business finance 3120 midterm 2 osu

The manager of Gloria's Boutique has approved Carla's application for credit. The maximum payment that has been approved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carla can make given this credit approval? A. $1,288.90 B. $1,300.00 C. $1,331.42 D. $1,350.00 E. $1,428.46

**C.** $1,331.42

If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows? A. $71,407.19 B. $74,221.80 C. $78,270.77 D. $80,407.16 E. $81,121.03

**C.** $78,270.77

Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days from today. Which one of the following statements is correct concerning this purchase? A. The present value of the car is equal to $500 + (36 × $450). B. The $500 is the present value of the purchase. C. The car loan is an annuity due. D. To compute the initial loan amount, you must use a monthly interest rate. E. The future value of the loan is equal to 36 × $450.

**D.** To compute the initial loan amount, you must use a monthly interest rate.

What is the net present value of the following cash flows if the relevant discount rate is 8 percent? A. $1,587.61 B. $2,311.92 C. $2,900.15 D. $3,248.87 E. $3,545.60

A. $1,587.61

What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the end of this week. A. $14,239.14 B. $14,361.08 C. $14,727.15 D. $15,003.14 E. $15,221.80

A. $14,239.14

The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for the following two years, and then cease paying dividends altogether. How much is one share of this stock worth to you today if you require a 19 percent rate of return? A. $2.31 B. $2.36 C. $2.56 D. $2.60 E. $2.64

A. $2.31

This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be on this stock if you sell it three years from now? A. $2.43 B. $2.51 C. $2.63 D. $2.87 E. $2.92

A. $2.43

Granger Corp. stock currently sells for $48.29 per share. The market requires a 13 percent return on the firm's stock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent annual dividend per share paid on the stock? A. $3.43 B. $3.57 C. $3.90 D. $4.15 E. $4.36

A. $3.43

Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at a required return of 14 percent. What is the amount of the last dividend this company paid? A. $3.50 B. $3.55 C. $3.60 D. $3.65 E. $3.70

A. $3.50

Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share three years from now. Starting in year 6, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent? A. $7.70 B. $8.09 C. $8.29 D. $9.03 E. $9.34

A. $7.70

New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increase by 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of this stock if the required return is 16 percent? A. $8.50 B. $9.67 C. $10.46 D. $12.23 E. $12.49

A. $8.50

If Treasury bills are currently paying 3.2 percent and the inflation rate is 2.8 percent, what is the approximate real rate of interest? The exact real rate? A. 0.40 percent; 3.89 percent B. 0.40 percent; 3.98 percent C. 6.00 percent; 5.67 percent D. 6.00 percent; 5.87 percent E. 6.00 percent; 5.92 percent

A. 0.40 percent; 3.89 percent

The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 7 percent? A. 0.96 B. 0.99 C. 1.04 D. 1.09 E. 1.12

A. 0.96

A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR? A. 13.53 percent B. 13.59 percent C. 13.96 percent D. 14.07 percent E. 14.10 percent

A. 13.53 percent

Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years. Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Bill have? A. Amortized B. Complex C. Pure discount D. Lump sum E. Interest-only

A. Amortized

Which one of the following statements is correct? A. Both preferred stock and corporate bonds can be callable. B. Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each. C. Interest payments to bondholders as well as dividend payments to preferred shareholders are tax-deductible expenses for the issuing firm. D. Bondholders generally receive a fixed payment while preferred shareholders receive a variable payment. E. Preferred shareholders receive preferential treatment over bondholders in a liquidation.

A. Both preferred stock and corporate bonds can be callable.

Which one of the following is the price that an investor pays to purchase an outstanding bond? A. Dirty price B. Face value C. Call price D. Bid price E. Clean price

A. Dirty price

Which one of the following statements is correct? A. From a legal perspective, preferred stock is a form of corporate equity. B. All classes of stock must have equal voting rights per share. C. Common shareholders elect the corporate directors while the preferred shareholders vote on mergers and acquisitions. D. Dividends are tax-free income for individual investors. E. Shareholders prefer noncumulative dividends over cumulative dividends

A. From a legal perspective, preferred stock is a form of corporate equity.

A real rate of return is defined as a rate that has been adjusted for which one of the following? A. Inflation B. Interest rate risk C. Taxes D. Liquidity E. Default risk

A. Inflation

You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal at the end of three years. What type of loan did you obtain? A. Interest-only B. Amortized C. Perpetual D. Pure discount E. Lump sum

A. Interest-only

Which one of the following is most closely related to the net present value profile? A. Internal rate of return B. Average accounting return C. Profitability index D. Payback E. Discounted payback

A. Internal rate of return

Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? A. The firm should increase in value each time the firm accepts a new project. B. The firm is most likely steadily losing value. C. The price of the firm's stock should remain constant. D. The net present value of each new project is zero. E. The internal rate of return on each new project is zero.

