Business Finance Test 2 (CH 4-7)

Equity represents a(n)________interest of a firm.

ownership

Which of the following are usually included in a bond's indenture?

- The repayment arrangements - The total amount of bonds issued

Opulance Corp. common stock is selling for $44.25 a share and has a dividend yield of 1.9 percent. What is the dividend amount?

$0.84

A $1,000 face value bond currently has a yield to maturity of 6.03 percent. The bond matures in thirteen years and pays interest semiannually. The coupon rate is 6.25 percent. What is the current price of this bond?

$1,019.63

Lake Industries bonds have a face value of $1,000, a coupon rate of 7.2 percent, semiannual interest payments, and mature in 15 years. What is the current price of these bonds if the yield to maturity is 6.98 percent?

$1,020.26

What is the price of a $1,000 face value bond if the quoted price is 102.1?

$1,021.00

You want to purchase a new condominium that costs $325,000. Your plan is to pay 20 percent down in cash and finance the balance over 15 years at 4.1 percent. What will be your monthly mortgage payment including principal and interest?

$1,936.24

Far West Trading expects to pay an annual dividend of $1.75 per share next year. What is the anticipated dividend for Year 3 if the firm increases its dividend by 3 percent annually?

$1.75 × (1.03)^2 = 1.86

The Glass Ceiling paid an annual dividend of $1.64 per share last year and just announced that future dividends will increase by 1.3 percent annually. What is the amount of the expected dividend in Year 6?

$1.77

River City Recycling just paid its annual dividend of $1.15 per share. The required return is 12.3 percent and the dividend growth rate is 0.75 percent. What is the expected value of this stock five years from now?

$10.41

Kristina started setting aside funds three years ago to save for a down payment on a house. She has saved $900 each quarter and earned an average rate of return of 4.8 percent. How much money does she currently have saved?

$11,542.10

Ferris Athletic Equipment plans to pay an annual dividend of $1.90 per share next year, $1.25 per share a year for the following two years, and then a final liquidating dividend of $11.50 per share four years from now. How much is one share of this stock worth to you today if you require a rate of return of 19.65 percent of this risky investment?

$11.20

Healthy Foods just paid its annual dividend of $1.62 a share. The firm recently announced that all future dividends will be increased by 2.1 percent annually. What is one share of this stock worth to you if you require a rate of return of 15.7 percent?

$12.16

Gator Tires pays a constant annual dividend of $1.21 per share. How much are you willing to pay for one share if you require a rate of return of 9.3 percent?

$13.01

Jorge is considering an investment that will pay $4,650 a year for five years, starting one year from today. What is the maximum amount he should pay for this investment if he desires a rate of return of 9.0 percent?

$18,086 PV = $4,650/ 1 + .09 + $4,650/ (1+.09)^2+$4,650/(1 + .09)^3 + $4,650/(1 + .09)^4 + $4,650/ (1 + .09)^5 = $18,086

Krystal plans to save $500 at the end of Year 1, $600 at the end of Year 2, and $800 at the end of Year 3. If she earns 2.8 percent on her savings, how much money will she have saved at the end of Year 3?

$1945.19 FV =

Polar Mechanical Systems will pay an annual dividend of $1.88 per share next year. The company just announced that future dividends will be increasing by 1.2 percent annually. How much are you willing to pay for one share of this stock if you require a rate of return of 9.68 percent?

$22.17

Variance Logistics wants to issue 20-year, zero-coupon bonds that yield 6.2 percent. What price should it charge for these bonds if the face value is $1,000? Assume semiannual compounding.

$294.89

Braxton's Cleaning Company stock is selling for $32.60 a share based on a rate of return of 13.8 percent. What is the amount of the next annual dividend if the dividends are increasing by 2.4 percent annually?

$3.72

A bond has a par value of $1,000, a current yield of 6.25 percent, and semiannual interest payments. The bond quote is 100.8. What is the amount of each coupon payment?

$31.50

A preferred stock pays an annual dividend of $2.95. What is one share of this stock worth to you today if you require a rate of return of 8.2 percent?

$35.98 PV of Perpetuity = PMT / r

How much money does Yvette need to have in her retirement savings account today if she wishes to withdraw $36,000 a year for 30 years? She expects to earn an average rate of return of 8.25 percent.

