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FNCE 101 Sample Midterm Questions (2012-13 Term2) ! ! 1. Which of the following questions are addressed by financial managers?

I. How long will it take to produce a product? II. Should customers be given 30 or 45 days to pay for their credit purchases? III. Should the firm borrow more money? IV. Should the firm acquire new equipment? a. I and IV only b. II and III only c. I, II, and III only D. II, III, and IV only e. I, II, III, and IV ! 2. When considering a capital budgeting project the financial manager should consider the I. size of the project. II. timing of the project's cash flows. III. risk associated with the project's cash flows. a. I only b. II only c. I and III only d. II and III only E. I, II, and III ! 3. Which of the following help convince managers to work in the best interest of the stockholders? I. compensation based on the value of the stock II. stock option plans III. threat of a company takeover IV. threat of firing a. I and II only b. III and IV only c. I, II, and III only d. I, III, and IV only E. I, II, III, and IV ! 4. Which of the following are advantages of the corporate form of business ownership? I. limited liability for firm debt II. double taxation III. ability to raise capital IV. unlimited firm life a. I and II only b. III and IV only c. I, II, and III only d. II, III, and IV only E. I, III, and IV only

5. Which one of the following business types is best suited to raising large amounts of capital? a. sole proprietorship b. limited liability company C. corporation d. general partnership e. limited partnership

6. Which of the following represent cash outflows from a firm? I. issuance of securities II. payment of dividends III. new loan proceeds IV. payment of government taxes a. I and III only B. II and IV only c. I and IV only d. I, II, and IV only e. II, III, and IV only

7. Which of the following are included in current liabilities? I. note payable to a supplier in eight months II. amount due from a customer next month III. account payable to a supplier that is due next week IV. loan payable to the bank in fourteen months A. I and III only b. II and III only c. III and IV only d. II, III, and IV only e. I, II, and III only

8. The higher the degree of financial leverage employed by a firm, the: A. higher the probability that the firm will encounter financial distress. b. lower the amount of debt incurred. c. less debt a firm has per dollar of total assets. d. higher the number of outstanding shares of stock. e. lower the balance in accounts payable.
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9. As seen on an income statement: a. interest is deducted from income and increases the total taxes incurred. b. the tax rate is applied to the earnings before interest and taxes when the firm has both depreciation and interest expenses. c. depreciation is shown as an expense but does not affect the taxes payable. D. depreciation reduces both the taxable income and the net income. e. interest expense is added to earnings before interest and taxes to get taxable income. 10. Depreciation: A. reduces both taxes and net income. b. increases the net fixed assets as shown on the balance sheet. c. reduces both the net fixed assets and the costs of a firm. d. is a noncash expense which increases the net operating income. e. decreases net fixed assets, net income, and operating cash flows. 11. When you are making a financial decision, the most relevant tax rate is the a. average b. fixed C. marginal d. total e. variable rate.

12. A negative cash flow from assets indicates that: a. a firm is borrowing money. b. a firm is acquiring new fixed assets. c. a firm has a net loss for the period. D. outside capital is being utilized. e. newly issued shares of stock are being sold.

Cash Flow from assets = cash ow to shareholders and debtholders

13. Which one of the following will decrease a firm's operating cash flow? a. a decrease in wages paid b. an increase in sales C. a decrease in the depreciation expense d. a decrease in the marginal tax rate e. a decrease in net working capital

14. Net capital spending: a. is equal to ending fixed assets minus beginning fixed assets. B. is equal to zero if the decrease in the fixed assets account is equal to the depreciation expense. c. reflects the net changes in total assets over a stated period of time. d. is equivalent to the cash flow from assets minus the operating cash flow minus the change in net working capital. e. is equal to the change in the inventory balance for the period.
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15. Which one of the following must increase the cash flow to creditors? A. an increase in the cash flow from assets accompanied by a decrease in the cash flow to stockholders b. acquiring new long-term debt c. decreasing the dividend paid d. a decrease in both the cash flow to stockholders and the cash flow from assets e. the repayment of an old loan and the acquisition of a new loan

