Multiple choice, 34 questions, please highlight correct answer.

Eric just won $13 million in the state lottery. He's been given the option of receiving a total of $6.6 million now, or he can elect to be paid $600,000 at the end of each of the next 35 years. If Eric can earn 9% annually on his investments, which option should he take? Question 2 options: A) He should take the lump sum ($6.6 million). B) He should not take the ordinary annuity because the present value of the ordinary annuity is less than $6.6 million. C) He should take the ordinary annuity because the future value of the ordinary annuity is greater than $6.6 million. D) He should take the ordinary annuity because the present value of the ordinary annuity is greater than $6.6million. Your firm has the option of making an investment in new software that will cost $460,000 today and is estimated to provide the following savings: $130,000; $180,000; $170,000; $90,000; and $50,000 for years 1 through year 5. Should the firm make this investment if it requires a minimum annual return of 8% on all investments? Question 3 options: A) The firm should not make this investment because the cost outweight the benefit. B) The firm should make this investment because the benefit outweight the cost. C) The firm should not make this investment if it requires a minimum annual return of 10% on all investments. D) The firm can do either because the cost equals the benefit. Calculate the present value of the cash flow and discount it at the rate given. Assume that the cash flow is received at the end of the period. Single cash flow $250,000 Discount rate 12% End of period (yrs.) 8 Question 4 options: A) 78,970.8070 B) 118,970.8070 C) 68,388.3574 D) 100,970.8070 Calculate the present value of the cash flow and discount it at the rate given. Assume that the cash flow is received at the end of the period. Single cash flow $450,000 Discount rate 17% End of period (yrs.) 12 Question 5 options: A) 78,970.8070 B) 118,970.8070 C) 100,970.8070 D) 68,388.3574 In exchange for a $60,000 payment today, a well-known company will allow you to choose one of three alternatives: (1) receive $85,500 at the end of 3 years, (2) receive $162,000 at the end of 9 years, or (3) receive $480,000 at the end of 20 years. Find the value today of each alternative. Your opportunity cost is 11%. Are all the alternatives acceptable (i.e. worth $60,000 today)? Which alternative, if any, would you take? Question 6 options: A) (1).52,516.8631 (2).63,329.8130 (3).69,536.2754 Alternatives (2) and (3) are both greater than the $60,000 initial payment in terms of present value. The best alternative is (3) because the present value of (3) is the largest of the three and is also greater than the $60,000 payment. (1).62,516.8631 (2).63,329.8130 (3).59,536.2754 B) Alternatives (1) and (2) are both greater than the $60,000 initial payment in terms of present value. The best alternative is (2) because the present value of (2) is the largest of the three and is also greater than the $60,000 payment. (1).62,516.8631 (2).63,329.8130 C) (3).60,536.2754 All three projects are acceptable. D) (1).52,516.8631 (2).53,329.8130 (3).59,536.2754 All Alternatives are less than the $60,000 initial payment in terms of present value. None of the three is acceptabl Ryan has an opportunity to purchase any of the investments shown below. The purchase price, the amount of the single cash inflow, and the year of receipt are given for each investment. Which purchase recommendations would you make, assuming that Tom can earn 10% on his investment. Investment A: today price$54,000; single cash inflow $90,000; year of receipt 5 Investment B: today price$1,800; single cash inflow $9,000; year of receipt 20 Investment C: today price$10,500; single cash inflow $30,000; year of receipt 10 Investment D: today price$3,000; single cash inflow $45,000; year of receipt 40 Question 7 options: A) Investment C and D B) Investment A and B C) Investment A and C D) Investment