FIN 300 exam 2
Which one of the following indicates an accept decision for an independent project with conventional cash flows?
PI greater than 1.0
Which two methods of project analysis are the most biased towards short-term projects?
Payback and discounted payback
The Fisher effect is defined as the relationship between which of the following variables?
Real rates, inflation rates, and nominal rates
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
A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year 1 and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project?
Reject the project because the PI is .97
A note is generally defined as:
an unsecured bond with an initial maturity of 10 years or less.
Bonds issued by the U.S. government:
are considered to be free of default risk.
U. S. Treasury bonds:
are quoted as a percentage of par.
Which one of the following is the price at which a dealer will sell a bond?
asked price
You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $11.1 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,764,300, $1,817,600, $1,786,000, and $1,239,500 over these four years, respectively, what is the project's average accounting return (AAR)?
average accounting return= 29.76% Average net income = ($1,764,300 + 1,817,600 + 1,786,000 + 1,239,500)/4 = $1,651,850 Average book value = ($11,100,000 + 0)/2 = $5,550,000 AAR= average net income/ average book value AAR= $1,651,850/$5,550,000 AAR= 29.76%
Which one of the following represents the capital gains yield as used in the dividend growth model?
g
A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be:
greater than 7 percent
Callable bonds generally:
have a sinking fund provision.
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
have multiple rates of return
The Zuffa Company has a semi-annual coupon bond outstanding. A decrease in the market interest rate will have which one of the following effects on this bond, all else equal?
increase the market price
Real rates are defined as nominal rates that have been adjusted for which of the following?
inflation
You purchase a bond with a coupon rate of 8.1 percent and a clean price of $925. Assume a par value of $1,000. If the next semiannual coupon payment is due in two months, what is the invoice price?
invoice price= $952.00 accrued interest= 81/2 x 4/6 = $27.00 dirty price = clean price + accrued interest = 925 +27 = 952
Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?
liquidity
Which bond would you generally expect to have the highest yield?
long-term, taxable junk bond
The current yield is defined as the annual interest on a bond divided by the:
market price
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:
mutually exclusive
Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?
net present value
The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?
net present value
Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?
net present value
Scott is considering a project that will produce cash inflows of $2,900 a year for 3 years. The required rate of return is 15.4 percent and the initial cost is $6,800. What is the discounted payback period?
never PVA= $2,900{[1 − (1/1.154^3)]/.154} = 6,577.68 pv of cash inflows is less than initial cost
Interest rates that include an inflation premium are referred to as:
nominal rates
A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market?
over-the-counter
Which two methods of project analysis are the most biased towards short-term projects?
payback and discounted payback
The length of time a firm must wait to recoup the money it has invested in a project is called the:
payback period
Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers?
pillar system
Your local toy store just announced its annual dividend will be $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in Year 3. At a discount rate of 18 percent, what should one share sell for today?
#33.54 Po= 4/1.18+3/1.18^2 + 46/1.18^3 = 33.54
You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond?
$1,108.58 Accrued interest = (.0625)($1,000)(1/2)(2/6) Accrued interest = $10.42 Clean price = $1,119 − 10.42 Clean price = $1,108.58
You purchase a bond with an invoice price of $1,119. The bond has a coupon rate of 6.25 percent, a face value of $1,000, and there are four months to the next semiannual coupon date. What is the clean price of this bond?
$1,108.58 accrued interest = (.0625)(1000)(1/2)(2/6)=$10.42 clean price= $1,119-10.42 = $1,108.58
Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today?
$10.82 Po= [1.42(1.013)]/(.146-.013)= 10.82
Assume an investment has cash flows of −$39,700, $21,750, $18,500, and $12,500 for Years 0 to 3, respectively. What is the NPV if the required return is 12.9 percent? Should the project be accepted or rejected?
$2,764.89; accept NPV= −$39,700 + $21,750/1.129 + $18,500/1.129^2 + $12,500/1.129^3 = 2,764.89 NPV is positive so should be accepted
Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price?
$26.42 Po= 2.08(12.7) = 26.42
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 .0845(1000)/2
Crystal Glass recently paid $3.60 as an annual dividend. Future dividends are projected at $3.80, $4.10, and $4.25 over the next three years, respectively. Beginning four years from now, the dividend is expected to increase by 3.25 percent annually. What is one share of this stock worth today at a discount rate of 12.5 percent?
$42.92 p3= [4.25(1.0325)]/(.125-.0325) = 47.44 p0= 3.80/1.125 + 4.10/1.125^2 + (4.25 + 47.44) /1.125^3 = 42.92
A Treasury bond is quoted at a price of 101.4621. What is the market price of this bond if the face value is $5,000?