$395,904.99

A preferred stock offers a rate of return of 5.45 percent and sells for $78.20? What is the annual dividend amount?

$4.26

The common stock of Zeta Group sells for $42 per share, has a rate of return of 12.2 percent, and a dividend growth rate of 1.8 percent annually. What was the amount of the last annual dividend paid?

$4.35

A preferred stock sells for $54.20 a share and has a market return of 9.68 percent. What is the dividend amount?

$5.25

The common stock of Federal Logistics is selling for $57.56 per share. The company pays a constant annual dividend and has a total return of 10.13 percent. What is the amount of the dividend?

$5.83

The Rent-to-Own Store has a six-year, interest-only loan at 7.6 percent interest. The firm originally borrowed $115,000. How much will the firm pay in total interest over the life of the loan?

$52,440

Best's Fried Chicken just took out an interest-only loan of $50,000 for three years with an interest rate of 8.15 percent. Payments are to be made at the end of each year. What is the amount of the payment that will be due at the end of Year 3?

$54,075.00 Payment Year 3 = $50,000 + ($50,000 x .0815) = $54,075.00

Which of the following are reasons that make valuing a share of stock more difficult than valuing a bond?

- The required rate of return is unobservable - Dividends are unknown and uncertain - Stock has no set maturity

Great Lakes Steel Supply is losing significant market share and thus its managers have decided to decrease the firm's annual dividend. The last annual dividend was $1.30 per share but all future dividends will be decreased by 2.75 percent annually. What is a share of this stock worth today at a required return of 15.5 percent?

$6.93

Tiger Trucking Company is considering a project that will produce cash inflows of $18,000 at the end of Year 1, $32,000 in Year 2, and $45,000 in Year 3. What is the present value of these cash inflows at a discount rate of 9 percent?

$78,195.78 PV = ($18,000/1.09) + ($32,000/1.092 ) + ($45,000/1.093 ) = $78.195.78

Software Sales Supply is expected to pay its first annual dividend of $1.10 per share in Year 3. Starting in Year 6, the company plans to increase the dividend by 3.2 percent per year. What is the value of this stock today, Year 0, at a required return of 13.1 percent?

$8.22

The manager of Steve's Audio has approved Daisy's application for 24 months of credit with maximum monthly payments of $45. If the APR is 19.2 percent, what is the maximum initial purchase that Daisy can buy on credit?

$890.99

Flash Freeze Frozen Foods is expected to pay annual dividends of $1.34 and $1.45 at the end of the next two years, respectively. After that, the company expects to pay a constant dividend of $1.50 a share. What is the value of this stock at a required return of 15.1 percent?

$9.76

The 5.3 percent bond of Dominic Cyle Parts has a face value of $1,000, a maturity of 12 years, semiannual interest payments, and a yield to maturity of 6.12 percent. What is the current market price of the bond?

$931.01

What are the three components that influence the Treasury yield curve?

- Expected future inflation - The real rate of return - The interest rate risk premium

What is a real rate of return?

- It is a percentage change in buying power. - It is a rate of return that has been adjusted for inflation.

What is the bid price?

- It is the price at which a dealer is willing to buy securities. - It is the price an investor will receive if he sells a bond to a dealer.

What is the asked price?

- It is the price at which a dealer is willing to sell a particular security. - It is the price at which an investor can buy a particular security from a dealer.

What are some features of the OTC market for bonds?

- The OTC has no designated physical location. - OTC dealers are connected electronically.

Which of the following ratios might be used to estimate the value of a stock?

- The Price/Sales ratio - The Price/Earnings ratio

Which of the following are rights of common stock holders?

- The right to share proportionally in any common dividends paid. - The right to vote on matters of importance. - The right to share proportionally in any residual value in the event of liquidation.

What is a corporate bond's yield to maturity (YTM)?

- YTM is the expected return for an investor who buys the bond today and holds it to maturity. - YTM is the prevailing market interest rate for bonds with similar features.

Which of the following are bonds that have actually been issued?

- a CoCo bond - a put bond - a convertible bond

The NYSE differs from the NASDAQ primarily because the NYSE has:

- a face-to-face auction market - a physical location

In the dividend growth model, the expected return for investors comes from which two sources?

- growth rate - dividend yield

Preferred stock has preference over common stock in the:

- payment of dividends - distribution of corporate assets

What are the two major forms of long-term debt?

