I need solutions for these practices questions

True/False

1. If the interest rate (or discount rate) is positive, the future value of an expected series of payment will always exceed the present value of the same series.

2. If semiannual compounding is used, the effective annual interest rate (EAI) is equal to the nominal annual rate.

3. You are able to buy a stock at $14 where as its intrinsic value (or fair value) is $14.01. You have indeed bought this stock at a bargain price.

4. Company ABC is expected to pay a dividend of $1.00 per year forever. You should be willing to pay up to $5 to buy a share of this company if your required return is 20%.

5. A company is expected to pay a dividend of $2/share at the end of year 1 and no dividends thereafter. You will be willing to pay up to $1.81 for one share if your required return is 10%.

6. You will write a call option if you are confident that the stock will not go up and believe that it will not fall drastically. Perhaps there will be little variation in stock price.

7. You are writing a put option on underlying British Pounds. It means that you are taking a long position.

8. Under constant growth, the DCF model growth rate can exceed the required return.

9. Writing put option on an underlying index limits your profit to the premium received, but the risk increases as stock rises.

Please choose the BEST answer.

10. What is the Present Value given the following information?

End of year

Year APR CFs

1 5% $100

2 5% $200

3 5% $200

4 7% $100

5 7% $300

6 8% $400

7 8% $400

1. 1124
2. 1294
3. 1424
4. 1524

11. Assume that you will receive $2,000 a year in Years 1 through 5, $3,000 a year in Years 6 through 8, and $4,000 in Year 9, with all cash flows to be received at the end of the year. If you require a 14 percent rate of return, what is the present value of these cash flows?

1. $ 9,851
2. $13,250
3. $11,714
4. $15,129
5. $17,353

12. If a 5-year ordinary annuity has a present value of $1,000, and if the interest rate is 10 percent, what is the amount of each annuity payment?

1. $240.42
2. $263.80
3. $300.20
4. $315.38
5. $346.87

13. In 1958 the average tuition for one year at an Ivy League school was $1,800. Thirty years later, in 1988, the average cost was $13,700. What was the average annual compounded growth rate in tuition over the 30-year period?

13. 1. 12%
    2. 9%
    3. 6%
    4. 7%
    5. 8%
14. You have the opportunity to buy perpetuity that pays $1,000 annually. Your required rate of return on this investment is 15 percent. You should be essentially indifferent to buying or not buying the investment if it were offered at a price of

1. $5,000.00
2. $6,000.00
3. $6,666.67
4. $7,500.00
5. $8,728.50

15. South Penn Trucking is financing a new truck with a loan of $10,000 to be repaid in 5 annual end-of-year installments of $2,504.56. What annual interest rate is the company paying?

1. 7%
2. 8%
3. 9%
4. 10%
5. 11%

16. You just put $1,000 in a bank account that pays 6 percent nominal annual interest, compounded monthly. How much will you have in your account after 3 years?

1. $1,006.00
2. $1,056.45
3. $1,180.32
4. $1,191.00
5. $1,196.68

17. Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?

1. $164.19
2. $ 75.29
3. $107.53
4. $118.35
5. $131.74

18. Conner Corporation has a stock price of $32.35 per share. The last dividend was $3.42 (i.e., D₀ = $3.42). The long-run growth rate for the company is a constant 7 percent. What is the companys capital gains yield and expected dividend yield?

1. Capital gains yield = 7.00%; expected dividend yield = 10.57%.
2. Capital gains yield = 10.57%; expected dividend yield = 7.00%.
3. Capital gains yield = 7.00%; expected dividend yield = 4.31%.
4. Capital gains yield = 11.31%; expected dividend yield = 7.00%.
5. Capital gains yield = 7.00%; expected dividend yield = 11.31%.

19. The last dividend paid by Klein Company was $1.00. Kleins growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Kleins required rate of return on equity (k_s) is 12 percent. What is the current price of Kleins common stock?

1. $21.00
2. $33.33
3. $42.25
4. $50.16
5. $58.75

20. What is the fair value of stock (FIN 361) given the following information: D₀ = $4, required rate of return = 10%, growth rate in dividends = year 1 (-20%), year 2 (56%), year 3 (26%) and year 4 (0%).

1. 8.33
2. 12.33
3. 16.33
4. 20.33
5. 24.33

21. You write a December 2015 call on XYZ at an exercise price of $50. You receive a premium of $10. The market price does not exceed $45 until the new year (January 2016). Your profit or loss will be

1. $50
2. $45
3. $10
4. $5
5. $0