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Financial Management, FINN 3120 Sec 002 Spring 2019 Exam 2 Name___________________________________

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Date: Apr 3rd, 2019 TIME: 2:30 pm to 3:45 pm MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. (25*4 points) 1) The present value of a single future sum A) increases as the number of discount periods increases. B) is generally larger than the future sum. C) depends upon the number of discount periods. D) increases as the discount rate increases. 2) What is the present value of $11,463 to be received 7 years from today? Assume a discount rate of 3.5% compounded annually and round to the nearest $1. A) $5,790 B) $6,508 C) $7,210 D) $9,010 3) Biff deposited $9,000 in a bank account, and 10 years later he closes out the account, which is worth $18,000. What annual rate of interest has he earned over the 10 years? A) 6.45% B) 7.18% C) 9.10% D) 10.0% 4) D ʹAnthony borrowed $50,000 today that he must repay in 15 annual end ‐of ‐year installments of $5,000. What annual interest rate is DʹAnthony paying on his loan? A) 2.222% B) 3.333% C) 5.556% =RATE(15,-5000,50000,0) D) 33.33%

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5) What is the value on 1/1/13 of the following cash flows: Date Cash Received Amount of Cash 1/1/14 $14,000 1/1/15 $20,000 1/1/16 $30,000 1/1/17 $43,000 1/1/18 $57,000 Use a 7% discount rate, and round your answer to the nearest $10. A) $153,270 B) $128,490 =NPV(7%,14000,20000,30000,43000,57000) C) $112,350 D) $107,330

6) Given an interest rate of zero percent, the future value of a lump sum invested today will always: A) remain constant, regardless of the investment time period. B) decrease if the investment time period is shortened. C) decrease if the investment time period is lengthened. D) be equal to $0. 7) All else held constant, the present value of an annuity will increase if you: A) increase the annuity's future value. B) increase the payment amount. C) increase the time period. D) decrease the discount rate. 8) Which one of these is a perpetuity? (A/C) both correct A) Trust income of $1,200 a year forever B) Retirement pay of $2,200 a month for 20 years C) Lottery winnings of $1,000 a month for life D) Car payment of $260 a month for 60 months

9) Round House Furniture offers credit to its customers at a rate of 1.15 percent per month. What is the effective annual rate of this credit offer? A) 14.13 percent B) 13.80 percent EAR=(1+quated rate)^n-1 = (1+1.15%)^12-1 C) 14.41 percent D) 14.71 percent 10) Today, you are borrowing $18,200 to purchase a car. What will be your monthly payment if the loan is for three years at 7.0 percent interest? A) $608.40 B) $621.50 n=3*12 = 36 , r=7%/12 , PV = 18200 C) $561.96 D) $580.24 2

11) You have just won the lottery! You can either receive $183,555 per year for 20 years or $2,300,000 as a lump sum payment today. What is the interest rate on the annuity option? A) 4.94 percent B) 3.98 percent n=20, r=?, pmt=183555, pv=2,300,000 C) 5.50 percent =rate(20,183555,-2300000,0) D) 4.75 percent 12) A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: A) will be less than 12.9 percent. EAR = (1+quated rate)^n-1 =(1+12.9%/12)^12-1 B) can either be less than or equal to 12.9 percent. C) is 12.9 percent. D) will be greater than 12.9 percent. 13) PBJ Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of 5.5%, with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on January 1, 2021. What is the yield to maturity for a PBJ Corporation bond on January 1, 2012 if the market price of the bond on that date is $950? A) 5.50% n=6*2=12 , PV=950, PMT=5.5%*1000/2 , YMT=? , FV=1000 B) 6.23% C) 8.43% =rate(12, = 3.260*2 = YMT = 6.23% D) 10.50% 14) Two bonds are identical except for their maturity. The bonds have a coupon rate that is greater than their yield to maturity. Which of the following is true when comparing the two bonds? A) The longer maturity bond has a greater premium (is priced farther above par). B) The longer maturity bond has a smaller premium (is priced above par but closer to par). C) The longer maturity bond has a greater discount (is priced farther below par). D) The longer maturity bond has a smaller discount (is priced below par but closer to par). 15) Which of the following statements is true regarding convertible bonds? A) The holder has the right to sell these bonds back to the issuer if the bonds don't perform well. B) The holder can convert these bonds into an equal number of new bonds if they choose to do so. C) These bonds are convertible into common stock of the issuing firm at a prespecified price. D) These bonds have a variable interest rate. 16) Both Investor A and Investor B are considering the purchase of Corporation FJR bonds. The bonds are selling at a price of $1,100 each. Investor A decides to buy the bonds and Investor B does not buy the bonds. A) Investor A must have a required return lower than the required return for Investor B. B) The yield to maturity for Investor A must be higher than the yield to maturity for Investor B. C) The yield to maturity for Investor A must be less than the yield to maturity for Investor B. D) The yield to maturity for this bond must be higher than the coupon rate.

