FIN – MULTIPLE PROBLEMS

| March 14, 2016

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

less than 10%.

equal than 10%.

more than 10%.

2. 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?

3. 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

4. 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?

5. 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

6. 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%.

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?

8. 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?)

9. 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?

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

call premium

perpetuity value

face value

back-end value

coupon value

11. 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?

12. What is the effective rate of 18% compounded monthly?

13. 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?

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

Answer

sunk cost

financial cost

opportunity cost

side cost

relevant cost

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

16. 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?

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

discount bond

premium bond

par value bond

debenture

perpetuity

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

19. 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)

20. Given the following cash flows, calculate the payback period:

Year CF

0 -921

1 368

2 253

3 291

4 784

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