Finance Exam 2 (ch. 5/6/7)

The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity for interest rates greater than zero. True or false? Why?

a. False; Because every payment gets one less period of compounding.

b. True; Because every payment is already one period further ahead in time.

c. False: Because every payment is one period further from the end.

d. True; Because every payment gets one extra period of compounding.

d

The determination of the equal periodic loan payments necessary to provide a lender with a specified interest return and to repay the loan principal over a specified period refers to __________.

 

a. loan amortization

b. loan securitization

c. loan modernization

d. loan commercialization

a

The future value of a dollar ________ as the interest rate increases and ________ the longer the money remains invested.

 

a. decreases; decreases

b. increases; increases

c. decreases; increases

d. increases; decreases

b

________ is the amount earned on a deposit that has become part of the principal at the end of a specified time period.

 

a. Discount interest

b. Compound interest

c. Primary interest

d. Simple interest

b

The rate of interest agreed upon contractually charged by a lender or promised by a borrower is the ________ interest rate.

 

a. effective

b. discounted

c. nominal

d. continuous

c

The time value concept/calculation used in amortizing a loan is ________.

 

a. future value of a dollar

b. future value of an annuity

c. present value of a dollar

d. present value of an annuity

d

Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 7.55 percent with interest compounded monthly. Account B has an annual percentage rate of 7.45 percent with interest compounded continuously. Which account provides the highest effective annual return?

 

a. Account A

b. Account B

c. Both provide the same effective annual return.

d. We don't have sufficient information to make a choice.

a

(effective annual rate)

Jack was given a gold coin originally purchased for $1 by his great-grandfather 40 years ago. Today the coin is worth $550. The annual rate of return on this coin is approximately equal to ________.

a. 6.5%

b. 13.0%

c. 17.1%

d. 18.1%

c

(FV w simple annual interest)

You have been offered a project paying $350 at the beginning of each year for the next 15 years. What is the maximum amount of money you will invest in this project if you expect 7.0% rate of return to your investment?

 

a. $4,883

b. $5,250

c. $3,411

d. $3,188

c

(present value of an annuity due)

Carlos has deposited $20,000 in an investment account paying 7.5% annual interest. How many years will it take Carlos’ investment to grow to $55,000?

 

a. 2.75 years

b. 14.2 years

c. 13.7 years 

d. 13.99 years

d

(FV w simple annual interest, involves using natural log)

You inherited an investment portfolio worth $1,500,000. The portfolio earns a return of 9.5% per year. You want to withdraw money from this portfolio once per year starting one year from today, and you want to continue making withdrawals forever. Furthermore, you want to increase your withdrawals at 4.0% per year to keep up with inflation. How large can your first withdrawal be?

 

a. $142,500

b. $60,000

c. $82,500 

d. $202,500

c

Account X has an annual percentage rate of 11.35% with interest compounded monthly. Account Y has an annual percentage rate of 11.25% with interest compounded continuously. What are the effective annual rates for accounts X and Y?

 

a. 11.96%; 11.91%

b. 12.02%; 11.91%

c. 11.96%; 11.85%

d. 12.02%; 11.85%

a

Yazmin has opened a retirement fund account that pays 8% interest and requires $6,000 annual deposits. Yazmin will retire in 35 years and expects 35 years of retirement. What is the maximum annual retirement benefit Yazmin can get during his retirement years?

 

a. $82,141

b. $88,712

c. $95,809 

d. $210,000

b

(FV of an ordinary annuity, can solve w calculator)

A college received a contribution to its endowment fund of $4,000,000. It can never touch the principal, but can use the earnings. At an assumed interest rate of 10%, how much can the college earn to help its operations each year?

 

a. $20,000 

b. $40,000

c. $200,000

d. 400,000

d

A lottery administrator has just completed the state's most recent $100,000,000 lottery. Receipts from lottery sales were $100,000,000 and the payout will be $10,000,000 at the end of each year for 10 years. The expenses of running the lottery were $1,600,000. The state can earn an annual compound rate of 9% on any funds invested. Calculate the net profit to the state from this lottery (no taxes).

