Question
I need solutions for these practices questions True/False If the interest rate (or discount rate) is positive, the future value of an expected series of
I need solutions for these practices questions
True/False
- 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.
- If semiannual compounding is used, the effective annual interest rate (EAI) is equal to the nominal annual rate.
- 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.
- 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%.
- 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%.
- 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.
- You are writing a put option on underlying British Pounds. It means that you are taking a long position.
- Under constant growth, the DCF model growth rate can exceed the required return.
- 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.
- 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
- 1124
- 1294
- 1424
- 1524
- 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?
- $ 9,851
- $13,250
- $11,714
- $15,129
- $17,353
- 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?
- $240.42
- $263.80
- $300.20
- $315.38
- $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?
-
- 12%
- 9%
- 6%
- 7%
- 8%
- 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
- $5,000.00
- $6,000.00
- $6,666.67
- $7,500.00
- $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?
- 7%
- 8%
- 9%
- 10%
- 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?
- $1,006.00
- $1,056.45
- $1,180.32
- $1,191.00
- $1,196.68
- 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?
- $164.19
- $ 75.29
- $107.53
- $118.35
- $131.74
- 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?
- Capital gains yield = 7.00%; expected dividend yield = 10.57%.
- Capital gains yield = 10.57%; expected dividend yield = 7.00%.
- Capital gains yield = 7.00%; expected dividend yield = 4.31%.
- Capital gains yield = 11.31%; expected dividend yield = 7.00%.
- Capital gains yield = 7.00%; expected dividend yield = 11.31%.
- 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 (ks) is 12 percent. What is the current price of Kleins common stock?
- $21.00
- $33.33
- $42.25
- $50.16
- $58.75
- 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%).
- 8.33
- 12.33
- 16.33
- 20.33
- 24.33
- 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
- $50
- $45
- $10
- $5
- $0
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