1. Assume you are to receive a 10-year annuity with annual payments of $800. The first payment will be received at the end of Year 1, and the last payment will be received at the end of Year 10. You will invest each payment in an account that pays 7 percent compounded annually. Although the annuity payments stop at the end of year 10, you will not withdraw any money from the account until 20 years from today, and the account will continue to earn 7% for the entire 20-year period. What will be the value in your account at the end of Year 20 (rounded to the nearest dollar)?
a. $21,743 b. $18,342 c. $15,737 d. $ 8,000
2. You decide to borrow $200,000 to build a new home. The bank charges an interest rate of 6% compounded monthly. If you pay back the loan over 30 years, what will your monthly payments be (rounded to the nearest dollar)?
a. $556 b. $589 c. $1,199 d. $1,374
3. Your grandparents deposit $1,000 each year on your birthday, starting the day you are born, in an account that pays 6% interest compounded annually. How much will you have in the account on your 30th birthday, just after your grandparents make their deposit?
a. $84,802 b. $83,802 c. $79,058 d. $74,640
4. You won the lottery and can receive either (1) $60,000 today, or (2) $10,000 one year from today plus $25,000 two years from today plus $35,000 three years from today. You plan to use the money to pay for your child's college education in 15 years. You should ________.
a. take the $60,000 today because of the time value of money regardless of current interest rates
b. take option two because you get $70,000 rather than $60,000 regardless of current interest rates
c. take the $60,000 today only if the current interest rate is at least 16.67%
d. take the $60,000 today if you can earn 6.81% per year or more on your investments
5. Cary's wonderful parents established a college savings plan for him when he was born. They deposited $50 into the account on the last day of each month. The account has earned 10% compounded monthly, tax-free. How much can they withdraw on his 18th birthday to spend on his education?
a. $27,360 b. $30,028 c. $33,407 d. $43,630
6. Cary's wonderful parents established a college savings plan for him when he was born. They deposited $50 into the account on the last day of each month. The account has earned 10% compounded monthly, tax-free. Now he's off to State U. What equal amount can they withdraw beginning today (his 18th birthday) and each year for three additional years to spend on his education, assuming that the account now earns 7% annually.
a. $8,285 b. $8,865 c. $9,486 d. $30,028
7. You have been depositing money at the end of each year into an account drawing 8% interest. What is the balance in the account at the end of year four if you deposited the following amounts?
Year End of Year Deposit
1 $350
2 $500
3 $725
4 $400
a. $1,622 b. $2,207 c. $2,384 d. $2,687
8. - 10. You are reviewing three different investments. The different cash flows are as follows:
End of Year A B C
1 400 500
2 400 250
3 400
4 400 500 600
5 500
6 500 300
7 500
8 500 600
Total 1,600 2,500 2,250
Because you only have enough savings for one investment, your broker has proposed the third alternative to be, according to his expertise, "the deal of a lifetime." However, you raise questions and want to calculate the present value of each investment. Assuming a 15% discount rate, what is
8. Frank's best alternative? a. A b. B c. C
9. The 2nd best alternative? a. A b. B c. C
10. The 3rd alternative? a. A b. B c. C
11. Joe purchased 500 shares of Robotics Stock at $4 per share on 1/1/07. Bill sold the shares on 12/31/07 for $5.45. Robotics stock has a beta of 1.4, the risk-free rate of return is 5%, and the market risk premium is 9%. Joe's holding period return is ________.
a. 14.90% b. 18.65% c. 17.60% d. 36.25%
12. Joe purchased 500 shares of Robotics Stock at $4 per share on 1/1/07. Bill sold the shares on 12/31/07 for $5.45. Robotics stock has a beta of 1.4, the risk-free rate of return is 5%, and the market risk premium is 9%. The required return on Robotics Stock is ________.
a. 19.60% b. 18.65% c. 17.60% d. 36.25%
13. White Company stock has a beta of 1.5 and a required return of 15%, while Black Company stock has a beta of 1.0 and a required return of 12%. The standard deviation of returns for White Company is 10% more than the standard deviation for Black Company. The expected return on the market portfolio according to the CAPM is ________.
a. 10% b. 11% c. 12% d. 13%
14. A stock's beta is a measure of its ________.
a. unsystematic risk b. systematic risk c. company-unique risk d. diversifiable risk
15. Collectibles Corp. has a beta of 3.25 and a standard deviation of returns of 27%. The return on the market portfolio is 13% and the risk free rate is 5%. What is the risk premium on the market?
a. 16.25% b. 8.00% c. 9.00% d. 10.75%
16. Collectibles Corp. has a beta of 3.25 and a standard deviation of returns of 27%. The return on the market portfolio is 13% and the risk free rate is 5%. What is the risk premium on the market? According to CAPM, what is the required rate of return on Collectible's stock?
a. 42.25% b. 40.00% c. 31.00% d. 29.25%
17. The prices for the Electric Circuit Corporation for the first quarter of 2007 are given below. The price of the stock on January 1, 2007 was $120. Find the holding period return for an investor who purchased the stock on January 1, 2007 and sold it the last day of February 2007.
