Intro to Finance Exam 2

ABC CO. bonds have a 10% coupon rate with semi-annual coupon payments. They have 12 and 1/2 years to maturity and a par value of $1,000. Compute the value of Swanson's bonds if investors' required rate of return is 8%.

$1,156.22

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

You are going to receive $80 at the end of each year for the next 12 years. If you invest each of those amounts at 12%, then what amount of money will you have at the end of the 12th year? (FV of ordinary annuity)

$1,930.65

ABC company expects its current annual $2.50 per share common stock dividend to remain the same for the foreseeable future. Therefore, the value of the stock to an investor with a required return of 12% is

$20.83.

What is the value of a preferred stock that pays a $4 dividend to an investor with a required rate of return of 10%?

$40.00

The ABC Company's common stock is expected to pay a $3.00 dividend in the coming year. If investors require a 15% return and the growth rate in dividends is expected to be 8%, what will the market price of the stock be?

$42.86

Aunt Tilly borrows $3,500 from the bank at 12 percent annually compounded interest to be repaid in four equal annual installments. The interest paid in the first year is ________.

$420

ABC Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 10.7% on these bonds. What is the bond's price?

$781.53

Future value of an annuity Using the values​ below, answer the questions that follow: amount of annuity: $2,500 interest rate: 8% Deposit period (years): 10 a. Calculate the future value of the​ annuity, assuming that it is ​(1) An ordinary annuity. ​(2) An annuity due. b. Compare your findings in parts a​(1) and a​(2). All else being​ identical, which type of annuity-ordinary or annuity due- preferable as an​ investment? Explain why.

(1) the future value of the ordinary annuity is $36, 216.41 (2) the future value of the annuity due is $39,113.72 b. compare your findings in parts (1) and (2). All else being identical, which type of annuity is preferable as an investment? - annuity due, because it yields a greater future value

Perpetuities Suppose that​ today's date is January​ 1, 2019. You have the opportunity to make an investment that will pay you ​$100 on January 1 of every​ year, starting in 2020 and continuing forever. Assume the relevant discount rate is 7​%. a. What would you pay now for this​ investment? b. Suppose the​ investment's first cash flow comes​ immediately, on January​ 1, 2019​, with subsequent cash payments every January 1 thereafter. Now how much would you​ pay? It might be helpful to draw the first few years of a timeline here and compare it to the situation in part a. c. Suppose the​ investment's first cash flow is 3 years from​ now, on January​ 1, 2022. On every January 1 thereafter you will receive ​$100. How much is this worth to you​ today, January​ 1, 2019​?

-The amount you would pay for this investment is ​$1,428.57 -The amount you would pay for this investment is ​$1,528.57 -This investment is worth ​$1,247.77

Present value of an annuity Consider the following case: amount of annuity: $12,000 interest rate: 7% period (years): 3 a. Calculate the present value of the annuity assuming that it is ​(1) An ordinary annuity. ​(2) An annuity due. b. Compare your findings in parts a​(1) and a​(2). All else being​ identical, which type of annuity- ordinary or annuity due- is preferable? Explain why.

-The present value of the ordinary annuity is ​$31,491.79 -The present value of the annuity due is ​$33,696.22 -Compare your findings in parts a​(1) and a​(2). All else being​ identical, which type of annuity is​ preferable?: - annuity due, because all else being identical, it will yield a higher present value

ABC company paid a dividend yesterday of $2.25 per share. The company's stock is currently selling for $60 per share, and the required rate of return on Backford Company stock is 16%. What is the growth rate expected for ABC Company dividends assuming constant growth?

11.81%

ABC stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 at the end of the year. Dividends are expected to grow at a constant rate of 7.5% indefinitely. Compute the required rate of return on ABC Corporation stock.

16.12%

What is the approximate yield to maturity for a $1,000 par value bond selling for $1,120 that matures in 6 years and pays 12 percent interest annually?

9.3 percent

Yantai Food, Inc. has issued a bond with par value of $1,000, a coupon rate of 9 percent that is paid semi-annually, and that matures in 10 years. What is the value of the bond if the required rate of return is 12 percent?

