Finance exam 2

Project A has cash flows of $4,000, $3,000, $0, and $3,000 for Years 1 to 4, respectively. Project B has cash flows of $2,000, $3,000, $2,000, and $3,000 for Years 1 to 4, respectively. Which one of the following statements is correct assuming the discount rate is positive? (No calculations needed.)

Project B is worth less today than Project A.

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

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:

face value

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

market price

A Canadian consol is best categorized as a(n):

perpetuity

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

$7445.76

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?

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

You need to have $35,000 for a down payment on a house in 5 years. If you can earn an annual interest rate of 4.1 percent, how much will you have to deposit today?

$28,629.54

Braxton's Cleaning Company stock is selling for $31.75 per share based on a required return of 9.9 percent. What is the the next annual dividend if the growth rate in dividends is expected to be 3.9 percent indefinitely?

$31.75 = D1/(.0990 − .0390) D1= $1.91

Your parents have made you two offers. The first offer includes annual gifts of $4,000, $4,500, and $5,200 at the end of each of the next three years, respectively. The other offer is the payment of one lump sum amount today. You are trying to decide which offer to accept given the fact that your discount rate is 9.7 percent. What is the minimum amount that you will accept today if you are to select the lump sum offer?

$11,325 PV = $4,000/1.097 + $4,500/1.097^2 + $5,200/1.097^3PV = $11,325

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

Coupon

Stana, Incorporated, has preferred stock outstanding that sells for $101.22 per share. If the required return is 4.02 percent, what is the annual dividend?

D = $101.22 × .0402 = $4.07

A stock currently sells for $73. The dividend yield is 3.1 percent and the dividend growth rate is 4.4 percent. What is the amount of the dividend to be paid in one year?

D1 = .031($73) = $2.26

What is the future value of $2,988 invested for 8 years at 5.1 percent compounded annually?

FV = $2,988 × 1.051^8 = $4,448.38

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

Maturity

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?

4.84% n=10x2 I/Y=3.575 PV= -989.40 pmt=35 fv=$1000 YTM = 2(3.575%) = 7.15%

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?

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

You purchased a bond at a price of $4,000. In 25 years when the bond matures, the bond will be worth $20,000. It is exactly 19 years after you purchased the bond and you can sell the bond today for $12,600. If you hold the bond until it matures, what annual rate of return will you earn from today?

8%

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?

-1.79%

You currently have $5,900. First United Bank will pay you an annual interest rate of 9.4, while Second National Bank will pay you an annual interest rate of 10.5. How many fewer years must you wait for your account value to grow to $18,400 at Second National Bank?

1.27 yrs

You expect to receive a payout from a trust fund in 5 years. The payout will be for $13,800. You plan to invest the money at an annual rate of 5.1 percent until the account is worth $23,200. How many years do you have to wait from today?

10.44 yrs

Two years ago, you invested $3,300. Today, it is worth $4,050. What rate of interest did you earn?

10.78%

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?

12.53 yrs

What is the present value of $13,050 to be received 2 years from today if the discount rate is 6 percent?

$11,614.45

The Bell Weather Company is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 20 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 $2.70 per share. What is the current value of one share of this stock if the required rate of return is 8.20 percent?

$115.23

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?

$1190.93

Howell Corporation deposited $12,000 in an investment account one year ago for the purpose of buying new equipment. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today and plans to purchase the equipment four years from today. Assuming an interest rate of 5.5 percent, how much cash will be available when the company is ready to buy the equipment?

$46,008.30 FV = $12,000(1.055^5) + $15,000(1.055^4) + $10,000(1.055^3) FV = $46,008.30

Stoneheart Group is expected to pay a dividend of $2.87 next year. The company's dividend growth rate is expected to be 4 percent indefinitely and investors require a return of 10.2 percent on the company's stock. What is the stock price?

$46.29 P0 = $2.87/(.102 - .040) = $46.29

The stock in Up-Towne Movers is selling for $47.80 per share. Investors have a required return of 10.6 percent and expect the dividends to grow at 3.8 percent indefinitely. What was the dividend the company just paid?

$47.80 = D1/(.1060 − .0380) D1 = $3.25 D0 = $3.25/(1 + .0380) D0 = $3.13

Excellent Yachting is considering acquiring Turquoise Tours. Management believes Turquoise Tours can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Excellent Yachting should pay today to acquire Turquoise Coast? $519,799.59 $538,615.08 $545,920.61 $595,170.53 $538,407.71

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

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?

$548 = $65{[1 − (1/1.132^t)]/.132} + $1,000/1.132^t To solve for t, use the formula, a financial calculator, or a computer

You are considering purchasing stock in Canyon Echo. You feel the company will increase its dividend at 4.6 percent indefinitely. The company just paid a dividend of $3.41 and you feel that the required return on the stock is 11 percent. What is the price per share of the company's stock?

$55.73 P0 = [$3.41 × (1 + .046)]/(.110 - .046) = $55.73

Today, your dream car costs $60,000. You feel that the price of the car will increase at an annual rate 2 percent. If you plan to wait 4 years to buy the car, how much will it cost at that time?

$64,945.93

Which one of the following statements related to annuities and perpetuities is correct? An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest compounded annually. A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. Most loans are a form of a perpetuity. The present value of a perpetuity cannot be computed but the future value can. Perpetuities are finite but annuities are not.

