BUS 170 Exam 2

Cindy wants $2.5 million for her retirement at age 65. Cindy is 25 years old today and plans to deposit equal amounts each year starting on her 26th birthday and ending with her 65th birthday. If her investments earn 6% per year, how much must each deposit be (rounded to the nearest dollar)?

$16,154

(T/F)Small company stocks have historically had higher average annual returns than large company stocks, and also a higher risk premium.

T

Bacon Signs Company preferred stock pays a perpetual annual dividend of 4.5% of its $100 par value. If investors' required rate of return on this stock is 12%, what is the value per share? $8.50 $37.50 $31.82 $45.00

$37.50

If you expect NoDiv Corporation to sell for $75 per share in three years while paying no dividends along the way, and if your required rate of return is 16% per year, how much is the stock worth today. $51.10 $42.68 $48.05 $74.64

$48.05

The present value of $1,000 to be received in 5 years is $ ____________ if the discount rate is 12.78%

$548

A bond issued by Liberty, Inc. 10 years ago has a coupon rate of 8% and a face value of $1,000. The bond will mature in 15 years. What is the present value to an investor with a required return of 12.5%? $658.94 $701.52 $800.00 $750.86

$701.52

You decide to borrow $250,000 to build a new home. The bank charges an interest rate of 8% compounded monthly. If you pay back the loan over 30 years, what will your monthly payments be (rounded to the nearest dollar)?

1,834

Assume that you have $100,000 invested in a stock whose beta is .85, $200,000 invested in a stock whose beta is 1.05 and $300,000 invested in a stock whose beta is 1.25. What is the beta of your portfolio? 1.02 1.12 0.97 1.21

1.12

Assume that you expect to hold a $40,000 investment for one year. It is forecasted to have a year-end value of $42,000 with a 30% probability; a year end value of $48,000 with a 45% probability; and a year end value of $60,000 with a 25% probability. What is the expected holding period return for the investment? 18% 25% 23% 50%

23%

ND Electric Company issued $1,000 bonds that have an annual coupon rate of 6.5%. The present market value of the bonds is $1,225. If the bonds have 17 years remaining until maturity, what is the current yield on ND Electric Company bonds? 6.5% 13.2% 7.2% 4.6%

4.6%

An investment is expected to pay $300 in three years, $500 in five years, and $300 in seven ` years. What is the present value of this investment if the required rate of return is 5%?

864

Asymmetric Frames, Corp. had a return on equity of 15%. The corporation's earnings per share was $6.00, its dividend payout ratio was 40% and its profit retention rate was 60%. If these relationships continue, what will be Asymmetric's internal growth rate? 8.6% 6.0% 9.0% 15.6%

9.0%

Which of the following is a common protective provision of preferred stock? Anti-dilution All of the above Liquidation Preferences Right of First Refusal

All of the above

(T/F)A SAFE (Simple Agreement for Future Equity) offers the investor the opportunity to acquire equity in a company at a premium to the next round price.

F

(T/F)An investment earning simple interest is preferred over an investment earning compound interest because the simplicity adds value.

F

(T/F)Joe borrowed $10,000 at 10% per year and promised to pay it back in equal annual installments of principal and interest at the end of each of the next 5 years. Joe's annual payment will be $3,000 using the formula $3,000 = [($10,000/5) + ($10,000 x 10%)

F

(T/F)If the required rate of return (current interest rate) exceeds the bond's coupon rate, the bond will sell below par value or at a discount.

T

The interest on corporate bonds is typically paid Annually Semiannually Quarterly Monthly

Semiannually

(T/F)A certificate of deposit that pays 9.8% compounded monthly is better than a similar certificate of deposit that pays 10% compounded only once per year.

T

(T/F)Subordinated debentures are more risky than unsubordinated debentures because the claims of subordinated debenture holders are less likely to be honored in the event of liquidation.

T

(T/F)The definition of the pre-money valuation for a company that is undertaking a round of equity is equal to the post-money valuation less the amount of the invested cash.

T

(T/F)The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.

T

(T/F)The par value of a corporate bond indicates the payment that the issuer promises to make to the bondholder at maturity

T

(T/F)The realized rate of return, or holding period return, is equal to the holding period dollar gain divided by the price at the beginning of the period

T

(T/F)Variation in the rate of return of investment is a measure of the riskiness of that investment.

T

A call provision entitles a company to repurchase its preferred stock from holders at stated prices over a given time period.

T

Beta is the statistical measure of a. The relationship between an investment's return and the market return b. The standard deviation c. Total risk d. Unsystematic risk

a. The relationship between an investment's return and the market return

A zero coupon bond is selling for $476. The bond has a par value of $1,000 and matures in 8 years. Your friend asks you if he should buy the bond. He tells you his required return is 9 percent. Would you recommend he buy the bond or not? a. Do not buy the bond b. Buy the bond

b. Buy the bond

A small biotech company has been experiencing operating losses for the first three years of its existence, and thus has a negative balance in retained earnings. The company's stock price, however, is $1 per share. Which of the following statements is MOST correct? a. The required return on the stock will be small because the company has very few assets. b. Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive. c. Investors are irrational to pay $1 per share when earnings per share have been negative for three years. d. The company's accountants must have made a mistake because retained earnings may not be negative.

b. Investors believe the stock is worth $1 per share because future earnings (and cash flows) are expected to be positive.

investment A has an expected return of 15% per year, while Investment B has an expected return of 12% per year. A rational investor will choose a. Investment A because of the higher expected return. b. Investment A only if the standard deviation of returns for A is higher than the standard deviation of returns for B. c. Investment B because a lower return means lower risk. d. Investment A if A and B are of equal risk.

d. Investment A if A and B are of equal risk.

If a firm were to experience financial insolvency, the legal system provides for an order of hierarchy for payment of claims. Assume that a firm has the following outstanding securities; mortgage bonds, common stock, debentures, and preferred stock. In what position would investors be that own mortgage bonds to have their claim paid? Third Second Fourth First

first