BUS 225 Test 3

Question 1


As the discount rate becomes higher and higher, the present value of inflows approaches

[removed] 0
[removed] minus infinity
[removed] plus infinity
[removed] need more information

1 points

Question 2


As the interest rate increases, the present value of an amount to be received at the end of a fixed period

[removed] increases.
[removed] decreases.
[removed] remains the same.
[removed] Not enough information to tell.

1 points

Question 3


Under what conditions must a distinction be made between money to be received today and money to be received in the future?

[removed] A period of recession.
[removed] When idle money can earn a positive return.
[removed] When there is no risk of nonpayment in the future.
[removed] When current interest rates are different from expected future rates.

1 points

Question 4


If you invest $10,000 at 10% interest, how much will you have in 10 years?

[removed] $13,860
[removed] $25,940
[removed] $3,860
[removed] $80,712

1 points

Question 5


Increasing the number of periods will increase all of the following except

[removed] the present value of an annuity.
[removed] the present value of $1.
[removed] the future value of $1.
[removed] the future value of an annuity.

1 points

Question 6


Mr. Nailor invests $5,000 in a money market account at his local bank. He receives annual interest of 8% for 7 years. How much return will his investment earn during this time period?

[removed] $2,915
[removed] $3,570
[removed] $6,254
[removed] $8,570

1 points

Question 7


A retirement plan guarantees to pay to you or your estate a fixed amount for 20 years. At the time of retirement you will have $73,425 to your credit in the plan. The plan anticipates earning 9% interest. Given the following information, how much will your annual benefits be?

Present value of $1 PVIF= .178
Future value of $1 FVIF= 5.604
Present value of annuity PVIFA= 9.129
Future value of annuity FVIFA= 51.16

[removed] $1,435
[removed] $13,070
[removed] $8,043
[removed] $13,102

1 points

Question 8


Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment?

[removed] $566,400
[removed] $681,550
[removed] $150,000
[removed] $162,000

1 points

Question 9


Dr. J. wants to buy a Dell computer which will cost $3,000 three years from today. He would like to set aside an equal amount at the end of each year in order to accumulate the amount needed. He can earn 8% annual return. How much should he set aside?

[removed] $879
[removed] $627
[removed] $924
[removed] $1,243

1 points

Question 10


How much must you invest at 8% interest in order to see your investment grow to $8,000 in 10 years?

[removed] $3,070
[removed] $3,704
[removed] $3,105
[removed] none of these

1 points

Question 11


Sydney saved $10,000 during her first year of work after college and plans to invest it for her retirement in 40 years. How much will she have available for retirement if she can make 8% on her investment?

[removed] $596,250
[removed] $2,953,000
[removed] $1,345,100
[removed] $469,020

1 points

Question 12


The concept of time value of money is important to financial decision making because

[removed] it emphasizes earning a return on invested capital.
[removed] it recognizes that earning a return makes $1 worth more today than $1 received in the future.
[removed] it can be applied to future cash flows in order to compare different streams of income.
[removed] all of these

1 points

Question 13


Sharon Smith will receive $1 million in 50 years. The discount rate is 14%. As an alternative, she can receive $1,000 today. Which should she choose?

[removed] the $1 million dollars in 50 years.
[removed] $2,000 today.
[removed] she should be indifferent.
[removed] need more information.

1 points

Question 14


Ali Shah sets aside 2,000 each year for 5 years. He then withdraws the funds on an equal annual basis for the next 4 years. If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use the following two tables in this order:

[removed] present value of an annuity of $1; future value of an annuity of $1
[removed] future value of an annuity of $1; present value of an annuity of $1
[removed] future value of an annuity of $1; present value of a $1
[removed] future value of an annuity of $1; future value of a $1

1 points

Question 15


Pedro Gonzalez will invest $5,000 at the beginning of each year for the next 9 years. The interest rate is 8 percent. What is the future value?

[removed] $58,471.
[removed] $62,440.
[removed] $67,435.
[removed] $72,435.

1 points

Question 16


Mike Carlson will receive $12,000 a year from the end of the third year to the end of the 12thyear (10 payments). The discount rate is 10%. The present value today of this deferred annuity is:

[removed] $61, 450
[removed] $42,185
[removed] $55,379
[removed] $60,909

1 points

Question 17


You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

[removed] Present value of an annuity of $1
[removed] Future value of an annuity
[removed] Present value of $1
[removed] Future value of $1

1 points

Question 18


If Allison has saved $1,000,000 upon retirement, how much can she live on each year if she can earn 6% per year and will end with $0 when she expects to die 25 years after retirement?

[removed] $295,334
[removed] $20,953
[removed] $70,952
[removed] $78,229

1 points

Question 19


Football player Walter Johnson signs a contract calling for payments of $250,000 per year, to begin 10 years from now. To find the present value of this contract, which table or tables should you use?

[removed] The future value of $1
[removed] The future value of an annuity of $1 and the future value of $1
[removed] The present value of an annuity of $1 and the present value of $1
[removed] None of these

1 points

Question 20


The higher the rate used in determining the future value of a $1 annuity,

[removed] the smaller the future value at the end of the period.
[removed] the greater the future value at the end of a period.
[removed] the greater the present value at the beginning of a period.
[removed] none of these – the interest has no effect on the future value of an annuity.