Coupon payment = 1,000 × 0.09 = $90 Semi-annual coupon payment = 90/2 = $45 Using financial calculator: PMT = 45, I = 6, N = 20, FV = 1,000, CPT PV = $827.95

Julie's X-Ray Company paid $2.00 per share in common stock dividends last year. The company will allow its dividend to grow at 5 percent for 4 years, and after that the rate of growth will be 3 percent forever. What is the value of the stock if the required rate of return is 8 percent? Answer:

D5 = 2.43 (1 + 0.03) = $2.50 P2 = 2.50/0.08-0.03 × 1/(1+0.08)^4 = $36.81 Value of stock = $36.81 + $7.46 = $44.27

find the future value: For the case shown in the following​ table, calculate the future value of the single cash flow deposited today and held until the end of the deposit period if the interest is compounded annually at the rate specified. Single cash flow= $900 Interest rate= 13% Deposit Period (years)= 12

FV 12= $900*(1+0.13)^12= $3,901.10

Which of the following is true of common stock?

It gives the holder voting rights which permit selection of the firm's directors.

Interest rate​ fundamentals: The real rate of return: Carl​ Foster, a trainee at an investment banking​ firm, is trying to get an idea of what real rate of return investors are expecting in​ today's marketplace. He has looked up the rate paid on​ 3-month U.S. Treasury bills and found it to be 3.8​%. He has decided to use the recent rate of change in the Consumer Price Index as a proxy for the inflationary expectations of investors. That annualized rate now stands at 1.3​%. On the basis of the information that Carl has​ collected, what estimate can he make of the real rate of​ return?

The estimate of the real rate of return is 2.5​%.

value of a mixed stream: for the mixed stream of cash flow shown in the following table, determine the future value at the end of the final year if deposits are made into an account paying annual interest of 12​%, assuming that no withdrawals are made during the period and that the deposits are​ made: a. At the end of each year. b. At the beginning of each year.

The future value at the end of the final year if deposits are made at the end of each year is ​$123,617 The future value at the end of the final year if deposits are made at the beginning of each year is ​$138,451

Bond valuation-Semiannual interest: Find the value of a bond maturing in 6 ​years, with a ​$1 comma 000 par value and a coupon interest rate of 10​% ​(5​% paid​ semiannually) if the required return on​ similar-risk bonds is 14​% annual interest left parenthesis 7 % paid​ semiannually).

The present value of the bond is ​$841.15.

Present value concept Answer each of the following questions. a. How much money would you have to invest today to accumulate ​$3,900 after 9 years if the rate of return on your investment is 14​%? b. What is the present value of ​$3,900 that you will receive after 9 years if the discount rate is 14​%? c. What is the most you would spend today for an investment that will pay ​$3,900 in 9 years if your opportunity cost is 14 %​? d. ​Compare, contrast, and discuss your findings in part a through c.

a) A single investment made​ today, earning 14​% annual​ interest, worth ​$3,900 at the end of 9 years is= $1,199.28 b) The present value of $3,900 to be received at the end of 9 years, if the discount rate is 14% is= $1,199.28 c) the most you would spend today for an investment that will pay $3,900 in 9 years if your opportunity cost is 14% is= $1,199.28 d) compare and contrast and discuss your findings in part a through c= - in all three cases, you are solving for the present value, PV, $1,199.28 - the annual interest rats is also called the discount rate or opportunity cost.

Basic bond valuation: Complex Systems has an outstanding issue of ​$1,000​-par-value bonds with a 12​% coupon interest rate. The issue pays interest annually and has 16 years remaining to its maturity date. a. If bonds of similar risk are currently earning a rate of return of 10​%, how much should the Complex Systems bond sell for​ today? b. Describe the two possible reasons why the rate on​ similar-risk bonds is below the coupon interest rate on the Complex Systems bond. c. If the required return were at 12​% instead of 10​%, what would the current value of Complex​ Systems' bond​ be? Contrast this finding with your findings in part a and discuss.

a. If bonds of similar risk are currently earning a rate of return of 10​%, the Complex Systems bond should sell today for $1156.47. b. Describe the two possible reasons why the rate on​ similar-risk bonds is below the coupon interest rate on the Complex Systems bond: -Since Complex​ Systems' bonds were​ issued, there may have been a shift in the​ supply-demand relationship for money or a change in the risk towards the firm. c. If the required return were at 12​% instead of 10​%, the current value of Complex​ Systems' bond would be ​$ 1000. d. When the required return is equal to the coupon​ rate, the bond value is equal to the par value. In contrast in part a​ above, if the required return is less than the coupon​ rate, the bond will sell at a premium ​(its value will be greater than​ par).

