* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Download Unit 1:
Survey
Document related concepts
Pensions crisis wikipedia , lookup
Securitization wikipedia , lookup
Greeks (finance) wikipedia , lookup
Modified Dietz method wikipedia , lookup
Beta (finance) wikipedia , lookup
Interest rate swap wikipedia , lookup
Financialization wikipedia , lookup
Financial economics wikipedia , lookup
Public finance wikipedia , lookup
Short (finance) wikipedia , lookup
Business valuation wikipedia , lookup
Stock trader wikipedia , lookup
Interest rate ceiling wikipedia , lookup
Lattice model (finance) wikipedia , lookup
Present value wikipedia , lookup
Transcript
Unit 1: 1. Question: Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT? a. Cheers’ shareholders (the ex-partners) will now be Your CORRECT exposed to less liability. Answer: b. Cheers will now be subject to fewer regulations. c. Assuming Cheers is profitable, of its income will be subject to federal income taxes. d. Cheers’ investors will be exposed to less liability, but they will find it more difficult to transfer their ownership. e. Cheers will find it more difficult to raise additional capital. Points4 of 4 Received: 2. Question:Which of the following statements is CORRECT? a. Corporations generally face fewer regulations than sole Your proprietor-ships. Answer: b. Corporate shareholders are exposed to unlimited liability. c. It is usually easier to transfer ownership in a corporation than it is to transfer ownership in a sole proprietorship. d. Corporate shareholders are exposed to unlimited liability, but this factor is offset by the tax advantages of incorporation. e. There is a tax disadvantage to incorporation, and there is no way any corporation can escape this disadvantage, even if it is very small. CORRECT Points4 of 4 Received: 3. Question:The primary operating goal of a publicly-owned firm interested in serving its stockholders should be to_____________. Your Answer: a. Maximize its expected total corporate income. b. Maximize its expected EPS. c. Minimize the chances of losses. d. Maximize the stock price per share over the long run, which is the stock’s intrinsic value. CORRECT e. Maximize the stock price on a specific target date. Points4 of 4 Received: 4. Question:Which of the following actions would tend to reduce conflicts of interest between stockholders and bondholders? Your a. Including restrictive covenants in the Answer: company’s bond indenture (which is the contract CORRECT between the company and its bondholders). b. Compensating managers with more stock options and less cash income. c. The passage of laws that make it harder for hostile takeovers to succeed. d. A government regulation that banned the use of convertible bonds. e. Have the firm use only long-term debt, e.g., debt that matures in 30 years or more rather than in less than one year. Points4 of 4 Received: 5. Question:Which of the following mechanisms would be most likely to help motivate managers to act in the best interest of shareholders? Your a. Decrease the use of restrictive covenants in bond Answer: agreements. b. Take actions that reduce the possibility of a hostile takeover. c. Have the board of directors allow managers greater freedom of action. d. Increase the proportion of executive compensation that comes from stock options and CORRECT reduce the proportion that is paid as cash salaries. e. Eliminate a requirement that members of the board of directors have a substantial investment in the firm’s stock. Points4 of 4 Received: Unit 2: 1. Question: The U.S. Treasury offers to sell you a bond for $613.81. No payments will be made until the bond matures 10 years from now, at which time it will be redeemed for $1,000. What interest rate would you earn if you bought this bond at the offer price? Your 5.91% Answer: 6.71% 7.10% 5.59% 5.00% CORRECT InstructorInterest rate on a simple lump sum investment n Explanation:FV = PV (1 + i) 10 $1,000 = $613.81 (1 + i) 1.6292 = (1+i)10 ; take the 1/10th root of both sides: 1.62920.10 = 1 + i 1.0500 = 1 + i .0500 = i or i = 5% On a financial calculator: N 10; PV -613.81; PMT 0; FV 1,000; I/YR ?? I/YR = 5.00% 2. Points4 of 4 Received: Question:You want to buy a condo 5 years from now, and you plan to save $3,000 per year, beginning one year from today. You will deposit the money in an account that pays 6% interest. How much will you have just after you make the 5th deposit, 5 years from now? Your Answer: $14,764.40 $13,431.83 $16,911.28 CORRECT $17,843.15 $15,119.76 InstructorFV of an ordinary annuity n Explanation:FVA = PMT * [(1+i) - 1] /5 i FVA = $3,000 * [(1 + .06) – 1] / .06 FVA = $3,000 * [1.3382 – 1] / .06 FVA = $3,000 * .3382/.06 FVA = $3,000 * 5.6371 = $16,911.28 On a financial calculator: N 5; I/YR 6; PV 0; PMT -3,000; FV ??; FV = $16,911.28 3. Points4 of 4 Received: Question:Your father is about to retire, and he wants to