1.

What would the future value of $125 be after 8 years at 8.5% compound interest?

a. b. c. d. e.

$205.8 $21!.!" $228.0" $240.08 $252.08

2.

#uppose a $.#. treasury bond will pay $2%500 five years from now. &f the 'oin' interest rate on 5(year treasury bonds is ).25%% how much is the bond worth today?

a. b. c. d. e.

$1%*28."8 $2,030.30 $2%1 1.81 $2%2 8.)0 $2% 50. 2

. +ast year ,ason -orp.s earnin's per share were $2.50% and its 'rowth rate durin' the prior 5 years was *.0% per year. &f that 'rowth rate were maintained% how many years would it ta/e for ,ason0s 12# to double?

a. b. c. d. e.

5.8! !.52 ".2) 8.04 8.85

). 3ou want to 'o to 1urope 5 years from now% and you can save $ %100 per year% be'innin' one year from today. 3ou plan to deposit the funds in a mutual fund which you e4pect to return 8.5% per year. $nder these conditions% how much will you have 5ust after you ma/e the 5th deposit% 5 years from now?

a. b.

$18,368.66 $1*%28".0*

c. d. e.

$20%251.)) $21%2!).02 $22% 2".22

5.

3ou want to buy a new sports car years from now% and you plan to save $)%200 per year% be'innin' immediately. 3ou will ma/e deposits in an account that pays 5.2% interest. $nder these assumptions% how much will you have today? years from

a. b. c. d. e.

$13,956.42 $1)%!5).2) $15% 8!.*5 $1!%15!. 0 $1)%202.21

!.

6t a rate of !.25%% what is the present value of the followin' cash flow stream? $0 at 7ime 08 $"5 at the end of 3ear 18 $225 at the end of 3ear 28 $0 at the end of 3ear 8 and $ 00 at the end of 3ear )? a. b. c. $)11.5" $) .2

$)5!.0

d. e.

$)80.0 $505.30

".

6fter 'raduation% you plan to wor/ for 9ynamo -orporation for 12 years and then start your own business. 3ou e4pect to save and deposit $"%500 a year for the first ! years and $15%000 annually for the followin' ! years% with the first deposit bein' made a year from today. &n addition% your 'randfather 5ust 'ave you a $25%000 'raduation 'ift which you will deposit immediately. &f the account earns *% compounded annually% how much will you have when you start your business 12 years from now? a. b. c. d. e. $2 8%1"! $250%"12 $2! %*0" $277,797 $2*1%!8"

8.

3ou are ne'otiatin' to ma/e a "(year loan of $25%000 to :rec/ &nc. 7o repay you% :rec/ will pay $2%500 at the end of 3ear 1% $5%000 at the end of 3ear 2% and $"%500 at the end of 3ear % plus a fi4ed but currently unspecified cash flow% ;% at the end of 3ears ) throu'h ". :rec/

is essentially ris/less% so you are confident the payments will be made% and you re'ard 8% as an appropriate rate of return on low ris/ "(year loans. What cash flow must the investment provide at the end of each of the final ) years% that is% what is ;?

a. b. c. d. e.

$)%2"1.!" $)%)*!.)* $4,733.15 $)%*!*.81 $5%218. 0

*.

<ohn and 9aphne are savin' for their dau'hter 1llen.s colle'e education. 1llen is now 10 years old and will be enterin' colle'e 8 years from now =t > 8?. -olle'e tuition and e4penses at #tate $. are currently

$1)%500 a year% but they are e4pected to increase at a rate of .5% a year. 7hey e4pect 1llen to 'raduate in ) years. =&f 1llen wants to 'o to 'raduate school% she will be on her own.? 7uition and other costs will be due at the be'innin' of each school year =at t > 8% *% 10% and 11?. #o far% <ohn and 9aphne have accumulate d $15%000 in the colle'e savin's account. 7heir lon'( run financial

plan is to add an additional $5%000 at the be'innin' of each of the ne4t ) years =at t > 0% 1% 2% and ?. 7hen they plan to ma/e ) e@ual annual contribution s at the end of each of the followin' 5 years =t > )% 5% !% "% and 8?. 7hey e4pect their investment account to earn *%. Aow lar'e must the annual payments be at t > )% 5% !% "% and 8 to meet 1llen.s anticipated colle'e costs?

a. b. c. d. e.