 

a. $35,823,423

b. $64,176,577

c. $34,223,423

d. $4,224,108

c

(solve for present value w ba2 calc and subtract expenses)

Last Christmas, Laurel received an annual bonus of $2,000. These annual bonuses are expected to grow by 6% for the next 5 years. How much will Laurel have at the end of the fifth year if she invests her Christmas bonuses (including the most recent bonus) in an account paying 7% per year?

 

a. $16,442

b. $11,501

c. $11,274

d. $10,000

a

A sequence of cash flows has a future value in 3 years of $89,702 when the interest rate is 9%. The cash flow sequence is show below, except that the cash payment made in year 2 is missing. All payments come at the end of the year. What is the missing payment at the end of year 2?
 

Cash Flow Year 1	$21,334
Cash Flow Year 2	?
Cash Flow Year 3	$32,550

 

a. $28,531

b. $31,099

c. $35,818

d. $29,179

d

(cf 1 has 2 interests on it, then add that to cf 3, then subtract from the FV of 89k, then divide that by 1.09 to get the initial payment)

The main idea behind the time value of money is that a dollar today is worth more than a dollar in the future because ________.

a. inflation erodes the value of money over time

b. investors can earn a return on money they have today and

thereby have more money in the future

c. the future is more uncertain than the present

d. investors are impatient

b

__________ is the amount earned only on the principal at the end of a period of time.

a. Discount interest

b. Compound interest

c. Primary interest

d. Simple interest

d

Which of the following is not a term that might be used interchangeably with the term discount rate?

a. inflation rate

b. required return

c. opportunity cost

d. cost of capital

a

If Fred Moreno places $100 in an account paying 8% interest compounded annually, how much will he have after 1 year?

$108

If Fred Moreno places $100 in an account paying 8% interest compounded annually, how much will he have after 2 years?

$116.64

Jane Farber places $800 in a savings account paying 3% interest compounded annually. How much money will be in the account after 5 years?

$927.42

Pam Valenti has been offered an investment opportunity that will pay her $1,700 eight years from now. If Pam requires a 4% rate of return, how much should she pay for this opportunity?

$1,242.17

Fran Abrams is evaluating two annuities that both pay $1,000 per year. Annuity A is an ordinary annuity, while annuity B is an annuity due.

Which annuity is worth more at the end of year 5?

B

Fran Abrams is evaluating two annuities that both pay $1,000 per year. Annuity A is an ordinary annuity, while Annuity B is an annuity due.

How much money will Fran have after 5 years if she chooses annuity A, the ordinary annuity, and deposits the $1,000 annual end-of-year payments in an account that earns 7% annual interest?

$5,750.74

Fran Abrams is evaluating two annuities that both pay $1,000 per year. Annuity A is an ordinary annuity, while Annuity B is an annuity due.

How much money will Fran have after 5 years if she chooses annuity B, the annuity due, and deposits the $1,000 annual beginning-of-year payments in an account that earns 7% annual interest?

$6,153.29

The future value of an annuity due is always ______ the future value of an otherwise identical ordinary annuity.

a. greater than

b. less than

c. equal to

d. worse than

a

Braden Company wants to determine the most it should pay for an ordinary annuity that consists of cash inflows of $700 each for 5 years.

If the firm requires the annuity to provide a minimum return of 4% what is the annuity worth?

$3,116.28

Braden Company wants to determine the most it should pay for an ordinary annuity that consists of cash inflows of $700 each for 5 years.

The firm requires the annuity to provide a minimum return of 4%. Let’s now assume that Braden’s $700 annual cash inflow occur at the start of each year. What is the present value of this annuity due?

$3,240.93

The present value of an annuity due is always less than the present value of an otherwise identical ordinary annuity for interest rates greater than zero. True or false? Why?

a. False; Because every payment gets one less period of discounting.

b. True; Because every payment gets one more period of discounting.

c. False; Because every payment gets one less period of compounding.

d. True; Because every payment gets one more period of compounding.