buy an annuity that will provide him with $50,000 of income per year for 20 years, beginning a year from today. The going rate on such annuities is 6%. How much would it cost him to buy such an annuity today? Your Answer: $488,349.15 $416,110.34 $517,513.68 $615,976.84 $573,496.06 CORRECT InstructorPV of an ordinary annuity n Explanation:PVA = PMT * [(1 – {1 / (1+i) }) / i20] PVA = 50,000 * [(1 – {1 / (1+.06) } / .06] PVA = 50,000 * [(1 – {1 / 3.271}) / .06] PVA = 50,000 * [(1 - .3118) / .06] PVA = 50,000 * [.6882 / .06] = 50,000 * 11.4699 = $573,496.06 On a calculator, you would enter: N 20; I/YR 6.00; PMT -50,000; FV 0; PV ??; PV = $573.496.06 4. Points4 of 4 Received: Question:Suppose you inherited $200,000 and invested it at 6% per year. How much could you withdraw at the end of each of the next 15 years? Your Answer: $24,764.40 $23,431.83 $20,592.55 CORRECT $17,843.15 $15,119.76 InstructorPayments on an ordinary annuity n i] Explanation:PVA = PMT * [(1 – {1 / (1+i) }) / 15 200,000 = PMT * [(1 – {1 / 1.06 }) / .06] 200,000 = PMT * [(1 – .4173) / .06] 200,000 = PMT * 9.7122 PMT = 200,000 / 9.7122 = $20,592. On a calculator, you would enter: N 15; I/YR 6.00; PV -200,000; FV 0: PMT ??; PMT = $20,592.55 5. Points4 of 4 Received: Question:An investment promises the following cash flow stream: $1,000 at Time 0; $2,000 at the end of Year 1 (or at T=1); $3,000 at the end of Year 2; and $5,000 at the end of Year 3. At a discount rate of 5%, what is the present value of the cash flow stream? Your Answer: $9,324.89 $9,591.45 $9,945.04 CORRECT $9,011.87 $9,854.13 InstructorPV of an uneven cash flow stream flow, then add up the PVs: Explanation:You need to calculate the PV of each cash 2 3 PV = 1,000 + 2,000 / 1.05 + 3,000 / 1.05 + 5,000 / 1.05 PV = 1,000 + 1,904.76 + 2,721.09 + 4,319.19 = 9,945.04 6. Points4 of 4 Received: Question: What’s the future value of $2,000 after 3 years if the appropriate interest rate is 8%, compounded monthly? Your Answer: $2,854.13 $2,491.45 $2,324.89 $2,011.87 $2,540.47 CORRECT InstructorFV of a lump sum, monthly n*t Explanation:FV = PV * (1 + i/t) 3*12 FV = 2,000 * (1 + .08/12) FV = 2,000 * (1.00667)36 FV = 2,000 * 1.2702 = $2,540.47 On a calculator, enter: N 36; PMT 0; I/YR 8/12 = .67; PV 2,000; FV ??; FV = $2,540.47 Points4 of 4 7. Received: Question:Suppose you borrowed $25,000 at a rate of 8% and must repay it in 4 equal installments at the end of each of the next 4 years. How large would your payments be? Your Answer: $7,691.45 $7,548.02 CORRECT $7,324.89 $7,011.87 $7,854.13 InstructorLoan amortization: payment n Explanation:PVA = PMT * [(1 – {1 / (1+i) })4/ i ] 25,000 = PMT * [(1 – {1 / 1.08 }) / .08] 25,000 = PMT * [(1 – .7350) / .08] 25,000 = PMT * 3.3121 PMT = $7,548.02 On a calculator, enter: I/YR 8.00; N 4; PV 25,000; PMT ??; PMT = $7,548.02 8. Points4 of 4 Received: Question:You are buying your first house for $220,000, and are paying $30,000 as a down payment. You have arranged to finance the remaining $190,000 30-year mortgage with a 7% nominal interest rate and monthly payments. What are the equal monthly payments you must make? Your Answer: $1,513 $1,110 $1,264 CORRECT $1,976 $1,349 InstructorMortgage payments n Explanation:PVA = PMT * [(1 – {1 / (1+i) }) / i ] 190,000 = PMT * [(1 – {1 / (1 + .07/12)30*12}) / (.07 / 12)] 190,000 = PMT * [(1 – {1 / 1.005833360} / .005833] 190,000 = PMT * 150.3162 PMT = $1,264.00 On a calculator, enter: N 360; I 7/12 = .5833; PV 190,000; PMT ??; PMT = -$1,264.00 9. Points4 of 4 Received: Question:Your sister turned 30 today, and she is planning to save $3,000 per year for retirement, with the first deposit to be made one year from today. She will invest in a mutual fund, which she expects to provide a return of 10% per year. She plans to retire 35 years from today, when she turns 65, and she expects to live for 30 years after retirement, to age 95. Under these assumptions, how much can she spend in each year after she retires? Her first withdrawal will be made at the end of her first retirement year. Your Answer: $78,976 $91,110 $88,513 $86,250 CORRECT $83,049 InstructorRetirement planning Explanation:First step is to find the amount that you will have saved by age 65. This is done as the FVA problem: FVA = PMT * [(1+i)n - 1] / i FVA = 3,000 * [ 1.1035 – 1] / .10 FVA = 3,000 * 27.1024 / .10 FVA = 3,000 * 271.0244 = $813,073.11 Now, using this as your PV of an annuity, calculate the PMTs that you will receive: PVA = PMT * [(1 – {1 / (1+i)n}) / i ] 813,073.11 = PMT * [(1 – {1 / 1.1030}) / .10] 813,073.11 = PMT * [.9427 / .10 ] 813,073.11 = PMT * 9.4269 PMT = $86,250.18 On a calculator, first: N 35; I/YR 10; PV 0; PMT 3,000; FV ??; FV $813,073.11 then, N 30; I/YR 10; PV 813,073.11; FV 0; PMT ??; PMT = $86,250.18 10. Points4 of 4 Received: Question:A real estate investment has the following expected cash flows: Year Cash Flows 1 $10,000 2 25,000 3 50,000 