Financial Management Test 2 HW
Wine and Roses, Inc. offers a 7.5 percent coupon bond with semiannual payments and a yield to maturity of 8.16 percent. The bonds mature in 10 years. What is the market price of a $1,000 face value bond?
$955.47
You are going to loan a friend $6,000 for one year at an interest rate of 4.5 percent, compounded annually. How much additional interest could you have earned if you had compounded the rate continuously rather than annually?
$.6.17
Weisbro and Sons common stock sells for $21 a share and pays an annual dividend that increases by 5.4 percent annually. The market rate of return on this stock is 9.40 percent. What is the amount of the last dividend paid by Weisbro and Sons?
$0.80
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 6 percent, compounded monthly. What will be your monthly payment?
$1,058.01
Suppose the first comic book of a classic series was sold in 1954. In 2015, the estimated price for this comic book in good condition was about $310,000. This represented a return of 22 percent per year. For this to be true, what was the original price of the comic book in 1954?
$1.67
Sue plans to save $4,500, $0, and $5,500 at the end of each of the next three years, respectively. What will her investment account be worth at the end of the third year if she earns an annual rate of 4.15 percent?
$10,381.25
Electric Utilities just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity beginning 10 years from now. What is one share of this stock worth today if the market requires a return of 9 percent on this investment?
$102.32
What is the present value of $12,750 to be received 2 years from today if the discount rate is 6 percent?
$11,347.45
Suppose you are committed to owning a $195,000 Ferrari. You believe your mutual fund can achieve an annual rate of return of 8 percent and you want to buy the car in 7 years. How much must you invest today to fund this purchase assuming the price of the car remains constant?
$113,780.63
You borrow $5,930 to buy a car. The terms of the loan call for monthly payments for 5 years a rate of interest of 6 percent. What is the amount of each payment?
$114.64
You have your choice of two investment accounts. Investment A is a five-year annuity that features end-of-month $2,500 payments and has an interest rate of 11.5 percent compounded monthly. Investment B is a 10.5 percent continuously compounded lump sum investment, also good for five years. How much would you need to invest in B today for it to be worth as much as investment A five years from now?
$119,176.06
Theresa adds $1,500 to her savings account on the first day of each year. Marcus adds $1,500 to his savings account on the last day of each year. They both earn 6.5 percent annual interest. What is the difference in their savings account balances at the end of 35 years?
$12,093
Jensen Shipping currently has an EPS of $5.29, a benchmark PE of 19.5, and an earnings growth rate of 4.3 percent. What is the target share price 4 years from now?
$122.08
Todd is able to pay $310 a month for 4 years for a car. If the interest rate is 6.2 percent, how much can Todd afford to borrow to buy a car?
$13,148.50
Railway Cabooses just paid its annual dividend of $4.10 per share. The company has been reducing the dividends by 12.5 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?
$13.54
Thomas invests $112 in an account that pays 6 percent simple interest. How much money will Thomas have at the end of 4 years?
$138.88
You collect old coins. Today, you have two coins each of which is valued at $100. One coin is expected to increase in value by 5.2 percent annually while the other coin is expected to increase in value by 5 percent annually. What will be the difference in the value of the two coins 25 years from now?
$16.50
Leslie's Unique Clothing Stores offers a common stock that pays an annual dividend of $2.10 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 12.60 percent return on your equity investments?
$16.67
Your parents are giving you $300 a month for 6 years while you are in college. At a 7 percent discount rate, what are these payments worth to you when you first start college?
$17,596.33
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 9 percent?
$17.50
Your car dealer is willing to lease you a new car for $349 a month for 60 months. Payments are due on the first day of each month starting with the day you sign the lease contract. If your cost of money is 4.5 percent, what is the current value of the lease?
$18,790.34
A newly issued 20-year, $1,000, zero coupon bond just sold for $311.05. What is the implicit interest, in dollars, for the first year of the bond's life? Assume semiannual compounding.
$18.70
You are scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?
$2,170.39
The Great Giant Corp. has a management contract with its newly hired president. The contract requires a lump sum payment of $25,400,000 be paid to the president upon the completion of her first 8 years of service. The company wants to set aside an equal amount of funds each year to cover this anticipated cash outflow. The company can earn 7 percent on these funds. How much must the company set aside each year for this purpose?
$2,475,681.17
One year ago, the Jenkins Family Fun Center deposited $3,800 in an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $5,600 to this account. They plan on making a final deposit of $7,800 to the account next year. How much will be available when they are ready to buy the equipment, assuming they earn a 6 percent rate of return?
$21,445.05
The Shore Hotel just paid a dividend of $2 per share. The company will increase its dividend by 6 percent next year and will then reduce its dividend growth rate by 2 percentage points per year until it reaches the industry average of 2 percent dividend growth, after which the company will keep a constant growth rate forever. What is the price of this stock today given a required return of 12 percent?
