1) Your firm is going to settle a lawsuit for $1 million. How much would be the present value of the payment if the firm could negotiate the payment to be in 2 years instead of today, assuming the applicable interest rate is 10%?
a. $826,446.28 b. $1210,000.00 c. $174,543.72 d. $210,000.00
2) What is the effective annual rate (EAR) for a loan with a nominal interest rate of 12% compounded monthly?
a. 12% b. 12.68% c. 1% d. 144%
3) What are the annual payments on a 20 year loan of $50,000 with the interest rate of 4.5%?
a. $2500.00 b. $3.843.81 c. $4271.21 d. $4750.00
4) For a 10 year loan with 6% interest and $10,000 principal, what percentage of the first payment does go towards the payment of the principal?
a. 10% b. 21.81% c. 41.23% d. 55.84%
5) On August 18 2017, Wells Fargo announced a quarterly cash dividend of $20.00 per share was declared on its 8.00% non-cumulative perpetual class A preferred stock, Series J, liquidation preference $1,000 per share. Based on the risk, the discount rate is 5% per year. What is the price of the stock? (Hint: This is a perpetuity)
a. $1,000 b. $400 c. $1,600 d. $1,200
6) Since, investors care about their real consumption, holding everything else equal an increase in expected future inflation should result in higher interest rates.
a. True b. False
7) You are interested to raise capital by issuing 10-year bond for your company. Based on your company's credit rating, you believe that the market requires 3% default risk premium and relative small size of the issue would add 1% liquidly premium to the required interest rate. The current 10-year treasury rate and 10- year TIPS rate are 2% and 0.4% respectively. What interest rate would you expect to pay on the issue if the 10-year maturity premium is 0.4%?
a. 4.4% b. 4.8% c. 6.4% d. 6.8%
8) A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?
a. If market interest rates decline, the price of the bond will also decline.
b. The bond is currently selling at a price below its par value.
c. If market interest rates remain unchanged, the bond's price one year from now will be lower than it is today.
d. The bond should currently be selling at its par value.
e. If market interest rates remain unchanged, the bond's price one year from now will be higher than it is today
9) Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?
a. An 8-year bond with a 9% coupon.
b. A 1-year bond with a 15% coupon.
c. A 3-year bond with a 10% coupon.
d. A 10-year zero coupon bond.
e. A 10-year bond with a 10% coupon.
10) Which of the following events would make it more likely that a company would call its outstanding callable bonds?
a. The company's bonds are downgraded.
b. Market interest rates rise sharply.
c. Market interest rates decline sharply.
d. The company's financial situation deteriorates significantly.
e. Inflation increases significantly.
Reference: Mod Bond risk lecture slides and ch.7-7 textbook
11) A five-year bond has an annual coupon rate of 10% and face value of $1000. What is the price of the bond if the yield to maturity on the bond is 10%? You learn that Federal Reserve is tightening monetary policy and you expect a similar bond (same maturity and default risk) to have a 15% yield. What would be the fair price of the bond given your expectations?
a. $1000/$832.39 b. $937.91/$782.67 c. $1000/$1000 d. $379.08/$335.22
12) You can buy AAPL stock today for $150 and you plan to keep the stock for 1 year. What would be the return on your investment if you receive $5 in dividends (for simplicity assume the dividends are received at the end of the holding period) and the stock price is $80 after a 2:1 stock split?
a. 10%
b. 6.66%
c. 8%
d. 12%
13) Returns for the Dayton Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.)
Year Return
2014 21.00%
2013 -12.50%
2012 25.00%
a. 20.08%
b. 20.59%
c. 21.11%
d. 21.64%
e. 22.18%
14) Jane has a portfolio of 20 average stocks, and Dick has a portfolio of 2 average stocks. Assuming the market is in equilibrium, which of the following statements is CORRECT?
a. Jane's portfolio will have less diversifiable risk and also less market risk than Dick's portfolio.
b. The required return on Jane's portfolio will be lower than that on Dick's portfolio because Jane's portfolio will have less total risk.
c. Dick's portfolio will have more diversifiable risk, the same market risk, and thus more total risk than Jane's portfolio, but the required (and expected) returns will be the same on both portfolios.
d. If the two portfolios have the same beta, their required returns will be the same, but Jane's portfolio will have less market risk than Dick's.
e. The expected return on Jane's portfolio must be lower than the expected return on Dick's portfolio because Jane is more diversified.
15) 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.
a. True
b. False
16) Even if the correlation between the returns on two securities is +1.0, if the securities are combined in the correct proportions, the resulting 2-asset portfolio will have less risk than either security held alone.
a. True
b. False
17) Caterpillar (NYSE:CAT) stock has a Beta of 1.25. What is the required rate of return for CAT stock if the market risk premium is 8% and risk free rate is 2%? Given that CAT is trading at $115 today, what would you expect the stock price to be one year from (ignore dividends)?
a. 12% , $128.8 b. 10% , $126.5 c. 12%, $115
d. Insufficient information
18) Intel (INTC:NASDAQ) is expected to pay $1 dividend (sum of quarterly dividends) one year from now with a forecasted dividend growth of 5% and required rate of return of 8%. What is the fair stock price using dividend growth mode?
a. $33.33
b. $12.50
c. $20
d. $35
19) Intel (INTC:NASDAQ) has a stock price of $35 and is expected to pay $1 dividend (sum of quarterly dividends) one year from now with a forecasted dividend growth of 5%. What is cost of equity for Intel implied by the dividend growth model using the given information?
a. 7%
b. 7.86%
c. 8%
d. 8.35%
20) Suppose Boyson Corporation's projected free cash flow for next year is FCF1 =
$150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the firm's total corporate value?
a. $2,572,125 b. $2,707,500 c. $2,850,000 d. $3,000,000 e. $3,150,000