Question 1

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Accepted Answer

A) $1,537.69 
B) $1,618.62 
C) $1,699.55 
D) $1,784.53 
E) $1,873.76 
A) $1,537.69 
B) $1,618.62 
C) $1,699.55 
D) $1,784.53 
E) $1,873.76

Question 2

Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%,and it currently sells for $50 a share.Which of the following statements is CORRECT?

Accepted Answer

A) The stock's dividend yield is 8%. 
B) The current dividend per share is $4.00. 
C) The stock price is expected to be $54 a share one year from now. 
D) The stock price is expected to be $57 a share one year from now. 
E) The stock's dividend yield is 7%. 
A) The stock's dividend yield is 8%. 
B) The current dividend per share is $4.00. 
C) The stock price is expected to be $54 a share one year from now. 
D) The stock price is expected to be $57 a share one year from now. 
E) The stock's dividend yield is 7%.

Question 3

Orwell building supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (rs)is 12%.What is the best estimate of the current stock price?

Accepted Answer

A) $41.58 
B) $42.64 
C) $43.71 
D) $44.80 
E) $45.92 
A) $41.58 
B) $42.64 
C) $43.71 
D) $44.80 
E) $45.92

Question 4

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the greater the present value of a given lump sum to be received at some future date.

Accepted Answer

A) True 
 B)False

Question 5

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

Accepted Answer

A) $16.28 
B) $16.70 
C) $17.13 
D) $17.57 
E) $18.01 
A) $16.28 
B) $16.70 
C) $17.13 
D) $17.57 
E) $18.01

Question 6

When adding a randomly chosen new stock to an existing portfolio,the higher (or more positive)the degree of correlation between the new stock and stocks already in the portfolio,the less the additional stock will reduce the portfolio's risk.

Accepted Answer

A) True 
 B)False

Question 7

All other things held constant,the present value of a given annual annuity decreases as the number of periods per year increases.

Accepted Answer

A) True 
 B)False

Question 8

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Accepted Answer

A) $11,262.88 
B) $11,826.02 
C) $12,417.32 
D) $13,038.19 
E) $13,690.10 
A) $11,262.88 
B) $11,826.02 
C) $12,417.32 
D) $13,038.19 
E) $13,690.10

Question 9

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity,an annual coupon of $95,and a par value of $1,000.What is their yield to maturity?

Accepted Answer

A) 6.20% 
B) 6.53% 
C) 6.87% 
D) 7.24% 
E) 7.62% 
A) 6.20% 
B) 6.53% 
C) 6.87% 
D) 7.24% 
E) 7.62%

Question 10

Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Accepted Answer

A) $923.22 
B) $946.30 
C) $969.96 
D) $994.21 
E) $1,019.06 
A) $923.22 
B) $946.30 
C) $969.96 
D) $994.21 
E) $1,019.06

Question 11

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

Accepted Answer

A) 6.01% 
B) 6.17% 
C) 6.33% 
D) 6.49% 
E) 6.65% 
A) 6.01% 
B) 6.17% 
C) 6.33% 
D) 6.49% 
E) 6.65%

Question 12

Which of the following statements is CORRECT?

Accepted Answer

A) A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable. 
B) If a stock has a negative beta, its expected return must be negative. 
C) A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5. 
D) According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns. 
E) If the returns on two stocks are perfectly positively correlated and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks. 
A) A portfolio with a large number of randomly selected stocks would have more market risk than a single stock that has a beta of 0.5, assuming that the stock's beta was correctly calculated and is stable. 
B) If a stock has a negative beta, its expected return must be negative. 
C) A portfolio with a large number of randomly selected stocks would have less market risk than a single stock that has a beta of 0.5. 
D) According to the CAPM, stocks with higher standard deviations of returns must also have higher expected returns. 
E) If the returns on two stocks are perfectly positively correlated and these stocks have identical standard deviations, an equally weighted portfolio of the two stocks will have a standard deviation that is less than that of the individual stocks.