A

Ross Clark wishes to endow a chair in finance at his alma mater. The university indicated that the annual cash flow required to support an endowed chair is $400,000 and that it will invest the money Ross donates today in assets earning a 5% annual return.

If Ross wants to give money today so that the university will begin receiving annual cash flows next year, how much must his gift be?

$8,000,000

Ross Clark wishes to endow a chair in finance at his alma mater. The university indicated that the annual cash flow required to support an endowed chair is $400,000 and that it will invest the money Ross donates today in assets earning a 5% annual return.

Suppose, after consulting with his alma mater, Ross Clark learns that the university requires the endowment to provide a $400,000 cash flow next year, but subsequent annual cash flows must grow by 2% per year to keep up with inflation. How much does Ross need to donate today to cover this requirement?

$13,333,333

(constant growth perpetuity

400k / .03)

Shrell Industries expects to receive the following mixed stream of cash flows. How much will Shrell accumulate at the end of 5 years if it immediately reinvests the cash flows at 8% when they are received?

$83,608.15

Frey Company has the opportunity to receive the following mixed stream of cash flows over the next 5 years. If the firm must earn at least 9% on its investments, what is the most it should pay for this opportunity?

$1,904.76

If the expected return is above the required return on an

asset, rational investors will ________.

a. buy the asset, which will drive the price up and cause expected return to reach the level of the required return

b. buy the asset, which will drive the price down and cause the expected return to reach the level of the required return

c. sell the asset, which will drive the price up and cause the expected return to reach the level of the required return

d. sell the asset, since price is expected to decrease

a

Recall Fred Moreno from earlier. He invested $100 for two years in a savings account paying 8% interest compounded annually, but what if the interest is compounded semiannually, quarterly, or continuously instead?

Semi: $116.99

Quarter: $117.17

Continuous: $117.35

Recall Fred Moreno from earlier. He invested $100 for two years in a savings account paying 8% interest compounded annually. What would his expected rate of return be if it were compounded semiannually, quarterly, or continuously?

Semi: 8.16%

Quarter: 8.24%

Continuous: 8.33%

Suppose you want to buy a house 5 years from now and you need a down payment of$30,000. To accumulate the $30,000 in five years, how much will equal annual end-of-year deposits into an account paying annual interest of 6% need to be?

$5,321.89

Alex May borrows $6,000 from a bank. The bank requires Alex to repay the loan fully in 4 years by making four end-of-year payments. If the interest rate is 10%, how much is the loan payment each year?

$1,892.82

For an amortizing loan, the _________ each period __________ over the life of the loan.

a. payment; declines

b. interest; is constant

c. principal; declines

d. interest; increases

c

An investor who purchased a $10 share of Dollar Tree stock at the end of 2006 saw the firm’s stock price grow to $70 by 2016’s close. What compound annual growth rate does that increase represent?

21.48%

Ann Bates wishes to determine how long it will take for her initial $1,000 deposit, earning 8% annual interest, to grow to $2,500.

11.9 years

A sequence of cash flows has a present value today of $19,750 when the discount rate is 7.5%. The cash flow sequence is show below, except that the cash flow made in year 2 is missing. What is the missing cash flow at the end of year 2?

6,885.37

Assume Julian has a choice between two deposit accounts. Account A has an annual percentage rate of 9.40% with interest compounded quarterly. Account B has an annual percentage rate of 9.33% percent with interest compounded monthly. Which account provides the highest effective annual return (round percentages to two decimal places)?

a. Account A

b. Account B

c. Both provide the same effective annual return.

d. We don't have sufficient information to make a choice.

C

You recently deposited $12,250 in an investment account paying 6.75% annual interest compounded monthly. How many years will it take your investment to grow to $47,075?

a. 24 years

b. 20.6 years

c. 20 years

d. 18.7 years

c

(dont forget to divide by 12 at the end because it’s monthly!)

