Finance 3000 Quiz:hw questions ALL Chaps PDF

Preview

Summary

all hw ...

Description

Quiz/ HW Finance questions Baruch College High Color Detergent is issuing new shares of stock which will trade on NASDAQ. If Sue purchases 300 of these shares, the trade will occur in which one of the following markets?

Primary- Answer Wilson just placed an order with his broker to purchase 500 of the outstanding shares of GE. This purchase will occur in which one of the following markets? primary secondary third fourth fifth ©2017 McGraw-Hill Education. All rights reserved.

Answer- secondary Hi-Tek Shoes is a private firm that has decided to issue shares of stock to the general public. This stock issue will be referred to as a(n): open-end sale break-out issue public service offering initial public offering initial trial issue

Answer is IPO. A firm that specializes in arranging financing for companies is called a(n): floor broker investment banking firm investment dealer private broker marketing firm

Investment banking firm The financing provided for new ventures that are frequently high-risk investments is referred to as "venture _______".

Venture capital Marco Painting Supplies is a publicly-traded firm with 250,000 shares of stock outstanding. If the firm issues an additional 10,000 shares, those shares will be referred to as a(n): supplemental offering. seasoned equity offering. initial public offer. market expansion offer. after-market underwriting.

Answer seasoned equity offering

An index consists of the following securities and has an index divisor of 3.0. What is the priceweighted index return?

9.43 percent 9.67 percent 10.53 percent 10.91 percent 11.03 percent Price-weighted index = {[($19 + $11 + $33)/3] - [($17 + $14 + $26)/3]}/[($17 + $14 + $26)/3] = 10.53 percent

Finance 3000 Jamie earned $180 in interest on her savings account last year. She has decided to leave the $180 in her account so that she can earn interest on the $180 this year. The interest Jamie earns this year on this $180 is referred to as: Answer: Interest on Interest bc she is resubmitting her interest so she can earn more money Todd will be receiving a $10,000 bonus one year from now. The process of determining how much that bonus is worth today is called:

Answer: Discounting Which of the following will increase the future value of a lump sum investment? I. Decreasing the interest rate II. Increasing the interest rate III. Increasing the time period IV. Decreasing the amount of the lump sum investment

II and III only. Your grandparents just gave you a gift of $15,000. You are investing this money for 12 years at 6 percent simple interest. How much money will you have at the end of the 12 years?

25,800 15000x12x.06= $25,800

You want to invest an amount of money today and receive back twice that amount in the future. You expect to earn 6 percent interest. Approximately how long must you wait for your investment to double in value?

Answer: use rule of 72 to double. 72/6 = 12 take 12yrs to double.

Chapter 5 Quiz questions Travis is buying a car and will finance it with a loan that requires monthly payments of $265 for the next four years. His car payments can be described by which one of the following terms?

Answer: Annuity Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months. Which one of the following terms best describes these scholarship payments?

Answer: Annuity due The Jones Brothers recently established a trust fund that will provide annual scholarships of $12,000 indefinitely. These annual scholarships can best be described by which one of the following terms?

Answer: perpetuity Anna pays 1.5 percent interest monthly on her credit card account. When the interest rate on that debt is expressed as if it were compounded only annually, the rate would be referred to as the:

Answer: effective annual rate aka effec t i v eannual r at e Lee pays 1 percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:

AnswerAnnaul per centr at e An investment offers $7,800 per year for 15 years, with the first payment occurring 1 year from now. Assume the r percent. What is the value of the investment today? (Enter rounded answer as directed, but do not use rounded numbe calculations. Round your answer to 2 decimal places (e.g., 32.16).) Present value

$ 66,763.93

What would the value be if the payments occurred for 40 years? (Enter rounded answer as directed, but do not use in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Present value

$ 93,011.98

What would the value be if the payments occurred for 75 years? (Enter rounded answer as directed, but do not use in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Present value

$ 97,196.46

What would the value be if the payments occurred forever? (Enter rounded answer as directed, but do not use rou intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Present value

$ $97,500

Curly’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $34,000 per year forever. Assume the required return on this investment is 7 percent.