B and C You put $40,000 in an account earning 5%. After 3 years, you make another deposit into the same account. Four years later (7 years after initial $40,000) the account balance is $80,000. What was the amount of the deposit at the end of year 3? Question 8 options: A) 21,523.40 B) 15,118.30 C) 18,934.58 D) 19,511.20 Calculate the future value of the annuity assuming that it is (1) an ordinary annuity and then (2) an annuity due. Comparing the two types of annuities, all else being equal, which type is more preferable? Why? Annuity Info: Amount of annuity Interest rate $23,000 5% Deposit period (years) 9 Question 9 options: Ordinary annuity = 266,291.5283 A) Annuity due = 253,610.9794 Ordinary annuity is better because it discounts for one less year. Ordinary annuity =253,610.9794 B) Annuity due = 266,291.5283 Annuity due is better because it discounts for one less year. Ordinary annuity =253,610.9794 C) Annuity due = 266,291.5283 Annuity due is better because it compounds for one more year. D) Ordinary annuity = 266,291.5283 Annuity due = 253,610.9794 Ordinary annuity is better because it compound for one less year. Calculate the future value of the annuity assuming that it is (1) an ordinary annuity and then (2) an annuity due. Comparing the two types of annuities, all else being equal, which type is more preferable? Why? Annuity Info: Amount of annuity Interest rate $15,000 12% Deposit period (years) 35 Question 10 options: Ordinary annuity =6,474952.447 A) Annuity due = 7,251,946.741 Ordinary annuity is better because it discounts for one less year. Ordinary annuity =6,474952.447 B) Annuity due = 7,251,946.741 Annuity due is better because it compounds for one more year. Ordinary annuity =6,474952.447 C) Annuity due = 7,251,946.741 Ordinary annuity is better because it compound for one less year. Ordinary annuity =6,474952.447 D) Annuity due = 7,251,946.741 Annuity due is better because it discounts for one less year. Calculate the present value of the annuity assuming that it is (1) an ordinary annuity and then (2) an annuity due. Comparing the two types of annuities, all else being equal, which type is more preferable? Why? Annuity Info: Amount of annuity Interest rate $210,000 6% Deposit period (years) 8 Question 11 options: Ordinary annuity =1,304,056.700 A) Annuity due = 1,382,300.102 Ordinary annuity is better because it discounts for one less year. Ordinary annuity =1,304,056.700 B) Annuity due = 1,382,300.102 Annuity due is better because it discounts for one less year. Ordinary annuity =1,304,056.700 C) Annuity due = 1,382,300.102 Ordinary annuity is better because it compound for one less year. Ordinary annuity =1,304,056.700 D) Annuity due = 1,382,300.102 Annuity due is better because it compounds for one more year. Calculate the present value of the annuity assuming that it is (1) an ordinary annuity and then (2) an annuity due. Comparing the two types of annuities, all else being equal, which type is more preferable? Why? Annuity Info: Amount of annuity Interest rate $32,700 9% Deposit period (years) 7 Question 12 options: Ordinary annuity =164,577.5577 A) Annuity due = 179,389.5379 Annuity due is better because it compounds for one more year. Ordinary annuity =164,577.5577 B) Annuity due = 179,389.5379 Ordinary annuity is better because it discounts for one less year. Ordinary annuity =164,577.5577 C) Annuity due = 179,389.5379 Ordinary annuity is better because it compound for one less year. Ordinary annuity =164,577.5577 D) Annuity due = 179,389.5379 Annuity due is better because it discounts for one less year. Alex Weldon, a 20yearold college graduate, wished to retire at age 65. In order to supplement other sources of retirement income, he can deposit $3,000 each year into a taxdeferred individual retirement arrangement (IRA). The IRA will earn a 12% return over the next 45 years. 