Answer the following questions correctly.,,,

You are planning to deposit $1,000 in a savings account. Account A compounds semiannually while account B compounds monthly. If both accounts have the same quoted annual rate of interest, you should choose

Option C is correct.

A. either account since both quote the same rate of interest

B. account A because it has a higher APR

C. account A because it has a higher EAR

D. account B because it is compounded more often

Question 2 of 25

You are evaluating two annuities. They are identical in every way, except that one is an ordinary annuity and the other is an annuity due. Which of the following is FALSE?

Option B is correct.

A. The ordinary annuity must have a lower future value than the annuity due.

B. The ordinary annuity must have a higher present value than the annuity due.

C. The two annuities will differ in present value by the amount (1+r).

D. The annuity due and the ordinary annuity will make the same number of total payments over time

Question 3 of 25

What is the total present value of $80 received in one year, $300 received in two years, and $700 received in six years if the discount rate is 7%? Note: There is no direct formula for this kind of PV computation other than the basic equation, PV = FV/(1+r)t. 0 1 2 3 4 5 6 |-----------|----------|----------|----------|----------|---------| PV=? $80 $300 $700.

PV = FV/(1+r)t.

= 80+300+700/(1+0.07)

= 1080/(1.07) 6 = 1080/1.5007 = $ 719.66

Question 4 of 25

You need to borrow $23,000 to buy a car. The current loan rate is 7.9% APR compounded monthly and you want to pay the loan off in equal monthly payments over 5 years. What is the correct computation to find your monthly payment (C)?

Option C is correct.

A. C = $23,000 [PVIFA(7.9%/12, 60)]

B. $23,000 = C [1 - (1/1.0795)] / .079

C. $23,000 = C [1 - (1 /1.0065860)] / .00658

D. C = $23,000 [1 - (1/1.07960)] / .079

Answer: $23,000 = C [1 -(1 / 1.0065860)] / .00658; C = $465.26

Question 5 of 25

The monthly mortgage payment on your house is $821.69. It is a 30-year mortgage at an APR of 6.5% compounded monthly. How much did you borrow? Note: PVIFA(r, t) = [1 - 1/(1+r)t] / r, and of course, you can use your calculator here.

Option C is correct.

A. $100,000

B. $115,000

C. $130,000

D. $140,000

3. Forward rate. Suppose the following spot rates are available: 5.0% for one year, 6.0% for two years, 6.5% for three years, and 7.0% for four years. Suppose you want to borrow $20 million for two year, starting one years from today, what would be a fair rate for the forward contract? 4. Dividend discount model. The common stock of XYZ is selling for $17.00. The firm pays dividends that are expected to grow at a rate of 3.60% indefinitely. (a) If the current dividend is $1/share, what is the implied required rate of return of XYZ's equity? (b) If the expected next year dividend is $1/share, what is the implied required rate of return of XYZ's equity? (c) What do you estimate the price of XYZ stock to be after 10 years (at t = 10)? 5. Growth opportunities. The firm XYZ has projected earnings per share (EPS) for the next three years as listed in the following table. The firm plan to payout a fraction of EPS as dividend, with the payout ratio listed in the table. Starting from year 4, the firm will maintain a constant payout ratio of 80%. Suppose the firm XYZ's return on equity is 15%, and the required rate of return is 10%. Year 1 2 3 4 EPS/$ 2.1 3.5 5.0 ? Grow at 9 =7 Payout ratio 20% 40% 60% 80% Constant 80% Dividend ? ? ? Grow at g =?% (a) What are the expected dividend payments in the first three years? (b) What is the expected EPS and expected dividend in year 4? (c) What is the growth rate of expected dividend after year 4? (d) What is your estimation of current stock price using DDM?Penn Corp. is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total after-tax annual cash flows by $1.7 million indefinitely. The current market value of Teller is $42 million, and the market value of Penn is $82 million. The appropriate discount rate for the incremental cash flows is 10%. Penn is trying to decide whether it should offer 40% of its stock or $67 million in cash to Teller's shareholders. What is the NPV using the cash offer