$""".*! $818.*1 $8!2.01 $*0". 8 $955.13

10.

6ssume that 2appas -ompany commence d operations on <anuary 1% 200"% and it was 'ranted permission to use the same depreciatio n calculations for shareholder reportin' and income ta4 purposes. 7he company planned to depreciate its fi4ed assets over

15 years% but in 9ecember 200" mana'eme nt realiBed that the assets would last for only 10 years. 7he firm.s accountants plan to report the 200" financial statements based on this new information. Aow would the new depreciatio n assumption affect the company0s financial statements ?

a.

7he firm0s reported net fi4ed assets would increase.

b.

7he firm0s 1:&7 would increase.

c.

7he firm.s reported 200" earnin's per share would increase.

d.

The firm's cash position in 2007 and 2008 o!"d increase.

e.

7he firm0s net liabilities would increase.

11.

Which of the followin' statements is -CDD1-7 ?

a.

Cne way to increase 1E6 is to achieve the same level of operatin' income but with more investor( supplied capital.

b.

&f a firm reports positive net income% its 1E6 must also be positive.

c.

Cne drawbac/ of 1E6 as a performanc e measure is that it mista/enly assumes that e@uity capital is free.

d.

#ne

a$ to

increase %&' is to (enerate the same "e)e" of operatin( income b!t ith "ess

in)estor* s!pp"ied capita". e. 6ctions that increase reported net income will always increase net cash flow.

12. 7he -FC of #halit &ndustries plans to have the company issue $ 00 million of new common stoc/ and use the proceeds to pay off some of its outstandin' bonds. 6ssume that the company% which does not pay any dividends% ta/es this action% and

that total assets% operatin' income =1:&7?% and its ta4 rate all remain constant. Which of the followin' would occur?

a.

7he company0s ta4able income would fall.

b.

7he company0s interest e4pense would remain constant.

c.

7he company would have less common e@uity than before.

d.

The compan$+s net income

o!"d increase. e. 7he company would have to pay less ta4es.

1 .

Walter &ndustries0 current ratio is 0.5. -onsidered alone% which of the followin' actions would increase the company0s current ratio?

a.

,orro

!sin( short*term

notes pa$ab"e and !se the cash to increase in)entories. b. c. $se cash to reduce accruals. $se cash to reduce accounts payable. d. $se cash to reduce short(term notes payable. e. $se cash to reduce lon'(term bonds outstandin'.

1).

-ompanies A9 and +9 have the same total assets% sales% operatin' costs% and ta4 rates% and they pay the same interest rate on their debt. Aowever% company A9 has a hi'her debt ratio. Which of the followin' statements is -CDD1-7?

a.

Given this information% +9 must have the hi'her DC1. b. -ompany +9 has a hi'her basic earnin' power ratio =:12?. c. -ompany A9 has a hi'her basic earnin' power ratio =:12?. d. &f the interest rate the companies pay on their debt is more than their basic earnin' power =:12?% then -ompany A9 will have the hi'her DC1. e. -f the interest rate the companies pa$ on their debt is "ess than their basic earnin( po er .,%/0, then 1ompan$ 23 hi(her 4#%. i"" ha)e the

15.

-ompanies A9 and +9 have the same sales% ta4 rate% interest rate on their debt% total assets% and basic earnin' power. :oth companies have positive net incomes. -ompany A9 has a hi'her debt ratio and% therefore% a hi'her interest e4pense. Which of the followin' statements is -CDD1-7?

a.

1ompan$ 23 pa$s "ess in

ta5es. b. -ompany A9 has a lower e@uity multiplier. c. -ompany A9 has a hi'her DC6. d. -ompany A9 has a hi'her times interest earned =7&1? ratio. e. -ompany A9 has more net income.

1!.

Which of the followin' statements is -CDD1-7? a. &f two bonds have the same maturity% the same yield to maturity% and the same level of ris/% the bonds should sell for the same price re'ardless of the bond0s coupon rates. b. 6ll else e@ual% an increase in interest rates will have a 'reater effect on the prices of short(term than lon'(term bonds. c. 6ll else e@ual% an increase in interest rates will have a 'reater effect on hi'her(coupon bonds than it will have on lower( coupon bonds. d. -f a bond+s $ie"d to mat!rit$ e5ceeds its co!pon rate, the bond+s price m!st be "ess than its mat!rit$ )a"!e. e. &f a bond0s yield to maturity e4ceeds its coupon rate% the

bond0s current yield must be less than its coupon rate.