4 35,000 If the discount rate is 8%, what is the investment’s present value? Your Answer: $103,799 $ 96,110 CORRECT $ 95,353 $120,000 $ 77,592 InstructorPV of an uneven CF Explanation:stream NPV = $10,000/1.08 + $25,000/(1.08)2 + $50,000/(1.08)3 + $35,000/(1.08)4 = $9,259.26 + $21,433.47 + $39,691.61 + $25,726.04 = $96,110.38 » $96,110. Financial calculator solution (using the cash flow register): Inputs: CF0= 0; CF1 = 10000; CF2 = 25000; CF3 = 50000; CF4 = 35000; I/YR = 8. Output: NPV = $96,110.39 » $96,110. Unit 3: 1. Question: 1. Explain the effect of each of the following transactions on the balance sheet of a firm: a. It issues $2 million of new common stock b. It buys a new plant and equipment at a cost of $3 million. c. It reports a large loss for the year. d. It increases the dividends paid on its common stock. Your A.Increases the amount of cash for the comany and the stockholder Answer: equity is increased. B. Decrease cash and increase plant & equipment and the property since a new plant comes with property by $3 Million Dollars. C. This would mean stockholder equity would decrease. D. If dividends are paid out on its common stock the stockholder equity would decrease and it would aslo decreast the amount of cash. Instructor The first transaction increases the amount of cash the company has and also Explanation: increases stockholder's equity. The second transaction would decrease cash but increase Property, Plant & Equipment by the same amount. A large loss would decrease stockholder's equity. Finally, increased dividends would decrease cash and decrease stockholder's equity. 2. Points 4 of 4 Received: Question: Superior Medical System's 2005 balance sheet showed total common equity of $2,050,000. The company had 100,000 shares of stock outstanding which sold at a price of $57.25 per share. By how much did the firm's market value and book value per share differ? Your Answer: $36.75 CORRECT $38.25 $39.50 $40.25 $51.00 InstructorBalance sheet: market value vs. book value 100,000 Explanation:Shares Outstanding Price per share $57.25 Total common equity $2,050,000 Book value per share $20.50 Difference between book and market value $36.75 3. Points4 of 4 Received: Question:Madison Metals recently reported $9,000 of sales, $6,000 of operating costs other than depreciation, and $1,500 of depreciation. The company had no amortization charges and no non-operating income. It had issued $4,000 of bonds that carry a 7% interest rate, and its federal-plus-state income tax rate was 40%. What was the firm's taxable, or pre-tax, income? Your Answer: $1,180 $1,220 CORRECT $1,260 $1,300 $1,340 Instructor Sales $9,000 Explanation: Operating costs excl depr’n $6,000 Depreciation $1,500 Operating Income (EBIT) $1,500 Interest expense ($4,000 * 7%) $280 Taxable Income $1,220 Points4 of 4 Received: 4. Question:Fine Breads Inc. paid out $26,000 common dividends during 2005, and it ended the year with $150,000 of retained earnings. The prior year’s retained earnings were $145,000. What was the firm's 2005 net income? Your Answer: $30,000 $31,000 CORRECT $32,000 $33,000 $34,000 InstructorCurrent RE = Prior RE + NI – dividends paid Explanation:$150,000 = $145,000 + NI - $26,000 $5,000 = NI - $26,000 NI = $31,000 Points4 of 4 Received: 5. Question:Over the past year, M.D. Ryngaert & Co. had an increase in its current ratio and a decline in its total assets turnover ratio. However, the company's sales, cash and equivalents, DSO and its fixed assets turnover ratio have remained constant. What balance sheet accounts must have changed to produce the indicated changes? Your Answer:The first thing is that this company has a decrease in asset turnover and a increase in its current ratio, it appears the company assets has increased. Another reflection of change would be that the cash, sales,and equivanltes, DSO and fixed assets turnover ration have remained the constant it must mean that the company has more inventory. InstructorGiven that sales have not changed, a decrease in the total assets turnover Explanation:means that the company’s assets have increased. Also, the fact that the fixed assets turnover ratio remained constant implies that the company increased its current assets. Since the company’s current ratio increased, and yet, its cash and equivalents and DSO are unchanged means that the company has increased its inventories. Points4 of 4 Received: 6. Question:Raleigh Corp's total common equity at the end of last year was $300,000 and its net income after taxes was $55,000. What was its ROE? Your Answer: 18.33% CORRECT 18.67% 19.00% 19.33% 19.67% InstructorROE = NI /Common equity Explanation:ROE = $55,000 / $300,000 = .1833 or 18.33% Points4 of 4 Received: 7. Question:Rutland Corp's stock price at the end of last year was $30.25 and its earnings per share for the year were $2.45. What was its P/E ratio? Your Answer: 11.65 12.00 