Bond prices and yields: Assume that the Financial Management​ Corporation's ​$1 comma 000​-par-value bond has a 6.500 % ​coupon, matures on May​ 15, 2027, has a current price quote of 94.084 and a yield to maturity​ (YTM) of 7.456 %. Given this​ information, answer the following​ questions: a. What was the dollar price of the​ bond? b. What is the ​bond's current​ yield? c. Is the bond selling at​ par, at a​ discount, or at a​ premium? ​ Why? d. Compare the​ bond's current yield calculated in part b to its YTM and explain why they differ.

a. The dollar price of the bond is ​$940.84. b. The ​bond's current yield is 6.9​%. c. The bond is selling at a discount because its price is less than the par value. d. Compare the​ bond's current yield calculated in part b to its YTM and explain why they differ: -The yield to maturity is higher than the current yield because the former includes ​$59.16 in price appreciation between today and the May​ 15, 2027 bond maturity.

Compounding frequency, time value, and effective annual rates: for each of the cases in the following table: a. Calculate the future value at the end of the specified deposit period. b. Determine the effective annual​ rate, EAR. c. Compare the nominal annual ​rate,​ r, to the effective annual​ rate, EAR. What relationship exists between compounding frequency and the nominal and effective annual​ rates?

a. The future value of case A at the end of year 5 is ​$3674.77 -The future value of case B at the end of year 3 is ​$75012.94 -The future value of case C at the end of year 12 is ​$1989.60 -The future value of case D at the end of year 6 is ​$51243.38 b. The effective annual rate of case A is 7.2% -The effective annual rate of case B is 13.7​%. -The effective annual rate of case C is 5.1​% -The effective annual rate of case D is 18.0​%. c. What relationship exists between compounding frequency and the nominal and effective annual​ rates? -The effective rates of interest rise relative to the stated nominal rate with increasing compounding frequency.

Yield to maturity: The Salem Company bond currently sells for ​$867.59​, has a coupon interest rate of 6​% and a $ 1000 par​ value, pays interest annually​, and has 15 years to maturity. a. Calculate the yield to maturity ​(YTM​) on this bond. b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond.

a. The yield to maturity on this bond is 7.500​% b. Explain the relationship that exists between the coupon interest rate and yield to maturity and the par value and market value of a bond: -The market value of the bond approaches its par value as the time to maturity declines. The yield to maturity approaches the coupon interest rate as the time to maturity declines.

Value of an annuity versus a single amount: Personal Finance Problem: Assume that you just won the state lottery. Your prize can be taken either in the form of ​$40,000 at the end of each of the next 25 years​ (that is, ​$1,000,000 over 25 ​years) or as a single amount of ​$500,000 paid immediately. a. If you expect to earn 5​% annually on your investments over the next 25 ​years, ignoring taxes and other​ considerations, which alternative should you​ take? Why? b. Would your decision in part a change if you could earn 7​% rather than 5​% on your investments over the next 25 ​years? Why? c. At approximately what interest rate would you be indifferent between the two​ options?

a. To decide which alternative to​ take, you need to compare the values of these alternatives. Although the total nominal dollar amount of the annuity is much larger than the single​ payment, the former is not necessarily a better choice due to the different timing of cash flows. A way to make a meaningful comparison of the two alternatives is to compare their present values. - If you take the prize as an​ annuity, the present value of the 25​-year ordinary annuity is ​$563,757.78 -If you take the prize as a single​ amount, the present value of the lump sum is ​$500,000 -which alternative should be chosen?: annual payments, because the present value is greater -If you earned 7​% rather than 5​% on your​ investments, the present value of the 25​-year ordinary annuity is ​$466,143.33 -which alternative should be chosen?: lump sum, because the present value is greater - on strictly economic basis, the rate at which you would be indifferent between two plans is 6.24%

A(n) ________ is an annuity with an infinite life making continual annual payments.

perpetuity

The current yield on a bond is measured by ________.

the annual interest payment divided by the current price

The value of any bond should be

the present value of all the coupon receipts as well as the principal (par value) repayment at the bond's maturity.