EXAM 2 Review Question PDF

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EXAM 2 REVIEW FANG FANG DU...

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Notice: N= number of payment per year for the whole time IY=YTM=equity cost of capital ( r ) the value (PRICE)=PO, current value (PV) PMT= Coupon payment FV= Face Value Capital Gain = P1 – P0

payback period: year( time)

1: How are investors in zero−coupon bonds compensated for making such an investment? A. Such bonds are purchased at their face value and sold at a premium on a later date. B. Such bonds are purchased at a discount, below their face value. C. Such bonds have a lower face value as compared to other bonds of similar term. D. Such bonds make regular interest payments. 2: Which of the following statements is FALSE? A. According to the constant dividend growth model, the value of the firm depends on the current dividend level, divided by the equity cost of capital plus(minus moi dung) the grow rate. B. Estimating dividends, especially for the distant future, is difficult. C. A firm can only pay out its earnings to investors or reinvest their earnings. D. Successful young firms often have high initial earnings growth rates. 3: Which of the following will NOT increase a company's dividend payments? A. It can decrease the number of shares outstanding. B. It can increase its earnings. C. It can issue more shares. D. It can increase its dividend payout rate.

4: You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is A. profitability index B. internal rate of return (IRR) C. net present value (NPV) D. incremental internal rate of return (IRR) 5)The ultimate goal of the capital budgeting process is to ________. A. determine how the consequences of making a particular decision affects the firm's revenues and costs B. determine the effect of the decision to accept or reject a project on the firm's cash flows C. forecast the consequences of a list of future projects for the firm D. list the projects and investments that a company plans to undertake in the future

6: Spacefood Products will pay a dividend of $ 2.05 per share this year. It is expected that this dividend will grow by 5% per year each year in the future. What will be the current value of a single share of Spacefood's stock if the firm's equity cost of capital is 9%? P0=Div1/(rE−g) P0=2.05/(9%-5%)=51.25

7) A $1,000 par value 10-year bond with a 10% coupon rate recently sold for $900. The yield to Maturity is không cho thì mặc định là trả 1 lần 1 năm N=10 IY=? 11.75% PV=-900 PMT=( Face Value x Coupon rate)/number of coupon payment per year=(1000 x 10%)/1=100 FV=1000

8)MI has a $1,000 par value, 30-year bond that was issued 20 years ago at an annual coupon rate of 10%, paid semiannually. Market interest rates on similar bonds are 7%. Calculate the bond's current price. N=30-20=10 x 2=20 IY=7%/2=3.5% PV=? $1213.18 PMT=(Face Value x Coupon rate)/number of coupon payment per year=(1000 x 10%)/2=50 FV=1000

9) The XYZ Company, whose common stock is currently selling for $50 per share, is expected to pay a $2.00 dividend in the coming year. If investors believe that the expected rate of return on XYZ is 14%, what growth rate in dividends must be expected?

P0=Div1/(rE−g) 50=2/(14%-g) (14%-g)=2/50=0.04 G=14%-0.04=0.1 x 100=10% 10) Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%. Initial outlay = $450 Cash flows: Year 1 = $325 Year 2 = $65 Year 3 = $100 Year 1 = $325+Year 2 = $65=390 ( vậy còn thiếun450-390=60 để cover cost 450) 60/100=0.6 year 2 year+0.6 years=2.6 years

11) A risk-free, zero-coupon bond with a face value of $5000 has 15 years to maturity. If the YTM is 5.8%, what the price this bond will trade at? (không cho coupon rate thì ko cần tính coupon payment=> PMT=0) N=15 IY=5.8 PV=? 2146 PMT=0 FV=5000

12)You are interested in purchasing a new automobile that costs $39,000. The dealership offers you a special financing rate of 12% APR (1 %) per month for 60 months( 5 YEAR). Assuming that you do not make a down payment on the auto and you take the dealer's financing deal, then your monthly car payments would be closest to: Per period=1-month N=60 MONTH IY=12/12=1 monthly rate PV=39000 PMT=? $867.53 FV=0