12.35 CORRECT 12.70 13.05 InstructorP/E = current stock price / earnings per share = $30.25 / $2.45 Explanation:P/E = 12.35 Points4 of 4 Received: 8. Question:Cooper Inc's latest EPS was $4.00, its book value per share was $20.00, it had 200,000 shares outstanding, and its debt ratio was 40%. How much debt was outstanding? Your Answer: $2,333,333 $2,666,667 CORRECT $3,000,000 $3,333,333 $3,666,667 InstructorFirst, we need to calculate the total equity: Explanation:Book value per share X number of shares = total equity $20 * 200,000 = $4,000,000 Next we need to calculate the total assets. We know the debt ratio is 40%. This tells us the equity ratio is 60%. D + E = TA $4,000,000 / .60 = $6,666,667 Now we can calculate the total debt outstanding: $6,666,667 - $4,000,000 = $2,666,667 Points4 of 4 Received: 9. Question:Burger Corp has $500,000 of assets, and it uses only common equity capital (zero debt). Its sales for the last year were $600,000, and its net income after taxes was $25,000. Stockholders recently voted in a new management team that has promised to lower costs and get the return on equity up to 15%. What profit margin would Burger need in order to achieve the 15% ROE, holding everything else constant? Your Answer: 8.00% 9.50% 11.00% 12.50% CORRECT 14.00% InstructorWe need to calculate what income level is needed to provide a 15% Explanation:ROE. Since there is zero debt, and D + E = TA, we know that E = TA so, equity = $500,000 ROE = net income / stockholders equity .15 = NI / $500,000 NI = $75,000 This represents a profit margin of: $75,000 / $600,000 = .1250 or 12.50% Points4 of 4 Received: 10. Question:Last year Charter Corp. had sales of $300,000, operating costs of $265,000, and year-end assets of $200,000. The debt-to-total-assets ratio was 25%, the interest rate on the debt was 10%, and the firm's tax rate was 35%. The new CFO wants to see how the ROE would have been affected if the firm had used a 60% debt ratio. Assume that sales and total assets would not be affected, and that the interest rate and tax rate would both remain constant. By how much would the ROE change in response to the change in the capital structure? Your Answer: 5.01% 5.20% 5.35% 5.57% 5.69% CORRECT Instructor Explanation: Interest rate Tax rates Assets Debt ratio Total debt Total equity Sales Operating Costs EBIT Interest Paid (Total debt X OLD NEW 10% 10% 35% 35% $200,000 $200,000 25% 60% $50,000 $120,000 $150,000 $80,000 $300,000 $300,000 $265,000 $35,000 $5,000 $265,000 $35,000 $12,000 Interest rate) Taxable Income Taxes (taxable income X tax rate) Net Income $30,000 $10,500 $23,000 $8,050 $19,500 $14,950 ROE old: $19,500 / $150,000 = .1300 or 13.00% ROE new: $14,950 / $80,000 = .1869 or 18.69% Difference in ROE = 18.69% - 13.00% = 5.69% Points4 of 4 Received: Unit 4: 1. Question: Money markets are markets for Your Foreign currencies. Answer: Consumer automobile loans. ( ) Corporate stocks. Long-term bonds. Short-term debt securities such a Treasury CORRECT bills. InstructorSee page 145 of the text. Explanation: Points4 of 4 Received: 2. Question:Which of the following statements is CORRECT? Your The most important difference between spot Answer: markets versus futures markets is the maturity of the instruments that are traded. Spot market transactions involve securities that have maturities of less than one year whereas futures markets transactions involve securities with maturities greater than one year. Capital market transactions involve only preferred stock or common stock. If General Electric were to issue new stock this year, it would be considered a secondary market transaction since the company already has stock outstanding. Both Nasdaq dealers and “specialists” on the CORRECT NYSE hold inventories of stocks. Money market transactions do not involve securities denominated in currencies other than the U.S. dollar. InstructorCapital market transactions involve any long-term debt or equity Explanation:instrument. If a company sells stock to directly raise money for the firm, this is a primary market transaction, even if the company already has stock outstanding. Money market transactions can be denominated in any currency. They are merely very short-term, highly liquid securities. Therefore, the only correct answer is “d” – both Nasdaq dealers and NYSE specialists hold inventories of stocks. Points4 of 4 Received: 3. Question: If the stock market is semistrong-form efficient, which of the following statements would be CORRECT? Your The required returns on all stocks are the same, Answer: and the required returns on stocks are higher than the required returns on bonds. The required returns on stocks equal the required returns on bonds. A trading strategy in which you buy stocks that have recently fallen in price is likely to provide you with a return that exceeds the return on the overall stock market. If you have insider