1.If Alex makes an annual endofyear $3,000 deposit into the IRA, how much will he have by the end of his 65th year? 2. If he decides to wait until he's 40 to start depositing $3000 yearly, how much will he have by the end of his 65th year? 3. How much must the 40year old deposit annually to catch up with the 20year old? Question 13 options: 1. 4,074,690 A) 2. 1,404,506 3. 30,560 1. 4,074,690 B) 2. 400,001 3. 35,560 1. 4,074,690 C) 2. 400,002 3. 30,560 1. 4,074,690 D) 2. 400,001 3. 25,456 Calculate the present values for the perpetuities: (1) annual amount $4,500 and a discount rate of 9% and then (2) annual amount $90,000 and a discount rate of 7.5%. Question 14 options: 1 $ 50,000 2 $1,000,000 1 $ 50,000 2 $1,200,000 1 $ 60,000 A) B) C) 2 $1,200,000 1 $ 60,000 2 $1,000,000 D) Find the present value of the following mixed streams of cash flows using the given discount rate: Year 1 Year 2 Year 3 Year 4 Year 5 Discount rate $15,000 $30,000 $45,000 $60,000 $75,000 12% Question 15 options: A) 181,912.85 B) 150,026.88 C) 157,674.91 D) 32,792.50 Find the future value of the following mixed streams of cash flows (assume deposits are made at the end of each year) Year 1 Year 2 Year 3 Year 4 Year 5 Discount rate $45000 $35,000 $30,000 $15,000 $7,500 12% Question 16 options: A) 150,026.88 B) 181,912.85 C) 157,674.91 D) 32,792.50 Using the following information, calculate the future value at the end of the specified deposit period and the effective annual rate (EAR) for a period of 1 year. Amount of initial deposit $1,500 Question 17 options: FV =32,792.50 A) EAR = 9.00% FV =1576.75 B) EAR = 5.00% Nominal annual rate, r 5% Compounding frequency, m (times/year) 12 FV =1576.75 C) EAR = 5.12% FV =32,792.50 D) EAR = 9.31% Using the following information, calculate the future value at the end of the specified deposit period and the effective annual rate (EAR) for a period of 1 year. Amount of initial deposit $30,000 Question 18 options: FV =1576.75 A) EAR = 5.12% FV =32,792.50 B) EAR = 9.31% FV =32,792.50 C) EAR = 9.00% D) FV =1576.75 Nominal annual rate, r 9% Compounding frequency, m (times/year) 4 EAR = 5.00% Joe Brown borrowed $45,000 at a 12% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, endofyear payments. Calculate the annual, endofyear loan payment. Question 19 options: A) 18,896.87 B) 18,735.70 C) 15,756.71 D) 17,375.41 Joe Brown borrowed $45,000 at a 12% annual rate of interest to be repaid over 3 years. The loan is amortized into three equal, annual, endofyear payments. Prepare an amortization schedule showing the interest & principal breakdown of each of the three loan payments Question 20 options: A) End of Payments Year Interest Principal 1 $13,335.7041 $5,400.0000 2 $3,799.7155 $14,935.9886 3 $2,007.3969 $16,728.3073 End of Payments Year Interest B) 1 $5,400.0000 $13,335.7041 2 $3,799.7155 $14,935.9886 3 $2,007.3969 $16,728.3073 End of Year Principal C) Payments Interest Principal 1 $2,007.3969 $16,728.3073 2 $5,400.0000 $13,335.7041 3 $3,799.7155 $14,935.9886 End of Year D) Payments Interest Principal 1 $2,007.3969 $16,728.3073 2 $3,799.7155 $14,935.9886 3 $5,400.0000 $13,335.7041 Mike has $4,500 to invest. His investment counselor suggests an investment that pays no stated interest, but will return $6,000 at the end of 3 years. What is the annual rate of return on this investment? Question 21 options: A) 11.24% B) 10.06% C) 9.07% D) 6.77% Freddie wishes to determine how long it will take an initial deposit of $15,000 to double if he earns 8% annual interest. Question 22 options: A) 7 years B) 10 years C) 8 years D) 9 years Alex wishes to determine how long it will take an initial deposit of $24,000 to double if he earns 15% annual interest. Question 23 options: A) 7 years B) 6 years C) 5 years D) 4 years The real rate of interest is currently 1.5%, find the required return for security A. Security A Time to maturity Inflation premium Default risk premium Liquidity premium Maturity risk premium 20 years 3.5% 4.5% 2.5% 2.5% Question 24 options: A) 13.0% B) 14.5% C) 11% D) 12.3% Calculate the corporate bond yield spread for the following securities: Rate U.S Treasury 2.34% AAA Corporate 3.00% AA Corporate 3.19% A Corporate 3.88% Question 25 options: AAA Corporate bond yield spread=0.66% AA Corporate bond yield spread=0.85% A) A Corporate bond yield spread=0.69% AAA Corporate bond yield spread=0.66% AA Corporate bond yield spread=0.19% B) A Corporate bond yield spread=0.69% AAA Corporate bond yield spread=0.66% AA Corporate bond yield spread=0.19% C) A Corporate bond yield spread=1.54% AAA Corporate bond yield spread=0.66% D) AA Corporate bond yield spread=0.85% A Corporate bond yield spread=1.54% Using the following information, calculate the value of the bond and discuss whether it sells at par, discount, or premium. (Annual interest rate) Par value Coupon interest rate Years to maturity Required return $1,000 15% 13 17% Question 26 options: A) $1,272.2076 Discount B) C) D) $897.634 4 Premium $897.634 4 Discount $1,272.2076 Premium Using the following information, calculate the value of the bond and discuss whether it sells at par, discount, or premium. (Annual interest rate) Par value Coupon interest rate Years to maturity Required return $1,000 13% 11 9% Question 27 options: A) B) C) D) $1,272.2076 $897.634 4 Discount Discount $1,272.2076 $897.634 4 Premium Premium Using the following information, calculate the yield to maturity for the bond and discuss whether it sells at par, discount, or premium. Par value Coupon interest rate Years to maturity Current value $1,000 16% 11 $1,120 Question 28 options: A) B) C) D) 6.95% Discount 13.82% Discount 6.95% Premium 13.82% Premium Using the following information, calculate the yield to maturity for the bond and discuss whether it sells at par, discount, or premium. Par value Coupon interest rate Years to maturity Current value $1,000 4% 4 $900 Question 29 options: A) B) C) D) 13.82% Discount 6.95% Premium 13.82% Premium 6.95% Discount Find the value of a bond maturing in 18 years, with a $1,000 par value and a coupon interest rate of 15% (7.5% paid semi-annually) if the required return on a similar-risk bond is 21% annual interest (10.5% paid semiannually). Question 30 options: A) 1070.65 B) 722.14 C) 700.75 D) 1120.45 Lizada Inc.'s bonds currently sell for $1,536 and have a par value of $1,000. They pay a $138 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,440. What is their yield to call (YTC)? Question 31 options: A) 9.00% B) 8.76% C) 7.65% D) 7.92% Use the constant-growth model (Gordon growth model) to find the value of the firm shown in the following table. Firm Dividend expected next year A $9.00 Dividend growth rate 4% Required return 9% Question 32 options: A) $52.50 B) $25.54 C) $90.00 D) $180.00 Use the constant-growth model (Gordon growth model) to find the value of the firm shown in the following table. Firm Dividend expected next year Dividend growth rate Required return B $5.25 5% 15% Question 33 options: A) $180.00 B) $52.50 C) $25.54 D) $90.00 Vincent Roofing's common stock paid a dividend of $2.20 per share last year. The company expects earnings and dividends to grow at a rate of 12% per year for the foreseeable future. What required rate of return for the stock would result in a price of $34 per share? Question 34 options: A) 10.21% B) 9.56% C) 19.29% D) 20.56% Depaul Inc. paid the dividends, shown in the table below, over the past 6 years. The firm's dividend per share next year is expected to be $6.04 Year 2007 2008 2009 2010 2011 2012 Dividend per share $4.50 $4.74 $4.9 2 $5.20 $5.5 2 $5.74 If you could earn 11% on a similar-risk investment, what is the most you would be willing to pay per share? Question 35 options: A) 115.00 B) 130.26 C) 100.50 D) 96.48 Bradley Industries' most recent annual dividend was $2.70 per share (D 0=$2.70), and the firm's required return is 13%. Find the market value of Bradley's shares when the dividends are expected to grow at 6% annually for 3 years, followed by a 8% constant growth from year 4 to infinity. Question 36 options: A) $55.28 B) $70.25 C) $34.68 D) $56.77