- public issue - private issue

A benchmark PE ratio can be determined using:

- the PEs of similar companies - a company's own historical PEs

The term structure of interest rates describes ________.

- the pure time value of money - the relationship between nominal rates and time to maturity

The US government borrows money by issuing:

- treasury notes - treasury bonds

Isaac only has $1,090 today but needs $1,979 to buy a new computer. How long will he have to wait to buy the computer if he earns 5.4 percent compounded annually on his savings? Assume the price of the computer remains constant.

11.34 years

Cromwell is acquiring some land for $1,200,000 in exchange for semiannual payments of $75,000 at an interest rate of 6.35 percent. How many years will it take Cromwell to pay for this purchase?

11.80 years

Your aunt loaned you money at 1.00 percent interest per month. What is the APR of this loan?

12.00%

You have $300 today and want to triple your money in 5 years. What interest rate must you earn if the interest is compounded annually?

24.57%

You expect to receive $5,000 at graduation one year from now. Your plan is to invest this money at 6.5 percent, compounded annually, until you have $50,000. At that time, you plan to travel around the world. How long from now will it be until you can begin your travels?

36.57 years

Rob wants to invest $15,000 for 7 years. Which one of the following rates will provide him with the largest future value?

4 percent interest, compounded annually

A $1,000 face value bond is currently quoted at 100.8. The bond pays semiannual payments of $22.50 each and matures in six years. What is the coupon rate?

4.50%

A corporate bond pays 6.25 percent interest. How much would a municipal bond have to pay to be equivalent to this on an after tax basis if you are in the 28 marginal percent tax bracket?

4.50%

Sweet Treats pays a constant annual dividend of $2.38 a share and currently sells for $52.60 a share. What is the rate of return?

4.52%

Last year, you earned a rate of return of 5.89 percent on your bond investments. During that time, the inflation rate was 1.2 percent. What was your real rate of return?

4.63%

Standards Life Insurance offers a perpetuity that pays annual payments of $12,000. This contract sells for $250,000 today. What is the interest rate?

4.80%

A fourteen-year, semiannual coupon bond is selling for $898.56. The bond has a face value of $1,000 and a yield to maturity of 6.03 percent. What is the coupon rate?

4.95%

Forni's Furniture is offering a bedroom suite for $2,700. The credit terms are 60 months at $73.00 per month. What is the interest rate on this offer?

5.56%

A bond has a coupon rate of 5.65 percent, a face value of $1,000, semiannual payments, and sells at par. The current yield is _____ percent and the effective annual yield is _____ percent.

5.65 / 5.73

The $1,000 face value bonds of Galaxies International have coupon of 5.5 percent and pay interest semiannually. Currently, the bonds are quoted at 98.02 and mature in 12 years. What is the yield to maturity?

5.73%

Which one of the following has the highest effective annual rate?

6% compounded daily

The Toy Chest will pay an annual dividend of $2.64 per share next year and currently sells for $48.30 a share based on a market rate of return of 11.67 percent. What is the capital gains yield?

6.20%

Jenny needs to borrow $5,500 for four years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny?

6.5% simple interest (lowest)

If your nominal rate of return is 8.68 percent and your real rate of return is 2.05 percent, what is the inflation rate?

6.50%

Warson Motors wants to raise $2 million by selling 20-year coupon bonds at par. Comparable bonds in the market have a coupon rate of 6.3 percent, semiannual payments, 20 years to maturity, and are selling at 96.5 percent of par. What coupon rate should Warson Motors set on its bonds?

6.62%

A bond has a $1,000 face value, a market price of $989, and pays interest payments of $69.50 every year. What is the coupon rate?

6.95%

American Hat has $1,000 face value bonds outstanding with a market price of $1,150. The bonds pay interest semiannually, mature in 8 years, and have a yield to maturity of 5.98 percent. What is the current yield?

7.28%

What is the effective annual rate of 8.25 percent compounded quarterly?

8.51%

A person who brings buyers and sellers together is called a(n) ______.

Broker

A provision in the bond indenture giving the issuing company the option to repurchase the bonds before maturity is termed a _________________.

Call Provision

Tomas earned $89 in interest on his savings account last year and has decided to leave the $89 in his account this coming year so it will earn interest. This process of earning interest on prior interest earnings is called:

Compounding

What is a bond's current yield?

