Question 1

Suppose you just won the state lottery,and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Accepted Answer

A)  7.12%
B)  7.49%
C)  7.87%
D)  8.26%
E)  8.67%F) A) and B)
G) A) and C)

Question 2

What is the present value of the following cash flow stream at a rate of 6.25%?

Accepted Answer

A)  $411.57
B)  $433.23
C)  $456.03
D)  $480.03
E)  $505.30F) None of the above
G) C) and D)

Question 3

McCurdy Co.'s Class Q bonds have a 12-year maturity,$1,000 par value,and a 5.75% coupon paid semiannually (2.875% each 6 months) ,and those bonds sell at their par value.McCurdy's Class P bonds have the same risk,maturity,and par value,but the P bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?

Accepted Answer

A)  $943.98
B)  $968.18
C)  $993.01
D)  $1,017.83
E)  $1,043.28F) D) and E)
G) A) and D)

Question 4

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is rs = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Accepted Answer

A)  $17.39
B)  $17.84
C)  $18.29
D)  $18.75
E)  $19.22F) B) and E)
G) C) and D)

Question 5

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Accepted Answer

A) True 
 B)False

Question 6

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Accepted Answer

A)  6.77%
B)  7.13%
C)  7.50%
D)  7.88%
E)  8.27%F) B) and D)
G) A) and B)

Question 7

Scott and Linda have been saving to pay for their daughter Casie's college education.Casie just turned 10 at (t = 0) ,and she will be entering college 8 years from now (at t = 8) .College tuition and expenses at State U.are currently $14,500 a year,but they are expected to increase at a rate of 3.5% a year.Ellen should graduate in 4 years⎯if she takes longer or wants to go to graduate school,she will be on her own.Tuition and other costs will be due at the beginning of each school year (at t = 8,9,10,and 11) . So far,Scott and Linda have accumulated $15,000 in their college savings account (at t = 0) .Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1,2,3,and 4) .Then they plan to make 3 equal annual contributions in each of the following years,t = 5,6,and 7.They expect their investment account to earn 9%.How large must the annual payments at t = 5,6,and 7 be to cover Casie's anticipated college costs?

Accepted Answer

A)  $1,965.21
B)  $2,068.64
C)  $2,177.51
D)  $2,292.12
E)  $2,412.76F) B) and D)
G) C) and D)

Question 8

A $250,000 loan is to be amortized over 8 years,with annual end-of-year payments.Which of these statements is CORRECT?

Accepted Answer

A)  The proportion of interest versus principal repayment would be the same for each of the 8 payments.
B)  The annual payments would be larger if the interest rate were lower.
C)  If the loan were amortized over 10 years rather than 8 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 8-year amortization plan.
D)  The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.
E)  The last payment would have a higher proportion of interest than the first payment.F) A) and D)
G) A) and E)

Question 9

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Accepted Answer

A) True 
 B)False

Question 10

Zacher Co.'s stock has a beta of 1.40,the risk-free rate is 4.25%,and the market risk premium is 5.50%.What is the firm's required rate of return?

Accepted Answer

A)  11.36%
B)  11.65%
C)  11.95%
D)  12.25%
E)  12.55%F) C) and E)
G) C) and D)

Question 11

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Accepted Answer

A)  $3,704.02
B)  $3,889.23
C)  $4,083.69
D)  $4,287.87
E)  $4,502.26F) B) and E)
G) A) and D)

Question 12

If the returns of two firms are negatively correlated,then one of them must have a negative beta.

Accepted Answer

A) True 
 B)False

Question 13

Wildwoods,Inc.earned $1.50 per share five years ago.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS) over the 5-year period?

Accepted Answer

A)  15.54%
B)  16.36%
C)  17.18%
D)  18.04%
E)  18.94%F) C) and D)
G) A) and E)

Question 14

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,rs,is 11.50%.What is the stock's expected price 5 years from now?

Accepted Answer

A)  $40.17
B)  $41.20
C)  $42.26
D)  $43.34
E)  $44.46F) A) and D)
G) All of the above

Question 15

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%,what is its current stock price?

Accepted Answer

A)  $30.57
B)  $31.52
C)  $32.49
D)  $33.50
E)  $34.50F) All of the above
G) C) and D)

Question 16

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Accepted Answer

A)  $839.31
B)  $860.83
C)  $882.90
D)  $904.97
E)  $927.60F) None of the above
G) B) and C)

Question 17

Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%,compounded monthly.The loan (principal plus interest) must be repaid at the end of the year.Woodburn Bank also offers to lend you the $50,000,but it will charge an annual rate of 7.0%,with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern?