1".

6ssumin' all else is constant% which of the followin' statements is -CDD1-7? a. 6 20(year Bero coupon bond has more reinvestment rate ris/ than a 20(year coupon bond. b. 6or an$ (i)en mat!rit$, a 1.0 percenta(e point decrease in the mar7et interest rate (ain than the capita" "oss stemmin( from a 1.0 percenta(e point increase in the interest rate. c. From a corporate borrower0s point of view% interest paid on bonds is not ta4(deductible. d. 2rice sensitivity as measured by the percenta'e chan'e in price due to a 'iven chan'e in the re@uired rate of return decreases as a bond0s maturity increases. e. For a bond of any maturity% a 1.0 percenta'e point increase in the mar/et interest rate =rd? causes a lar'er dollar capital loss than the capital 'ain stemmin' from a 1.0 percenta'e point decrease in the interest rate. o!"d ca!se a sma""er do""ar capita"

6ll are incorrect.

18.

Which of the followin' statements is -CDD1-7? a. -f inf"ation is e5pected to increase in the f!t!re, and if the mat!rit$ ris7 premi!m .84/0 is (reater than 9ero, then the $ie"d c!r)e an !p ard s"ope. b. &f the maturity ris/ premium =,D2? is 'reater than Bero% then the yield curve must have an upward slope. c. :ecause lon'(term bonds are ris/ier than short(term bonds% yields on lon'(term 7reasury bonds will always be hi'her than yields on short(term 7(bonds. d. &f the maturity ris/ premium =,D2? e@uals Bero% the yield curve must be flat. e. 7he yield curve can never be downward slopin'. i"" ha)e

1*.

Garvin 1nterprises0 bonds currently sell for $1%150. 7hey have a !(year maturity% an annual coupon of $85% and a par value of $1%000. What is their current yield?

a. b. c.

7.39: "."!% 8.15%

d. e.

8.5!% 8.*8%

20.

,oerdy/ -orporation.s bonds have a 10(year maturity% a !.25% semiannual coupon% and a par value of $1%000. 7he 'oin' interest rate =rd? is )."5%% based on semiannual compoundin'. What is the bond0s price?

a. b. c. d. e.

1%0! .0* 1%0*0. 5 1,118.31 1%1)!.2" 1%1").*

21.

-ompanies can issue different classes of common stoc/. Which of the followin' statements concernin' stoc/ classes is -CDD1-7? a.

6ll common stoc/s fall into one of three classesH 6% :% and -. b. 6ll common stoc/s% re'ardless of class% must have the same votin' ri'hts. c. d. 6ll firms have several classes of common stoc/. 6ll common stoc/% re'ardless of class% must pay

the same dividend. e. ;ome c"ass or c"asses of common stoc7 ma$ be entit"ed to more )otes per share than other c"asses.

22.

#toc/s 6 and : have the same re@uired return and the same price% $25. #toc/ 60s dividend is e4pected to 'row at a constant rate of 10% per year% while #toc/ :0s dividend is e4pected to 'row at a constant rate of 5% per year. Which of the followin' statements is -CDD1-7? a.

#toc/ 6.s e4pected dividend at t > 1 is only half that of #toc/ :. b. #toc/ 6 has a hi'her dividend yield than #toc/ :. c. -urrently the two stoc/s have the same price% but over time #toc/ :.s price passes that of 6. d. ;ince ;toc7 '+s (ro th rate is t ice that of ;toc7 ,, ;toc7 '+s f!t!re di)idends ;toc7 ,+s. e. 7he two stoc/s should not sell at the same price. &f their prices are e@ual% then a dise@uilibrium e4ists. i"" a" a$s be t ice as hi(h as

2 .

&f 91 > $1.25% ' =which is constant? > 5.5%% and 20 > $))%

what is the stoc/0s e4pected total return for the comin' year?

a. b. c. d. e.

".5)% "." % ".* % 8.1 % 8.34:

2).

Gary Wells &nc. plans to issue perpetual preferred stoc/ with an annual dividend of $!.50 per share. &f the re@uired return on this preferred stoc/ is !.5%% at what price should the stoc/ sell?

a. b. c. d. e.

$*0. " $*2.!* $*5.0! $*".50 $100.00