Current yield = annual coupon payment / current price

The price of a stock at Year 3 can be expressed as:

D4 / (R - g)

Someone who maintains an inventory of stocks and buys and sells those stocks is known as a ____.

Dealer

R

Discount rate

D0

Dividend just paid

What does historical data suggest about the nature of short-term and long-term interest rates?

Sometimes short-term rates are higher and sometimes long-term rates are higher.

Which one of the following is an electronic network that enables Katie to sell her shares of ABC stock directly to Marti?

ECN

Which of the following is not a difference between debt and equity?

Equity is publicly traded while debt is not

The price of a share of common stock is equal to the present value of all ______ future dividends.

Expected

True or false: Common stock has a set maturity.

FALSE: common stock has no maturity

What is the future value of $8,000 invested today and held for 15 years at 8.5 percent compounded annually?

FV = $27,197.94

Your grandparents just gave you a gift of $3,000. You are investing this money at 3 percent simple interest. How much money will you have at the end of the 10 years?

FV = PV (1 + r)^t FV = $3,900

True or false: Daily stock prices can only be found by looking up the stock in newspapers.

False

Marcos is investing $5 today at 7 percent interest so he can have $35 later. This $35 is referred to as the:

Future Value

Precision Engineering invested $95,000 at 5.5 percent interest, compounded annually for 2 years. How much interest did the company earn over this period of time?

Interest = $10,737.38

What is the nominal rate of return on an investment?

It is the actual percentage change in the dollar value of an investment unadjusted for inflation.

What does a Treasury yield curve show?

It shows the yield for different maturities of Treasury notes and bonds

Why is the bond market less transparent than the stock market?

Many bond transactions are negotiated privately.

The two most important stock markets in the U.S. are the New York Stock Exchange and ______.

NASDAQ

D1

Next expected Dividend

The term structure of interest rates represents the relationship between which of the following?

Nominal rates on default-free, pure discount bonds and time to maturity

What is the formula for the present value of a growing perpetuity where C1 is the net cash flow, R is the required return and g is the growth rate?

P = C1/(R-g)

Twelve years from now, you will be inheriting $60,000 What is this inheritance worth to you today if you can earn 6.0 percent interest, compounded annually?

PV = $29,818.16

Which one of the following is the correct formula for computing the present value of $600 to be received in 6 years? The discount rate is 7 percent.

PV = $600 / (1 + .07)^6 PV = FV / (1 + r)^t

Which one of the following is the annuity present value formula?

PV = PMT [(1- {1 / (1 = r)^t}) / r]

Dividends are:

Paid out of after tax profits

What are the cash flows involved in the purchase of a 5-year zero-coupon bond that has a par value of $1,000 if the current price is $800? Assume the market rate of interest is 5 percent.

Pay $800 today and receive $1,000 at the end of 5 years

P1

Price in one year

P0

Price today

Shares of stock are first brought to the market and sold to investors in the ___________ market.

Primary

A part of the indenture limiting certain actions during the term of the loan are termed ________.

Protective Covenants

What is the equation for approximating the nominal rate of return? R = the nominal rate of interest r = the real rate of interest h = the inflation rate

R = r + h

What does a bond's rating reflect?

The ability of the firm to repay its debt and interest on time

True or false: A put bond allows the holder to force the issuer to buy the bond back at a stated price.

True

True or false: Current yield = Annual coupon payment/Price

True

True or false: The government sells Treasury notes and bonds to the public every month.

True

Which one of these is a perpetuity?

Trust income of $1,200 a year forever

To be a member of the NYSE, you must:

own a trading license

The coupon payments on floating-rate bonds are _____.

adjustable

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?

amortized loan

Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

annual percentage rate (APR)

Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

annuity

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

This morning, Jeff found an aged bond certificate lying on the street. He picked it up and noticed that it was a 50-year bond that matured today. He presented the bond to the bank teller at his local bank and received payment for both the entire principal and the final interest payment. The bond that Jeff found must have been which one of the following?

bearer-form bond

A bond trader just purchased and resold a bond. The amount of profit earned by the trader from this purchase and resale is referred to as the:

bid-ask spread

Which one of the following must equal zero if a firm pays a constant annual dividend?

capital gains yield

A loan has an APR of 8.5 percent and an EAR of 8.5 percent. Given this, the loan must:

charge interest annually

Which one of the following types of securities has the lowest priority in a bankruptcy proceeding?

common stock

The inflation premium:

compensates investors for expected price increases.