Accepted Answer

A)  0.52%
B)  0.44%
C)  0.36%
D)  0.30%
E)  0.24%F) A) and C)
G) A) and B)

Question 18

Two constant growth stocks are in equilibrium,have the same price,and have the same required rate of return.Which of the following statements is CORRECT?

Accepted Answer

A)  If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
B)  If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
C)  The two stocks must have the same dividend growth rate.
D)  The two stocks must have the same dividend yield.
E)  The two stocks must have the same dividend per share.F) A) and B)
G) A) and C)

Question 19

If D0 = $1.75,g (which is constant) = 3.6%,and P0 = $32.00,what is the stock's expected total return for the coming year?

Accepted Answer

A)  8.37%
B)  8.59%
C)  8.81%
D)  9.03%
E)  9.27%F) A) and E)
G) A) and D)

Question 20

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Accepted Answer

A)  Stock B must have a higher dividend yield than Stock A.
B)  Stock A must have a higher dividend yield than Stock B.
C)  If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's.
D)  Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.
E)  If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.F) A) and E)
G) None of the above

Exam 29: Basic Financial Tools: a Review

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Correct Answer
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Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

Correct Answer
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Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Correct Answer
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Wildwoods,Inc.earned $1.50 per share five years ago.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS) over the 5-year period?

Correct Answer
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A $250,000 loan is to be amortized over 8 years,with annual end-of-year payments.Which of these statements is CORRECT?

Correct Answer
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Correct Answer
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If the returns of two firms are negatively correlated,then one of them must have a negative beta.

Correct Answer
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Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Correct Answer
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If D₀ = $1.75,g (which is constant) = 3.6%,and P₀ = $32.00,what is the stock's expected total return for the coming year?

Correct Answer
verified

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Correct Answer
verified

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Correct Answer
verified

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

Correct Answer
verified

Correct Answer
verified

Two constant growth stocks are in equilibrium,have the same price,and have the same required rate of return.Which of the following statements is CORRECT?

Correct Answer
verified

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct Answer
verified

Zacher Co.'s stock has a beta of 1.40,the risk-free rate is 4.25%,and the market risk premium is 5.50%.What is the firm's required rate of return?

Correct Answer
verified

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Correct Answer
verified

Suppose you just won the state lottery,and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Correct Answer
verified

Correct Answer
verified

What is the present value of the following cash flow stream at a rate of 6.25%?

Correct Answer
verified

Exam 29: Basic Financial Tools: a Review

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Correct AnswerverifiedShow Answer

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,rs,is 11.50%.What is the stock's expected price 5 years from now?

Correct AnswerverifiedShow Answer

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Correct AnswerverifiedShow Answer

Wildwoods,Inc.earned $1.50 per share five years ago.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS) over the 5-year period?

Correct AnswerverifiedShow Answer

A $250,000 loan is to be amortized over 8 years,with annual end-of-year payments.Which of these statements is CORRECT?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

If the returns of two firms are negatively correlated,then one of them must have a negative beta.

Correct AnswerverifiedShow Answer

Your sister paid $10,000 (CF at t = 0) for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

Correct AnswerverifiedShow Answer

If D0 = $1.75,g (which is constant) = 3.6%,and P0 = $32.00,what is the stock's expected total return for the coming year?

Correct AnswerverifiedShow Answer

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Correct AnswerverifiedShow Answer

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (rs) is 11%,what is its current stock price?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Two constant growth stocks are in equilibrium,have the same price,and have the same required rate of return.Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is rs = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct AnswerverifiedShow Answer

Zacher Co.'s stock has a beta of 1.40,the risk-free rate is 4.25%,and the market risk premium is 5.50%.What is the firm's required rate of return?

Correct AnswerverifiedShow Answer

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

Correct AnswerverifiedShow Answer

Suppose you just won the state lottery,and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

What is the present value of the following cash flow stream at a rate of 6.25%?

Correct AnswerverifiedShow Answer

Correct Answer
verified

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified

Correct Answer
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Correct Answer
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If D₀ = $1.75,g (which is constant) = 3.6%,and P₀ = $32.00,what is the stock's expected total return for the coming year?

Correct Answer
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Correct Answer
verified

Correct Answer
verified

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s) is 11%,what is its current stock price?

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
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