$21.58
Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flows of $5,000, $10,000, and $16,200 over the next three years, respectively. After that time, they feel the business will be worthless. Marko has determined that a rate of return of 12 percent is applicable to this potential purchase. What is Marko willing to pay today to buy ABC Co.?
$23,967.06
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 21 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $2.10 per share. What is the current value of one share of this stock if the required rate of return is 7.60 percent?
$233.85
You need a 30-year, fixed-rate mortgage to buy a new home for $225,000. Your bank will lend you the money at an APR of 5.5 percent with monthly compounding. You can only afford monthly payments of $1,000 for principal and interest, so you offer to pay off any remaining loan balance at the end of the loan term in the form of a single balloon payment. What will be the amount of the balloon payment?
$253,550
Galloway, Inc. has an odd dividend policy. The company just paid a dividend of $6 per share and has announced that it will increase the dividend by $1 per share for each of the next 4 years, and then never pay another dividend. How much are you willing to pay per share today to buy this stock if you require a 10 percent return?
$26.57
Gee-Gee's is going to pay an annual dividend of $2.05 a share on its common stock next year. This year, the company paid a dividend of $2 a share. The company adheres to a constant rate of growth dividend policy. What will one share of this common stock be worth five years from now if the applicable discount rate is 10.9 percent?
$27.61
You are planning to save for retirement over the next 15 years. To do this, you will invest $1,100 a month in a stock account and $500 a month in a bond account. The return on the stock account is expected to be 7 percent, and the bond account will pay 4 percent. When you retire, you will combine your money into an account with a 5 percent return. How much can you withdraw each month during retirement assuming a 20-year withdrawal period?
$3,113.04
Farmco just paid a dividend of $.20 per share. The dividends are expected to grow at 20 percent annually for the next 7 years and then level off to an annual growth rate of 3 percent indefinitely. What is the price of this stock today given a required return of 15 percent?
$3.98
When you retire 35 years from now, you want to have $1.2 million. You think you can earn an average of 9 percent on your investments. To meet your goal, you are trying to decide whether to deposit a lump sum today, or to wait and deposit a lump sum 5 years from today. How much more will you have to deposit as a lump sum if you wait for 5 years before making the deposit?
$31,662.08
You are the recipient of a gift that will pay you $25,000 one year from now and every year thereafter for the following 24 years. The payments will increase in value by 2.5 percent each year. If the appropriate discount rate is 8.5 percent, what is the present value of this gift?
$316,172
Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 5 if the interest rate is 8 percent?
$33,445
You will receive $25,000 in two years when you graduate. When you receive it, you will invest it for 6 more years at 7.5 percent per year. How much money will you have 8 years from now?
$38,582.54
A zero coupon bond with a face value of $1,000 is issued with an initial price of $415.50. The bond matures in 10 years. What is the implicit interest, in dollars, for the first year of the bond's life? Use semiannual compounding.
$38.14
You have just made a $1,500 contribution to your individual retirement account. Assume you earn a rate of return of 8.7 percent and make no additional contributions. How much more will your account be worth when you retire in 25 years than it would be if you waited another 5 years before making this contribution?
$4,117.64
George Jefferson established a trust fund that provides $183,500 in scholarships each year for worthy students. The trust fund earns a 4 percent rate of return. How much money did Mr. Jefferson contribute to the fund assuming that only the interest income is distributed?
$4,587,500
The Red Bud Co. pays a constant dividend of $2.50 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 8.1 percent?
$4.45
You just received $25,000 from an insurance settlement and have decided to invest it for your retirement. Currently, your goal is to retire 40 years from today. How much more will you have in your account on the day you retire if you can earn an average return of 8.2 percent rather than just 8 percent?
$41,718.03
The Good Life Insurance Co. wants to sell you an annuity which will pay you $760 per quarter for 30 years. You want to earn a minimum rate of return of 6.1 percent. What is the most you are willing to pay as a lump sum today to buy this annuity?
$41,730.49
You want to be a millionaire when you retire in 40 years and can earn an annual return of 12.5 percent. How much more will you have to save each month if you wait 15 years to start saving versus if you start saving at the end of this month?
$414.34
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
This morning, you borrowed $162,000 to buy a house. The mortgage rate is 4.35 percent. The loan is to be repaid in equal monthly payments over 20 years with the first payment due one month from today. Assume each month is equal to 1/12 of a year and all taxes and insurance premiums are paid separately. How much of the second payment applies to the principal balance?