You inherited an investment portfolio that is worth $10 million today. Starting one year from now you want to withdraw $245,000 and then continue to withdraw a growing amount each year for the rest of time. If you want withdraws to grow 6% per year, what rate of return will be necessary?

a. 8.45%

b. 6%

c. 2.45%

d. 7%

a

(constant growth perp)

During her 35-year career, Janae made end-of-year contributions of $18,000 to her retirement account that paid 6% annually. If Janae expects 30 years of retirement and 4% annual rate of return in retirement, what is her maximum annual retirement income at the start of each year of retirement?

a. $90,862

b. $111,536

c. $96,314

d. $115,997

B

dont forget to change it to an ANN DUE!

A bond will sell at ___________ when the stated rate of interest exceeds the required rate of return, at ___________ when the stated rate of interest is less than the required rate of return, and at ___________ when the stated rate of interest is equal to the required return.

 

a. a premium; par value; a discount

b. a discount; a premium; par value

c. a premium; a discount; par value 

d. par value; a premium; a discount

c

Interest rate risk is the risk that a bond's _________ will change when market interest rates change. Generally, ___________ bonds have higher interest rate risk than ____________ bonds.

 

a. coupon; perpetuity; annuity

b. par value; municipal; government

c. maturity; primary; secondary

d. value; long-term; short-term

d

Assume the following returns and yields: U.S. T-bill = 0.15%, 5-year U.S. T-note = 0.28%, 10-year U.S. T-note = 0.36%, 15-year U.S. T-bond = 0.32%, 20-year U.S. T-bond = 0.27%, and 25-year U.S. T-bond = 0.23%. Based on this information, the shape of the yield curve is ________ and reflects the ______________.

 

a. upward sloping; expectation theory

b. downward sloping; liquidity preference theory 

c. humped; market segmentation theory

d. normal; interest rate theory

c

You are comparing three different bond issues from a single firm:
 
Issue A: Grants the issuer the right, but not obligation, to repurchase bonds prior to their stated maturity.
Issue B: Includes a provision that allows bondholders to redeem bonds at a stated price prior to maturity.
Issue C: Allows bondholders to exchange bonds for shares of the issuer’s common stock.
 
What general features of bonds do these issues exemplify and, all else equal, which bond is likely to have the highest yield to maturity (i.e., required return)?

 

a. Purchase; Redeem; Exchange; Issue B

b. Call; Put; Conversion; Issue A 

c. Income; Extend; Float; Issue C

d. Put; Call; Swap; Issue B

b

Gong Li has recently inherited $10,000 and is considering purchasing 10 bonds of the Lucky Corporation. The bond has a par value of $1,000 with 10 percent coupon rate and will mature in 10 years. Does Gong Li have enough money to buy 10 bonds if the required rate of return is 9 percent?

 

a. Yes

b. No

c. Maybe

d. Not enough information to determine

b

A certain bond was issued a few months ago, but since then the company that issued the bond has fallen on hard times, and investors perceive the bond to be riskier than it was when it was issued. We should expect that compared to when the bond was issued ________.

 

a. its price is now lower and its expected return is lower

b. its price is now higher and its expected return is lower

c. its price is now lower and its expected return is higher

d. its price is now higher and its expected return is higher

c

Rank the following bonds from lowest to highest in value:
 

Bond	Par Value	Stated Interest Rate	Years to Maturity	Yield to Maturity
A	$1,000	15%	24	9%
B	$1,000	8%	7	9%
C	$1,000	15%	24	15%
D	$1,000	8%	7	10%

 

a. CDAB

b. ABCD 

c. DBCA

d. BADC

c

Walters Cloth Inc. has issued a bond with a coupon rate of 7% paid semi-annually and a maturity in 15 years. What is the value of the bond if the required rate of return is 11%?

 

a. $251.68

b. $709.33

c. $508.68 

d. $301.13

b

Brook Inc. bonds have a $1,000.00 par value and pay interest annually. Based on the bond quotation below what is the bond's current market price and current yield?
 