13)The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as detailed below: Year 1 Year 2 Year 3 Year 4 $150,574 $150,574 $150,574 $150,574 The appropriate discount rate for this project is 17 %. The internal rate of return (IRR) for this project is closest to: The NPV of the project is closest to: • CF 2nd Clear CFo=-450,000 enter

CO1= 150,574 enter F01=4 IRR CPT IRR=12.77 NPV 17 ENTER NPV=-36,940

14) The Sisyphean Company is considering a new project that will have an annual depreciation expense of $2 million. If Sisyphean's marginal corporate tax rate is 30% and its average corporate tax rate is 35%, then what is the value of the depreciation tax shield on the company's new project? Depreciation tax shield=Marginal tax rate x Depreciation =30% x $2= 0.6 million 1. What is the coupon rate of a five-year, $5,000 bond with semiannual coupons and a price of $4,718.87, if it has a yield to maturity of 6.2%? A. 3.9% B. 5.85 % C. 6.825% D. 4.875% N=5 YEARx2=10 IY=6.3/2=3.1 PV=$4,718.87 PMT=CPN=? 121.87 FV=5000 Coupon rate=(CPNx Number of coupon payments per year)/Face Value = (121.87x2)/5000=4.8748

2. What is the yield to maturity of a five-year, $10,000 bond with a 5% coupon rate and semiannual coupons if this bond is currently trading for a price of $9,531? A. 8.54% B. 3.05% C. 6.1% D. 7.32% N=5 YEARx2=10 IY=? 3.051 PV=$9,531 PMT=(10,000x5)/100=500:2=250 FV=10,000 YTM=IYx2=3.051x2=6.102

3. A risk-free, zero-coupon bond with a $5,000 face value has 20 years to maturity. The bond currently trades at $3,900. What is the yield to maturity of this bond? A. 1.25% B. 61% C. 0.625% D. 78% N=20 IY=? 1.25 PV=3900

PMT=0 FV=5000

4. A stock is expected to pay $3.90 per share every year indefinitely and the equity cost of capital for the company is 9%. What price would an investor be expected to pay per share next year? A. $10.83 B. $21.67

PV =P0=

Di v 1 re

=

$ 3.90 = $43.33 9%

C. $43.33 D. $32.50

5. What must be the price of a $5,000 bond with a 6% coupon rate, semiannual coupons, and two years to maturity if it has a yield to maturity of 12% APR? A. $4,480 B. $3,584 C. $6,272 D. $5,376 N=2 years x 2 =4 IY=12/2=6% PV=price=? -4480 PMT=(6%/2)x5000=150 FV=5000

6. Consider the following timeline detailing a stream of cash flows: Date

0

1

?

$5000

2

3

4

$6000

$7000

$8000

Cash flow

If the current market rate of interest is 10%, then the present value (PV) of this stream of cash flows is closest to PV of cash flow 1=C/(1+r)^n=5000/(1+10%)=4545.45 PV of cash flow 2=C/(1+r)^n=6000/(1+10%)^2= 4958.68 PV of cash flow 3=C/(1+r)^n=7000/(1+10%)^3=5259.20 PV of cash flow 4=C/(1+r)^n=8000/(1+10%)^4=5464.11 PV of this stream of cash flows=4545.45+4958.68+5259.20+5464.11= 20227.44 A. $20,227 B. $24,272 C. $10,114 D. $32,363

8. A lender lends $10,300, which is to be repaid in annual payments of $2,030 for 6 years. Which of the following shows the timeline of the loan from the lender's perspective?

A. Year 1 Year 2 0

$2,030

B. Year 1 -$10,300

C. Year 0 -$10,300

D. Year 0 -$10,300

Year 3

Year 4

Year 5

Year 6

$2,030

$2,030

$2,030

$2,030

Year 2

Year 3

Year 4

$2,030

$2,030

$2,030

Year 1 Year 2 $2.030

$2,030

Year 5 $2,030

Year 3 Year 4 $2,030

Year 1

Year 2

Year 3

$2,030

$4,030

$6,030 $8,030

Year 6

Year 5

$2,030

Year 4

S2,030

Year 6

S2,030

Year 5 $10,030

$2,030

Year 6 $12,030

10. A company has stock which costs $42.00 per share and pays a dividend of $3.00 per share this year. The company's cost of equity is 12%. What is the expected annual growth rate of the company's dividends?