An unexpected decrease in market interest rates will cause a:

coupon bond's YTM to decrease

A bond's annual interest divided by its face value is referred to as the:

coupon rate

If unpaid preferred dividends must be "caught up" before any common dividends can be paid, they are called _________ dividends.

cumulative

Mary owns 100 shares of stock. Each share entitles her to one vote per open seat on the board of directors. Assume there are three open seats in the current election and Mary casts all 300 of her votes for a single candidate. What is the term used to describe this type of voting?

cumulative

The current yield on a bond is equal to the annual interest divided by the:

current market price

Miller Farm Products is issuing a 15-year, unsecured bond. Based on this information, you know that this debt can be described as a:

debenture

All else held constant, the present value of an annuity will decrease if you:

decrease the annuity payment

Which one of the following players on the floor of the NYSE is obligated to maintain a two-sided, orderly market for a limited number of securities?

designated market maker

The capital gains yield equals which one of the following?

dividend growth rate

The constant-growth model assumes that _________.

dividends change at a constant rate

Anna pays .85 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded annually, the rate would be referred to as the:

effective annual rate (EAR)

What is the principal amount of a bond that is repaid at the end of the loan term called?

face value

The value of a firm is derived using the firm's ______ rate and its _______ rate.

growth and discount

If shareholders are granted a preemptive right they will:

have priority in the purchase of any newly issued shares.

Assume all else is equal. When comparing savings accounts, you should select the account that has the:

highest effective annual rate

Which one of the following will increase the current value of a stock?

increase in capital gains yield

A real rate of return is defined as a rate that has been adjusted for which one of the following?

inflation

The nominal rate is found by adding the _____ and the real rate of return.

inflation

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk?

interest rate risk premium

Travis borrowed $10,000 four years ago at an annual interest rate of 7 percent. The loan term is six years. Since he borrowed the money, Travis has been making annual payments of $700 to the bank. Which type of loan does he have?

interest-only loan

Stock price reporting has increasingly moved from traditional print media to the ______ in recent years.

internet

The relationship between the present value and the investment time period is best described as:

inverse

Which one of the following provides compensation to a bondholder when a bond is not readily marketable at its full value?

liquidity premium

A zero-coupon bond is a bond that ____.

makes no interest payments

The dividend yield is defined as:

next year's expected cash dividend divided by the current market price per share.

On which one of the following dates do dividends become a liability of the issuer for accounting purposes?

on the date the board declares the dividend

When voting for the board of directors, the number of votes a shareholder is entitled to is generally determined as follows:

one vote per share held

By definition, a bank that pays simple interest on a savings account will pay interest:

only on the principal amount originally invested

The fundamental business of the New York Stock Exchange is to attract _______.

order flow

The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships are:

perpetuity

Katlyn needs to invest $5,318 today in order for her savings account to be worth $8,000 six years from now. Which one of the following terms refers to the $5,318?

present value

The primary purpose of bond covenants is to:

protect the bondholders

Kate could not attend the last shareholders' meeting and thus she granted the authority to vote on her behalf to the managers of the firm. Which term applies to this granting of authority?

proxy

Cindy is taking out a loan today. The cash amount that she is receiving is equal to the present value of the lump sum payment that she will be required to pay two years from today. Which type of loan is this?

pure discount loan

The term structure of interest rates examines the ____.

relationship between short-term and long-term interest rates

Given an interest rate of zero percent, the future value of a lump sum invested today will always:

remain constant, regardless of the investment time period

The trading of existing shares occurs in the ______ market.

secondary

What term is used to describe an account that a bond trustee manages for the sole purpose of redeeming bonds early?

sinking fund

New York Stock Exchange Designated Market Makers (DMMs) were formerly called ________ .

specialists

Bond ratings are based on the probability of default risk, which is the risk that ___.

the bond's issuer may not be able make all the required payments

On which one of the following dates is the principal amount of a semiannual coupon bond repaid?

the entire bond is repaid on the maturity date

Most of the time, a floating-rate bond's coupon adjusts ____.

with a lag to some base rate

The market-required rate of return on a bond that is held for its entire life is called the:

yield to maturity

Which one of the following terms applies to a bond that initially sells at a deep discount and only makes one payment to bondholders?

zero coupon