A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

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

Balance Year 4 with simple interest = $1,360 + ($1,360 × 0.03 × 4) = $1,523.20 Balance Year 4 with compound interest = $1,360 × 1.03^4 = $1,530.69 Additional interest = $1,530.69 − 1,523.20 = $7.49

Thomas invests $114 in an account that pays 4 percent simple interest. How much money will Thomas have at the end of 6 years?

Balance Year 6 = $114 + ($114 × 0.04 × 6) = $141.36

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?

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

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?

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

A stock currently sells for $56. The dividend yield is 3.4 percent and the dividend growth rate is 4.7 percent. What is the amount of the dividend that was just paid?

D1 = .034($56) = $1.90 D0 = $1.90/(1 + .047) = $1.82

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?

P4 = ($1.17 × 1.037)/(.11 - .037) = $16.62

Five years from today, you plan to invest $5,200 for 6 additional years at 8.5 percent compounded annually. How much will you have in your account 11 years from today?

FV = $5,200 × 1.085^6 = $8,483.63

Thanh-Mi will receive $7,500 at the end of Year 2, $9,000 at the end of Year 3, and $12,500 at the end of Year 4. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent?

FV = $7,500(1.08^4) + $9,000(1.08^3) + $12,500(1.082^) FV = $36,121.08

Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $1.60 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 10.20 percent on your equity investments?

P = $1.60/.1020 = $15.69

Asonia Company will pay a dividend of $4.80, $8.90, $11.75, and $13.50 per share for each of the next four years, respectively. The company will then close its doors. If investors require a return of 11.4 percent on the company's stock, what is the stock price?

P = $4.80/(1 + .114) + $8.90/(1 + .114)^2 + $11.75/(1 + .114)^3 + $13.50/(1 + .114)^4 P = $28.75

Knightmare, Incorporated, will pay a dividend of $6.55, $10.65, and $13.85 per share for each of the next three years, respectively. The company will then close its doors. Investors require a return of 9.8 percent on the company's stock. What is the current stock price?

P = $6.55/(1 + .098) + $10.65/(1 + .098)^2 + $13.85/(1 + .098)^3 P = $25.26

Santa Klaus Toys just paid a dividend of $1.60 per share. The required return is 8.9 percent and the perpetual dividend growth rate is 2.5 percent. What price should this stock sell for five years from today?

P = [$1.60(1 + .025)^6]/(.089 − .025) P = $28.99

The Red Bud Company pays a constant dividend of $2.20 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 7.8 percent?

P0 = $2.20/1.078 + $2.20/1.078^2 = $3.93

Weisbro and Sons common stock sells for $22 a share and pays an annual dividend that increases by 4.1 percent annually. The market rate of return on this stock is 9.8 percent. What is the amount of the last dividend paid by Weisbro and Sons?

P0 = $22 = [D0 × (1 + .041)]/(.0980 - .041) D0 = $1.20

Kindzi Company has preferred stock outstanding that is expected to pay an annual dividend of $3.69 every year in perpetuity. If the required return is 3.84 percent, what is the current stock price?

P0 = $3.69/.0384 = $96.09

Symon's Suppers Company has announced that it will pay a dividend of $4.37 per share one year from today. Additionally, the company expects to increase its dividend by 4.3 percent annually. The required return on the company's stock is 11.3 percent. What is the current share price?

P0 = $4.37/(.113 - .043) = $62.43

Railway Cabooses just paid its annual dividend of $1.50 per share. The company has been reducing the dividends by 11.2 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 12 percent?

P0 = [$1.50 × [1 + (- .112)]]/[.12 - (- .112)] = $5.74

McKerley Corporation has preferred stock outstanding that will pay an annual dividend of $6.40 per share with the first dividend exactly 14 years from today. If the required return is 4.14 percent, what is the current price of the stock?

P13 = $6.40/.0414 = $154.59 P0 = $154.59/(1 + .0414)^13 = $91.23

A small business has determined that the machinery they currently use will wear out in 16 years. To replace the new machine when it wears out, the company wants to establish a savings account today. If the interest rate on the account is 1.3 percent per quarter and the cost of the machinery will be $265,000, how much will the company have to deposit today?

PV = $265,000/1.013^(16×4) = $115,942.16

Project X has cash flows of $8,500, $8,000, $7,500, and $7,000 for Years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for Years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate Both projects have the same future value at the end of Year 4. Both projects have the same value at Time 0. Both projects are ordinary annuities. Project Y has a higher present value than Project X. Project X has both a higher present and a higher future value than Project Y.

Project X has both a higher present and a higher future value than Project Y.

The common stock of Eddie's Engines, Incorporated, sells for $44.48 a share. The stock is expected to pay a dividend of $2.90 per share next year. Eddie's has established a pattern of increasing their dividends by 5.0 percent annually and expects to continue doing so. What is the market rate of return on this stock?

R = $2.90/$44.48 + .050 = 0.1152, or 11.52%

Which one of the following statements correctly defines a time value of money relationship? Time and future values are inversely related, all else held constant. Interest rates and time are positively related, all else held constant. An increase in a positive discount rate increases the present value. An increase in time increases the future value given a zero rate of interest. Time and present value are inversely related, all else held constant.

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

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:

Yield to maturity

You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?

You should accept the second offer because it has the larger net present value.

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

annual percentage rate.