D iv 1 P0 = rE - g A. 19.44% B. 9.72% C. 14.58% D. 4.86%

42=3/(12%-g)=>12%-g=3/42=>12%-g=0.0714=>12%- 0.0714=0.0486x100=4.86%

Von Bora Corporation (VBC) is expected to pay a $3.75 dividend at the end of this year. If you expect VBC's dividend to grow by 4% per year forever and VBC's equity cost of capital is 13%, then the value of a share of VBS stock is closest to:

P

0

D iv 1 = rE - g

3.75/(13%-4%)=41.667

A. $16.67 B. $41.67 C. $22.06 D. $25.00 Gremlin Industries will pay a dividend of $1.95 per share this year. It is expected that this dividend will grow by 6% per year each year in the future. The current price of Gremlin's stock is $22.70 per share. What is Gremlin's equity cost of capital? -

A. 16.6% B. 18.6% C. 14.6% D. 13.6%

Cost of capital =

¿ +g P

=

1.95 +6 % 22.70

= 0.1459= 14.6%

15. NoGrowth Industries presently pays an annual dividend of S1.50 per share and it is expected that these dividend payments will continue indefinitely. If NoGrowth's equity cost of capital is 11%, then the value of a share of NoGrowth's stock is closest to 1.50/11%= 13.636 A. $15.00 B. $16.37 C. $10.91 D. $13.64

16. You are saving money to buy a car. If you save $350 per month starting one month from now at an interest rate of 6%, how much will you be able to spend on the car after saving for 4 years? N=4x12=48 IY=6/12=0.5 PV=0 PMT=350 FV=? A. $26,508 B. $22,721 C. $11,361 D. $18,934 19. A risk-free, zero-coupon bond with a face value of $5,000 has 15 years to maturity. If the YTM is 5.1%, which of the following would be closest to the price this bond will trade at? A. $2,371

B. $2,845 C. $3,794 D. $3,319 N=15 IY=5.1 PV=? PMT=0 FV=5000 21. Jumbuck Exploration has a current stock price of $2.00 and is expected to sell for $2.10 in one year's time, immediately after it pays a dividend of $0.20. Which of the following is closest to Jumbuck Exploration's equity cost of capital? R t+1 =

¿ +P1−Po Po

=

= 0.15 =15%

0.20 + 2.10−2 2

A. 15% B. 18.75% C. 9% D. 7.5% 22. If $12,000 is invested in a certain business at the start of the year, the investor will receive $3,600 at the end of each of the next four years. What is the present value of this business opportunity if the interest rate is 4% per year? 0

1

-12000

$3600

•

CF 2nd Clear

2

3

4

$3600

$3600

$3600

CFo=-12000 enter CO1=3600 enter F01=1 CO2=3600 ENTER

CO4 ENTER NPV, I= 4% ENTER

CPT

A. $1,068 B. $1,281 C. $534 D. $1,708

23. A corporation issued a bond that generates the above cash flows. If the periods shown are 1 month, which of the following best describes that bond? A. a 180-year bond with a notional value of $5,000 and a coupon rate of 5.6% paid semiannually. B. a 15-year bond with a notional value of $5,000 and a coupon rate of 5.6% paid monthly C. a 15-year bond with a notional value of $5,000 and a coupon rate of 1.400% paid annually. D. a 60-year bond with a notional value of $5,000 and a coupon rate of 2.800% paid quarterly. Period 0

1 $23.3

2

3

$23.3 $23.3

179 $23.3

180 $23.3 + $5,000

Một năm trả 12 lần thì 180 lần trả là bao nhiêu năm cho nên lấy 180 lần trả/12=15 years

Coupon rate=(CPNx Number of coupon payments per year)/Face Value =(23.3x12)/5000=0.05592x100=5.592

Một năm trả 4 lần 60 lần trả thì là bao nhiêu năm Coupon rate=(CPNx Number of coupon payments per year)/Face Value =(28x4 số lần trả trong 1 năm)/2000=5.6 4 lần nên chọn Quarter

