Question 1

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

Accepted Answer

$\begin{array}{lr}
\text { Coupon rate } & 5.5 \% \
\text { PMT } & \$ 55 \
\text { N } & 10 \
\text { I/YR } & 7.0 \% \
\text { FV } & \$ 1,000 \
\text { PV } & \$ 894.65
\end{array}$

Question 2

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

Accepted Answer

$\begin{array}{lr}
\mathrm{D}_{1} & \$ 0.75 \
\mathrm{r}_{\mathrm{s}} & 10.5 \% \
\mathrm{~g} & 6.4 \% \
\mathrm{P}_{0}=\mathrm{D}_{1} /\left(\mathrm{r}_{\mathrm{S}}-\mathrm{g}\right) & \$ 18.29
\end{array}$

Question 3

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 σ28% 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%

Accepted Answer

$\begin{array}{ccc}
&&& Prob\
Conditions& Prob.&Return& x Return\
Good&0.50 & 25.0 \% & 12.50 \% \
Average&0.30 & 10.0 \% & 3.00 \% \
Poor&0.20 & -28.0 \% & -5.60 \%\
&1.00&&9.90\%&=\text { Expected return }
\end{array}$

Question 4

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

Accepted Answer

$\begin{array}{lr}
\text { I } & 7 \
\text { I YR } & 8.5 \% \
\text { PMT } & \$ 70 \
\text { FV } & \$ 1,000 \
\text { PV } & \$ 923.22
\end{array}$

Question 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?
A) 5.80%
B) 5.95%
C) 6.09%
D) 6.25%
E) 6.40%

Accepted Answer

Use the SML to determine the market risk premium with the given data.
 $\begin{aligned}
r_{\mathrm{S}} &=1 \mathrm{RF}+\mathrm{b}_{\text {Stock }} \times \mathrm{RP}_{\mathrm{M}} \
12.25 \% &=5.00 \%+1.25 \times \mathrm{RP}_{\mathrm{M}} \
7.25 \% &=\mathrm{RP}_{\mathrm{M}} \times 1.25 \
5.80 \% &=\mathrm{RP}_{\mathrm{M}}
\end{aligned}$

Question 6

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
D) $24,424
E) $25,645

Accepted Answer

BEGIN Mode
 $\begin{array}{lr}
\text { N } & 3 \
\text { I/YR } & 5.2 \% \
\text { PV } & \$ 0.00 \
\text { PMT } & \$ 7,000 \
\text { FV } & \$ 23,261
\end{array}$ 
Alternative setup:
 $\begin{array}{cccc}
0 & 1 & 2 & 3 \
\hline \$ 7,000 & \$ 7,000 & \$ 7,000 & \$ 7,000 \
& & & F V=\$ 23,261
\end{array}$

Question 7

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%

Accepted Answer

$\begin{array}{lr}
\text { Cost }(\mathrm{PV}) & \$ 950 \
\mathrm{PMT} & \$ 85 \
\mathrm{M} / \mathrm{YR} & 895 \%
\end{array}$

Question 8

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

Accepted Answer

$\begin{array}{lccc}
\text { Par value } & \$ 1,000 \
\text { Coupon rate } & 9.5 \% \
\text { Periodslyear } & 2 \
\text { Yrs to maturity } & 15 \
\mathrm {~N} = \text { periods } & 30 \
\text { Aruul rate } & 11.0 \% \
\text { Periodic rate } & 5.50 \% \
\text { PMTperiod } & \$ 47.50 \
\text { FV } & \$ 1,000 \
\text { PV } & \$ 691.00
\end{array}$

Question 9

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

Accepted Answer

$\begin{array}{lr}
\mathrm{UYR} & 5.0 \% \
\mathrm{PMT} & \$ 250 \
\mathrm{PV} & \$ 5,000
\end{array}$

Question 10

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%

Accepted Answer

$\begin{array}{ll}
N & 15 \
\text { PV } & \$ 1,080 \
\text { PMT } & \$ 10 \
\text { FV } & \$ 1,000 \
\text { I/YR } & 9.01 \%=\text { YTM }
\end{array}$

