Question 11

Which bond will be the most sensitive (in terms of percentage changes in its price) to interest rate changes?

5 year 10% coupon bond

20 year 10 % coupon bond

20 year 2% coupon bond

5 year 2% coupon bond

There is no way to determine which bond will be most sensitive

Question 12

Choose the correct statement regarding the Roth IRA. (This is a multiple answer format question which means you should check all that apply...there may be more than one correct response).

More individuals can participate in a Roth IRA because it has less restrictive income limits than a Traditional IRA.

An investor will pay taxes on eligible withdraws from the Roth IRA during retirement as those withdraws will be treated as ordinary income.

An investor will not have to pay taxes on her investment income (interest, dividends, and capital gains) while the money is in the Roth IRA.

Question 13

Your firm has bonds outstanding with 18 years remaining until maturity. The bonds are trading for $1127 and pay a 8.5% coupon rate. Your firm faces a 32% tax rate. Based on this, the after-tax cost of debt financing is

None of the other answers are correct

7.23%

8.50%

4.92%

5.78%

Question 14

You have estimated the following values for dividends over the next four years.

D1 = $1.50

D2 = $2.50

D3 = $3.50

D4 = $4.50

In addition, you anticipate that you can sell the stock four years from today (immediately after you receive the year four dividend) for $50. Assuming a 9% required return, the value of the stock today is

$44.79

$45.64

$41.87

$49.49

Question 15

Developed equity markets have seen higher returns than emerging equity markets over the the Nov. 2004 to June 2012 time frame.

True

False

Question 16

You are evaluating a capital budgeting project that will cost $25,000

Year 1 ==> $12,000

Year 2 ==> $20,000

Year 3 ==> $9,000

The required return is 13% and the critical acceptance level is 1.9 years. Calculate the Internal Rate of Return and determine whether or not the project should be accepted based solely on the Internal Rate of Return.

The IRR is 21.33% and we should reject the project

The IRR is 17.27% and we should accept the project

The IRR is 17.27% and we should reject the project

The IRR is 21.33% and we should accept the project

None of the other answers is correct

Question 17

Linda is saving for retirement and would like to accumulate $800,000 at her retirement. She currently has $30,000 saved and would like to work for another 25 years. She plans to save $3500 at the end of each year over the next 25 years. What rate of return must she earn on her investments over the next 25 years?

10.95%

12.45%

8.76%

7.23%

9.42%

Question 18

Consider two projects:

Project A Project B

PP 2.8 years 3.0 years

IRR 12.5% 13.3%

NPV -$15,500 -$16,900

Assume that the projects both have a required return of 15% and a critical acceptance level (T) of 3.25 years. If these are independent projects we should

Take both projects A and B

Take project B and reject project A

Take neither project

Take project A and reject project B

Question 19

Ecuador offers an example of

Dollarization

A pegged exchange rate

A floating exchange rate

The gold standard

Question 20

Your firm wants to raise $4924796 by issuing preferred stock. The stock has a par value of $50 and pays a 6% dividend, how many shares must be issued if the required return is 10% (ignore costs associated with issuing the shares known as floatation costs -- round to the nearest share)?