Question 1

If the final expressions in a present value equation used to calculate the price of a bond you are considering buying are "[$50 / (1 + .08)3] + [$500 / (1 + .08)3]",which of the following is correct?

Accepted Answer

The expression matches the present value equation for a bond with a face value of $500, a coupon of $50, and a maturity of 3 years.

Question 2

The difference between a firm's revenue and its operating expenses is the firm's operating income.

Accepted Answer

This statement is true. Operating income is a measure of a firm's profitability and is calculated as revenue minus operating expenses.

Question 3

Yolanda received a $100 savings bond for her birthday.The bond pays $100 at maturity,which is in five years.If the interest rate is 3%,the bond has a present value of $86.26.

Accepted Answer

The answer of Yolanda received a $100 savings bond for...

Question 4

On a balance sheet,stockholders' equity is listed as an asset.

Accepted Answer

Stockholders' equity is actually listed as a liability on the balance sheet, representing the amount of the company's assets that are owned by shareholders.

Question 5

Why is money you receive at some future date worth less to you than money you receive today?

Accepted Answer

The answer of Why is money you receive at some...

Question 6

If the present value equation used to calculate the price of a stock you are considering buying is "[$7 / (0.04 - 0.03)],which of the following is correct,assuming that dividends will grow at a constant rate?

Accepted Answer

The present value equation used to calculate the stock price is [$7 / (0.04 - 0.03)] = $700. Therefore, the stock price is $700. The question asks us to assume that dividends will grow at a constant rate, but does not provide any information about the dividend amount or growth rate. Therefore, we cannot determine the exact values of the dividend or the dividend growth rate. Furthermore, the interest rate in the equation is 4 percent, not 3 percent or 1 percent as specified in the answer choices. Choice C is the only option that correctly identifies the stock price as $700.

Question 7

If you own a $1,000 face value bond with one year remaining to maturity and a 3 percent coupon rate and new bonds are paying 9 percent,what is the most you can get for your old bond?

Accepted Answer

The most you can get for your old bond is its present value, which would be calculated using the current market rate (9 percent) as the discount rate. Using the formula for present value of a bond, we get: PV = (Coupon payment / (1 + r)^n) + (Face value / (1 + r)^n) = (30 / 1.09) + (1000 / 1.09) = $944.95.

Question 8

The longer you have to wait to receive a payment,

Accepted Answer

The longer you have to wait to receive a payment, the less valuable it will be to you. This is because of the time value of money concept, where money received later is worth less than the same amount received today due to inflation and the potential to earn interest on the money in the interim. Therefore, waiting for a payment to be received later decreases its present value and reduces its worth to the recipient.

Question 9

If a stock's dividend is expected to grow at a constant rate of 6 percent in the future and it has just paid a dividend of $2.50 a share,and you have an alternative investment of equal risk that will earn a 8 percent rate of return,what would you be willing to pay per share for this stock?

Accepted Answer

The answer of If a stock's dividend is expected to...

Question 10

Using present value to calculate stock prices is ________ than using present value to calculate bond prices because ________.

Accepted Answer

Using present value to calculate stock prices is less accurate than using it for bond prices because, unlike bond coupon payments which are fixed and known in advance, dividend payments for stocks are uncertain and can vary over time.

Question 11

If a company pays a dividend of $2 to be received one year from now,dividends are expected to grow at a rate of 3 percent per year for the indefinite future,and the interest rate is 4 percent,the price of the company's stock should be ________ per share.

Accepted Answer

The answer of If a company pays a dividend of...

Question 12

Suppose you hit a progressive jackpot on a 25-cent Fortunemaker slot machine in a casino in Las Vegas and are given the choice of the following prizes:
Prize 1: $200,000 to be received right away,with four additional payments of $200,000 to be received each year for the next four years.
Prize 2: $750,000 to be received right away.
If the interest rate is 3 percent,what is the present value of each prize?

Accepted Answer

The answer of Suppose you hit a progressive jackpot on...

Question 13

If the present value equation used to calculate the price of a stock you are considering buying is "[$12 / (0.05 - 0.02)],which of the following is correct,assuming that dividends will grow at a constant rate?

Accepted Answer

The answer of If the present value equation used to...

Question 14

How much is a bond that pays $80 in coupon payments for 4 years and $1,000 at the end of the fourth year worth if the interest rate is 6%?

Accepted Answer

The answer of How much is a bond that pays...

Question 15

What is the present value of $777 in one year if the current rate of interest is 7 percent?

Accepted Answer

Using the formula for present value, $PV = \frac{FV}{(1+r)^n}$, where $FV$ is the future value, $r$ is the interest rate, and $n$ is the number of periods, we get $PV = \frac{777}{(1+0.07)^1} = 726.17$. Therefore, the present value of $777 in one year at a 7 percent interest rate is $726.17.

Question 16

Georgia's great uncle gave her a $5,000 savings bond as a wedding gift.The bond pays $5,000 at maturity,which is in 10 years.If the interest rate is 4%,the bond has a present value of $ 3,377.82.

Accepted Answer

The present value of a bond is calculated using the formula PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($5,000), r is the annual interest rate (4% or 0.04), and n is the number of years until maturity (10). Plugging these values into the formula gives PV = $5,000 / (1 + 0.04)^10 = $3,377.97, which is approximately $3,377.82 due to rounding differences.

Question 17

How much is a bond that pays $40 in coupon payments for 2 years and $1,000 at the end of the fourth year worth if the interest rate is 4%?

Accepted Answer

The answer of How much is a bond that pays...

Question 18

If the final expressions in a present value equation used to calculate the price of a bond you are considering buying are "[$75 / (1 + .04)6] + [$2,500 / (1 + .04)6]",which of the following is correct?

Accepted Answer

The answer of If the final expressions in a present...

Quiz 6: Firms, the Stock Market, and Corporate Governance

If the final expressions in a present value equation used to calculate the price of a bond you are considering buying are "[$50 / (1 + .08) 3] + [$500 / (1 + .08) 3]",which of the following is correct?