A. The firm should increase in value each time the firm accepts a new project.

The written agreement that contains the specific details related to a bond issue is called the bond: A. indenture. B. debenture. C. document. D. registration statement. E. issue paper

A. indenture.

The average accounting return: A. measures profitability rather than cash flow. B. discounts all values to today's dollars. C. is expressed as a percentage of an investment's current market value. D. will equal the required return when the net present value equals zero. E. is used more often by CFOs than the internal rate of return.

A. measures profitability rather than cash flow.

A note is a(n): A. unsecured debt that is generally payable within the next 10 years. B. formal type of loan that is secured by real estate. C. long-term debt secured by part, or all, of the assets of the borrower. D. debt that is secured by a borrower's accounts receivable. E. written agreement that details the information relative to a bond issue.

A. unsecured debt that is generally payable within the next 10 years.

Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

Annuity due

Spiral Staircase is offering preferred stock which is commonly referred to as 10-10 stock. This stock will pay an annual dividend of $10 a share starting 10 years from now. What is this stock worth to you today if you desire a 15 percent rate of return? A. $16.70 B. $18.95 C. $19.63 D. $20.52 E. $20.94

B. $18.95

Classic Pickles is a mature manufacturing firm. The company just paid a $4 annual dividend, but management expects to reduce the payout by 4 percent per year, indefinitely. If you require a 12 percent return on this stock, what will you pay for a share today? A. $21.42 B. $24.00 C. $25.24 D. $28.56 E. $30.02

B. $24.00

Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 10 percent annually. What is a share of this stock worth today at a required return of 15 percent? A. $3.06 B. $3.24 C. $3.41 D. $3.59 E. $3.95

B. $3.24

A 7 percent bond has a yield to maturity of 6.5 percent. The bond matures in seven years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each coupon payment? A. $30.00 B. $35.00 C. $60.00 D. $65.00 E. $70.00

B. $35.00

A bond has a par value of $1,000, a current yield of 7.5 percent, and semiannual interest payments. The bond quote is 98.6. What is the amount of each coupon payment? A. $32.07 B. $36.98 C. $37.50 D. $72.31 E. $75.00

B. $36.98

What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent? A. $4,518.47; $628.30 B. $4,518.47; -$321.76 C. $4,518.47; -$525.13 D. $4,722.09; $504.21 E. $4,722.09; -$418.05

B. $4,518.47; -$321.76

Jeffries, Inc. has 6 percent coupon bonds on the market that have 11 years left to maturity. The bonds make annual payments. If the YTM on these bonds is 7.4 percent, what is the current bond price? A. $895.88 B. $897.08 C. $903.14 D. $921.42 E. $933.33

B. $897.08

Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest annually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the current yield? A. 5.39 percent B. 5.43 percent C. 5.50 percent D. 5.61 percent E. 5.77 percent

B. 5.43 percent

You've just found a 7 percent coupon bond on the market that sells for par value. What is the maturity on this bond? A. The bond must mature in 1 year. B. The bond could have any maturity date. C. The bond must be maturing today. D. The bond must mature in 10 years. E. None of these are correct.

B. The bond could have any maturity date.

Which one of the following will occur when the internal rate of return equals the required return? A. The average accounting return will equal 1.0. B. The profitability index will equal 1.0. C. The profitability index will equal 0. D. The net present value will equal the initial cash outflow. E. The profitability index will equal the average accounting return.

B. The profitability index will equal 1.0.

Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one year from now. This type of loan is referred to as a(n): A. interest-only loan. B. pure discount loan. C. quoted rate loan. D. compound interest loan. E. amortized loan.

