1. Assume that D0, which was just paid, = $1.00, D1= $1.20, D2 = = $1.40, D3 = $1.55, D4 = $2.00, D5 = $2.13, D6 = $2.27, and P3 = $80.00. If the required return is 8.6%, the what should be the stock's expected price today, (i.e.. P0)? I encourage you to draw a time line clearly indicating the situation.

87.15

65.96

66.96

79.14

68.4

2. Assume the following regarding a growing annuity valuation problem:

Your salary at the end of the last year that you work is $90,000.

You would like your income stream to begin at the end of your first year of retirement with a payment equal to 70% of your last working year's salary. (Assume all amounts are "endofyear" payments.)

You plan to be retired for 25 years.

You would like your retirement income will grow at a constant rate equal to a 3.5% (to compensate for expected inflation).

Using a discount rate of 8%, what is the present value at the beginning of your first year of retirement, (i.e. one period prior to the first retirement payment) of your projected 25 year retirement income stream?

960,730

916,893

672,511

211,573

3,308,543

483,107

3. ** ASSUME that in 25 years you will need $500,000 for your retirement (i.e. retirement is actually 25 years away, and you want to have saved $500,000). How much money would you have to put into a bank today to accumulate this if your money will earn 8% per year (assume annual compounding)?

73,009

166,365

211, 573

676,001

insufficient information to compute

4.** ASSUME that in 25 years you will need $500,000 for your retirement (i.e. retirement is actually 25 years away, and you want to have saved $500,000). If you will make equal MONTHLY payments at the end of each MONTH for the next 25 years to fund your retirement, what is the amount of the MONTHLY payments required to fund your retirement? Assume the 8% APR discount rate with monthly compounding for this question only.

3859

3903

570

526

Insufficient information to compute

5. Consider three investors in Stock A:

Mr. Single invests for 1 year

Ms Double invests for 2 years

Mrs. Triple invests for 3 years

Which of the following statements are true? (Hint: Recall what the basic stock valuation principle is.)

Mrs. Triple would place the highest value on Stock A because she is investing for the longest time.

Ms. Double would place the second highest value on Stock A because she is investing for the second longest time.

Mr. Single would place the lowest value on Stock A because he is investing for the shortest time. all of the above are true

Mr. Single, Ms. Double, and Mrs. Triple would all place the same value on Stock A

none of the above are true

6. A practical and prevalent problem in financial management regarding potential conflicts of interests of various parties is known as

ethics

marginal conflicts

limited liability

the options principle

agency problems

7. Which of the following would be classified as a use of cash?

An increase in accounts payable.

A decrease in inventories.

A decrease in accounts receivable.

An increase in retained earnings.

An increase in inventories.

8. Empirical evidence shows that financial market price movements are essentially random. This is evidence that:

Financial markets are reasonable efficient markets.

Financial markets are NOT efficient markets.

This is irrelevant evidence, because the randomness of market price movements is NOT related to the efficiency of financial markets.

none of the above.

9. According to the payoff diagram that illustrates the payoff to bondholders and stockholders as a function of the value of the firm,

bondholders would prefer more risk than stockholders, because bondholders payoff is flat as the firm value increases beyond the debt level stockholders would prefer more risk than bondholders, because stockholders payoff is flat as the firm value increases beyond the debt level

stockholders would prefer more risk than bondholders, because stockholders payoff increases dollar for dollar as the firm value increases beyond the debt level

managers would prefer more risk than stockholders, because their payoff increases dollar for dollar as the firm value increases beyond the debt level

10. You currently earn $35,000 per year. If your salary grows at an assumed 3.5% average inflation rate, how much will your annual salary be in 25 years?

$82,713

$79,916

$1,363,245

$1,445,960

Insufficient information to compute