Fin 120

Question 1

What correctly defines a time value of money relationship

Answer 1

Time and present value are inversely related, all else held constant

Question 2

Project X has cash flows of $8,500, $8,000, $7,500, & $7,000 for years 1 to 4, respectively. Project Y has cash flows of $7,000, $7,500, $8,000, and $8,500 for years 1 to 4, respectively. Which one of the following statements is true concerning these two projects given a positive discount rate?

Answer 2

Project X has both a higher present and a higher Future value than project Y

Question 3

You are comparing two investment options that each pay 6 percent interest compounded annually. Both options will provide you with $12,000 of income.
Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Answer 3

Option B has a higher present value at Time 0

Question 4

An Ordinary annuity is best defined as:

Answer 4

Equal payments paid at the end of regular intervals over a stated time period

Question 5

A perpetuity is defined as:

Answer 5

Unending equal payments paid at equal time intervals

Question 6

A Canadian consol is best categorized as

Answer 6

Perpetuity

Question 7

The interest rate that commonly quoted by a lender is referred to as

Answer 7

The annual percentage rate

Question 8

The actual interest rate on a loan that is compounded monthly but expressed as an annual rate is referred to as the ___ rate

Answer 8

Effective annual

Question 9

Your credit card charged you .85 percent interest per month. This rate when multiplied by 12 is called ___ rate

Answer 9

Annual percentage

Question 10

Which one of the following compounding periods will yield the lowest effective annual rate given a stated future value at Year 5 and an annual percentage rate of 10 percent?

Answer 10

Annual

Question 11

A friend agreed to lend you money today. You must repay your friend by making payments of $30 per month for the next six months. The first payment must be paid today. In addition, you must pay 2 percent interest per month. How much total interest will you end up paying your friend?

Answer 11

PVADue = $30{[1 - (1/1.026) ]/.02(1.02) }
PVADue = $171.40
Total payments = $30(6)
Total payments = $180
Total interest = $180 - 171.40
Total interest = $8.60

Question 12

Western Bank offers you a $12,000, 6-year term loan at 7 percent annual interest. What is the amount of your annual loan payment?

Answer 12

$12,000 = C{[1 - (1/1.07^6)1/.07}
C = $2,517.55

Question 13

A new sports coupe costs $41,750 and the finance office has quoted you an APR of 7.7 compounded monthly for 36 months. What is the EAR?

Answer 13

EAR = (1 + .077/12)^12 - 1
EAR = . 0798, or 7.98%

Question 14

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 23 years to maturity, and a coupon rate of 5.8 percent paid annually. If the yield to maturity is 4.7 percent, what is the current price of the bond in euros?

Answer 14

=Par value*PRICE(settlement date, Maturity date, coupon rate, yield to maturity, redemption value (% of par), coupons per year)/100

Question 15

Ana just received the semiannual payment of $35 on a bond she owns. This is called the___payment

Answer 15

Coupon

Question 16

Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the:

Answer 16

Face Value

Question 17

A bond’s principal is repaid on the____date

Answer 17

Maturity

Question 18

A $1,000 par value corporate bond that pays $45 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $989.42?

Answer 18

The current yield exceeds the coupon rate

Question 19

Which one of the following applies to a premium bond?

Answer 19

Coupon rate > current yield > yield to maturity

Question 20

Which one of the following relationships applies to a par value bond?

Answer 20

Coupon rate = Current yield = Yield to maturity

Question 21

In response to a change in the market rate of interest, the price sensitivity of a bond increases as the:

Answer 21

Coupon rate decreases and the time to maturity increases

Question 22

As a bonds time to maturity increases, the bond’s sensitivity to interest rate risk

Answer 22

Increases at a decreasing rate

Question 23

As a bonds time to maturity increases, the bond’s sensitivity to interest rate risk

Answer 23

Increases at a decreasing rate

Question 24

Which one of these statements is correct

Answer 24

Bonds often provide tax benefits to issuers

Question 25

Callable bonds generally

Answer 25

Have a sinking fund provision

Question 26

Protective covenants

Answer 26

Are primarily designed to protect bond holders

Question 27

Darriji Systems has 10-year bonds outstanding. The interest payments on these bonds are sent directly to each of the individual bondholders. These direct payments are a clear indication that the bonds can accurately be defined as being issued:

Answer 27

In registered form

Question 28

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate?

Answer 28

Constant growth model

Question 29

The annual dividend yield is computed by dividing______annual dividend by the current stock price

Answer 29

Next year’s

Question 30

Which one of the following is the rate at which a stock’s price is expected to appreciate

Answer 30

Capital gains yield

Question 31

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is:

Answer 31

Priced the same as a $1 perpetuity

Question 32

A forward PE is based on:

Answer 32

Estimated future earnings

Question 33

A decree in which of the following will increase the current value of a stock according to the dividend growth model

Answer 33

Discount rate

Question 34

The dividend growth model

Answer 34

Requires the growth rate to be less than the required return

Question 35

Which one of the following represents the capital gains yield as used in the dividend growth model

Answer 35

g

Question 36

Reyes has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?

Answer 36

The stock has a negative capital gains yields

Question 37

The Blue Marlin is owned by a group of five shareholders who all vote independently and who all want personal control over the firm. What is the minimum percentage of the outstanding Shares one of these shareholders must own if he or she is to gain personal control over this firm given that the firm uses straight voting?

Answer 37

50% plus one vote

Question 38

Which one of the following types of stock is defined by the fact that it receives no preferential treatment in respect to either dividends or bankruptcy proceedings?

Answer 38

Common

Question 39

A project has a net present value of zero. Given this info:

Answer 39

The project’s cash inflows equal its cash outflows in current dollar terms

Question 40

Which one of the following will decrease the net present value of a project

Answer 40

Increasing the project’s initial cost at time 0

Question 41

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted

Answer 41

Net present value

Question 42

If a project has a net present value equal to zero, then:

Answer 42

The project earns a return exactly equal to the discount rate

Question 43

The net present value of a project will increase if:

Answer 43

The after tax salvage value of the fixed assets increases

Question 44

Net present value

Answer 44

Is the best method of analyzing mutually exclusive projects

Question 45

The length of time a firm must wait to recoup the money it has invested in a project is called the:

Answer 45

Payback period

Question 46

Why is payback often used as the sole method of analyzing a proposed small project

Answer 46

The benefits of payback analysis usually outweigh the costs of the analysis

Question 47

Which of the following are advantages of the payback method of project analysis

Answer 47

Liquidity bias; ease of use

Question 48

A project’s average net income divided by its average book value is referred to as the project’s average

Answer 48

Accounting return

Question 49

Which one of the following methods of analysis provides the best information on the benefits to be received from a project per dollar invested

Answer 49

Profitability index

Question 50

You are considering two mutually exclusive projects. Project A has cash flows of -$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of -$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?

Answer 50

Accept project A and reject Project B Paybacka = 2 + ($72,000 - 21,400 - 22,900) /$56,300 Payback A = 2.49 Payback = 2.52 years Payback = 2 + ($81,000 - 20,100 - 22,200) /$74,800