MBA512 Exam 2

Net present value:

is the best method of analyzing mutually exclusive projects.

The common stock of Air Express had annual returns of 11.7 percent, 8.8 percent, 16.7 percent, and −7.9 percent over the last four years, respectively. What is the standard deviation of these returns?

10.66%

You purchased an investment that will pay you $8,000, in real dollars, per year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars?

$21,705 r = 1.0846/1.031 − 1r = .0520, or 5.20%PV = $8,000{[1 − (1/1.0523)]/.052}PV = $21,705

Finn intends to save $2,000 per year, and expects to earn an annual rate of 6.9 percent. How much will he have in his account at the end of 37 years?

$313,274.38

You just settled an insurance claim that calls for increasing payments over a 10-year period. The first payment will be paid one year from now in the amount of $5,000. The following payments will increase by 3.5 percent annually. What is the value of this settlement to you today if you can earn 6.5 percent on your investments?

$41,422.89

An insurance annuity offers to pay you $1,000 per quarter for 20 years. If you want to earn a rate of return of 6.5 percent compounded quarterly, what is the most you are willing to pay as a lump sum today to obtain this annuity?

$44,591.11

Your insurance agent is trying to sell you an annuity that costs $50,000 today. By buying this annuity, your agent promises that you will receive payments of $250 a month for the next 20 years. What is the rate of return on this investment?

1.88%

Which one of the following relationships applies to a par value bond?

Coupon rate = Current yield = Yield to maturity

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Determining the amount of the dividend to be paid per share

Generally speaking, which of the following best correspond to a wide frequency distribution?

High standard deviation, large risk premium

Payback Decision Rule

If the computed payback is less than managements cutoff, accept.

A stock had annual returns of 5.3 percent, −2.7 percent, 16.2 percent, and 13.6 percent over the past four years. Which one of the following best describes the probability that this stock will produce a return of 20 percent or more in a single year?

Less than 16 percent but more than 2.5 percent

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule?

Project X only

which one of the following categories of securities had the highest average annual return for the period 1926-2019?

Small-company stocks

Standard deviation is a measure of which one of the following?

Volatility

The return earned in an average year over a multiyear period is called the _____ average return.

arithmetic

A bond that is payable to whomever has physical possession of the bond is said to be in:

bearer form

The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:

crossover rate.

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

If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

mutually exclusive.

The primary purpose of Blume's formula is to:

project future rates of return.

Cabrera Carriers, Incorporated, common stock offers an expected total return of 14.56 percent. The last annual dividend was $2.27 per share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield?

12.46% Explanation Dividend yield = .1456 − .021Dividend yield = .1246, or 12.46%

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 years

A venture will provide a net cash inflow of $57,000 in Year 1. The annual cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $739,000 and has a required return of 15.6 percent. The company is somewhat unsure about the growth rate assumption. At what constant rate of growth would the company just break even?

7.89% NPV = 0 = −$739,000 + $57,000/(.156 − g)g = .0789, or 7.89%

You are preparing to make monthly payments of $100, beginning at the end of this month, into an account that pays 5 percent interest compounded monthly. How many payments will you have made when your account balance reaches $10,000?

83.77

You are considering two mutually exclusive projects. Project A has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?

Accept Project A and reject Project B PaybackA = 2 + ($72,000 − 21,400 − 22,900)/$56,300PaybackA = 2.49 yearsPaybackB = 2 + ($81,000 − 20,100 − 22,200)/$74,800PaybackB = 2.52 years

Which one of the following is the price at which a dealer will sell a bond?

Asked price

You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Option B has a higher present value at Time 0.

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?

Reject Project A and accept Project B explanation NPVA = −$87,000 + $32,600/1.092 + $35,900/1.0922 + $43,400/1.0923NPVA = $6,288.17NPVB = −$85,000 + $14,700/1.127 + $21,200/1.1272 + $89,800/1.1273NPVB = $7,468.93

You want to be on the board of directors of Uptown Communications. Since you are the only shareholder who will vote for you, you will need to own more than half of the outstanding shares of stock if you are to be elected to the board. What is the type of voting called that requires this level of stock ownership to be successfully elected?

Straight

A discount bond's coupon rate is equal to the annual interest divided by the:

face value.

The dividend growth model:

requires the growth rate to be less than the required return.

The excess return is computed as the:

return on a risky security minus the risk-free rate.

Ducazau Shipping has 700,000 shares outstanding, which are trading for $23.63 per share. Using the firm's required rate of return of 17 percent, a project has an NPV of $202,000. All else constant, if the project is accepted, the stock price per share would be expected to:

rise to $23.92. Change in value per share = $202,000/700,000 shares = $.29New share price = $23.63 + .29 = $23.92

Inside information has the least value when financial markets are:

strong form efficient.

The internal rate of return is:

tedious to compute without the use of either a financial calculator or a computer.

The net present value of a project will increase if:

the aftertax salvage value of the fixed assets increases.

Efficient financial markets fluctuate continuously because:

the markets are continually reacting to new information.