information about a particular stock, you cannot expect to earn an above average return on this information because it is already incorporated into the current stock price. Even if a market is semistrong-form efficient, an investor could still earn a better return than CORRECT the market return if he or she had inside information. InstructorThe semi-strong form efficient market only addresses publicly available Explanation:information. If an investor has inside knowledge, this would lead to an advantage and the ability to earn superior returns. Therefore, answer “e” is the correct answer. Points4 of 4 Received: 4. Question:Suppose 1-year T-bills currently yield 5.00% and the future inflation rate is expected to be constant at 3.10% per year. What is the real risk-free rate of return, r*? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. Your 1.90% CORRECT Answer: 2.00% 2.10% 2.20% 2.30% InstructorrT-bill = r* + IP Explanation:5.00% = r* + 3.10% 5. r* = 1.90% Points4 of 4 Received: Question:Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.25%, and a maturity premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the years to maturity. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is NOT valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average. Your 5.95% Answer: 6.05% 6.15% 6.25% CORRECT 6.35% InstructorT-note yield = r* + IP + MRP Explanation:T-note yield = 3.50% + 2.25% + .10%(5) = 6.25% Points4 of 4 Received: 6. Question:Which of the following would be most likely to lead to a higher level of interest rates in the economy? Your Households start saving a larger percentage of Answer: their income. Corporations step up their expansion plans and CORRECT thus increase their demand for capital. The level of inflation begins to decline. The economy moves from a boom to a recession. The Federal Reserve decides to try to stimulate the economy. InstructorIf households save more, this will increase savings leading to lower Explanation:interest rates. If inflation declines, this will also lead to lower interest rates to stimulate spending. If the economy moves from a boom to a recession, the demand for funds would decrease, leading to less demand for credit and lower interest rates. If the Federal Reserve is trying to stimulate the economy, they will lower interest rates. If corporations increase expansion plans, this will lead to an increased demand for funds and, thus higher interest rates as businesses compete for the limited funds. Points4 of 4 Received: 7. Question:Assume that interest rates on 20-year Treasury and corporate bonds are as follows: T-bond = 7.72% A = 9.64% AAA = 8.72% BBB = 10.18% The differences in rates among these issues were caused primarily by Your Answer: Tax effects. Default risk differences. CORRECT Maturity risk differences. Inflation differences. Real risk-free rate differences InstructorWhile there may be some interest rate differential due to the tax effects of Explanation:the Treasury bond versus the corporate bond, the only thing that explains the differences across the corporate bonds as well is the default risk. Bonds with lower credit ratings, moving from AAA-rated to BBB-rated, indicate the default risk of the company. Therefore, answer “b” is correct. Points4 of 4 Received: 8. Question:Describe the three different forms of market efficiency. YourThree different forms or market efficiency: (1) weak form efficiency (2) Answer:semi strong form efficiency (3) strong from efficiency InstructorThe three forms, or levels, of market efficiency are: weak-form Explanation:efficiency, semistrong-form efficiency, and strong-form efficiency. The weak form of the EMH states that all information contained in past stock price movements is fully reflected in current market prices. The semistrong form of the EMH states that current market prices reflect all publicly available information. The strong form of the EMH states that current market prices reflect all pertinent information, whether publicly available or privately held. Points4 of 4 Received: 9. Question: Which fluctuate more, long-term or short-term interest rates? Why? YourShort-term interest rates fluctuate more than long-term interest rates. The Answer:Fed Reserve has an affect on the short-term side. These rates are are only set for a short term and for specific purposes unlike the long-term rates which more often are fixed for a long period of time between 20-30 years. The long term does fixed rates does not change but the adjustable rates does. InstructorShort-term interest rates are more volatile because (1) the Fed operates Explanation:mainly in the short-term sector, hence Federal Reserve intervention has its major effect here, and (2) long-term interest rates reflect the average expected inflation rate over the next 20 to 30 years, and this average does not change as radically as year-to-year expectations. Points4 of 