1. What would the future value of $125 be after 8 years at 8.5% compound interest? a. $205.83 b.

$216.67 c. $228.07 d. $240.08 e. $252.08

2. Last year Mason Corp's earnings per share were $2.50, and its growth rate during the prior 5
years was 9.0% per year. If that growth rate were maintained, how many years would it take for
Masons EPS to double? a. 5.86 b. 6.52 c. 7.24 d. 8.04 e. 8.85
3. Your girlfriend just won the Florida lottery. She has the choice of $15,000,000 today or a 20year annuity of $1,050,000, with the first payment coming one year from today. What rate of
return is built into the annuity? a. 2.79% b. 3.10% c. 3.44% d. 3.79% e. 4.17%
4. An investment costs $1,000 (CF at t = 0) and is expected to produce cash flows of $75 at the
end of each of the next 5 years, then an additional lump sum payment of $1,000 at the end of the
5th year. What is the expected rate of return on this investment? a. 6.77% b. 7.13% c. 7.50% d.
7.88% e. 8.27%
5. Credit card issuers must by law print the Annual Percentage Rate (APR) on their monthly
statements. If the APR is stated to be 18.00%, with interest paid monthly, what is the card's EFF
%? a. 18.58% b. 19.56% c. 20.54% d. 21.57% e. 22.65%
6. East Coast Bank offers to lend you $25,000 at a nominal rate of 7.5%, compounded monthly.
The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers
to lend you the $25,000, but it will charge an annual rate of 8.3%, with no interest due until the
end of the year. What is the difference in the effective annual rates charged by the two banks? a.
0.93% b. 0.77% c. 0.64% d. 0.54% e. 0.43%
7. The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an
annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the
bond's price? a. $923.22 b. $946.30 c. $969.96 d. $994.21 e. $1,019.06
8. Consider some bonds with one annual coupon payment of 7.25%. The bonds have a par value
of $1,000, a current price of $1,125, and they will mature in 13 years. What is the yield to
maturity on these bonds? a. 5.56% b 5.85% c. 6.14% d. 6.45% e. 6.77%
9. Assume that you are considering the purchase of a 15-year bond with an annual coupon rate of
9.5%. The bond has face value of $1,000 and makes semiannual interest payments. If you require
an 11.0% nominal yield to maturity on this investment, what is the maximum price you should
be willing to pay for the bond? a $891.00 b. $913.27 c. $936.10 d. $959.51 e. $983.49
10. Wachowicz Corporation issued 15-year, noncallable, 7.5% annual coupon bonds at their par
value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the
current price of the bonds, given that they now have 14 years to maturity? a. $1,077.01 b.
$1,104.62 c. $1,132.95 d. $1,162.00 e $1,191.79
11. Taussig Corp.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a
15-year maturity, but they can be called in 6 years at $1,067.50. Assume that no costs other than

the call premium would be incurred to call and refund the bonds, and also assume that the yield
curve is horizontal, with rates expected to remain at current levels on into the future. Under these
conditions, what rate of return should an investor expect to earn if he or she purchases these
bonds, the YTC or the YTM? a. 3.92% b. 4.12% c. 4.34% d. 4.57% e. 4.81%
12. In order to accurately assess the capital structure of a firm, it is necessary to convert its
balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as
follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock
($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 The bonds
have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly
10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the
current market value of the firm's debt? a. $5,276,731 b $5,412,032 c. $5,547,332 d. $7,706,000
e. $7,898,650
13. Crockett Corporation's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real
risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP = 0.85% versus
zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%, and the maturity risk
premium for all bonds is found with the formula MRP = (t 1) ? 0.1%, where t = number of
years to maturity. What is the inflation premium (IP) on 5-year bonds? a. 1.40% b 1.55% c.
1.71% d. 1.88% e. 2.06%
14. J. Harper Inc.'s stock has a 50% chance of producing a 35% return, a 30% chance of
producing a 10% return, and a 20% chance of producing a -28% return. What is Harper's
expected return? a. 14.16% b. 14.53% c 14.90% d. 15.27% e. 15.65%
15. A stock has an expected return of 12.60%. Its beta is 1.49 and the risk-free rate is 5.00%.
What is the market risk premium? a. 5.10% b. 5.23% c. 5.36% d. 5.49% e. 5.63%
16. Yonan Corporation's stock had a required return of 11.50% last year, when the risk-free rate
was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk
aversion, and the market risk premium increases by 2%. The risk-free rate and Yonan's beta
remain unchanged. What is Yonan's new required return? (Hint: First calculate the beta, then find
the required return.) a. 14.03% b. 14.38% c. 14.74% d. 15.10% e. 15.48%
Urgency: HIGH