Company	Coupon	Maturity	Last Price	Yield (YTM)
Brook Inc	12.00%	Dec.9, 2029	$75.50	19.23%

 

a. $755.00; 15.89%

b. $1,000.00; 12.00% 

c. $1,000.00; 15.89%

d. $755.00; 19.23%

a

Felix Corp issued bonds bearing a coupon rate of 10.50%, pay coupons semiannually, have 4 years remaining to maturity, and are currently priced at $960.00 per bond. What is the yield to maturity?

 

a. 5.89%

b. 4.85% 

c. 9.71%

d. 11.78%

d

Use the following excerpt from the Daily Treasury Yield Curve Rates from 9/24/2022. According to the expectations theory, what interest rate would you expect a 5-year Treasury to pay two years from now (i.e., over years 3-7)?
 

Treasury	1-year	2-year	3-year	5-year	7-year	10-year
Yield	0.11%	0.48%	0.75%	1.21%	1.45%	1.60%

 

a. 0.11%

b. 0.43%

c. 1.84%

d. 1.41%

c

What is the current price of a $1,000.00 par value bond maturing in 15 years with a coupon rate of 12.00%, paid semiannually, that has a YTM of 14.00%?

 

a. $892.86

b. $5,667.65

c. $744.54 

d. $875.91

d

What is the yield to call for a corporate bond selling for $1,220.00 that matures in 20 years, has a 13.00% coupon rate, pays interest semi-annually, is callable in 7 years, and has a call price of $1,000.00?

 

a. 7.45% 

b. 8.73%

c. 6.62% 

d. 5.20%

b

Zion Corporation plans to issue new bonds to finance its expansion plans. In its efforts to price the issue, Zion Corporation has identified a company of similar risk with an outstanding bond issue that has an 10.00% coupon rate having a maturity of 15 years. This firm's bonds are currently selling for $1,071.54. If interest is paid annually for both bonds, what must the coupon rate of the new bonds for the issue to sell at par?

 

a. 10.22%

b. 10.00%

c. 9.11% 

d. 10.18%

c

At the start of 2008, one-year U.S. government bond rates were about 3.3%, while the inflation rate that year was 0.1%. What was the real interest rate in 2008?

3.2%

At the start of 2011, one-year interest rates were about 0.3%, and the inflation rate that year was about 3.0%. What was the real interest rate in 2011?

-2.62%

Nico invested an amount a year ago and calculated his return on investment. He found that his purchasing power had increased by 15 percent as a result of his investment. If inflation during the year was 4 percent, then Nico's ________.

a. nominal return on investment is less than 11 percent

b. real return on investment is equal to 4 percent

c. real return on investment is more than 15 percent

d. nominal return on investment is more than 15 percent

d

According to the expectations theory, what are the YTMs for Treasury securities with 1, 2, and 3 years to maturity if the market expects the following one-year interest rates: E(r1) = 0.6%, E(r2) = 0.9%, and E(r3) = 1.1%?

0.87%

Suppose that a 1-year T-bill currently offers a 3.5% return and a 2-year Treasury note offers a 3.0% annual return. Thus, the short-term rate is higher than the long-term rate and the yield curve slopes down. According to the expectations theory, what belief must investors hold about the rate of return that a 1-year T-bill will offer next year (i.e., what do they expect the rate to be)?

2.5%

Assume the following returns and yields: U.S. 1-year T- bill = 8%, 5-year U.S. T-note = 7%, IBM common stock = 15%, IBM AAA Corporate Bond = 12% and 10-year U.S. T-bond = 6%. Based on this information, the shape of the yield curve is ________.

a. upward sloping

b. humped

c. downward sloping

d. flat

c

The key inputs to the valuation process are ________.

a. risk and risk aversion

b. cash flow, cash flow timing, and risk

c. cash flows and depreciation

d. cash flows and taxes

b

Tim Sanchez wishes to determine the current value of the Mills Company bond paying a 6% annual coupon rate and maturing in 10 years. If the required return on the bond is 6%, then what is the bond’s current value?