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16. What is the change in the net working capital from 2006 to 2007? a. $1,379 B. $553 c. $1,887 d. $2,280 e. $4,007

17. What is the cash flow from assets for 2007? A. $109 b. $247 c. $508 d. $967 e. $1,215 18. Which one of the following is a source of cash? A. an increase in accounts payable b. an increase in cash c. a purchase of inventory d. the payoff of a loan e. a credit sale to a customer 19. Mansfield Enterprises currently has a total asset turnover of 1.21. Which one of the following set of circumstances must increase this ratio regardless of the size of the changes that occur? Assume that all else remains constant. a. decrease in sales and increase in current assets b. decrease in sales and increase in total assets C. increase in sales and decrease in total assets d. increase in both sales and net fixed assets e. decrease in both sales and total assets 20. Herman's Bar and Grill paid $1,618 in interest and $265 in dividends last year. The times interest earned ratio is 1.9 and the depreciation expense is $50. What is the value of the cash coverage ratio? a. 1.62 b. 1.87 C. 1.93 d. 1.99 e. 2.11 EBIT = 1.9 $1,618 = $3,074.20; Cash coverage ratio = ($3,074.20 + $50) $1,618 = 1.93

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21. A firm has net working capital of $2,580, net fixed assets of $13,120, sales of $22,580, and current liabilities of $1,610. How many dollars worth of sales are generated from every $1 in total assets? a. $1.27 B. $1.30 c. $1.67 d. $1.72 e. $1.75 Total asset turnover = $22,580 generates $1.30 in sales. ($2,580 + $13,120 + $1,610) = 1.30; Every $1 in total assets

22. A firm has a debt-equity ratio of 62 percent, a total asset turnover of 1.39, and a profit margin of 7.8 percent. The total equity is $672,100. What is the amount of the net income? A. $118,048 b. $119,600 c. $120,202 d. $121,212 e. $124,097 Using the Du Pont identity: Total assets = (1 + .62) $672,100 = $1,088,802; Total sales = $1,088,802 1.39 = $1,513,434.78; Net income = $1,513,434.78 .078 = $118,048 23. Jeff invests $3,000 in an account that pays 7 percent simple interest. How much more could he have earned over a 20-year period if the interest had compounded annually? a. $2,840.00 b. $3,212.12 c. $3,778.54 d. $4,087.18 E. $4,409.05 Ending value at 7 percent simple interest = $3,000 + ($3,000 .07 20) = $7,200.00; Ending value at 7 percent compounded annually = $3,000 (1 + .07)20 = $11,609.05; Difference = $11,609.05 $7,200.00 = $4,409.05 24. Twelve years ago, Jake invested $2,000. Six years ago, Tami invested $4,000. Today, both Jake's and Tami's investments are each worth $9,700. Assume that both Jake and Tami continue to earn their respective rates of return. Which one of the following statements is correct concerning these investments? a. Three years from today, Jake's investment will be worth more than Tami's. b. One year ago, Tami's investment was worth more than Jake's. c. Jake has earned a higher rate of return than Tami. D. Tami has earned an average annual interest rate of 15.91 percent. e. Jake has earned an average annual interest rate of 15.47 percent. 25. Which one of the following statements concerning the annual percentage rate is correct? a. The annual percentage rate considers interest on interest. b. The rate of interest you actually pay on a loan is called the annual percentage rate. c. The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly. d. When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws. E. The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

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26. 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 $150,000 today or receive payments of $1,627.89 a month for 10 years. You can earn 7.5 percent on your money. Which option should you take and why? a. You should accept the payments because they are worth $151,291.91 to you today. b. You should accept the payments because they are worth $153,417.68 to you today. c. You should accept the payments because they are worth $154,311.12 to you today. D. You should accept the $150,000 because the payments are only worth $137,141.17 to you today. e. You should accept the $150,000 because the payments are only worth $134,808.17 to you today. 27. Marcia plans on saving $6,000 a year and expects to earn an annual rate of 11.5 percent. How much will she have in her account at the end of 40 years? A. $4,007,098 b. $4,467,914 c. $5,911,408 d. $6,221,009 e. $6,347,238 28. The Home Improvement Center (HIC) has an employment contract with the newly hired CEO. The contract requires a lump sum payment of $32.4 million be paid to the CEO upon the successful completion of her first five years of service. HIC wants to set aside an equal amount of money at the end of each year to cover this anticipated cash outflow and will earn 7.25 percent on the funds. How much must HIC set aside each year for this purpose? a. $5,227,064 B. $5,606,026 c. $5,668,987 d. $6,778,958 e. $7,270,433 29. One year ago, Dover Supply deposited $5,200 in an investment account for the purpose of buying new equipment four years from today. Today, they are adding another $5,200 to this account. The company plans on making a final deposit of $12,000 to the account one year from today. How much will be available when they are ready to buy the equipment, assuming they earn a 6.5 percent rate of return? a. $22,109.16 b. $25,277.78 c. $25,409.18 d. $26,581.67 E. $28,309.47

30. You are considering two loans. The terms of the two loans are equivalent with the exception of the interest rates. Loan A offers a rate of 8.10 percent compounded daily. Loan B offers a rate of 8.25 percent compounded semi-annually. Loan is the better offer because _. a. A; the effective annual rate is 8.41 percent ! b. A; the annual percentage rate is 8.41 percent c. B; the annual percentage rate is 8.32 percent d. B; the interest is compounded less frequently E. B; the effective annual rate is 8.42 percent 31. The advantages of the payback method of project analysis include the: I. application of a discount rate to each separate cash flow. II. bias towards liquidity. III. ease of use. IV. arbitrary cutoff point. a. I and II only b. I and III only C. II and III only d. II and IV only e. II, III, and IV only 32. The discounted payback rule may cause: A. some positive net present value projects to be rejected. b. the most liquid projects to be rejected in favor of less liquid projects. c. projects to be incorrectly accepted due to ignoring the time value of money. d. projects with negative net present values to be accepted. e. some projects to be accepted which would otherwise be rejected under the payback rule. 33. The internal rate of return for a project will increase if: a. the initial cost of a project is increased. b. the total amount of the cash inflows is reduced. c. each cash inflow is moved such that it occurs one year later than originally projected. d. the required rate of return is increased. E. the salvage value of the assets utilized by the project is increased. 34. A project will produce cash inflows of $2,250 a year for five years. The project initially costs $11,400 to get started. In year six, the project will end and will provide a final cash flow of $1,500. What is the net present value of this project if the required rate of return is 14.4 percent? a. $1,080.08 wrong b. $783.72 answer, c. $461.07 D. $919.92 should be: e. $1,207.50 3080

35. You are considering the following two mutually exclusive projects. The required rate of return is 10.75 percent for project A and 12 percent for project B. Which project should you accept and why?

a. project A; because it has the lower required rate of return B. project A; because its NPV is about $796 more than the NPV of project B c. project B; because it has the largest total cash inflow d. project B; because it returns all its cash flows within two years e. project B; because it is the largest sized project
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36. You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 7 percent? What if the discount rate is 10 percent?

a. accept project A as it always has the higher NPV b. accept project B as it always has the higher NPV C. accept A at 7 percent and B at 10 percent d. accept B at 7 percent and A at 10 percent e. accept A at 7 percent and neither at 10 percent
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37. You would like to invest in the following project.

Krista, your boss, insists that only projects returning least $1.08 in today's dollars for every $1 invested can be accepted. She also insists on applying a 12 percent discount rate to all cash flows. Based on these criteria, you should: a. accept the project because the project has positive NPV. b. accept the project because it has a positive IRR. c. reject the project because the NPV is negative. d. reject the project because the IRR is less than the required return. E. reject the project because the NPV is not high enough to meet your boss requirement.

38. You are analyzing the following two mutually exclusive projects and have developed the following information. What is the discount rate with which youre indifferent between the two project? (see a similar question in the text book)

a. 6.02 percent b. 7.23 percent c. 10.92 percent d. 12.21 percent E. 14.47 percent
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39. You spent $600 last week repairing the brakes on your car. Now, the starter is acting up and you are trying to decide whether to fix the starter or trade the car in for a newer model. In analyzing the starter situation, the $600 you spent fixing the brakes is a(n) cost. a. opportunity b. fixed c. incremental d. erosion E. sunk 40. All of the following are related to a proposed project. Which should be included in the cash flow at time zero? I. initial inventory increase of $2,500 II. loan of $125,000 to commence a project III. depreciation tax shield of $1,100 IV. initial purchase of $6,500 of fixed assets a. I and II only B. I and IV only c. II and IV only d. I, II, and IV only e. I, II, III, and IV

41. A project will increase the sales of Joe's Workshop by $50,000 and increase cash expenses by $36,000. The project will cost $30,000 and be depreciated using straight-line depreciation to a zero book value over the 3-year life of the project. The company has a marginal tax rate of 35 percent. What is the operating cash flow of the project? a. $8,400 b. $9,100 C. $12,600 d. $15,600 e. $17,500 OCF = [($50,000 $36,000) (1 .35)] + [($30,000 / 3) .35] = $12,600

42. Bright Lighting is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $175,000 and increasing its debt to suppliers by 60 percent of that amount. The company will also spend $180,000 for a building contractor to expand the size of the showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $35,000. For the project analysis, what amount should be used as the initial cash flow for net working capital? a. $35,000 b. $70,000 C. $105,000 d. $175,000 e. $210,000 Initial NWC requirement = -$175,000 + (.60 $175,000) $35,000 = $105,000

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43. When conducting a best case scenario analysis, you should assume that: a. the number of units sold and the variable cost per unit are at the high end of their potential ranges. B. the salvage value will be at the high end of its possible range. c. sales quantity will be at the low end of its range while the sales price is the highest price possible. d. the variable costs per unit are at the high end of potential cost range. e. fixed costs will become variable and decrease in dollar amount. 44. Which of the following statements are correct concerning the financial break-even point of a project? I. The present value of the cash inflows exactly offsets the initial cash outflow. II. The payback period is equal to the life of the project. III. The NPV is zero. IV. The discounted payback period equals the life of the project. a. I and II only b. I and III only c. II and IV only d. III and IV only E. I, III, and IV only 45. Which one of the following will reduce the risk of a project by lowering the degree of operating leverage? a. hiring temporary workers from an employment agency rather than hiring part-time employees B. subcontracting portions of the project rather than purchasing new equipment to do all the work in-house c. leasing equipment on a long-term basis rather than buying equipment d. lowering the projected selling price per unit e. changing the proposed production method to a more capital intensive method

The Franklin Co. is analyzing a proposed project. The company expects to sell 3,500 units, give or take 15 percent. The expected variable cost per unit is $6 and the expected fixed costs are $15,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $6,000. The sales price is estimated at $21 a unit, give or take 3 percent. The company bases their sensitivity analysis on the base case scenario.

46. What is the sales revenue under the worst case scenario? A. $60,600.75 b. $62,474.00 c. $73,500.00 d. $84,525.00 e. $87,060.75
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47. What is the amount of the fixed cost per unit under the best case scenario? a. $3.47 B. $3.66 c. $3.85 d. $4.21 e. $4.43 Fixed cost per unit for the best case = ($15,500 .95) / (3,500 1.15) = $3.66

48. Assume that a fixed, semi-annual coupon bond is outstanding. An increase in market interest rates will: a. increase the coupon rate of the bond. b. decrease the coupon rate of the bond. c. increase the market price of the bond. D. decrease the market price of the bond. e. not affect the market price of the bond.

49. You own a bond that has an 8 percent coupon and matures 8 years from now. You purchased this bond at par value when it was originally issued. If the current market rate for this type and quality of bond is 8.25 percent, then you would expect: a. the yield to maturity on your bond to be 8.12 percent today. b. the current yield to maturity to be 8 percent. C. to realize a capital loss if you sold the bond at the market price today. d. next semi-annual interest payment to be $41.25. e. the current yield today to be less than 8 percent.