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17) A bond issued by Liberty, Inc. 10 years ago has a coupon rate of 8% and a face value of $1,000. The bond will mature in 15 years. What is the value to an investor with a required return of 12.5% at today? A) $800 B) $750.86 N=15, R=12.5%, PMT=8%*1000, FV=1000 =PV(12.5%,15,8%*1000,1000) C) $658.94 D) $701.52

18) Nunavet Ocean Cruises sold an issue of 12-year $1,000 par bonds to build new ships. The bonds pay 4.85% interest, semiannually. Today's required rate of return is 9.7%. How much should these bonds sell for today? Round off to the nearest $1. A) $771.86 N=24, R=4.85% , PMT= (4.85%*1000)/2 , FV=1000 B) $732.93 =PV(A9,24,A9*1000/2,1000) C) $660.45 D) $598.33 19) Which of the following statements concerning the required rate of return on stocks is true? A) The higher an investor's required rate of return, the higher the value of the stock. B) If risk is reduced, the required return will decrease because more investors are risk-averse. C) The required return on preferred stock is generally higher than the required return on common stock. D) The higher the risk, the higher the required return, other things being equal.

20) A small company struggling to reach profitability just announced a major new government contract that will validate its technology and generate revenue for the next several years. The announcement of the contract will A) cause the stock price to increase because rcs (the required return) is likely to increase. B) cause the stock price to decrease because the government usually pays below market price for the goods and services it purchases. C) cause the stock price to increase because rcs (the required return) is likely to decrease and g (the growth rate in future dividends) is likely to increase. D) have no effect on the stock price because the company has not yet paid any dividends.

21) Shasta Co. just paid a dividend of $1.65 (D0) on its common stock. This company's dividends are expected to grow at a constant rate of 3% indefinitely. If the required rate of return on this stock is 11%, compute the current value per share of Shasta stock. A) $20.63 P0= D0(1+3%) / (.11-.03) = $21.24 B) $21.24 C) $15.00 D) $55.00

22) How is preferred stock similar to common stock? A) Preferred dividend payments usually have unlimited growth potential. B) Investors cannot sue a corporation for the non-payment of dividends. C) Both preferred and common stockholders have voting control of a firm. 4

D) Preferred stock dividends and common stock dividends are fixed.

23) Dry Dock Marina is expected to pay an annual dividend of $1.58 next year. The stock is selling for $18.53 a share and has a total return of 9.48 percent. What is the dividend growth rate? A) .82 percent 18.53 = 1.58/(0.0948-G) P0=D1/R-G B) 1.03 percent 1.7566 – 18.53G = 1.58 C) 1.28 percent 0.1766 = 18.53G D) .95 percent G=.95% 24) River City Recycling just paid its annual dividend of $1.15 per share. The required return is 12.3 percent and the dividend growth rate is 0.75 percent. What is the expected value of this stock five years from now? A) $10.16 P5 = D6/R-G = 1.15*(1+0.75%)^6 / (12.3%-0.75%) B) $10.41 C) $12.03 D) $8.42 25) This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12 percent rate of return and the dividend increases at 3.5 percent annually. What will your capital gain be in dollars on this stock if you sell it three years from now? A) $2.43 B) $2.51 C) $2.63 D) $2.87 P3=D4/R-G = 1.9*(1+3.5%)^3 / (12%-3.5%) = $24.78 P0 = D1/R-G = 1.9/(12%-3.5%) = $22.35 Gain = $24.78 - $22.35 = $2.43

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