$426.11
Your older sister deposited $2,000 today at 6.5 percent interest for 5 years. You would like to have just as much money at the end of the next 5 years as your sister will have. However, you can only earn 6 percent interest. How much more money must you deposit today than your sister did if you are to have the same amount at the end of the 5 years?
$47.62
What is the future value of $3,008 invested for 10 years at 5.3 percent compounded annually?
$5,041.52
One year ago, JK Mfg. deposited $20,500 in an investment account for the purpose of buying new equipment four years from today. 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. How much will be available when it is ready to buy the equipment, assuming the account pays 3.5 interest?
$52,648
Michael's, Inc. just paid $2.30 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5.00 percent. If you require a rate of return of 9.2 percent, how much are you willing to pay today to purchase one share of Michael's stock?
$57.50
What is the future value of $1,200 a year for 5 years at a 7 percent rate of interest?
$6,900.89
NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $0.49 a share. The following dividends will be $0.54, $0.69, and $0.99 a share annually for the following three years, respectively. After that, dividends are projected to increase by 3.4 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 15 percent?
$6.90
You are scheduled to receive annual payments of $9,800 for each of the next 20 years. Your discount rate is 7 percent. What is the difference in the present value if you receive these payments at the beginning of each year rather than at the end of each year?
$7,267
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 compounded annually?
$7.49
You just acquired a 30-year mortgage in the amount of $179,500 at 4.75 percent interest, compounded monthly. Payments will be equal over the life of the loan with the first payment due one month after the date of the loan. How much of the first payment will be interest?
$710.52
On June 1, you borrowed $195,000 to buy a house. The mortgage rate is 5.25 percent. The loan is to be repaid in equal monthly payments over 15 years. All taxes and insurance premiums are to be paid separately. The first payment is due on July 1. How much of the first payment applies to the principal balance?
$714.43
HCC, Inc., is experiencing rapid growth. The company expects dividends to grow at 25 percent per year for the next seven years before leveling off to 7 percent into perpetuity. The required return on the stock is 11 percent. What is the current stock price if the annual dividend per share that was just paid was $1.05?
$76.67
What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 23 annual payments?
$9,149.74
You are planning a special wedding three years from today. You don't know who your spouse will be but you do know that you are saving $25,000 today and $35,000 one year from today for this purpose. You also plan to pay the final $45,000 of costs on your wedding day. At a discount rate of 7 percent, what is the current cost of your special wedding?
$94,444
A bond has a coupon rate of 8 percent, 7 years to maturity, semiannual interest payments, and a YTM of 7 percent. If interest rates suddenly rise by 2 percent, what will be the percentage change in the bond price?
-10.02 percent
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 percent decrease
The common stock of Eddie's Engines, Inc. sells for $44.18 a share. The stock is expected to pay $2.60 per share next year. Eddie's has established a pattern of increasing their dividends by 4.7 percent annually and expects to continue doing so. What is the market rate of return on this stock?
10.59 percent
You are preparing to make monthly payments of $75, beginning at the end of this month, into an account that pays 6 percent interest compounded monthly. How many payments will you have made when your account balance reaches $10,000?
102
The Friendly Bank wants to earn an effective annual return on its consumer loans of 12 percent per year. The bank uses daily compounding. What rate is the bank most apt to quote on these loans?
11.33 percent
You are considering a one-year discount loan of $16,000. The interest rate is quoted as 7 percent plus 4 points. What is the actual rate you are paying on this loan?
11.46 percent
Shares of common stock of the Samson Co. offer an expected total return of 20.0 percent. The dividend is increasing at a constant 6.8 percent per year. The dividend yield must be:
13.20 percent.
Your credit card company charges you 1.15 percent per month. What is the annual percentage rate on your account?
13.80 percent
You are paying an effective annual rate of 14.80 percent on your credit card. The interest is compounded monthly. What is the annual percentage rate on your account?
13.88 percent
The Lo Sun Corporation offers a 6.0 percent bond with a current market price of $788.50. The yield to maturity is 8.40 percent. The face value is $1,000. Interest is paid semiannually. How many years is it until this bond matures?
16.38 years
Winston Enterprises would like to buy some additional land and build a new factory. The anticipated total cost is $150.3 million. The owner of the firm is quite conservative and will only do this when the company has sufficient funds to pay cash for the entire expansion project. Management has decided to save $550,000 a month for this purpose. The firm earns 6 percent compounded monthly on the funds it saves. How long does the company have to wait before expanding its operations? (Do not round intermediate calculations.)
172.70 months
Bob bought some land costing $16,240. Today, that same land is valued at $46,517. How long has Bob owned this land if the price of land has been increasing at 6 percent per year?
18.06 years
Mr. Miser loans money at an annual rate of 21 percent. Interest is compounded daily. What is the actual rate Mr. Miser is charging on his loans?
