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Chapter 29: Basic Financial Tools: A review
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Page 81
NATIONAL STANDARDS:
United States - BUSPROG: o Reflective Thinking - BUSPROG: Analytic skills: Statistics
142. You would like to travel in South America 5 years from now, and you can save $3,100 per year, beginning one year
from today. You plan to deposit the funds in a mutual fund that you think will return 8.5% per year. Under these
conditions, how much would you have just after you make the 5th deposit, 5 years from now?
a.
$18,369
b.
$19,287
c.
$20,251
d.
$21,264
e.
$22,327
ANSWER:
a
143. You want to open a sushi bar 3 years from now, and you plan to save $7,000 per year, beginning immediately. You
will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years
from today?
a.
$20,993
b.
$22,098
c.
$23,261
Chapter 29: Basic Financial Tools: A review
d.
$24,424
e.
$25,645
ANSWER:
c
144. What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?
a.
$16,806
b.
$17,690
c.
$18,621
d.
$19,601
e.
$20,633
ANSWER:
e
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145. After receiving a reward for information leading to the arrest of a notorious criminal, you are considering investing it
in an annuity that pays $5,000 at the end of each year for 20 years. You could earn 5% on your money in other
investments with equal risk. What is the most you should pay for the annuity?
a.
$50,753
b.
$53,424
c.
$56,236
d.
$59,195
e.
$62,311
ANSWER:
e
146. What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?
a.
$11,262.88
b.
$11,826.02
c.
$12,417.32
d.
$13,038.19
e.
$13,690.10
Chapter 29: Basic Financial Tools: A review
ANSWER:
a
147. What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?
a.
$4,750
b.
$5,000
c.
$5,250
d.
$5,513
e.
$5,788
ANSWER:
b
148. A perpetuity pays $85 per year and costs $950. What is the rate of return?
a.
8.95%
b.
9.39%
c.
9.86%
d.
10.36%
e.
10.88%
ANSWER:
a
149. 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?
a.
$923.22
b.
$946.30
c.
$969.96
d.
$994.21
e.
$1,019.06
ANSWER:
a
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150. Noncallable bonds that mature in 10 years were recently issued by Sternglass Inc. They have a par value of $1,000
and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?
a.
$829.21
b.
$850.47
c.
$872.28
d.
$894.65
e.
$917.01
ANSWER:
d
151. 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?
a.
6.20%
b.
6.53%
Chapter 29: Basic Financial Tools: A review
c.
6.87%
d.
7.24%
e.
7.62%
ANSWER:
e
152. Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and
have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM)?
a.
8.56%
b.
9.01%
c.
9.46%
d.
9.93%
e.
10.43%
ANSWER:
b
153. Sentry Corp. bonds have an annual coupon payment of 7.25%. The bonds have a par value of $1,000, a current price
of $1,125, and they will mature in 13 years. What is the yield to maturity on these bonds?
a.
5.56%
b.
5.85%
c.
6.14%
d.
6.45%
e.
6.77%
ANSWER:
b
154. Rogoff Co.'s 15-year bonds have an annual coupon rate of 9.5%. Each bond has face value of $1,000 and makes
semiannual interest payments. If you require an 11.0% nominal yield to maturity on this investment, what is the maximum
price you should be willing to pay for the bond?
a.
$891.00
b.
$913.27
c.
$936.10
d.
$959.51
e.
$983.49
ANSWER:
a
155. Freedman Flowers' stock has a 50% chance of producing a 25% return, a 30% chance of producing a 10% return, and
a 20% chance of producing a −28% return. What is the firm's expected rate of return?
a.
9.41%
b.
9.65%
c.
9.90%
d.
10.15%
e.
10.40%
POINTS:
1
156. Erickson Inc. is considering a capital budgeting project that has an expected return of 25% and a standard deviation
of 30%. What is the project's coefficient of variation?
a.
1.20
b.
1.26
c.
1.32
d.
1.39
e.
1.46
ANSWER:
a
157. Donald Gilmore has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is
invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?
a.
0.65
b.
0.72
c.
0.80
d.
0.89
e.
0.98
ANSWER:
e
158. 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?
a.
11.36%
b.
11.65%
c.
11.95%
d.
12.25%
e.
12.55%
ANSWER:
c
159. Nystrand Corporation's stock has an expected return of 12.25%, a beta of 1.25, and is in equilibrium. If the risk-free
rate is 5.00%, what is the market risk premium?
a.
5.80%
b.
5.95%
c.
6.09%
d.
6.25%
e.
6.40%
POINTS:
1
160. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and
the expected constant growth rate is g = 6.4%. What is the stock's current price?
a.
$17.39
b.
$17.84
c.
$18.29
d.
$18.75
e.
$19.22
POINTS:
1
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161. A stock just paid a dividend of D0 = $1.50. The required rate of return is rs = 10.1%, and the constant growth rate is g
= 4.0%. What is the current stock price?
a.
$23.11
b.
$23.70
c.
$24.31
d.
$24.93
e.
$25.57
POINTS:
1
162. 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?
Chapter 29: Basic Financial Tools: A review
a.
$16.28
b.
$16.70
c.
$17.13
d.
$17.57
e.
$18.01
ANSWER:
d
163. 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?
a.
6.01%
b.
6.17%
c.
6.33%
d.
6.49%
e.
6.65%
POINTS:
1
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164. $35.50 per share is the current price for Foster Farms' stock. The dividend is projected to increase at a constant rate
of 5.50% per year. The required rate of return on the stock, rs, is 9.00%. What is the stock's expected price 3 years from
today?
a.
$37.86
b.
$38.83
c.
$39.83
d.
$40.85
e.
$41.69
ANSWER:
e
165. 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, rs, is 11.50%. What is the stock's expected price 5 years from
now?
a.
$40.17
Chapter 29: Basic Financial Tools: A review
b.
$41.20
c.
$42.26
d.
$43.34
e.
$44.46
ANSWER:
e
166. If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $26.00, what is the stock's expected dividend yield for the
coming year?
a.
4.12%
b.
4.34%
c.
4.57%
d.
4.81%
e.
5.05%
POINTS:
1
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167. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming
year?
a.
4.42%
b.
4.66%
c.
4.89%
d.
5.13%
e.
5.39%
POINTS:
1
168. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56, what is the stock's expected capital gains yield for the
coming year?
a.
6.50%
b.
6.83%
c.
7.17%
d.
7.52%
e.
7.90%
Chapter 29: Basic Financial Tools: A review
POINTS:
1
169. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock's expected total return for the coming
year?
a.
7.54%
b.
7.73%
c.
7.93%
d.
8.13%
e.
8.34%
POINTS:
1
170. 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?
a.
8.37%
b.
8.59%
c.
8.81%
d.
9.03%
e.
9.27%
POINTS:
1
171. A new investment opportunity for you is an annuity that pays $550 at the beginning of each year for 3 years. You
could earn 5.5% on your money in other investments with equal risk. What is the most you should pay for the annuity?
a.
$1,412.84
b.
$1,487.20
c.
$1,565.48
d.
$1,643.75
e.
$1,725.94
ANSWER:
c
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172. Because your mother is about to retire, she wants to buy an annuity that will provide her with $75,000 of income a
year for 20 years, with the first payment coming immediately. The going rate on such annuities is 5.25%. How much
would it cost her to buy the annuity today?
a.
$825,835
b.
$869,300
c.
$915,052
d.
$963,213
e.
$1,011,374
ANSWER:
d