$1,000

Let’s reconsider the Mills Company bond paying a 6% annual coupon rate and maturing in 10 years. Let’s see what happens to the bond’s value if the required return is higher at 8% than the coupon rate.

$865.80

Let’s reconsider the Mills Company bond paying a 6% annual coupon rate and maturing in 10 years. Let’s see what happens to the bond’s value if the required return is lower at 4% than the coupon rate.

$1,162.22

Rank the following bonds from highest to lowest price sensitivity to changes in required rates of return:

a. ZYXW

b. YWXZ

c. WXYZ

d. XWZY

b

When the required return is constant and equal to the coupon rate, the price of a bond as it approaches its maturity date will ________.

a. remain at par

b. increase

c. decrease

d. change depending on whether it is a discount or premium bond

a

Instead of an annual coupon, assume that the Mills Company bond pays a 6% semiannual coupon and matures in 10 years. Find the bond’s value if the required return is 4%.

$1,163.51

Jaylen Washington wishes to find the current yield and YTM for a bond that has a current price of $929.76, a 6% annual coupon rate, a $1,000 par value, and 10 years to maturity.

current yield: 6.45%

YTM: 7%

What if Jaylen’s bonds are callable at a call price of $1,150 in 5 years, what is the YTC for the bonds? The bond currently sells for $929.76, has a 6% annual coupon rate, and $1,000 par value. Use trial and error!

10.3%

Quick Trip Corp. bonds pay interest semiannually. Based on the bond quotation below what is the bond's current market price and current yield?

a. $1,046.30; 8.07%

b. $1,000.00; 8.75%

c. $1,000.00; 8.93%

d. $1,046.30; 8.36%

d

What is the current price of a corporate bond that is callable at $1,240, matures in 17 years, has a coupon rate of 13%, paid semiannually, and a YTM of 12%?

a. $1,329

b. $1,090

c. $1,072

d. $1,240

c

Use the following excerpt from the Daily Treasury Yield Curve Rates from 10/27/2021.

According to the expectations theory, what interest rate would you expect a 6-year Treasury to pay one year from now?

a. 1.29%

b. 1.45%

c. 1.39%

d. 1.63%

d

What is the yield to maturity, to the nearest percent, for

the following bond: current price is $1,142, coupon rate is 8.3%, $1,000 par value, interest paid annually, 24 years to maturity?

a. 8.59%

b. 7.06%

c. 6.52%

d. 5.87%

b

Shares of stock currently owned by a firm's shareholders are called ________.

a. authorized shares

b. issued shares

c. outstanding shares

d. treasury shares

c

A proxy battle is the attempt by ________.

a. the creditors of a bankrupt corporation to seize assets of the corporation

b. the management to dismiss the board of directors for their incapability to manage the operations

c. a nonmanagement group to unseat the existing management and gain control of the firm

d. the employees to form trade unions to influence decisions on behalf of members

c

Because equityholders are the last to receive any distribution of assets, as a result of bankruptcy proceedings, they expect ________.

a. fixed dividend payments

b. greater returns from their investment than the return that bondholders expect

c. all profits to be paid out in dividends

d. warrants to be attached to the stock issue

b

A certain investment that costs $10,000 today promises to pay you $10,500 in five years. This investment ________.

a. is unambiguously a good investment

b. is unambiguously a bad investment

c. may be a good investment if the rate of return you

can earn on alternative investments is very low

d. may be a good investment if the rate of return you can earn on alternative investments is very high

c

Lamar Company, paid the following dividends from 2014 through 2019. Find the value of Lamar’s stock using the constant-growth dividend model and a required return of 15%:

$18.75

Chuck Swimmer estimates that the dividend paid on the common stock of Denham Company is expected to remain constant at $3 per share indefinitely. If his required return on its common stock is 15%, then find the stock’s value:

$20

Victoria Robb is thinking about purchasing the common stock of Warren Industries. She finds that the firm’s most recent 2019 annual dividend payment was $1.50 per share.