23.36 percent
You have just purchased a new warehouse. To finance the purchase, you arranged for a 30-year mortgage loan for 65 percent of the $2.5 million purchase price. The monthly payment on this loan will be $10,400. What is the effective annual rate on this loan?
6.82 percent
You just received an offer in the mail to transfer your $5,000 balance from your current credit card, which charges an annual rate of 18.7 percent, to a new credit card charging a rate of 5.9 percent. You plan to make payments of $250 a month on this debt. How many fewer payments will you have to make to pay off this debt if you transfer the balance to the new card?
3.05 payments
Currently, a firm has a benchmark PE of 18.7 and an EPS of $4.18. Earnings are expected to grow 3.2 percent annually. What is the implicit stock return?
3.20 percent
You just paid $345,000 for a policy that will pay you and your heirs $11,700 a year forever. What rate of return are you earning on this policy?
3.39 percent
A bond that pays interest annually yields a rate of return of 6.50 percent. The inflation rate for the same period is 3 percent. What is the real rate of return on this bond?
3.40 percent
You expect to receive $5,000 at graduation in 2 years. You plan on investing this money at 9 percent until you have $75,000. How many years from today will it be until this occurs?
33.42 years
You are considering an annuity which costs $90,500 today. The annuity pays $6,200 a year. The rate of return is 6 percent. What is the length of the annuity time period? (Do not round intermediate calculations.)
35.80 years
The outstanding bonds of Roy Thomas, Inc. provide a real rate of return of 2.8 percent. The current rate of inflation is 1.7 percent. What is the nominal rate of return on these bonds?
4.55 percent
The nominal rate of return on the bonds of Stu's Boats is 8.75 percent. The real rate of return is 2.7 percent. What is the rate of inflation?
5.89 percent
Three years ago, you invested $3,200.00. Today, it is worth $3,950.00. What rate of interest did you earn?
7.27 percent
Which one of the following will produce the lowest present value interest factor?
8 percent interest for 10 years.
Al's obtained a discount loan of $71,000 today that requires a repayment of $90,000, 3 years from today. What is the APR on this loan?
8.23 percent
The MerryWeather Firm wants to raise $28 million to expand its business. To accomplish this, the firm plans to sell 20-year, $1,000 face value zero-coupon bonds. The bonds will be priced to yield 6 percent. What is the minimum number of bonds the firm must sell to raise the $28 million it needs? Use annual compounding.
89,800
You want to borrow $38,400 and can afford monthly payments of $960 for 48 months, but no more. Assume monthly compounding. What is the highest APR rate you can afford?
9.24 percent
Some time ago, Tracie purchased 11 acres of land costing $77,900. Today, that land is valued at $54,800. How long has she owned this land if the price of the land has been decreasing by 3.5 percent per year?
9.87 years
The banks in your area offer the following rates of interest on their savings accounts. If you want to open one of these accounts, which bank should you select? Bank A: .75 percent APR with daily compounding. Bank B: .85 percent APR with monthly compounding. Bank C: .8725 percent APR with annual compounding. Bank D: .87 percent APR with quarterly compounding. Bank E: .775 percent APR with semi-annual compounding.
Bank D
Which one of the following best describes NASDAQ?
Computer network of securities dealers.
Which one of the following applies to a premium bond?
Coupon rate > current yield > yield to maturity.
A decrease in which of the following will increase the current value of a stock according to the dividend growth model?
Discount rate.
You are considering five loan offers. The only significant difference between them is their interest rates. Given the following information, which offer should you accept? (Assume a 365-day year.) Offer A: 6.75 percent APR with daily compounding. Offer B: 6.8 percent APR with monthly compounding. Offer C: 7 percent APR with annual compounding. Offer D: 6.825 percent APR with quarterly compounding. Offer E: 6.85 percent APR with semi-annual compounding.
Offer E
Four years ago, Seegee invested $500. Three years ago, Trek invested $600. Today, these two investments are each worth $800. Assume each account continues to earn its respective rate of return. Which one of the following statements is correct concerning these investments?
One year ago, Seegee's investment was worth less than Trek's investment.
Samantha opened a savings account this morning. Her money will earn 3.5 percent interest, compounded annually. After four years, her savings account will be worth $5,000. Assume she will not make any withdrawals. Given this, which one of the following statements is true?
Samantha could have deposited less money today and still had $5,000 in four years if she could have earned a higher rate of interest.
Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?
The bonds will sell at a premium if the market rate is 5.5 percent.
This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6 percent annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?
The present value of this investment is equal to $1,000.
Which one of the following statements is false concerning the term structure of interest rates?
The term structure of interest rates and the time to maturity are always directly related.
Which one of the following statements correctly defines a time value of money relationship?
Time and present value are inversely related, all else held constant.