Question 13

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

Accepted Answer

A) $2,404.91 
B) $2,531.49 
C) $2,658.06 
D) $2,790.96 
E) $2,930.51 
A) $2,404.91 
B) $2,531.49 
C) $2,658.06 
D) $2,790.96 
E) $2,930.51

Question 14

The $10.00 million mutual fund Henry manages has a beta of 1.05 and a 9.50% required return.The risk-free rate is 4.20%.Henry now receives another $5.00 million,which he invests in stocks with an average beta of 0.65.What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium,then find the new portfolio beta.)

Accepted Answer

A) 8.83% 
B) 9.05% 
C) 9.27% 
D) 9.51% 
E) 9.74% 
A) 8.83% 
B) 9.05% 
C) 9.27% 
D) 9.51% 
E) 9.74%

Question 15

You are considering two equally risky annuities,each of which pays $15,000 per year for 20 years.Investment ORD is an ordinary (or deferred)annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

Accepted Answer

A) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant. 
B) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. 
C) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
D) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
E) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD. 
A) If the going rate of interest decreases from 10% to 0%, the difference between the present value of ORD and the present value of DUE would remain constant. 
B) The present value of ORD must exceed the present value of DUE, but the future value of ORD may be less than the future value of DUE. 
C) The present value of DUE exceeds the present value of ORD, while the future value of DUE is less than the future value of ORD. 
D) The present value of ORD exceeds the present value of DUE, and the future value of ORD also exceeds the future value of DUE. 
E) The present value of DUE exceeds the present value of ORD, and the future value of DUE also exceeds the future value of ORD.

Question 16

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,rM − rRF,is positive.Which of the following statements is CORRECT?

Accepted Answer

A) Stock B's required rate of return is twice that of Stock A. 
B) If Stock A's required return is 11%, then the market risk premium is 5%. 
C) If Stock B's required return is 11%, then the market risk premium is 5%. 
D) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's. 
E) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's. 
A) Stock B's required rate of return is twice that of Stock A. 
B) If Stock A's required return is 11%, then the market risk premium is 5%. 
C) If Stock B's required return is 11%, then the market risk premium is 5%. 
D) If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's. 
E) If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's.

Question 17

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

Accepted Answer

A) $8,509 
B) $8,957 
C) $9,428 
D) $9,924 
E) $10,446 
A) $8,509 
B) $8,957 
C) $9,428 
D) $9,924 
E) $10,446

Question 18

You are considering investing in a European bank account that pays a nominal annual rate of 18%,compounded monthly.If you invest $5,000 at the beginning of each month,how many months would it take for your account to grow to $250,000? Round fractional months up.

Accepted Answer

A) 23 
B) 27 
C) 32 
D) 38 
E) 44 
A) 23 
B) 27 
C) 32 
D) 38 
E) 44

Question 19

Which of the following statements is CORRECT?

Accepted Answer

A) If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. 
B) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
C) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
D) The cash flows for an annuity due must all occur at the ends of the periods. 
E) The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month. 
A) If some cash flows occur at the beginning of the periods while others occur at the ends, then we have what the textbook defines as a variable annuity. 
B) The cash flows for an ordinary (or deferred) annuity all occur at the beginning of the periods. 
C) If a series of unequal cash flows occurs at regular intervals, such as once a year, then the series is by definition an annuity. 
D) The cash flows for an annuity due must all occur at the ends of the periods. 
E) The cash flows for an annuity must all be equal, and they must occur at regular intervals, such as once a year or once a month.

Question 20

Which of the following statements is CORRECT?

Accepted Answer

A) A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. 
B) A two-stock portfolio will always have a lower beta than a one-stock portfolio. 
C) If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
D) A stock with an above-average standard deviation must also have an above-average beta. 
E) A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio. 
A) A portfolio that consists of 40 stocks that are not highly correlated with "the market" will probably be less risky than a portfolio of 40 stocks that are highly correlated with the market, assuming the stocks all have the same standard deviations. 
B) A two-stock portfolio will always have a lower beta than a one-stock portfolio. 
C) If portfolios are formed by randomly selecting stocks, a 10-stock portfolio will always have a lower beta than a one-stock portfolio. 
D) A stock with an above-average standard deviation must also have an above-average beta. 
E) A two-stock portfolio will always have a lower standard deviation than a one-stock portfolio.