1 points

Question 21


An issue of preferred stock is paying an annual dividend of $1.50. The growth rate for the firm’s common stock is 5%. What is the preferred stock price if the required rate of return is 7%?

[removed] $21.43
[removed] $30.00
[removed] $22.50
[removed] None of these

1 points

Question 22


The dividend valuation model stresses the

[removed] importance of earnings per share.
[removed] importance of dividends and legal rules for maximum payment.
[removed] relationship of dividends to market prices.
[removed] relationship of dividends to earnings per share.

1 points

Question 23


A 15-year zero-coupon bond was issued with a $1000 par value to yield 8%. What is the approximate market value of the bond?

[removed] $597
[removed] $315
[removed] $275
[removed] $482

1 points

Question 24


Which of the following regarding preferred stock is true?

[removed] If the price decreases, required rate of return has decreased
[removed] If the required rate of return increases, the price decreases
[removed] If the required rate of return increases, the price increases
[removed] The price in the market remains at par

1 points

Question 25


Preferred stock has all but which of the following characteristics?

[removed] No stated maturity.
[removed] A fixed dividend payment that carries a higher precedence than common stock dividends.
[removed] The same binding contractual obligation as debt.
[removed] Preferred lacks the ownership privilege of common stock.

1 points

Question 26


All of the following would likely cause a firm to raise capital at a lower cost except:

[removed] Higher times interest earned
[removed] Higher profit margin
[removed] Increased market share
[removed] Higher debt to asset ratio

1 points

Question 27


In a general sense, the value of any asset is the

[removed] value of the dividends received from the asset.
[removed] present value of the cash flows received from the asset.
[removed] value of past dividends and price increases for the asset.
[removed] future value of the expected earnings discounted by the asset’s cost of capital.

1 points

Question 28


A 20-year bond pays 6% on a face value of $1,000. If similar bonds are currently yielding 5%, what is the market value of the bond? Use annual analysis.

[removed] Over $1,100
[removed] Under $1,000
[removed] Under $900
[removed] Not enough information given to tell

1 points

Question 29


Two years ago, Maple Enterprises issued 4%, 20 years bonds and Temple Corp issued 4%, 10 year bonds. Since their time of issue, interest rates have increased. Which of the following statements is true of each firm’s bond prices in the market, assuming they have equal risk?

[removed] Maple’s decreased more than Temple’s
[removed] Temple’s decreased more than Maple’s
[removed] Maple’s increased more than Temple’s
[removed] They are both priced the same

1 points

Question 30


An issue of common stock is selling for $57.20. The year end dividend is expected to be $2.32 assuming a constant growth rate of 4%. What is the required rate of return?

[removed] 10.3%
[removed] 10.1%
[removed] 8.1%
[removed] None of these

1 points

Question 31


The dividend on preferred stock is most similar to:

[removed] common stock with no growth in dividends.
[removed] common stock with constant growth in dividends.
[removed] common stock with variable growth in dividends.
[removed] certificate of Deposit.

1 points

Question 32


The market allocates capital to companies based on

[removed] risk.
[removed] efficiency.
[removed] expected returns.
[removed] all of these

1 points

Question 33


What is the approximate yield to maturity for a five-year bond that pays 4% interest on a $1000 face value annually if the bond sells for $952?

[removed] 5.4%
[removed] 4.3%
[removed] 6.5%
[removed] 5.1%

1 points

Question 34


A 10-year zero-coupon bond that yields 5% is issued with a $1000 par value. What is the issuance price of the bond (round to the nearest dollar)?

[removed] $614
[removed] $64
[removed] $6,140
[removed] None of these

1 points

Question 35


Market Enterprises would like to issue bonds and needs to determine the approximate rate they would need to pay investors. A firm with similar risk recently issued bonds with the following current features a 5% coupon rate, 10 years until maturity, and a current price of $1,150. At what rate would Market Enterprises expect to issue their bonds, assuming annual interest payments?

[removed] 3.2%
[removed] 5.9%
[removed] 5%
[removed] 4.8%

1 points

Question 36


An issue of common stock is expected to pay a dividend of $3 at the end of the year. Its growth rate is equal to 3%, and the current share price is $40. What is the required rate of return on the stock?

[removed] Between 7% and 10%
[removed] Between 10% and 12%
[removed] Between 12% and 14%
[removed] Between 14% and 17%

1 points

Question 37


Valuation of financial assets requires knowledge of

[removed] future cash flows.
[removed] appropriate discount rate.
[removed] past asset performance.
[removed] a and b.

1 points

Question 38


A bond which has a yield to maturity greater than its coupon interest rate will sell for a price

[removed] below par.
[removed] at par.
[removed] above par.
[removed] what is equal to the face value of the bond plus the value of all interest payments.

1 points

Question 39


An issue of common stock’s most recent dividend is $1.75. Its growth rate is 5.7%. What is its price if the market’s rate of return is 7.7%?

[removed] $24.63
[removed] $87.50
[removed] $92.50
[removed] None of these

1 points

Question 40


Required return by investors is directly influenced by all of the following except:

[removed] Inflation
[removed] U.S. Treasury rates
[removed] Dividends
[removed] Risk

1 points

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