Month End Value January $127.00 February 115.50 March 140.94
a. -3.90% b. -3.75% c. 2.08% d. 3.52%
18. You must add one of two investments to an already well- diversified portfolio.
Security A Security B
Expected Return = 13% Expected Return = 15%
Standard Deviation of Returns - 10.0% Standard Deviation of Returns = 19.9%
Beta = 1.5 Beta = 1.5
If you are a risk-averse investor, which one is the better choice?
a. Security A
b. Security B
c. either security would be acceptable
d. cannot be determined with information given
19. Assume that you have $165,000 invested in a stock that is returning 11.50%, $85,000 invested in a stock that is returning 22.75%, and $235,000 invested in a stock that is returning 10.25%. What is the expected return of your portfolio?
a. 15.6% b. 12.9% c. 18.3% d. 14.8%
20. and 21. You are considering a security with the following possible rates of return:
Probability Return (%)
0.10 8.5
0.30 12.6
0.40 14.7
0.20 22.3
20. Calculate the expected rate of return.
a. 14.97% b. 15.05% c. 14.85% d. 15.13%
21. Calculate the standard deviation of the returns.
a. 4.10% b. 4.15% c. 4.08% d. 4.02%
22. Jeffrey Corp. Bonds have a current yield of 7% and mature in 10 years. Jones Corp. Bonds have a current yield of 5% and mature in 10 years. Given this information, which of the following statements is most correct?
a. Jeffrey Corp. Bonds will have a higher yield to maturity than Jones Corp. Bonds.
b. Jones Corp. Bonds will sell for a lower price than Jeffrey Corp. Bonds.
c. Jones Corp. Bonds are riskier than Jeffrey Corp. Bonds.
d. If both bonds have the same yield to maturity, then the price of Jones Corp. Bonds must be less than the price of Jeffrey Corp. Bonds.
23. Ajax Corp issued 25 year bonds in 2002 with a coupon rate of 6% and a face value of $1,000. The bonds sold for face value when issued. Since 2002, interest rates have increased, so the going rate on similar bonds is now 9%. Which of the following statements is most accurate?
a. An investor who purchased an Ajax bond in 2002 and plans to keep the bond until it matures expects to earn 6% per year over the life of the bond.
b. Ajax Corp must now pay bondholders interest payments of $90 per year due to the increase in interest rates.
c. An investor who purchased an Ajax bond in 2002 and plans to keep the bond until it matures expects an increase in return from 6% per year to 9% per year.
d. The price of an Ajax Corp bond should be higher than $1,000 due to the increase in rates.
24. Swanson, Inc. bonds have a 10% coupon rate with semi-annual coupon payments. They have 12 and 1/2 years to maturity and a par value of $1,000. Compute the value of Swanson's bonds if investors' required rate of return is 8%.
a. $1,156.22 b. $1,239.33 c. $1,137.10 d. $1,084.44
25. Homer's Trucking Company bonds have a 14% coupon rate. Interest is paid semi-annually. The bonds have a par value of $1,000 and will mature 6 years from now. Compute the value of Homer's Trucking Company bonds if investors' required rate of return is 10%.
a. $1,177.27 b. $1,233.05 c. $1,098.99 d. $1,108.28
26. Which of the following statements is true?
a. Short-term bonds have greater interest rate risk than do long-term bonds.
b. Long-term bonds have greater interest rate risk than do short-term bonds.
c. All bonds have equal interest rate risk.
d. Interest rate risk is highest during periods of high interest rates.
27. Which of the following statements is true?
a. The value of a bond is inversely related to changes in investors' present required rate of return.
b. If interest rates decrease, the value of a bond will decrease.
c. If interest rates increase, the value of a bond will increase.
d. If interest rates remain constant, the value of premium bonds will increase over time.
28. If market interest rates rise ________.
a. short-term bonds will decline in value more than long-term bonds
b. short-term bonds will rise in value more than long-term bonds
c. long-term bonds will decline in value more than short-term bonds
d. long-term bonds will rise in value more than short-term bonds
29. You are considering the purchase of a common stock that paid a dividend of $1.00 yesterday. You expect this stock to have a growth rate of 20 percent for the next 3 years, resulting in dividends of D1=$1.20, D2=$1.44, and D3=$1.73. The long-run normal growth rate after year 3 is expected to be 8 percent (that is, a constant growth rate after year 3 of 8% per year forever). If you require a 12 percent rate of return, how much should you be willing to pay for this stock?
a. $38.65 b. $ 7.24 c. $36.73 d. $24.89
30. Using the constant growth dividend valuation model and assuming dividends will growth a constant rate forever, the increase in the value of the stock each year should be equal to the ________.
a. growth rate in dividends, g
b. required return on the stock, kcs
c. dividend yield plus the capital gains yield
d. dividend yield
31. A financial analyst expects KacieCo. to pay a dividend of $3 per share one year from today, a dividend of $3.50 per share in years two, and estimates the value of the stock at the end of year two to be $28. If your required return on KacieCo stock is 15 %, what is the most you would be willing to pay for the stock today if you plan to sell the stock in two years?
a. $26.09 b. $26.43 c. $28.90 d. $34.00
32. Preferred stock is similar to common stock in the following way ________.
a. both preferred stock and common stock provide equal periodic dividends
b. both investments have a final maturity value set by the issuing agreement
c. both contain a dividend growth factor
d. as equity, both are subordinate to bondholders in the event of bankruptcy
33. Chambers Corporation's ROE is 18%. Their dividend payout ratio is 80%. The last dividend, just paid, was $2.20. If dividends are expected to grow by the company's internal growth rate indefinitely, what is the current value of Chambers common stock if its required return is 20%?
a. $12.56 b. $12.89 c. $13.90 d. $15.43
34. Consider the following four types of payments that could be made by a normal operating firm: interest, common dividends, income taxes, and preferred dividends. Compared to the other payments mentioned, where would you rank common dividend payments in terms of the order of payment if the firm is liquidating?
a. first b. second c. third d. fourth
35. I Sage, whose common stock is currently selling for $12 per share, is expected to pay a $1.80 dividend, and sell for $14.40 one year from now. What are the dividend yield, growth rate, and total rate of return, respectively?
a. 15%; 20%; 35% b. 10%; 5%; 15% c. 15%; 12%; 27% d. 20%; 15%; 35%