Exam 29: Basic Financial Tools: a Review

What's the future value of $1,200 after 5 years if the appropriate interest rate is 6%,compounded monthly?

Merrell Enterprises' stock has an expected return of 14%.The stock's dividend is expected to grow at a constant rate of 8%,and it currently sells for $50 a share.Which of the following statements is CORRECT?

Orwell building supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (rs)is 12%.What is the best estimate of the current stock price?

The greater the number of compounding periods within a year,then (1)the greater the future value of a lump sum investment at Time 0 and (2)the greater the present value of a given lump sum to be received at some future date.

A share of Lash Inc.'s common stock just paid a dividend of $1.00.If the expected long-run growth rate for this stock is 5.4%,and if investors' required rate of return is 11.4%,what is the stock price?

When adding a randomly chosen new stock to an existing portfolio,the higher (or more positive)the degree of correlation between the new stock and stocks already in the portfolio,the less the additional stock will reduce the portfolio's risk.

All other things held constant,the present value of a given annual annuity decreases as the number of periods per year increases.

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Curtis Corporation's noncallable bonds currently sell for $1,165.They have a 15-year maturity,an annual coupon of $95,and a par value of $1,000.What is their yield to maturity?

Kessen Inc.'s bonds mature in 7 years,have a par value of $1,000,and make an annual coupon payment of $70.The market interest rate for the bonds is 8.5%.What is the bond's price?

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D1 = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

Which of the following statements is CORRECT?

Suppose you borrowed $15,000 at a rate of 8.5% and must repay it in 5 equal installments at the end of each of the next 5 years.By how much would you reduce the amount you owe in the first year?

You are considering two equally risky annuities,each of which pays $15,000 per year for 20 years.Investment ORD is an ordinary (or deferred)annuity,while Investment DUE is an annuity due.Which of the following statements is CORRECT?

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,rM − rRF,is positive.Which of the following statements is CORRECT?

What's the present value of a 4-year ordinary annuity of $2,250 per year plus an additional $3,000 at the end of Year 4 if the interest rate is 5%?

You are considering investing in a European bank account that pays a nominal annual rate of 18%,compounded monthly.If you invest $5,000 at the beginning of each month,how many months would it take for your account to grow to $250,000? Round fractional months up.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

An Overview of Financial Management and the Financial Environment

Risk and Return: Part I

Risk and Return: Part Ii

Bond Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Basic Stock Valuation

Corporate Valuation and Financial Planning

Corporate Governance

Determining the Cost of Capital

Capital Budgeting: Decision Rules

Cash Flow Estimation and Risk Analysis

Real Options

Distributions to Shareholders: Dividends and Repurchases

Capital Structure Decisions

Dynamic Capital Structures and Corporate Valuation

Initial Public Offerings, investment Banking, and Financial Restructuring

Lease Financing

Hybrid Financing: Preferred Stock, Warrants, and Convertibles

Supply Chains and Working Capital Management

Providing and Obtaining Credit

Advanced Issues in Cash Management and Inventory Control

Enterprise Risk Management

Bankruptcy, reorganization, and Liquidation

Mergers and Corporate Control

Multinational Financial Management

Time Value of Money

Pension Plan Management

Financial Management in Not-For-Profit Businesses

a Values of the Areas Under the Standard Normal

Filters

Orwell building supplies' last dividend was $1.75.Its dividend growth rate is expected to be constant at 25% for 2 years,after which dividends are expected to grow at a rate of 6% forever.Its required return (r_s)is 12%.What is the best estimate of the current stock price?

Franklin Corporation is expected to pay a dividend of $1.25 per share at the end of the year (D₁ = $1.25).The stock sells for $32.50 per share,and its required rate of return is 10.5%.The dividend is expected to grow at some constant rate,g,forever.What is the equilibrium expected growth rate?

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium,r_M − r_RF,is positive.Which of the following statements is CORRECT?