Question 1

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?

Accepted Answer

The answer of After receiving a reward for information leading...

Question 2

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?

Accepted Answer

The bond's price can be calculated using the present value formula for bonds, which is the present value of the annuity (coupon payments) plus the present value of the par value. Given the annual coupon payment of $70, a market interest rate of 8.5%, and a maturity of 7 years, the correct price is $923.22.

Question 3

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?

Accepted Answer

The answer of Noncallable bonds that mature in 10 years...

Question 4

A perpetuity pays $85 per year and costs $950.What is the rate of return?

Accepted Answer

The answer of A perpetuity pays $85 per year and...

Question 5

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

Accepted Answer

The answer of A stock just paid a dividend of...

Question 6

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?

Accepted Answer

The required rate of return can be calculated using the Capital Asset Pricing Model (CAPM):

Required rate of return = risk-free rate + beta * market risk premium

= 4.25% + 1.40 * 5.50%

= 11.95%

Therefore, the correct answer is (C) 11.95%.

Question 7

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?

Accepted Answer

The answer of A share of Lash Inc.'s common stock...

Question 8

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

Accepted Answer

The answer of What is the PV of an ordinary...

Question 9

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

Accepted Answer

The answer of A stock is expected to pay a...

Question 10

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

Accepted Answer

The present value of a perpetuity is calculated using the formula PV = PMT / i, where PV is the present value, PMT is the annual payment, and i is the interest rate. Plugging in the given values, PV = $250 / 0.05 = $5,000.

Question 11

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?

Accepted Answer

The answer of Nystrand Corporation's stock has an expected return...

Question 12

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?

Accepted Answer

To calculate the yield to maturity, we need to use the following formula:
YTM = (C + (F-P)/n) / ((F+P)/2)
where
C = annual coupon payment
F = face value
P = current price
n = number of years to maturity

Plugging in the values, we get:
YTM = (70 + (1000-1125)/13) / ((1000+1125)/2)
YTM = 5.85%

Therefore, the yield to maturity on these bonds is 5.85%, which is closest to option B).

Question 13

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?

Accepted Answer

Using the formula for future value of an annuity: 
FV = PMT * [(1 + r)^n - 1] / r

Where PMT = $7,000
r = 5.2% = 0.052
n = 3 (since we are saving for 3 years)

Plugging in the values: 
FV = $7,000 * [(1 + 0.052)^3 - 1] / 0.052
FV = $23,260.74

Therefore, the closest answer choice is C) $23,261.

Question 14

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

Accepted Answer

The answer of What is the PV of an annuity...

Question 15

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?

Accepted Answer

The answer of Curtis Corporation's noncallable bonds currently sell for...

Question 16

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?

Accepted Answer

The answer of Freedman Flowers' stock has a 50% chance...

Question 17

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?

Accepted Answer

The portfolio's beta is calculated by taking the weighted average of the betas of the stocks in the portfolio. The investment in Stock X is $35,000 and in Stock Y is $65,000 (since the total investment is $100,000). The formula for the portfolio's beta is:$$ \text{Portfolio Beta} = (Weight of X \times Beta of X) + (Weight of Y \times Beta of Y) $$$$ = \left(\frac{35,000}{100,000} \times 1.50\right) + \left(\frac{65,000}{100,000} \times 0.70\right) $$$$ = (0.35 \times 1.50) + (0.65 \times 0.70) $$$$ = 0.525 + 0.455 $$$$ = 0.98 $$Therefore, the portfolio's beta is 0.98.

Question 18

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?

Accepted Answer

The answer of Erickson Inc.is considering a capital budgeting project...

Question 19

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)?

Accepted Answer

To calculate YTM, we need to calculate the present value of all cash flows (coupons and par value) and then solve for the discount rate (YTM) that makes the present value equal to the current bond price. Using a financial calculator or Excel, we find that the YTM is approximately 9.01%. This is the closest option to the calculated value, so the best choice is B.

Question 20

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?

Accepted Answer

The answer of Rogoff Co.'s 15-year bonds have an annual...

Quiz 29: Basic Financial Tools: a Review

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?

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 perpetuity pays $85 per year and costs $950.What is the rate of return?

A stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

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 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?

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

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?

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?

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?

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

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?

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?

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?

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?

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) ?

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?

Quiz 29: Basic Financial Tools: a Review

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?

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 perpetuity pays $85 per year and costs $950.What is the rate of return?

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?

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 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?

What is the PV of an ordinary annuity with 5 payments of $4,700 if the appropriate interest rate is 4.5%?

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?

What's the present value of a perpetuity that pays $250 per year if the appropriate interest rate is 5%?

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?

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?

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?

What is the PV of an annuity due with 5 payments of $2,500 at an interest rate of 5.5%?

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?

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?

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?

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?

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) ?

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 stock just paid a dividend of D₀ = $1.50.The required rate of return is r_s = 10.1%,and the constant growth rate is g = 4.0%.What is the current stock price?

A stock is expected to pay a dividend of $0.75 at the end of the year.The required rate of return is r_s = 10.5%,and the expected constant growth rate is g = 6.4%.What is the stock's current price?