4 Received: 10. Question:Suppose interest rates on Treasury bonds rose from 5 to 9 percent as a result of higher interest rates in Europe . What effect would this have on the price of an average company's common stock? YourTreasury bonds is an alternative investment to common stock along with Answer:other types of bonds. If the rates rose from 5 to 9 percent investors could sell stock and switch to an alternative. Then if they pull away from treasury bonds, this would cause stock prices to fall. So, treasury bonds would become a risky investment. InstructorTreasury bonds, along with all other bonds, are available to investors as Explanation:an alternative investment to common stocks. An increase in the return on Treasury bonds would increase the appeal of these bonds relative to common stocks, and some investors would sell their stocks to buy Tbonds. This would cause stock prices, in general, to fall. Another way to view this is that a relatively riskless investment (T-bonds) has increased its return by 4 percentage points. The return demanded on riskier investments (stocks) would also increase, thus driving down stock prices. Unit 5: 1. Question: The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds? Your $935.82 CORRECT Answer: $941.51 $958.15 $964.41 $979.53 InstructorOn a financial calculator, enter: N 10; I/YR 9; PMT 80; FV 1,000; PV Explanation:PV = $935.82 Alternatively, using the bond formula: VB = COUPON [{1 – 1 / (1 + iN}} / i] + FV / (1 + i)N VB = $80 [{1 – (1 / (1 + .09)10) }/ .09 ] + $1,000 / (1 + .09)10 VB = $80 * 6.4177 + $422.41 VB = $513.34 + $422.41 = $935.83 Points4 of 4 Received: 2. Question:Rollincoast Incorporated issued BBB bonds two years ago that provided a yield to maturity of 11.5%. Long-term risk-free government bonds were yielding 8.7% at that time. The current risk premium on BBB bonds versus government bonds is half of what it was two years ago. If the riskfree long-term government bonds are currently yielding 7.8%, then at what rate should Rollincoast expect to issue new bonds? Your 7.8% Answer: 8.7% 9.2% CORRECT 10.2% 12.9% InstructorCalculate the previous risk premium, RPBBB, and new RPBBB: Explanation:RPBBB = 11.5% - 8.7% = 2.8%. New RPBBB = 2.8%/2 = 1.4%. Calculate new YTM on BBB bonds: YTMBBB = 7.8% + 1.4% = 9.2%. Points4 of 4 Received: 3. Question: A 10-year, $1,000 face value bond has an 8.5% annual coupon. The bond has a current yield of 8%. What is the bond’s yield to maturity? Your Answer: 8.25% 8.86% 7.59% CORRECT 8.50% 8.00% InstructorData given: N = 10; I/YR = ? (This is what the problem is looking for); Explanation:PMT = 85; PV = ? (Don't have directly, but you can calculate it from the current yield); FV = 1,000. Step 1: Calculate the bond's current price from information given in the current yield. Current yield = Coupon/Price 0.08 = $85/Price Price = ? = $1,062.50. Step 2: Given the bond's price, calculate the bond's yield to maturity using your financial calculator by entering the following data as inputs: N = 10; PV = -1062.50; PMT = 85; FV = 1000; and then solve for I/YR = 7.5859% or about 7.59%. Points4 of 4 Received: 4. Question:You wish to purchase a 20-year, $1,000 face value bond that makes semiannual interest payments of $40. If you require a 10% nominal yield to maturity, what price should you be willing to pay for the bond? Your $619 Answer: $674 $761 $828 CORRECT $902 InstructorWith semiannual coupon payments, you need to double the number of Explanation:payments that you will receive over the twenty years. You also need to divide the annual interest in half. Financial calculator solution: Inputs: N = 40; I/YR = 5; PMT = 40; FV = 1000. Output: PV = -$828.41; VB » $828. Alternatively, you could use the formula: VB = COUPON [{1 – 1 / (1 + iN }} / i] + FV / (1 + i)N 5. VB = $40 [{1 – (1 / (1 + .05)40) }/ .05 ] + $1,000 / (1 + .05)40 VB = $40 * 17.1591 + $142.05 VB = $686.36 + $142.05 = $828.41 Points4 of 4 Received: Question: Which of the following bonds will have the greatest percentage increase in value if all interest rates decrease by 1%? Your 20-year, zero coupon bond. CORRECT Answer: 10-year, zero coupon bond. 20-year, 10% coupon bond. 20-year, 5% coupon bond. 1-year, 10% coupon bond. InstructorStatement A. is correct, because the longer the maturity of a bond and the Explanation:lower the coupon rate, the more sensitive its price is to a change in interest rates. For this reason, the remaining statements are incorrect. Points4 of 4 Received: 6. Question:Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? Your CORRECT Market interest rates decline sharply. Answer: The company’s bonds are downgraded. Market interest rates rise sharply. Inflation increases significantly. The company's financial situation deteriorates significantly. InstructorStatement A. is true, because if rates declined the issuer could save money Explanation:on annual coupon payments