24. How much will the coupon payments be of a 25-year $10,000 bond with a 7.5% coupon rate and semiannual payments? A. $750

Semia=(10,000x7.5%)/2=375

B. $125 C. $1,500 D. $375 Credenza Industries is expected to pay a dividend of $1.40 at the end of the coming year. It is expected to sell for $69 at the end of the year. If ts equity cost of capital is 10%, what is the expected capital gain from the sale of this stock at the end of the coming year? A. $82.73 B. $84.00 C. $5.00 D. $6.27

R=((Div1+P1)/P0 )– 1 10%=(1.40+69)/P0 – 1

10%= 70.4/P0 -1 70.4/P0=10%+1 70.4/P0=1.1 P0=70.4/1.1=64

Capital Gain = P1 – P0 = 69-64=5 1. A company issues a ten-year bond at par with a coupon rate of 6.2% paid semi-annually. The YTM at the beginning of the third year of the bond (8 years left to maturity) is 7.7%. What is the new price(PV) of the bond? A. $1,276 B. $1,094 C $912 D. $1,000 N=8 x 2=16 IY=7.7/2=3.85 Price=PV=? PMT=(6.2%/2)x1000=31 FV=1000

2. Spacefood Products will pay a dividend of $2.25 per share this year. It is expected that this dividend will grow by 4% per year each year in the future. What will be the current value (PV)of a single share of Spacefood's stock if the firm's equity cost of capital ( r ) is 10%? A $26.25

P0=Div1/(rE−g)

B. $37.50

P0=2.25/(10%-4%)=37.5

C. $33.75 D. $24 38

3. A stock is expected to pay $1.80 per share every year indefinitely and the equity cost of capital for the company is 8.6% What price would an investor be expected to pay per share ten years in

the future?

PV =P0=

Di v 1 $ 1.80 = = $20.93 8.6 % re

A $41.86 B. $52.33 C. $20.93 D. $31.40

4. Jumbuck Exploration has a current stock price of $2.20 and is expected to sell for $2.31 in one year's time, immediately after it pays a dividend of $0.38 Which of the following is closest to Jumbuck Exploration's eqity cost of capital (r)? A. 22.27% B. 27 84% C. 13.36% D. 11.14% CostofEqui t y=Di vi dendYi el d+Capi t alGai nYi el d Di vi dendYi el d=Di vi dend/Cur r entPr i ce

=0.38/2.20=0.173

Capi t alGai nYi el d=( Pr i cenextyear-Cur r entPr i ce)/Cur r entPr i ce

=(2.31-2.20)/2.20=0.05 CostofEqui t y=Di vi dendYi el d+Capi t alGai nYi el d

=0.173+0.05=0.223x100=22.3 OR

=

= 0.2227 =22.27%

¿ +P1−Po 0.38 + 2.31−2.20 Po 2.20 8. What is the yield to maturity of a one-year, risk-free, zero-coupon bond with a $10,000 face

R t+1 =

value and a price of $9,600 when released? A. 2.083% B. 4. 167% C. 0.01% D. 4% YTM = FV / PV -1 YTM = 10000/9600 -1=0.04167 x 100=4.167

9. JRN Enterprises just announced that plans to cut its next-year dividend, D1 from $2.25 to $1.10 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 6% per year and JRN's stock was trading at $25.50 per share. With the new expansion. JRN's dividends are expected to grow at 12% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value (PRICE=PO)of a share of JRN after the announcement is closest to A. $25.50 B. $38.95 C. $79.67 D. $12.47

Stock Price = Expected Dividend in year 1/ (Required rate of return – growth rate) 25.50=2.25/ ( Required rate of return – 6%) ( Required rate of return – 6%)=2.25/25.50=0.08823

Required rate of return =0.08823+6%=0.14823 x 100=14.823 Value of share after announcement = 1.10/(14.823%-12%)=38.96

P

0

D iv 1 = rE - g

10. How much will the coupon payments be of a 25-vear $10.000 bond with a 7.5% coupon rate and semiannual payments? A. $750 B. $1,500 C. $125 D. $375 trung cau 24

11. Since your birth, your grandparents have been depositing $110 into a savings account every month. The account pays 12% interest annually. Immediately after your grandparents make the deposit on your 18th birthday, the amount of money in your savings account will be closest to A. $50,019 B. $116,711 C. $83,365 D. $100,038

N=18 x 12 months =216 IY=12/12 month= 1 PV=0 PMT=110 FV=?