Policy value today

$ 485,714.29

Qui zf orc hapt er5 Rooster Co. has identified an investment project with the following cash flows. Year 1 2 3 4

Cash Flow $ 1,210 1,120 1,550 1,910

Requirement 1: If the discount rate is 9 percent, what is the present value of these cash flows? (Enter rounded answer as directe rounded numbers in intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).) Present value

$ 4,602.75

Requirement 2: What is the present value at 17 percent? (Enter rounded answer as directed, but do not use rounded number calculations. Round your answer to 2 decimal places (e.g., 32.16).) Present value

$ 3,839.41

Requirement 3: What is the present value at 23 percent? (Enter rounded answer as directed, but do not use rounded number calculations. Round your answer to 2 decimal places (e.g., 32.16).) Present value

$ 3,391.5

PV = $1,210/(1.09)^1 + $1,120/1.09^2 + 1,550/1.09^3 + 1,910/1.09^4 PV = $4,602.75 Req 2 Present value at 17% PV = $1,210/(1.17)^1 + $1,120/1.17^2 + 1,550/1.17^3 + 1,910/1.17^4 PV = $3,839.41

REq 3 PV at 23% PV = $1,210/(1.23)^1 + $1,120/1.23^2 + 1,550/1.23^3 + 1,910/1.23^4 PV = $ 3,391.5

2. Curly’s Life Insurance Co. is trying to sell you an investment policy that will pay you and your heirs $42,000 per year forev required return on this investment is 6.7 percent.

Pol i c yamount=annualc ashfl ow/ r equi r edr at e

626, 865. 67

i v eannuali nt er es tr at ei sani nv es t ment ' sannualr at eofi nt er es twhenc ompoundi ngocc ur s 3.Effect mor eof t ent hanonceay ear .Cal c ul at edast hef ol l owi ng:

Stated Rate (APR) 11.2 5 Wrong 15.79

Number of Times Compounded

%

Effective Rate (EAR)

Quarterly

11.73%

14.7 5

Monthly

15.22%

17.2 5

Daily

18.82%

13.2 5

Semiannual ly

13.68%

Working notes: For discrete compounding, to find the EAR, we use the equation: EAR = [1 + (APR / m)]m – 1 EAR = [1 + (.1125 / 4)]4 – 1 EAR = [1 + (.1475 / 12)]12 – 1

= .1173, or 11.73% = .1579, or 15.79%

EAR = [1 + (.1725 / 365)]365 – 1 EAR = [1 + (.1325 / 2)]2 – 1

= .1882, or 18.82% = .1369, or 13.69%

n -T oc al cul at eEffec t i v eRat ef orQuar t er l y=(1+i/n ) 1 4 =(1+11. 25% /4)-1 4 =(1+0. 1125/4) -1 4 =(1+0. 02812)-1 4 =(1. 02812) -1 =1. 1173-1

=0. 1173(Conv er tt oaper cent agebymul t i pl y i ngby100t ogetaneffec t i v er at eofr et ur nof 11. 73per cent ) . Hence, Effective Rate for Quarterly = 11.73% n -T oc al cul at eEffec t i v eRat ef orMont hl y=(1+i/n ) 1 12 =(1+14. 75% /12) -1 12 =(1+0. 1475/12) -1 12 =(1+0. 01229) -1 12 =(1. 01229) -1 =1. 1578-1 =0. 1578(Conv er tt oaper cent agebymul t i pl y i ngby100t ogetaneffec t i v er at eofr et ur nper cent ) . Hence, Effective Rate for Monthly = 15.78% - To calculate Effective Rate for Daily = ( 1 + i / n )n -1 365 =(1+17. 25% /365) -1 365 =(1+0. 1725/365) -1 365 =(1+0. 00047) -1 365 =(1. 000047) -1 =1. 1882-1 =0. 1882(Conv er tt oaper cent agebymul t i pl y i ngby100t ogetaneffec t i v er at eofr et ur nper cent ) . Hence, Effective Rate for Daily = 18.82% - To calculate Effective Rate for Semi annual l y= ( 1 + i / n )n -1 2 =(1+13. 25% /2) -1 2 =(1+0. 1325/2) -1 2 =(1+0. 06625) -1 2 =(1. 06625) -1 =1. 1368-1 =0. 1368(Conv er tt oaper cent agebymul t i pl y i ngby100t ogetaneffec t i v er at eofr et ur nper cent ) . Hence, Effective Rate for Semiannually = 13.68% Find the APR, or stated rate, in each of the following cases. (Use 365 days in a year. Enter rounded answers as direct do not use rounded numbers in intermediate calculations. Enter your answers as a percent rounded to 2 decimal (e.g., 32.16).)

Stated Rate (APR) %

Number of Times Compounded Semiannually

Effective Rate (EAR) 16.00%

% % %

Monthly Weekly Daily

12.00 9.00 7.00

Explanation: Here we are given the EAR and need to find the APR. Using the equation for discrete compounding: EAR = [1 + (APR / m)]m – 1 We can now solve for the APR. Doing so, we get: APR = m[(1 + EAR)1/m – 1] EAR = .1600 = [1 + (APR / 2)]2 – 1 EAR = .1200 = [1 + (APR / 12)]12 – 1 EAR = .0900 = [1 + (APR / 52)]52 – 1 EAR = .0700 = [1 + (APR / 365)]365 – 1

APR = 2[(1.1600)1/2 – 1] APR = 12[(1.1200)1/12 – 1] APR = 52[(1.0900)1/52 – 1] APR = 365[(1.0700)1/365 – 1]

T es t1ans wer sBol dar et heans wer s Today, Courtney wants to invest less than $5,000 with the goal of receiving $5,000 back some time in the future. Which one of the following statements is correct? The period of time she has to wait until she reaches her goal is unaffected by the compounding of interest. The lower the rate of interest she earns, the shorter the time she will have to wait to reach her goal. She will have to wait longer if she earns 6 percent compound interest instead of 6 percent simple interest. The length of time she has to wait to reach her goal is directly related to the interest rate she earns. The period of time she has to wait decreases as the amount she invests today increases.