$5,073.11 price= 1.014621(5,000)=5,073.11
A project will produce cash inflows of $5,400 a year for 3 years with a final cash inflow of $2,400 in Year 4. The project's initial cost is $13,400. What is the net present value if the required rate of return is 14.2 percent?
$505.92 NPV = −$13,400 + $5,400([1 − (1/1.142^3)]/.142) + $2,400/(1.142)^4 = 505.92
Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000?
$929.42 Bond price = $28.25({1 − [1/(1 + .0694/2)(7)(2)]}/(.0694/2)) + $1,000/(1 + .0694/2)(7)(2)
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:
.05/(1 − t*) = .07
Assume a project has cash flows of −$54,300, $18,200, $37,300, and $14,300 for Years 0 to 3, respectively. What is the profitability index given a required return of 12.6 percent?
1.02 PVInflows = $18,200/1.126 + $37,300/1.126^2 + $14,300/1.126^3 = 55,599.30 PI= 55,599.30/54,300 =1.02
The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock?
10.86 percent R= .0189 + [(1.70-1.56)/1.56] = 10.86%
World Travel 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 N= ? I/Y= 6.72/2 PV= -1,023.46 PMT= 35 FV= 1000 number of years= 25.052/2= 12.53
Weston's uses straight-line depreciation to zero over a project's life. A new project has a fixed asset cost of $2,687,300 and projected annual net income of $95,000, $162,000, $286,000, and $304,000 over Years 1 to 4. What is the average accounting return?
15.76 percent AAR = [($95,000 + 162,000 + 286,000 + 304,000)/4]/[($2,687,300 + 0)/2] = 15.76%
Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?
17.84 years I/Y: 13.2 PV: -548 PMT: 65 FV: 1000
Redesigned Computers has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature?
17.84 years N= ? I/Y =13.2 PV= -548 PMT= 65 FV= 1000
A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?
3.13 years payback = 3 + ($6,900 − 850 − 2,400 − 3,100)/$4,100 = 3.13
New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity?
5.18 percent N=17 I/Y= ? PV= -1,022 PMT= 27.50 FV= 1000 YTM= 2(2.588) =5.18%
Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?
7.49 percent current yield= [.065 ($1,000)]/[.86725 ($1,000)]
A project has cash flows of -$148,400, $42,500, $87,300, and $43,200 for Years 0 to 3, respectively. The required rate of return is 11 percent. Based on the internal rate of return of _____ percent for this project, you should _____ the project.
8.03; reject
Bonner Metals wants to issue new 20-year bonds. The company currently has 8.5 percent bonds on the market that sell for $994, make semiannual payments, and mature in 7 years. What should the coupon rate be on the new bonds if the firm wants to sell them at par?
8.62 percent N= 14 I/Y= ? PV = -994 PMT= 42.50 FV= 1000 YTM= 2(4.308) 8.62
Which one of the following transactions occurs in the primary market?
A purchase of newly issued stock from the issuer
The next dividend payment by Savitz, Inc., will be $1.96 per share. The dividends are anticipated to maintain a growth rate of 4 percent forever. The stock currently sells for $39 per share. a. What is the dividend yield? b.What is the expected capital gains yield?
A. dividend yield= 5.03% B. capital gains yield= 4% dividend yield= 1.96/39= 5.03% capital is 4%
Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent? What if the discount rate is 13.5 percent?
Accept B at 11.7 percent and neither at 13.5 percent
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?
Accept Project B and reject Project A based on the NPVs
A note is generally defined as _____
An unsecured bond with an initial maturity of 10 years or less.
Which one of the following best describes NASDAQ?
Computer network of securities dealers
Wesimann Co. issued 13-year bonds a year ago at a coupon rate of 7.3 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 5.6 percent, what is the current bond price?
Current bond price= $1,147.10 N=24 I/Y= 5.6%/2 PMT= -73/2 FV= -1000 PV=?
Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $12 per share 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price?
Current share price = $41.00 P9=12/(.14-.05)= 133.33 P0= 133.33/1.14^9 =41
Which one of the following represents the dividend yield as used in the Dividend Growth Model (DGM)?
D1/P0
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
Which one of the following will decrease the net present value of a project?
Increasing the project's initial cost at time zero
In actual practice, managers most frequently use which two types of investment criteria?
Internal rate of return and net present value
Which of the following statement is most FALSE?
Inverted yield curves tend to follow recessions.
You purchase a bond with a coupon rate of 7.5 percent and a clean price of $915. Assume a par value of $1,000. If the next semiannual coupon payment is due in two months, what is the invoice price?
Invoice price = $940.00 accrued interest = $75/2 x 4/6 = $25.00 Dirty price= clean price + accrued interest =915 + 25 =940
Which of the following are advantages of the payback method of project analysis?
