Finance Chapter 29 Inputs Years Amount Needed Nominal Rate Earned Account Inflation Goal Seek Approach

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Chapter 29: Basic Financial Tools: A review
Copyright Cengage Learning. Powered by Cognero.
Page 141
DATE CREATED:
10/30/2017 8:23 PM
229. 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?
a.
$943.98
b.
$968.18
c.
$993.01
d.
$1,017.83
e.
$1,043.28
POINTS:
1
230. Burke Tires just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by
10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%.
What is the best estimate of the stock's current market value?
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Chapter 29: Basic Financial Tools: A review
a.
$41.59
b.
$42.65
c.
$43.75
d.
$44.87
e.
$45.99
POINTS:
1
231. You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th
month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate
will you be earning?
a.
7.62%
b.
8.00%
c.
8.40%
d.
8.82%
e.
9.26%
ANSWER:
a
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232. Your business has just taken out a 1-year installment loan for $72,500 at a nominal rate of 11.0% but with equal end-
of-month payments. What percentage of the 2nd monthly payment will go toward the repayment of principal?
a.
73.67%
b.
77.55%
c.
81.63%
d.
85.93%
e.
90.45%
POINTS:
1
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233. On January 1, 2016, your sister's pet supplies business obtained a 30-year amortized mortgage loan for $250,000 at a
nominal annual rate of 7.0%, with 360 end-of-month payments. The firm can deduct the interest paid for tax purposes.
What will the interest tax deduction be for 2016?
a.
$17,419.55
b.
$17,593.75
c.
$17,769.68
d.
$17,947.38
e.
$18,126.85
ANSWER:
a
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Page 145
234. You borrowed $50,000 which you must repay in 10 years. You plan to make an initial deposit today, then make 9
more deposits at the beginning of each the next 9 years, but with the deposits increasing at the inflation rate. You expect
to earn 5% on your funds, and you expect a 3% inflation rate. To the nearest dollar, how large must your initial deposit be
to enable you to reach your $50,000 target?
a.
$3,008
b.
$3,342
c.
$3,676
d.
$4,044
e.
$4,448
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POINTS:
1
235. Your 75-year-old grandmother expects to live for another 15 years. She currently has $1,000,000 of savings, which is
invested to earn a guaranteed 5% rate of return. If inflation averages 2% per year, how much can she withdraw (to the
nearest dollar) at the beginning of each year and keep the withdrawals constant in real terms, i.e., growing at the same rate
as inflation and thus enabling her to maintain a constant standard of living?
a.
$65,632
b.
$72,925
c.
$81,027
d.
$89,130
e.
$98,043
ANSWER:
c
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Chapter 29: Basic Financial Tools: A review
Copyright Cengage Learning. Powered by Cognero.
Page 147
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Chapter 29: Basic Financial Tools: A review
POINTS:
1
236. Julian and Jonathan are twin brothers (and so were born on the same day). Today, both turned 25. Their grandfather
began putting $2,500 per year into a trust fund for Julian on his 20th birthday, and he just made a 6th payment into the
fund. The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made
on Julian's 65th birthday. The grandfather set things up this way because he wants Julian to work, not be a "trust fund
baby," but he also wants to ensure that Julian is provided for in his old age.
Until now, the grandfather has been disappointed with Jonathan and so has not given him anything. However, they
recently reconciled, and the grandfather decided to make an equivalent provision for Jonathan. He will make the first
payment to a trust for Jonathan today, and he has instructed his trustee to make 40 additional equal annual payments until
Jonathan turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much
must the grandfather put into Jonathan's trust today and each subsequent year to enable him to have the same retirement
nest egg as Julian after the last payment is made on their 65th birthday?
a.
$3,726
b.
$3,912
c.
$4,107
d.
$4,313
e.
$4,528
ANSWER:
a
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237. You plan to work for Strickland Corporation for 12 years after graduation and after that want to start your own
business. You expect to save and deposit $7,500 a year for the first 6 years (t = 1 through t = 6) and $15,000 annually for
the following 6 years (t = 7 through t = 12). The first deposit will be made a year from today. In addition, your
grandmother just gave you a $25,000 graduation gift that you will deposit immediately (t = 0). If the account earns 9%
compounded annually, how much will you have when you start your business 12 years from now?
a.
$238,176
b.
$250,712
c.
$263,907
d.
$277,797
e.
$291,687
ANSWER:
d
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238. You are in negotiations to make a 7-year loan of $25,000 to DeVille Corporation. To repay you, DeVille will pay
$2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently
unspecified cash flow, X, at the end of each year from Year 4 through Year 7. You are confident the payments will be
made, since DeVille is essentially riskless. You regard 8% as an appropriate rate of return on a low risk but illiquid 7-year
loan. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?
a.
$4,271.67
b.
$4,496.49
c.
$4,733.15
d.
$4,969.81
e.
$5,218.30
ANSWER:
c
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Page 151
239. 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 yearsif 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?
a.
$1,965.21
b.
$2,068.64
c.
$2,177.51
d.
$2,292.12
e.
$2,412.76

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