Your grandparents just gave you a gift of $15,000. You are investing this money for 12 years at 6 percent simple interest. How much money will you have at the end of the 12 years? $15,900 $16,000 $17,375 $25,800 $26,938 Future value = $15,000 + ($15,000 × 0.06 × 12) = $25,800 Ben invested $5,000 twenty years ago with an insurance company that has paid him 5 percent simple interest on his funds. Charles invested $5,000 twenty years ago in a fund that has paid him 5 percent interest, compounded annually. How much more interest has Charles earned than Ben over the past 20 years? $0 $2,109.16 $3,266.49 $7,109.16 $8,266.49

= 15.41% = 11.39% = 8.62% = 6.77%

Interest on interest = $5,000 × (1 + 0.05)20 - [$5,000 + ($5,000 × 0.05 × 20)] = $3,266.49 Travis invests $10,000 today into a retirement account. He expects to earn 8 percent, compounded annually, on his money for the next 26 years. After that, he wants to be more conservative, so only expects to earn 5 percent, compounded annually. How much money will he have in his account when he retires 38 years from now, assuming this is the only deposit he makes into the account? $129,411.20 $132,827.88 $134,616.56 $141,919.67 $142,003.12 Future value = $10,000 × (1 + 0.08)26 × (1 + 0.05)(38 - 26) = $132,827.88 Planters Bank pays 5 percent simple interest on its savings account balances, whereas Centura Bank pays 5 percent compounded annually. If you made a $12,000 deposit in each bank, how much more money would you earn from your Centura Bank account at the end of 20 years? $7,155.84 $7,839.57 $7,960.47 $8,400.09 $8,784.14 Future value Planters = $12,000 + ($12,000 × 0.05 × 20) = $24,000 Future value Centura Street = $12,000 × (1 + 0.05)20 = $31,839.57 Difference = $31,839.57 - $24,000 = $7,839.57 You expect to receive $20,000 at graduation one year from now. You plan on investing it at 6 percent until you have $100,000. How long will you wait from now? 27.47 years 27.51 years 27.55 years 28.54 years 28.62 years $100,000 = $20,000 × (1 + 0.06)t; t = 27.62 years Wait time = 1 + 27.62 = 28.62 years Slaughter Industries just signed a sales contract with a new customer. What is this contract worth as of the end of year 4 if the following payments will be received and the firm earns 6 percent on its savings?

$397,425.35 $402,311.19

$466,118.00 $485,271.13 $489,512.14 FV = ($84,000 × 1.063) + ($113,000 × 1.062) + ($125,000 × 1.061) + $130,000 = $489,512.14

Today is your 21st birthday and you just decided to start saving money so you can retire early. Thus, you are going to save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. If you can earn an average of 8 percent on your savings, how old will you be when you retire? 33.39 years old 42.87 years old 54.39 years old 64.71 years old 63.87 years old You want to save $200 a month for the next 24 years and hope to earn an average rate of return of 11 percent. How much more will you have at the end of the 24 years if you invest your money at the beginning of each month rather than the end of each month? $1,611.29 $1,807.70 $2,238.87 $2,569.14 $2,707.27

Your grandparents would like to establish a trust fund that would pay annual payments to you and your heirs of $100,000 a year forever. How much do your parents need to deposit into this trust fund today to achieve their goal if the fund can earn 6 percent interest? $678,342.13

$700,000.00 $1,413,435.76 $1,620,975.32 $1,666,666.67 P = $100,000/0.06 = $1,666,666.67. A recent alumnus of your university gifted money to the school to fund annual scholarships for students in need. The school expects to earn an average rate of return of 5.5 percent and distribute $50,000 annually in scholarships. What was the amount of the gift? $384,090.91 $485,293.05 $615,384.62 $658,929.38 $909,090.91 P = $50,000/0.055 = $909,090.91 Anne plans to save $40 a week for the next five years. She expects to earn 3 percent for the first two years and 5 percent for the last three years. How much will her savings be worth at the end of the five years? $10,215.60 $10,684.29 $10,983.58 $11,014.88 $11,708.15

