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1.
An annuity stream of cash flow payments is a set of:
2.
An annuity stream where the payments occur forever is called a(n):
3. Which of the following statements concerning the effective annual rate are correct?
I. When making financial decisions, you should compare effective annual rates rather than annual percentage rates.
II. The more frequently interest is compounded, the higher the effective annual rate.
III. A quoted rate of 6% compounded continuously has a higher effective annual rate than if the rate were compounded
daily.
IV. When borrowing and choosing which loan to accept, you should select the offer with the highest effective annual
rate.
4. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two
options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of
$641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why?
5. Janet plans on saving $3,000 a year and expects to earn 8.5%. How much will Janet have at the end of twenty
-five years if she earns what she expects?
6. You retire at age 60 and expect to live another 27 years. On the day you retire, you have $464,900 in your
retirement savings account. You are conservative and expect to earn 4.5% on your money during your retirement. How
much can you withdraw from your retirement savings each month if you plan to die on the day you spend your last
penny?
7. The Good Life Insurance Co. wants to sell you an annuity which will pay you $500 per quarter for 25 years.
You want to earn a minimum rate of return of 5.5%. What is the most you are willing to pay as a lump sum today to
buy this annuity?
A.
8. You are considering an annuity which costs $100,000 today. The annuity pays $6,000 a year. The rate of
return is 4.5%. What is the length of the annuity time period?
9. The Robertson Firm is considering a project which costs $123,900 to undertake. The project will yield cash
flows of $4,894.35 monthly for 30 months. What is the rate of return on this project?
10. Suzette is going to receive $10,000 today as the result of an insurance settlement. In addition, she will
receive $15,000 one year from today and $25,000 two years from today. She plans on saving all of this money and
investing it for her retirement. If Suzette can earn an average of 11% on her investments, how much will she have in
her account if she retires 25 years from today?
11. You are paying an effective annual rate of 13.8% on your credit card. The interest is compounded monthly.
What is the annual percentage rate on your account?
12. What is the effective annual rate if a bank charges you 7.64% compounded quarterly?
13.
What is the effective annual rate of 14.9% compounded continuously?
14. Which one of the following statements concerning net present value (NPV) is correct?
15. The discount rate that makes the net present value of an investment exactly equal to zero is called the:
16. The internal rate of return (IRR):
I. rule states that a typical investment project with an IRR that is less than the required rate should be accepted.
II. is the rate generated solely by the cash flows of an investment.
III. is the rate that causes the net present value of a project to exactly equal zero.
IV. can effectively be used to analyze all investment scenarios.
17. Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both
projects have 5 year lives.
Matt has been asked for his best recommendation given this information. His recommendation should be to accept:
19. What is the net present value of a project with the following cash flows and a required return of 12%?
20. A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to
get started. In year five, the project will be closed and as a result should produce a cash inflow of $8,500. What
is the net present value of this project if the required rate of return is 13.75%?
21. You are considering the following two mutually exclusive projects that will not be repeated. The required
rate of return is 11.25% for project A and 10.75% for project B. Which project should you accept and why?
.
22. An investment has the following cash flows. Should the project be accepted if it has been assigned a
required return of 9.5%? Why or why not?
23. You are considering two independent projects with the following cash flows. The required return for both
projects is 10%. Given this information, which one of the following statements is correct?
A. You should accept project B since it has the higher IRR and reject project A because you can not accept both
projects.
B. You should accept project A because it has the lower NPV and reject project B.
C. You should accept project A because it has the higher NPV and you can not accept both projects.
D. You should accept project B because it has the higher IRR and reject project A.
E. You should accept both projects if the funds are available to do so since both NPV’s are > 0.
24. You are analyzing two mutually exclusive projects and have developed the following information. What is the
incremental IRR?
25. An asset characterized by cash flows that increase at a constant rate forever is called a:
26. The rate of return required by investors in the market for owning a bond is called the:
27. The relationship between nominal interest rates on default-free, pure discount securities and the time to
maturity is called the:
28. A bond that pays interest annually yields a 7.25% rate of return. The inflation rate for the same period is
3.5%. What is the real rate of return on this bond?
29. Aspens is preparing a bond offering with an 8% coupon rate. The bonds will be repaid in 10 years. The
company plans to issue the bonds at par value and pay interest semiannually. Given this, which of the following
statements are correct?
I. The initial selling price of each bond will be $1,000.
II. After the bonds have been outstanding for 1 year, you should use 9 as the number of compounding periods when
calculating the market value of the bond.
III. Each interest payment per bond will be $40.
IV. The yield to maturity when the bonds are first issued is 8%.
31. Consider a bond which pays 8% semiannually and has 8 years to maturity. The market requires an interest rate
of 10% on bonds of this risk. What is this bond’s price?
32. The bonds issued by Manson & Son bear a 6% coupon, payable semiannually. The bond matures in 8 years and has
a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?
33. Chocolate and Rum, Inc. offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%.
The bonds mature in 9 years. What is the market price of a $1,000 face value bond?
34. A 12-year, 5% coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in
the price of this bond if the market yield rises to 6% from the current yield of 4.5%?
35. A form of equity which receives no preferential treatment in either the payment of dividends or in
bankruptcy distributions is called _____ stock.
36. Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return
to increase across the board on all equity securities, then you should also expect the:
37. The Robert Phillips Co. currently pays no dividend. The company is anticipating dividends of $0, $0, $0,
$.10, $.20, and $.30 over the next 6 years, respectively. After that, the company anticipates increasing the
dividend by 4% annually. The first step in computing the value of this stock today, is to compute the value of the
stock when it reaches constant growth in year:
38. Differential growth refers to a firm that increases its dividend by:
40. Angelina’s made two announcements concerning its common stock today. First, the company announced that its
next annual dividend has been set at $2.16 a share. Secondly, the company announced that all future dividends will
increase by 4% annually. What is the maximum amount you should pay to purchase a share of Angelina’s stock if your
goal is to earn a 10% rate of return?
41. Martha’s Vineyard recently paid a $3.60 annual dividend on its common stock. This dividend increases at an
average rate of 3.5% per year. The stock is currently selling for $62.10 a share. What is the market rate of return?
42. Turnips and Parsley common stock sells for $39.86 a share at a market rate of return of 9.5%. The company
just paid its annual dividend of $1.20. What is the rate of growth of its dividend?
43. The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its
annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year. The
company just paid its annual dividend in the amount of $1.00 per share. What is the current value of one share if
the required rate of return is 9.25%?
