Exam 29: Basic Financial Tools: a Review

Your sister paid $10,000 (CF at t = 0)for an investment that promises to pay $750 at the end of each of the next 5 years,then an additional lump sum payment of $10,000 at the end of the 5th year.What is the expected rate of return on this investment?

According to the nonconstant growth model discussed in the textbook,the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

McCurdy Co.'s Class Q bonds have a 12-year maturity,$1,000 par value,and a 5.75% coupon paid semiannually (2.875% each 6 months),and those bonds sell at their par value.McCurdy's Class P bonds have the same risk,maturity,and par value,but the P bonds pay a 5.75% annual coupon.Neither bond is callable.At what price should the annual payment bond sell?

Stocks A and B have the same price and are in equilibrium,but Stock A has the higher required rate of return.Which of the following statements is CORRECT?

Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in 4 equal installments at the end of each of the next 4 years.How large would your payments be?

Two constant growth stocks are in equilibrium,have the same price,and have the same required rate of return.Which of the following statements is CORRECT?

A 25-year,$1,000 par value bond has an 8.5% annual coupon.The bond currently sells for $875.If the yield to maturity remains at its current rate,what will the price be 5 years from now?

If D₀ = $1.75,g (which is constant)= 3.6%,and P₀ = $32.00,what is the stock's expected total return for the coming year?

Wildwoods,Inc.earned $1.50 per share five years ago.Its earnings this year were $3.20.What was the growth rate in earnings per share (EPS)over the 5-year period?

If the returns of two firms are negatively correlated,then one of them must have a negative beta.

Southwestern Bank offers to lend you $50,000 at a nominal rate of 6.5%,compounded monthly.The loan (principal plus interest)must be repaid at the end of the year.Woodburn Bank also offers to lend you the $50,000,but it will charge an annual rate of 7.0%,with no interest due until the end of the year.How much higher or lower is the effective annual rate charged by Woodburn versus the rate charged by Southwestern?

The last dividend paid by Coppard Inc.was $1.25.The dividend growth rate is expected to be constant at 15% for 3 years,after which dividends are expected to grow at a rate of 6% forever.If the firm's required return (r_s)is 11%,what is its current stock price?

What is the present value of the following cash flow stream at a rate of 6.25%?

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Zacher Co.'s stock has a beta of 1.40,the risk-free rate is 4.25%,and the market risk premium is 5.50%.What is the firm's required rate of return?

Under the CAPM,the required rate of return on a firm's common stock is determined only by the firm's market risk.If its market risk is known,and if that risk is expected to remain constant,then analysts have all the information they need to calculate the firm's required rate of return.

Kelly Enterprises' stock currently sells for $35.25 per share.The dividend is projected to increase at a constant rate of 4.75% per year.The required rate of return on the stock,r_s,is 11.50%.What is the stock's expected price 5 years from now?

Suppose you just won the state lottery,and you have a choice between receiving $2,550,000 today or a 20-year annuity of $250,000,with the first payment coming one year from today.What rate of return is built into the annuity? Disregard taxes.

A $250,000 loan is to be amortized over 8 years,with annual end-of-year payments.Which of these statements is CORRECT?

Scott and Linda have been saving to pay for their daughter Casie's college education.Casie just turned 10 at (t = 0),and she will be entering college 8 years from now (at t = 8).College tuition and expenses at State U.are currently $14,500 a year,but they are expected to increase at a rate of 3.5% a year.Ellen should graduate in 4 years⎯if she takes longer or wants to go to graduate school,she will be on her own.Tuition and other costs will be due at the beginning of each school year (at t = 8,9,10,and 11). So far,Scott and Linda have accumulated $15,000 in their college savings account (at t = 0).Their long-run financial plan is to add an additional $5,000 in each of the next 4 years (at t = 1,2,3,and 4).Then they plan to make 3 equal annual contributions in each of the following years,t = 5,6,and 7.They expect their investment account to earn 9%.How large must the annual payments at t = 5,6,and 7 be to cover Casie's anticipated college costs?