B. pure discount loan

Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis. A. annual B. semiannual C. quarterly D. monthly E. daily

B. semiannual

A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent per year for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share. The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12 percent? A. $17.71 B. $18.97 C. $20.50 D. $21.08 E. $21.69

C. $20.50

Laura Lynn owns 20,700 shares of Global Exporters. Her shares have a total market value of $787,270. In total, the firm has 65,000 shares outstanding. Each share is entitled to one vote under the straight voting policy of the firm. The next election is in four months at which time two directors are up for election. How much more must Laura Lynn invest in this firm to guarantee that she is elected to the board? A. $0 B. $396,554 C. $448,820 D. $498,406 E. $547,478

C. $448,820

A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500, and finally in year 4, $4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project? A. $7,899.16 B. $8,098.24 C. $8,166.19 D. $9,211.06 E. $9,250.00

C. $8,166.19

(68) Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a fouryear cutoff for projects. The required return is 11 percent. The payback for Project A is ____ while the payback for Project B is ____. The NPV for Project A is _____ while the NPV for Project B is ____. Which project, if any, should the company accept? A. 3.92 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B B. 3.92 years; 3.79 years; -$211.60; $1,211.48; accept Project B only C. 3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only D. 4.06 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B E. 4.06 years; 3.79 years; -$211.60; -$7,945.93; reject both projects

C. 3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only

Today is your 21st birthday and you just decided to start saving money so you can retire early. Thus, you are going to save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn an average of 8 percent on your savings, how old will you be when you retire? A. 33.39 years old B. 42.87 years old C. 54.39 years old D. 64.71 years old E. 63.87 years old

C. 54.39 years old

One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent and pay interest annually. Today, the market rate of interest on these bonds is 7.2 percent. How does the price of these bonds today compare to the issue price? A. 4.99 percent lower B. 5.38 percent lower C. 6.05 percent lower D. 0.07 percent higher E. 1.36 percent higher

C. 6.05 percent lower

Last year, when the stock of Alpha Minerals was selling for $55 a share, the dividend yield was 3.2 percent. Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains a constant dividend growth rate of 2.5 percent? A. 6.13 percent B. 6.58 percent C. 6.90 percent D. 7.47 percent E. 7.40 percent

C. 6.90 percent

Whitts BBQ would like to issue some semiannual coupon bonds at par. Comparable bonds have a current yield of 9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rate should Whitts BBQ set on its bonds? A. 9.00 percent B. 9.16 percent C. 9.50 percent D. 9.68 percent E. 10.00 percent

C. 9.50 percent

Which one of the following is an indicator that an investment is acceptable? A. Modified internal rate of return equal to zero B. Profitability index of zero C. Internal rate of return that exceeds the required return D. Payback period that exceeds the required period E. Negative average accounting return

C. Internal rate of return that exceeds the required return

What is the primary purpose of bond covenants? A. Meet regulatory requirements B. Describe repayment terms C. Protect the lender D. Define a bond's rating E. Increase a bond's seniority position

C. Protect the lender

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? A. The internal rate of return exceeds the required rate of return. B. The investment never pays back. C. The net present value is equal to zero. D. The average accounting return is 1.0. E. The net present value is greater than 1.0.

C. The net present value is equal to zero

Which one of the following statements is correct? A. If the IRR exceeds the required return, the profitability index will be less than 1.0. B. The profitability index will be greater than 1.0 when the net present value is negative. C. When the internal rate of return is greater than the required return, the net present value is positive. D. Projects with conventional cash flows have multiple internal rates of return. E. If two projects are mutually exclusive, you should select the project with the shortest payback period.

C. When the internal rate of return is greater than the required return, the net present value is positive.

An investment has an initial cost of $300,000 and a life of four years. This investment will be depreciated by $60,000 a year and will generate the net income shown below. Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9.5 percent? Why or why not? A. Yes, because the AAR less than 9.5 percent B. Yes, because the AAR is 9.5 percent C. Yes, because the AAR is greater than 9.5 percent D. No, because the AAR is 9.5 percent E. No, because the AAR is greater than 9.5 percent

C. Yes, because the AAR is greater than 9.5 percent

The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities. A. face value B. market price C. maturity D. coupon rate E. issue date

C. maturity

If an investment is producing a return that is equal to the required return, the investment's net present value will be: A. positive. B. greater than the project's initial investment. C. zero. D. equal to the project's net profit. E. less than, or equal to, zero.

