21 QUESTIONS ON FINANCE : CORRECT ANSWERS :

| March 14, 2016

QUESTIONS :

ABC is reviewing a project that will cost $1,431.The project will produce cash flows $210 at the end of each year for the first two years and $772 at the end of each year for the next two years. What is the profitability index? Assume interest rate is 4%.

a. 1.56

b. 0.95

c. 1.22

d. 2.56

Question 2

Suppose an investment offers to double your money in 39 years. What annual rate of return are you being offered if interest is compounded semi-annually?

a. 1.79%

b. 1.56%

c. 0.98%

d. 0.89%

Question 3

How many years will it take to quadruple (i.e. 4 times) your money at 9% compounded quarterly?

a. 7.2424

b. 15.5759

c. 5.6478

d. 3.3168

Question 4

A bond is currently selling for $1,087. If the yield to maturity is 10%, the coupon rate will be:

a. less than 10%.

b. equal than 10%.

c. more than 10%.

d. None above

Question 5

Suppose the real rate is 9.83% and the inflation rate is 4.65%. Solve for the nominal rate.

a. 11.32%

b. 12.87%

c. 14.93%

d. 21.74%

Question 6

An investment is acceptable if the profitability index (PI) of the investment is:

a. less than the net present value (NPV).

b. less than one.

c. greater than one.

d. greater than the internal rate of return (IRR).

e. greater than a pre-specified rate of return.

Question 7

A 8.9 percent $1,000 bond matures in 17 years, pays interest semiannually, and has a yield to maturity of 16.02 percent. What is the current market price of the bond?

a. $587.92

b. $456.23

c. $143.24

d. $693.22

Question 8

Uptown Insurance offers an annuity due with semi-annual payments for 19 years at 4.9 percent interest. The annuity costs $176,239 today. What is the amount of each annuity payment?

a. $7,008.06

b. $5,670.26

c. $8,300.23

d. $4,607.98

Question 9

ABC’s last dividend paid was $4.4, its required return is 13%, its growth rate is 6%, and its growth rate is expected to be constant in the future. What is ABC’s expected stock price in 19 years?

a. $104.37

b. $201.59

c. $98.15

d. $120.31

Question 10

Given the following cash flows, calculate the payback period:

Year CF

0 -921

1 368

2 253

3 291

4 784

a. 3.0115

b. 3

c. 2.0125

d. 4.5209

Question 11

A stock just paid a dividend of D0 = $3.4. The required rate of return is rs = 15.8%, and the constant growth rate is g = 3%. What is the current stock price?

a. $35.76

b. $24.469

c. $3.45

d. $27.359

Question 12

Suppose that today’s stock price is $49.8. If the required rate on equity is 18.6% and the growth rate is 7.9%, compute the expected dividend (i.e. compute D1)

a. $7.2447

b. $10.6483

c. $5.3286

d. $2.5643

Question 13

The common stock of ABC Industries is valued at $49 a share. The company increases their dividend by 3.1 percent annually and expects their next dividend to be $1.84. What is the required rate of return on this stock?

a. 2.82%

b. 3.61%

c. 4.87%

d. 6.86%

Question 14

The ABC Co. has $1,000 face value stock outstanding with a market price of $937.6. The stock pays interest annually, matures in 9 years, and has a yield to maturity of 10.7 percent. What is the current yield?

a. 5.11%

b. 10.22%

c. 7.34%

d. 14.94%

Question 15

The principal amount of a bond that is repaid at the end of term is called the par value or the:

a. call premium

b. perpetuity value

c. face value

d. back-end value

e. coupon value

Question 16

What is the effective rate of 18% compounded monthly?

a. 26.97%

b. 13.56%

c. 17.46%

d. 19.56%

Question 17

A project has the following cash flows. What is the internal rate of return?

Year 0 1 2 3

Cash flow -$121,000 68,150 $42,200 $39,100

a. 12.71%

b. 14.39%

c. 13.47%

d. 13.85%

e. 14.82%

Question 18

A cost that has already been incurred and cannot be recouped is called as a(n):

a. sunk cost

b. financial cost

c. opportunity cost

d. side cost

e. relevant cost

Question 19

ABC Corp. just paid a dividend of $2.4 per share at the end of the year. The stock has a required rate of return is 18%. The dividend is expected to grow at 6.9%. What is dividend at time = 8? (solve for D8?)

a. $7.667

b. $3.175

c. $6.451

d. $4.093

Question 20

What is the net present value of the following cash flows? Assume an interest rate of 3.5%

Year CF

0 -$11,895

1 $7,722

2 $5,687

3 $5,120

a. $5,492.69

b. $17,387.92

c. $6,247.34

d. $8,235.81

Question 21

A bond that sells for less than face value is called as:

a. discount bond

b. premium bond

c. par value bond

d. debenture

e. perpetuity

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