What is the value today of $3,600 received at the end of each year for seven years if the first payment is paid at the end of year 3 and the discount rate is 12 percent? $11,694.21 $12,484.57 $13,097.52 $15,089.23 $16,429.52

What is the effective annual rate of 14.9 percent compounded quarterly? 14.48 percent 14.67 percent 15.23 percent 15.54 percent 15.75 percent EAR = [1 + (0.149/4)]4 - 1 = 15.75 percent Radio Shack offers credit to its customers and charges interest of 1.2 percent per month. What is the annual percentage rate? 14.40 percent 14.61 percent 15.10 percent 15.31 percent 15.53 percent APR = 1.2 percent × 12 = 14.40 percent The Men's Warehouse charges 1.6 percent interest per month. What rate of interest are its credit customers actually paying? 18.00 percent 18.92 percent 19.26 percent 19.31 percent 20.98 percent EAR = (1 + 0.016)12 - 1 = 20.98 percent You have just purchased a new warehouse. To finance the purchase, you've arranged for a 25-year mortgage for 80 percent of the $1,800,000 purchase price. The monthly payment on this loan will be $10,800. What is the APR? The EAR? 7.67 percent; 7.94 percent 7.67 percent; 8.03 percent 7.72 percent; 7.94 percent 7.72 percent; 8.03 percent 7.75 percent; 8.03 percent Loan amount = 0.80 × $1,800,000 = $1,440,000

EAR = [1 + (0.076687/12)]12 - 1 = 7.94 percent Given an interest rate of 5.85 percent per year, what is the value at year t = 8 of a perpetual stream of $2,500 payments that begin at year t = 25? $16,412.02 $17,208.00 $34,335.96 $36,235.06 $36,711.41 PV t = 24 = $2,500/0.0585 = $42,735.04; PV t = 8 = $42,735.04/(1 + 0.0585)16 = $17,208.00 Given an interest rate of 5.75 percent per year, what is the value at Year 7 of a perpetual stream of $5,000 payments that 20? (Enter rounded answer as directed, but do not use rounded numbers in intermediate calculations. Round you decimal places (e.g., 32.16).) Present value

$

Explanation: The time line is: 0

1

19

20 $5,000

$5

Here we need to find the present value of a perpetuity at a date before the perpetuity begins. We will begin by finding the the perpetuity. Doing so, we find: PV = C / r PV = $5,000 / .0575 PV = $86,956.52 This is the present value of the perpetuity at Year 19, one period before the payments begin. So, using the present value equation to find the value at Year 7, we find: ` PV = FV / (1 + r)t PV = $86,956.52 / (1 + .0575)12 PV = $44,456.74

Able, Baker, and Charlie are the only three stocks in an index. The stocks sell for $39, $315, and $116, respectively. If Ba for-2 stock split, what is the new divisor for the price-weighted index? (Do not round intermediate calculations. Round decimal places.) Divisor

Explanation: d = (39 + 315 / 1.5 + 116) / [(39 + 315 + 116) / 3] = 2.32979

Assume the following information concerning two stocks that make up an index. What is the price-weighted return for the round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign response.) Price per Share

Kirk, Inc. Picard Co.

Shares Outstanding 38,000 34,000

Beginning of Year $46 76

End of Year $51 82

Return

%

Explanation: Beginning index value = (46 + 76) / 2 = 61.00 Ending index value = (51 + 82) / 2 = 66.50 Return = (66.50 − 61.00) / 61.00 = 9.02%

Assume the following information concerning two stocks that make up an index. What is the value-weighted return for the round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign response.) Price per Share

Kirk, Inc. Picard Co.

Shares Outstanding 39,000 28,000

Beginning of Year $ 72 113

Return

End of Year $ 77 122

%

Explanation: Beginning value = [($72 × 39,000) + ($113 × 28,000)] / 2 = $2,986,000 Ending value = [($77 × 39,000) + ($122 × 28,000)] / 2 = $3,209,500 Return = ($3,209,500 − 2,986,000) / $2,986,000 = 7.48% Note you could also solve the problem as: Beginning value = ($72 × 39,000) + ($113 × 28,000) = $5,972,000 Ending value = ($77 × 39,000) + ($122 × 28,000) = $6,419,000 Return = ($6,419,000 − 5,972,000) / $5,972,000 = 7.48%

The interpretation in this case is the percentage increase in the market value of the market. JJ Industries will pay a regular dividend of $3.20 per share for each of the next four years. At the end of the four years, the company will also pay out a $85 per share liquidating dividend, and the company will cease operations. If the discount rate is 9 percent, what is the current value of the company’s stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)

70.58

Xytex Products just paid a dividend of $2.17 per share, and the stock currently sells for $40. If the discount rate is 13 percent, what is the dividend growth rate?

Which one of the following ...