She estimates that dividends will increase at a 10% annual rate, g1, over the next 3 years 2020, 2021, and 2022.

Beyond 2022, she expects the firm’s dividend growth rate to be 5% per year, g2.

If Victoria’s required return, r, is 15% estimate the current value of Warren’s common stock, P0.

$17.93

Using the constant-growth dividend model, we found Lamar Company to have a share value of $18.75.

What if on the following day, the firm announced a major technological breakthrough that would revolutionize its industry?

The innovation is not expected to change the riskiness of the firm’s cash flows so the required rate of return will remain 15%, but the growth rate is expected to increase from 7% to 9%.

What effect will this have on the firm’s stock price?

$25.43

Let’s assume that Lamar Company’s 15% required return resulted from a risk-free rate of 4% and a risk premium of 11%. With this return, the firm’s share value was calculated previously to be $18.75.

Now, what if the financial manager makes a decision that, without changing expected dividends, causes the firm’s risk premium to increase to 12%. What effect will this have on the firm’s stock price?

$16.67

Finally, what if we assume that the two changes illustrated for Lamar Company in the preceding examples occur simultaneously?

$21.80

It is currently December 31, 2019, and Dewhurst Inc. wishes to determine the value of its common stock by using the free cash flow valuation model.

To apply the model, the firm’s CFO developed the free cash flow estimates and other data given in Table:

find p0

p0 = $15.75

At year-end 2019, Lamar Company’s balance sheet shows total assets of $6 million, total liabilities and preferred stock of $4.5 million, and 100,000 shares of common stock outstanding. Its book value per share would therefore be:

$15

Lamar Company found on investigation that it could obtain $6.25 million if it sold its assets today. The firm’s liquidation value per share would therefore be:

$17.50

Ann Perrier plans to use the price/earnings multiple approach to estimate the value of Lamar Company’s stock.

She estimates that Lamar Company will earn $1.90 per share next year 2020. This expectation is based on an analysis of the firm’s historical earnings trend and on expected economic and industry conditions.

She finds the price/earnings (P/E) ratio for firms in the same industry to average 14.

$26.60

Daniel Custom Cycles' common stock currently pays no dividends. The company plans to begin paying dividends starting 5 years from today. The first dividend will be $2.75, and dividends will grow at 4.25% per year thereafter. Given a required return of 13.5%, what would you pay for the stock today?

a. $17.91

b. $20.37

c. $29.73

d. $12.27

a

Karina’s Caribbean Foods has total assets recorded on its balance sheet of $1,500,000. What is the book value of the Karina’s common stock if it has $950,000 in liabilities, and 7,500 shares of common stock

outstanding?

a. $126.67

b. $73.33

c. $91.18

d. $200

b

Jia’s Fashions recently generated free-cash flow of $950,000. The company is projecting that its free-cash flow will grow by 6% next year, 4.5% annually for the two years after that, and then at 3% annually thereafter. In addition to 375,000 shares of common stock outstanding, Jia also has $325,000 worth of debt and $215,000 worth of preferred stock. If Jia’s weighed average cost of capital is 13.5%, how much should Jia’s Fashions common stock sell for today?

a. $26.22

b. $20.89

c. $24.78

d. $22.44

c

Tangshan’s stock is currently selling for $64.30 per share and its next dividend will be $3.65 per share. Assuming the required rate of return for Tangshan’s stock is 13.8%, what is the growth rate of Tangshan’s stock dividends?

a. 5.68%

b. 2.8%

c. 8.12%

d. 3.5%

c

A firm has issued noncumulative preferred stock with a $100 par value and a 12% annual dividend. For the past two years, the board of directors has decided not to pay a dividend. At the end of the current year, the preferred stockholders must be paid _______ prior to paying the common stockholders.

a. $24/share

b. $36/share

c. $0/share

d. $12/share

d

(it having been 2 years does not matter!)