by calling the outstanding issue and issuing new bonds. Statement b is false, because if the bonds are downgraded, their YTM will increase meaning new debt would carry a higher coupon rate. Statement c is false, because higher interest rates mean new bonds issued would carry a higher coupon. Statement d is false, because an increase in inflation will increase the bond’s YTM. Statement e is false, because if the company’s financial situation deteriorates, its risk increases and so does its YTM. Points4 of 4 Received: 7. Question:Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity? Your $1,046.59 Answer: $1,111.58 CORRECT $1,133.40 $1,177.78 $1,189.04 InstructorOn a financial calculator, enter: Explanation:N 19; I/YR 6; PMT 70; FV 1,000.00; PV PV = $1,111.58 Alternatively, you could use the formula: VB = COUPON [{1 – 1 / (1 + iN}} / i] + FV / (1 + i)N VB = $70 [{1 – (1 / (1 + .0619) }/ .06 ] + $1,000 / (1 + .06)19 VB = $70 * 11.1581 + $330.51 VB = $781.07 + $330.51 = $1,111.58 Points4 of 4 Received: 8. Question:Callaghan Motors' bonds have 10 years remaining to maturity. Interest is paid annually; they have a $1,000 par value; the coupon interest rate is 8 percent; and the yield to maturity is 9 percent. What is the bond's current market price? Your935.82 Answer: InstructorANSWER: $935.82 Explanation:With your financial calculator, enter the following: N = 10; I/YR = YTM = 9%; PMT = 0.08 „e 1,000 = 80; FV = 1000; PV = VB = ? PV = $935.82. Alternatively, you could solve the long way. With an 8% coupon, the bond pays $80 annually. This is an annuity stream. The par or future value is a lump sum to be received in 10 years. Thus, we have the PV of an annuity plus the PV of a lump sum: VB = COUPON [{1 ¡V 1 / (1 + iN}} / i] + FVN / (1 + i)N VB = $80 *[{1 ¡V 1 / (1 + .09)10 }/ .09] + $1,000 / (1+.09)10 VB = $80 * [{1 ¡V 1 / 2.3674} / .09] + $422.41 VB = $80 * [{1 - .4224} / .09] + $422.41 VB = $80 * [ .5776 / .09] + $422.41 VB = $80 * 6.4177 + $422.41 VB = $513.41 + 422.41 = $935.82 Points4 of 4 Received: 9. Question:An investor has two bonds in his or her portfolio, Bond C and Bond Z. Each matures in 4 years, has a face value of $1,000, and has a yield to maturity of 9.6 percent. Bond C pays a 10 percent annual coupon, while Bond Z is a zero coupon bond. Assuming that the yield to maturity of each bond remains 9.6% over the next four years, calculate the price of each of the bonds at the following years to maturity: Years to Maturity Price of Bond C Price of Bond Z 4 3 2 1 0 YourPrice of Bond C: 4-->$1,012.79; 3-->1,010.02; 2-->1,006.98; 1-Answer:>1,003.65 0-->1,000.00 Prize of Bond Z 4 --> 693.04 3 -->759.57 2 --> 832.49 1 --> 1,000.00 Instructor Years to Maturity Price of Bond C Price of Bond Z Explanation: 4 $1,012.79 $ 693.04 3 2 1 0 10. 1,010.02 1,006.98 1,003.65 1,000.00 759.57 832.49 912.41 1,000.00 Points4 of 4 Received: Question:An investor purchased the following five bonds. Each of them had an 8 percent yield to maturity on the purchase day. Immediately after she purchased them, interest rates fell and each then had a new YTM of 7 percent. What is the percentage change in price for each bond after the decline in interest rates? Price at 8% Price at 7% % Change 10-year, 10% annual coupon 10-year zero 5-year zero 30-year zero $100 perpetuity Your---> 8%: ---> 7% --->% Change $1,134.21 $1,210.66 6.74% $463.20 Answer:$508.30 9.74% $680.60 $713 4.76% $99.40 $131.40 32.19% $100 Perpetuity $1,250 $1,428.57 14.29% Instructor Price at 8% Price at 7% Change Explanation: 10-year, 10% annual $1,134.20 $1,210.71 6.75% coupon 10-year zero 5-year zero 30-year zero $100 perpetuity 463.19 680.58 99.38 1,250.00 508.35 712.99 131.37 1428.57 9.75 4.76 32.19 14.29 Points4 of Received: Unit 6: 1. Question: Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return? Your Answer: 10.25% 10.50% CORRECT 10.75% 11.00% 11.25% InstructorRMagee = RRF + (RM – RRF) Explanation:RMagee = 4.50% + 1.20(5.00%) = 10.50% 2. Points4 of 4 Received: Question:Parr Paper's stock has a beta of 1.40, and its required return is 13.00%. Clover Dairy's stock has a beta of 0.80. If the risk-free rate is 4.00%, what is the required rate of return on Clover's stock? (Hint: First find the market risk premium.) Your 8.55% Answer: 8.71% 8.99% 9.14% CORRECT 9.33% InstructorFirst, you need to calculate the market risk premium. You can do this Explanation:using Parr Paper information: RParr = RRF + (RM – RRF) 13.00% = 4.00% + 1.40(RM – RRF) 6.43% = (RM – RRF) Using this information, we can now calculate the require return for Clover: RClover = RRF + (RM – RRF) RClover = 4.00% + .80(6.43%) = 9.14% Points4 of 4 Received: 3. Question:Suppose you hold a diversified portfolio consisting of $10,000 invested equally in each of 10 different common stocks. The portfolio’s beta is 1.120. Now suppose you decided to sell one of your stocks that has a beta of 1.000 and to use