was your real return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

r = (1 + .105)/(1 + .045) - 1 r = .0574, or 5.74%

The dividend growth model:

requires the growth rate to be less than the required return.