C. zero.

Kris will receive $800 a month for the next five years from an insurance settlement. The interest rate is 4 percent, compounded monthly, for the first two years and 5 percent, compounded monthly, for the final three years. What is this settlement worth to him today? A. $36,003.18 B. $38,219.97 C. $41,388.71 D. $43,066.22 E. $45,115.16

D. $43,066.22

A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly? A. 13.09 percent B. 13.46 percent C. 13.90 percent D. 14.56 percent E. 14.82 percent

D. 14.56 percent

You are considering an equipment purchase costing $187,000. This equipment will be depreciated straight-line to zero over its three-year life. What is the average accounting return if this equipment produces the following net income? A. 12.29 percent B. 14.38 percent C. 15.67 percent D. 16.51 percent E. 21.00 percen

D. 16.51 percent

What is the effective annual rate of 6.5 percent compounded quarterly? A. 6.02 percent B. 6.29 percent C. 6.54 percent D. 6.66 percent E. 6.83 percent

D. 6.66 percent

Last year, you earned a rate of return of 12.37 percent on your bond investments. During that time, the inflation rate was 3.6 percent. What was your real rate of return? A. 6.30 percent B. 7.60 percent C. 7.75 percent D. 8.47 percent E. 8.70 percent

D. 8.47 percent

When you refer to a bond's coupon, you are referring to which one of the following? A. Difference between the purchase price and the face value B. Annual interest divided by the current bond price C. Difference between the bid and ask price D. Annual interest payment E. Principal amount of the bond

D. Annual interest payment

The current yield on a bond is equal to the annual interest divided by which one of the following? A. Issue price B. Maturity value C. Face amount D. Current market price E. Current par value

D. Current market price

Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. E. Net present value is equal to an investment's cash inflows discounted to today's dollars.

D. If the internal rate of return equals the required return, the net present value will equal zero

You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? A. Project A, because it pays back faster B. Project A, because it has the higher internal rate of return C. Project B, because it has the higher internal rate of return D. Project A, because it has the higher net present value E. Project B, because it has the higher net present value

D. Project A, because it has the higher net present value

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? A. One of the time periods within the investment period has a cash flow equal to zero. B. The initial cash flow is negative. C. The investment has cash inflows that occur after the required payback period. D. The investment is mutually exclusive with another investment under consideration. E. The cash flows are conventional.

D. The investment is mutually exclusive with another investment under consideration.

You are using a net present value profile to compare Project A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? A. The internal rate of return for Project A equals that of Project B, but generally does not equal zero. B. The internal rate of return of each project is equal to zero. C. The net present value of each project is equal to zero. D. The net present value of Project A equals that of Project B, but generally does not equal zero. E. The net present value of each project is equal to the respective project's initial cost.

D. The net present value of Project A equals that of Project B, but generally does not equal zero.

A bond has a make-whole call provision. Given this, you know that the: A. bond will always sell at par. B. call premium must equal the annual coupon payment. C. call price is directly related to the market rate of interest. D. call price is inversely related to the market rate of interest. E. bond must be a zero coupon bond.

D. call price is inversely related to the market rate of interest.

The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expected to pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is 15 percent? A. $27.64 B. $29.61 C. $30.66 D. $33.05 E. $33.93

E. $33.93

General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend is paid, the company expects to encounter some financial difficulties and is going to suspend dividends for five years. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 per share. What is the current value of this stock if the required return is 18 percent? A. $3.01 B. $3.55 C. $3.89 D. $4.27 E. $4.88

E. $4.88

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? A. Interest rate risk premium B. Inflation premium C. Liquidity premium D. Taxability premium E. Default risk premium

E. Default risk premium

Which one of the following will increase the current value of a stock? A. Decrease in the dividend growth rate B. Increase in the required return C. Increase in the market rate of return D. Decrease in the expected dividend for next year E. Increase in the capital gains yield

E. Increase in the capital gains yield

Which one of the following statements is correct? A. The APR is equal to the EAR for a loan that charges interest monthly. B. The EAR is always greater than the APR. C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 - 1. D. The APR is the best measure of the actual rate you are paying on a loan. E. The EAR, rather than the APR, should be used to compare both investment and loan options

E. The EAR, rather than the APR, should be used to compare both investment and loan options

The reinvestment approach to the modified internal rate of return: A. individually discounts each separate cash flow back to the present. B. reinvests all the cash flows, including the initial cash flow, to the end of the project. C. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. D. discounts all negative cash flows back to the present and combines them with the initial cost. E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.

E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.