the proceeds to buy a replacement stock with a beta of 1.750. What would the portfolio’s new beta be? Your 0.982 Answer: 1.017 1.195 CORRECT 1.246 1.519 InstructorWe need to calculate the beta of the portfolio’s nine stocks that we are Explanation:keeping. These nine represent 90% of the total value of the portfolio and 90% of the beta: .9x + .1(1.00) = 1.120 .9x = 1.02 x = 1.1333 If we add one stock with a beta of 1.75, we get: .9(1.1333) + .1(1.75) = 1.02 + .175 = 1.195 Points4 of 4 Received: 4. Question:A mutual fund manager has a $20.0 million portfolio with a beta of 1.50. The risk-free rate is 4.50%, and the market risk premium is 5.50%. The manager expects to receive an additional $5.0 million which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund’s required return to be 13.00%. What must the average beta of the new stocks added to the portfolio be to achieve the desired required rate of return? Your 1.12 Answer: 1.26 1.37 1.59 1.73 CORRECT InstructorFirst, we need to figure out what the beta of the new portfolio will be: Explanation:Rnew = RRF + Beta(RM – RRF) 13% = 4.50% + Beta(5.50%) 8.50% = Beta(5.50%) 1.5455 = Beta of the NEW $25MM portfolio Now we can calculate the beta of the new stocks (New Beta). We know that the size of the portfolio will now be $25 million and that $20 million has a beta of 1.50: (another weighted average!!!) ($20M / $25M) 1.50 + ($5M / $25M)New Beta = 1.5455 1.20 + .20(New Beta) = 1.5455 .20(New Beta) = .3455 New Beta = 1.7275 or about 1.73 5. Points4 of 4 Received: Question:A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is rs = 11%, and the expected constant growth rate is 5%. What is the current stock price? Your $16.67 CORRECT Answer: $18.83 $20.00 $21.67 $23.33 InstructorP0 = D1 / (rs – g) Explanation:P0 = $1 / (.11 - .05) P0 = $16.67 6. Points4 of 4 Received: Question: A stock just paid a dividend of $1. The required rate of return is rs = 11%, and the constant growth rate is 5%. What is the current stock price? Your $15.00 Answer: $17.50 CORRECT $20.00 $22.50 $25.00 InstructorP0 = D1 / (rs – g) Explanation:First, we need to calculate the dividend next year. $1 * 1.05 = $1.05 P0 = $1.05 / (.11 - .05) P0 = $17.50 7. Points4 of 4 Received: Question:The Lashgari Company is expected to pay a dividend of $1 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price? Your $15.00 Answer: $20.00 $25.00 CORRECT $30.00 $35.00 InstructorFirst, we need to calculate the required return on the stock, rs. This we Explanation:can get from the CAPM: Rs = RRF + (RM – RRF) Rs = 3% + 1.2(5%) Rs = 9% Now we can use this in the DCF formula to calculate the current price: P0 = D1 / (rs – g) P0 = $1 / (.09 - .05) P0 = $25.00 8. Points4 of 4 Received: Question:An increase in a firm’s expected growth rate would normally cause its required rate of return to Your Increase. Answer: Decrease. Fluctuate. Remain constant. Possibly increase, decrease, or have no effect. CORRECT InstructorThe expected growth rate of a firm is only one input into the calculation Explanation:of the required return. The other components include the price of the stock and the expected dividend. If all else is held equal, an increase in the growth rate will cause the required return to increase, but if the dividend increases with the expected growth rate, this have the effect of lowering the required return. Without knowing what happens to the other inputs, the best answer is “e”, possibly increase, decrease or have no effect. Points4 of 4 Received: 9. Question:Harrison Clothiers' stock currently sells for $20 a share. It just paid a dividend of $1.00 a share (that is D0 = $1.00). The dividend is expected to grow at a constant rate of 6 percent a year. What stock price is expected 1 year from now? What is the required rate of return? YourPart A: $21.20 Part B: 11.30% Answer: InstructorP0 = $20; D0 = $1.00; g = 6%; P1 = ?; rs = ? Explanation:P1 = P0(1 + g) = $20(1.06) = $21.20. rs = D1 / P0 + g = ($1.00 * 1.06) / $20 + 0.06 rs = $1.06 / $20 + 0.06 = 11.30%. rs = 11.30%. Points4 of 4 Received: 10. Question:A stock is expected to pay a dividend of $0.50 at the end of the year (that is, D1 = 0.50), and it should continue to grow at a constant rate of 7 percent a year. If its required return is 12 percent, what is the stock's expected price 4 years from today? Your$13.11 Answer: InstructorFirst, solve for the current price. Explanation:Po = D1/(Rs - g) P0 = $0.50/(0.12 - 0.07) P0 = $10.00. If the stock is in a constant growth state, the constant dividend growth rate is also the capital gains yield for the stock and the stock price growth rate. Hence, to find the price of the stock four years from today: P4 = P0(1 + g)4 P4 = $10.00(1.07)4 P4 = $13.10796 or $13.11. Alternatively, you could solve by calculating the expected dividend five years from now: D5 = 0.50 * 1.074 = 0.66 P4 = 0.66 / (.12 - .07) = 13.11 Points4 of Received: