MGT 3062 FINANCIAL MANAGEMENT FALL 2009 QUIZ 2 REDO

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1. How much are you willing to pay for one share of Delphia stock if the company just paid a $1.34 annual dividend, the dividends increase by 2.8 percent annually, and you require a 14 percent rate of return? A. $12.99 B. $9.84 C. $13.61 D. $11.96 E. $12.30

2. The bonds issued by Jordache Jewelers bear a 7.5 percent coupon, payable semiannually. The bonds mature in 13 years and have a $1,000 face value. Currently, the bonds sell at par. What is the yield to maturity? A. 7.41 percent B. 7.50 percent C. 7.46 percent D. 7.33 percent E. 7.67 percent

3. Swenson & Swenson just decided to save $2,200 a month for the next 6 years as a safety net for recessionary periods. The money will be set aside in a separate savings account which pays 5.5 percent interest compounded monthly. They deposit the first $2,200 today. If the company had wanted to deposit an equivalent lump sum today, how much would they have had to deposit? A. $135,273.51 B. $138,001.14 C. $130,297.18 D. $137,778.92 E. $134,656.34

4. Gerold's Travel Service just paid $1.79 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 3.2 percent. If you require a 10.5 percent rate of return, how much are you willing to pay to purchase one share of this stock? A. $20.64 B. $17.59 C. $24.52 D. $25.31 E. $24.08

5. On this date last year, you borrowed $12,500. You have to repay the loan principle plus all of the interest five years from today. The payment that is required at that time is $17,500. What is the interest rate on this loan? A. 8.25 percent B. 5.77 percent C. 9.89 percent D. 7.87 percent E. 8.40 percent

6. The outstanding bonds of Jacksen Global Freight carry an 8 percent coupon and have a current market price of $1,054. The bonds have a face value of $1,000. What is the current yield on these bonds? A. 7.59 percent B. 3.80 percent C. 8.00 percent D. 2.47 percent E. 4.00 percent

7. A bond with a 9 percent coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each. A. $1,000; $90 B. $1,090; $45 C. $1,000; $45 D. $1,090; $90 E. $1,009; $90

8. The bonds offered by Glenwood Studios are callable in 4 years at a quoted price of 106. What is the amount of the call premium on a $1,000 par value bond? A. $70 B. $50 C. $60 D. $40 E. $30

9. A real rate is a nominal rate which has been adjusted for: A. inflation. B. interest rate risk. C. changes in the market rate of interest. D. both inflation and interest rate risk. E. accrued interest.

10. A 7 percent preferred stock pays a total of _____ a year in dividends per share. Assume dividends are paid quarterly. A. $7.00 B. $28.00 C. $21.00 D. $14.00 E. $3.50

11. Which one of the following bonds has the greatest interest rate risk? A. 7-year; 6 percent coupon B. 3-year; 6 percent coupon C. 3-year; 4 percent coupon D. 5-year; 6 percent coupon E. 7-year; 4 percent coupon

12. Milner's Tools has a 9-year, 7 percent annual coupon bond outstanding with a $1,000 par value. Carter's Tools has a 10-year, 6 percent annual coupon bond with a $1,000 par value. Both bonds currently have a yield to maturity of 6.5 percent. Which of the following statements is correct if the market yield increases to 6.75 percent? A. The Milner's bond will increase in value by $16.82. B. The Milner's bond will increase in value by 1.63 percent. C. The Carter's bond will decrease in value by $16.82. D. Both bonds would decrease in value by 2.50 percent. E. The Carter's bond will decrease in value by 1.80 percent.

13. The Slim Waist announced today that they will begin paying annual dividends. The first dividend will be paid next year in the amount of $.35 a share. The following dividends will be $.40, $.55, and $.70 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.5 percent per year. How much are you willing to pay to buy one share of this stock if your desired rate of return is 12 percent? A. $5.47 B. $5.82 C. $5.92 D. $6.03 E. $6.27

14. You borrow $187,500 to buy a house. The mortgage rate is 7.25 percent and the loan period is 25 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay? A. $291,406 B. $227,001 C. $186,408 D. $264,319 E. $219,079

15. Pat retires at age 58 and expects to live to age 90. On the day she retires, she has $287,409 in her retirement savings account. She is conservative and expects to earn 5.25 percent on her money during her retirement years. How much can she withdraw from her retirement savings each month if she plans to die on the day she spends her last penny? A. $1,359.79 B. $1,702.11 C. $1,540.01 D. $1,546.75 E. $1,364.18

16. Lake Shore Vineyards recently paid a $4.20 annual dividend on their common stock. This dividend increases at an average rate of 4.2 percent per year. The stock is currently selling for $80.65 a share. What is the market rate of return? A. 9.63 percent B. 5.21 percent C. 5.67 percent D. 9.41 percent E. 5.43 percent

17. Ernie's Auto Sales is a relatively new firm that is still in a period of rapid growth. The company plans on retaining all of its earnings for the next four years. Five years from now, the company projects paying an annual dividend of $.20 a share and then increasing that amount by 3.5 percent annually thereafter. To value this stock as of today, you would most likely determine the value of the stock _____ years from today before determining today's value. A. 7 B. 3 C. 6 D. 5 E. 4

18. Your credit card company charges you 1.45 percent per month. What is the annual percentage rate on your account? A. 16.79 percent B. 18.00 percent C. 17.40 percent D. 18.86 percent E. 16.67 percent

19. 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. $15.06

20. Westover Ridge offers a 9 percent coupon bond with semiannual payments and a yield to maturity of 11.68 percent. The bonds mature in 16 years. What is the market price per bond if the face value is $1,000? A. $1,322.88 B. $916.26 C. $863.08 D. $1,453.10 E. $807.86

21. Payments made by a corporation to its shareholders in the form of either cash or shares of stock are called: A. redistributions. B. retained earnings. C. infused equity. D. net income. E. dividends.

22. In a liquidation, each share of 6 percent preferred stock is generally entitled to a liquidation payment of _____ as long as there are sufficient funds available. A. $100 B. $10 C. $50 D. $1 E. $6

23. On November 1, you take out a mortgage in the amount of $189,500 at an 8.5 percent interest rate compounded monthly. Payments are to be made at the end of each month for thirty years. How much of the first loan payment is interest? (Assume that each month is equal to 1/12 of a year.) A. $6,316.67 B. $4,974.38 C. $2,684.58 D. $1,342.29 E. $536.92

24. The underlying assumption of the dividend growth model is that a stock is worth: A. an amount computed as the next annual dividend divided by the required rate of return. B. the present value of the future cash flows which it generates. C. the same amount to every investor regardless of the investor's desired rate of return. D. an amount computed as the next annual dividend divided by the market rate of return. E. the same amount as any other stock that pays the same current dividend and has the same required rate of return.

25. A zero coupon bond with a face value of $1,000 is issued with an initial price of $387.50. The bond matures in 30 years. What is the implicit interest, in dollars, for the first year of the bond's life? A. $10.38 B. $12.44 C. $18.79 D. $22.50 E. $14.42

26. The price a dealer is willing to pay for a security is called the: A. equilibrium price. B. auction price. C. asked price. D. bid-ask spread. E. bid price.

27. Assume that a fixed, semi-annual coupon bond is outstanding. An increase in market interest rates will: A. decrease the market price of the bond. B. increase the market price of the bond. C. increase the coupon rate of the bond. D. decrease the coupon rate of the bond. E. not affect the market price of the bond.

28. You are purchasing a 30-year, zero coupon bond. The yield to maturity is 9.1 percent and the face value is $1,000. What is the current market price? A. $73.33 B. $263.20 C. $270.79 D. $69.27 E. $2.20

29. You have a sub-contracting job with a local manufacturing firm. Your agreement calls for annual payments of $82,000 for the next 3 years. At a discount rate of 9.5 percent, what is this job worth to you today? A. $162,556.16 B. $211,417.06 C. $205,730.36 D. $209,408.37 E. $213,918.01

30. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity is the _____ provision. A. debenture B. call C. seniority D. collateral E. sinking fund

MGT 3062 FINANCIAL MANAGEMENT FALL 2009 QUIZ 2 Key

1. E 2. B 3. A 4. D 5. B 6. A 7. C 8. C 9. A 10. A 11. E 12. E 13. E 14. E 15. D 16. A 17. E 18. C 19. B 20. E 21. E 22. A 23. D 24. B 25. B 26. E 27. A 28. A 29. C 30. B