12. The Sisyphean Company has a bond outstanding with a face value of $5,000 that reaches maturity in 9 years. The bond certificate indicates that the stated coupon rate for this bond is 8.6% and that the coupon payments are to be made semiannually. Assuming that this bond trades for $4,872. then the YTM for this bond is closest to A. 10.8% B. 9% C. 72% D. 126% N=9 x 2=18 IY=? 4.51 PV=4872 Coupond PMT=( Face Value x Coupon rate)/2 vi la semi=(5000 x 8.6%)/2=215 FV=5000 YTM= RATE x 2 vi la semi=4.51 x 2= 9.02

13. A bond has eight years to maturity, a $2,000 face value, and a 5.9% coupon rate with annual coupons. What is its yield to maturity if it is currently trading at $1,634? A. 12.93% B. 11.09% C. 7.39% D. 9.24% N=8 IY=? 9.235 PV=1634 PMT= Face Value x Coupon rate=2000 x 5.9%=118 FV=2000 15. The Sisyphean Company has a bond outstanding with a face value of $5.000 that reaches maturity in 15 years. The bond certificate indicates that the stated coupon rate for this bond is 8.5% and that the coupon payments are to be made semiannualy. Assuming the appropriate YTM on the Sisyphean bond is 10.2%, then the price that this bond trades for will be closest to A. $6,096 B. $4,354 C. 55.225 D. $3,483 N=15 x 2=30 IY=10.2/2=5.1 PV=? 4,354 PMT=( Face Value x Coupon rate)/2 vi la semi=(5000 x 8.5%)/2=212.5

FV=5000 18. A stock is bought for $22.50 and sold for $26.50 one year later, immediately after it has paid a dividend of $1.50. What is the capital gain rate for this transaction? A. 17.78% B. 3.56% C. 14.22% D. 8.89% capital gain rate=(End value-Beginning value)/Beginning value =(26.50-22.50)/22.50=0.1778x100=17.78 19. Consider a zero-coupon bond with a $100 face value and 20 years left until maturity. If the YTM of this bond is 10.5%, then the price of this bond is closest to: A. $14.00 B. $100.00 C. $19.01 D. $16.29 N=20 IY=10.5 PV=? 13.58 PMT=0 FV=100 OR Zero coupon bond value=Face value/(1+rate)^time period =100/(1+10.5%)^20=13.58

20. A $5,000 bond with a coupon rate of 6.8% paid semiannually has five years to maturity and a yield to maturity of 8.4%. If interest rates rise and the yield to maturity increases to 8.7%, what will happen to the price of the bond? A. fall by $57.41 B. rise by $57.41 C. fall by $68.89 D. The price of the bond will not change. N=5 x 2=10 IY=8.4/2=4.2

8.7/2=4.35

PV=? 4678

4621

PMT=( Face Value x Coupon rate)/2 vi la semi=(5000 x 6.8%)/2=170 FV=5000 4678-4621=57 22. The Sisyphean Company's common stock is currently trading for $27 per share. The stock is expected to pay a $2.3 dividend at the end of the year and the Sisyphean Company's equity cost of capital is 13% If the dividend payout rate is expected to remain constant, then the expected growth rate in the Sisyphean Company's earnings is closest to A. 2.24% B. 8.96% C. 4.48% D. 6.72%

P0= Dividen 1/(Required Rate-Growth) 27=2.3/(13%-G) (13%-G)=2.3/27=23/270 G=13%-23/270=0.04481 x 100=4.48 24. Maturity (years) 1 Price

2

$97.25 $94.53

3 $91.83

4

5

$89.23

$87.53

The above table shows the price per $100 face value of severalrisk-free, zero-coupon bonds. What is the yield to m...