Liquidity bias, ease of use
You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
NPV profile
You estimate that a project will cost $33,700 and will provide cash inflows of $14,800 in Year 1 and $24,600 in Year 3. Based on the profitability index rule, should the project be accepted if the discount rate is 14.2 percent? Why or why not?
No; the PI is .87 PVInflows = $14,800/1.142 + $24,600/1.142^3 29,476.93/33700 = .87
Which one of the following statements related to the internal rate of return (IRR) is correct?
The IRR is equal to the required return when the net present value is equal to zero.
A project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?
The stock has a negative capital gains yield.
Which of the following statement is most FALSE?
The yield curve tends to be sharply decreasing as the economy comes out of a recession and interest rates are expected to rise.
West Corp. issued 20-year bonds two years ago at a coupon rate of 8 percent. The bonds make semiannual payments. If these bonds currently sell for 110 percent of par value, what is the YTM?
YTM= 7.01% N=36 I/Y= ? PV= -1,100 PMT= 80/2 FV=1000 3.507% x 2= 7.01%
An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and −$11,200 for Years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not?
You should not apply the IRR rule in this case.
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount; less than
You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should:
accept Project A and reject Project B.
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:
accepted because the profitability index is greater than 1.
NYSE designated market makers:
act as dealers
A bond that is payable to whomever has physical possession of the bond is said to be in ___
bearer form
A bond that is payable to whomever has physical possession of the bond is said to be in ___:
bearer form
An agent who arranges a transaction between a buyer and a seller of equity securities is called a ____
broker
An agent who arranges a transaction between a buyer and a seller of equity securities is called a:
broker
A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?
callable
The interest rate risk premium is the:
compensation investors demand for accepting interest rate risk.
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
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.65, but management expects to reduce the payout by 4 percent per year indefinitely. If you require a return of 12 percent on this stock, what will you pay for a share today?
current share price= $57.90 Po= 9.65(1-.04)/(.12-(.04))= 57.90
Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 10.75 percent, what is the current share price?
current share price= $58.70 p4= 2.75(1.05)/(.1075-.05) = 50.22 Po= $13/1.1075 + $9/1.1075^2 + $6/1.1075^3 + $2.75/1.1075^4 + $50.22/1.1075^4 =58.70
Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $9.90, but management expects to reduce the payout by 5 percent per year indefinitely. If you require a return of 14 percent on this stock, what will you pay for a share today?
current share price= 49.50 Po= 9.90(1-.05)/[.14-(-.05)] = 49.50
An agent who maintains an inventory from which he or she buys and sells securities is called a:
dealer
Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?
default risk
Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:
dirty price
A decrease in which of the following will increase the current value of a stock according to the dividend growth model?
discount rate
The internal rate of return is defined as the:
discount rate which causes the net present value of a project to equal zero
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:
discounted payback period
What are the distributions of either cash or stock to shareholders by a corporation called?
dividends
A sinking fund is managed by a trustee for which one of the following purposes?
early bond redemption
A discount bond's coupon rate is equal to the annual interest divided by the:
face value
A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n):
floor broker
Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?
primary
Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?
primary
Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?
profitability index
The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
profitability index.
You cannot attend the shareholder's meeting for Company X, so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?
proxy voting
Say you own an asset that had a total return last year of 11.5 percent. If the inflation rate last year was 6.5 percent, what was your real return?
real return = 4.70% (1+R) = (1+r) (1+h) r= (1+.115)/(1+.065)-1 r= 4.69%
Bedeker, Inc., has an issue of preferred stock outstanding that pays a $5.35 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is the required return?
required return= 5.75% R= 5.35/93= 5.75
The dividend growth model:
requires the growth rate to be less than the required return.
The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:
spread
The pure time value of money is known as the ______
term structure of interest rates
Which one of the following must be true?
the stock has a negative capital gains yield
A Treasury yield curve plots Treasury interest rates relative to:
time to maturity
Treasury yield curve plots the interest rates relative to which one of the following?
time to maturity
You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called?
voting by proxy
The secondary market is best defined as the market:
where outstanding shares of stock are resold
A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not?
yes; the IRR exceeds the required return
The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:
yield of maturity
Which one of these equations applies to a bond that currently has a market price that exceeds par value?
yield to maturity < coupon rate
A Japanese company has a bond outstanding that sells for 86 percent of its ¥100,000 par value. The bond has a coupon rate of 4.5 percent paid annually and matures in 16 years. What is the yield to maturity of this bond
yield to maturity = 5.87% N= 16 I/Y= ? PV= -86,000 PMT= -4,500 FV= -100,000
A Japanese company has a bond outstanding that sells for 94 percent of its ¥100,000 par value. The bond has a coupon rate of 6.1 percent paid annually and matures in 17 years. What is the yield to maturity of this bond
yield to maturity= 6.70% N=17 I/Y= ? PV= -94,000 PMT= 6,100 FV= 100,000