50. Interest rate risk increases as the: I. time to maturity decreases. II. time to maturity increases. III. coupon rate decreases. IV. coupon rate increases. a. II only b. I and III only c. I and IV only D. II and III only e. II and IV only

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.Which one of the following bonds is the least sensitive to interest rate risk? . 3-year; 4 percent coupon B. 3-year; 6 percent coupon c. 5-year; 6 percent coupon d. 7-year; 6 percent coupon e. 7-year; 4 percent coupon 52. Which of the following statements are correct concerning the term structure of interest rates? I. The outlook for future inflation influences the shape of the term structure of interest rates. II. The term structure of interest rates includes only the real rate of return and the inflation premium. III. The interest rate risk premium is included in the term structure of interest rates. IV. The term structure of interest rates can be downward sloping. . I and II only b. II and IV only c. III and IV only D. I, III, and IV only e. I, II, and IV only 53. Which one of the following categories of securities have the lowest risk premium. . long-term government bonds b. small company stocks c. large company stocks d. long-term corporate bonds E. Treasury bills

54. A convertible bond: a. must be converted on or before the maturity date. b. grants the holder the option to switch a fixed coupon bond into a floating-rate bond. c. grants the holder the option to switch a floating-rate bond into a fixed rate bond. D. can be exchanged for shares of common stock. e. generally has a collar. 55. A $1,000 Treasury bond has an asked quote of 100:07 and a bid quote of 100:05. One bond: a. can be sold to a dealer at a price of $1,000.70. b. can be purchased from a dealer at a price of $1,001.56. c. has a spread of 200 basis points. d. is trading at a discount between 5 and 7 percent. E. provides the dealer a profit of $0.625.

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56. Beach Combers International has 5.75 percent coupon bonds outstanding with a current market price of $689.40. The yield to maturity is 11.20 percent and the face value is $1,000. Interest is paid semiannually. How many years is it until these bonds mature? a. 8.64 years 9.33 years 18.66 years 23.25 years 37.32 years B. c. d. e.

57. A 15-year, 6 percent 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 to maturity rises to 6.5 percent from the current rate of 6.25 percent? A. 2.37 percent decrease b. 2.43 percent decrease c. 2.37 percent increase d. 2.50 percent decrease e. 2.43 percent increase 58. An 8%, 15-year bond has a yield to maturity of 10% and duration of 8.05 years. If the market yield changes by 25 basis points, how much change will there be in the bond's price? A. 1.85% b. 2.01% c. 3.27% d. 6.44% e. none of the above

59. The total rate of return on a stock can be positive even when the price of the stock depreciates because of the: a. capital appreciation. b. interest yield. C. dividend yield. d. supernormal growth. e. real rate of return.

. Which one of the following transactions occurs in the primary market? a. the sale of 100 shares of Delta stock by Tami Lynn to Jennifer Lee b. the tax-free gift of Angel stock to the Faith Church from Isaac c. the repurchase of GP stock from Ted by Eddie D. the initial sale of MG stock to Katie by MG Enterprises e. the transfer of GO stock from Sue to her son, Pete

61. Which one of the following statements concerning dealers and brokers is correct? a. A dealer in market securities arranges sales between buyers and sellers for a fee. B. A dealer in market securities pays the bid price when purchasing securities. c. A broker in market securities earns income in the form of a bid-ask spread. d. A broker takes ownership of the securities being traded. e. A broker deals solely in the primary market. 62. Elegante Homes stock traditionally provides a 16 percent rate of return. The company just paid an annual dividend of $3.20 a share and is expected to increase that amount by 5 percent per year. If you are planning to buy 1,000 shares of this stock next year, how much should you expect to pay per share if the market rate of return for this type of security is 9 percent at the time of your purchase? a. $30.55 b. $32.07 c. $67.20 d. $80.00 E. $88.20
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63. J&J Exporters paid a $1.80 per share annual dividend last month. The company is planning on paying $2.00, $2.50, $2.75, and $3.00 a share over the next four years, respectively. After that the dividend will be constant at $3.20 per share per year. What is the market price of this stock if the market rate of return is 13 percent? a. $7.47 b. $15.96 c. $20.73 D. $22.57 e. $24.37 64. Cellular Talk is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 25 percent a year for the next three years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $0.80 per share. What is the current value of one share of this stock if the required rate of return is 17 percent? a. $11.17 B. $12.14 c. $12.94 d. $14.27 e. $15.0