Question 11

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%

Accepted Answer

$\begin{array}{lr}
\text { Beta } & 1.40 \
\text { Risk-free rate } & 4.25 \% \
\text { Marketrisk premium } & 5.50 \% \
\text { Required return } & 11.95 \%
\end{array}$

Question 12

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

Accepted Answer

$\begin{array}{l}
\begin{array} { l l} 
\text {Expected return}\
\text {Standard deviation}\
\text { Coefficient of variation }=\mathrm{Std} \mathrm{dev} / \text { Expected return }=
\end{array}
\begin{array} { l } 
25.0 \% \
30.0 \% \
1.20
\end{array}
\end{array}$

Question 13

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

Accepted Answer

$\begin{array}{lr}
\text { N } & 5 \
\text { I/YR } & 4.5 \% \
\text { PMT } & \$ 4,700 \
\text { FV } & \$ 0.00 \
\text { PV } & \$ 20,633
\end{array}$

Question 14

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

Accepted Answer

BEGIN Mode
 $\begin{array}{lr}
\text { N } & 5 \
\text { I/YR } & 5.5 \% \
\text { PMT } & \$ 2,500 \
\text { FV } & \$ 0.00 \
\text { PV } & \$ 11,262.88
\end{array}$

Question 15

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?
A) $11,973
B) $12,603
C) $13,267
D) $13,930
E) $14,626

Accepted Answer

$\begin{array}{lr}
\text { N} & 3 \
\text { I/YR } & 5.2 \% \
\text { PV } & \$ 0.00 \
\text { PMT } & \$ 4,200 \
\text { FV } & \$ 13,266.56
\end{array}$

Question 16

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

Accepted Answer

$\begin{array}{llll}
&&&&\text { Weight }\
\text { Company}&\text { Investment }&\text { Weight }&\text { Beta } & \text {  x beta }\
X&\$ 35,000 & 0.35 &1.50&0.53\
Y&\$ 65,000 & 0.65&0.70&0.46\
&\$100,000& 1.00&&0.98&=\text { Portfolio beta }
\end{array}$

Question 17

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%

Accepted Answer

$\begin{array}{lr}
\text { Coupon rate } & 7.25 \% \
\text { N } & 13 \
\text { PV }=\text { Price } & \$ 1,125 \
\text { PMT } & \$ 72.50 \
\text { FV }=\text { Par } & \$ 1,000 \
\text { IVR } & \mathbf{5} 85 \%=\text { VTM }
\end{array}$

Question 18

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

Accepted Answer

$\begin{array}{lr}
\text { N } & 5 \
\text { I/YR } & 8.5 \% \
\text { PV } & \$ 0.00 \
\text { PMT } & \$ 3,100 \
\text { FV } & \$ 18,369
\end{array}$

Question 19

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%
C) 6.87%
D) 7.24%
E) 7.62%

Accepted Answer

$\begin{array}{lr}
\text { N } & 15 \
\text { PV } & \$ 1,165 \
\text { PMT } & \$ 95 \
\text { FV } & \$ 1,000 \
\text { I/YR } & 762 \%
\end{array}$

Question 20

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

Accepted Answer

$\begin{array}{lr}
\text { N } & 5 \
\text { I/YR } & 5.0 \% \
\text { PMT } & \$ 5,000 \
\text { FV } & \$ 0.00 \
\text { PV } & \$ 62,311
\end{array}$

Quiz 29: Basic Financial Tools: A review

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 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?

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 σ28% return. What is the firm's expected rate of return?

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?

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?

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

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?

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

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) ?

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?

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?

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

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

You are hoping to buy a new boat 3 years from now, and you plan to save $4,200 per year, beginning one year from today. You will deposit your savings in an account that pays 5.2% interest. How much will you have just after you make the 3rd deposit, 3 years from now?

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?

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?

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?