65. An investor is more likely to prefer a high dividend payout if a firm: a. has high flotation costs. B. has few, if any, positive net present value projects. c. has lower tax rates than the investor. d. has a stock price that is increasing rapidly. e. offers high capital gains which are taxed at a favorable rate.
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66. If you ignore taxes and transaction costs, a stock repurchase will: I. reduce the total assets of a firm. II. increase the earnings per share. III. reduce the PE ratio more so than an equivalent stock dividend. IV. reduce the total equity of a firm. a. I and III only b. II and IV only C. I, II, and IV only d. I, III, and IV only e. I, II, III, and IV

67. Jaguar, Inc. maintains a debt-equity ratio of .60 and follows a residual dividend policy. The company has aftertax earnings of $3,100 for the year and needs $3,000 for new investments. What is the total amount Jaguar will pay out in dividends for this year? a. $0 b. $1,125 C. $1,225 d. $1,875 e. $1,975 Equity needed for new investment = (1.00 / 1.60) $1,875 = $1,225 $3,000 = $1,875; Dividend = $3,100

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68. Young Consultants maintains a retention ratio of 60% for its earnings to be invested in new projects. The companys ROE is 15%. If the next dividend is $0.50 and the required rate of return is 13%, what is Young Consultants stock price today? a. $3.84 B.$12.50 c. $25.00 d. $7.14

69. You bought a standard 7-year annuity 6 months ago. The annuity pays $10,000 at the end of each year. The annual quoted rate is 10% with semi-annual compounding. How much is the annuity worth to you now? a. 48684.19 B. 50,700.36 c. 51,002.48 d. 51,118.40 e. 93935.73 70. You purchased an annual interest coupon bond one year ago with 6 years remaining to maturity at the time of purchase. The coupon interest rate is 10% and par value is $1,000. At the time you purchased the bond, the yield to maturity was 8%. If you sold the bond after receiving the first interest payment and the bond's yield to maturity had changed to 7%, your annual total rate of return on holding the bond for that year would have been . a. 7.00% b. 8.00% c. 9.95% D. 11.95% e. none of the above 71. A project will produce operating cash flow of $60,000 a year for four years. At the start of the project, inventory will be lowered by $20,000 and accounts receivable will increase by $25,000. Accounts payable will decrease by $10,000. The project requires the purchase of equipment at an initial cost of $200,000. The equipment will be depreciated straight-line to a zero book value over the life of the project, and the after-tax salvage value is $30,000. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 12 percent? a. -$17,759.04 b. -$13,693.50 C. -$4,160.73 d. $2,194.46 e. $10,839.27

72. You purchased a stock for $100 a share 2 years ago. Last year you received dividends for $2 per share, and youve just received this years dividends for $3 per share. If you can sell you shares now for $110, whats the IRR for your investment in this stock? a. 5.00% B. 7.31% c. 8.25% d. 10.30% e. cannot be determined

73. You just received a bonus that pays $10,000 forever, with the first payment to be received 1.5 years from today, and subsequent payments every 2 years thereafter. If the interest rate is 10% APR, compounded quarterly, how much is the bonus worth to you today? (Draw a timeline, and show steps) Ans: 2 year rate = (1 + (.1/4))^8 1 = .2184 t = -.5 value of perpetuity 10000 / .2184 = 45786.94 Bring it to time = 0 45786.94 *(1 + (.1/4))^2 = $48,104.88