EXPERT SOLUTIONS MAY 2014

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1. A bond is currently selling for $1,087. If the yield to maturity is 10%, the coupon rate will be:
less than 10%.
equal than 10%.
more than 10%.

2. The ABC Co. has $1,000 face value stock outstanding with a market price of $937.6. The stock pays interest annually, matures in 9 years, and has a yield to maturity of 10.7 percent. What is the current yield?

3. What is the net present value of the following cash flows? Assume an interest rate of 3.5%
Year CF
0 -$11,895
1 $7,722
2 $5,687
3 $5,120

4. A stock just paid a dividend of D0 = $3.4. The required rate of return is rs = 15.8%, and the constant growth rate is g = 3%. What is the current stock price?

5. A project has the following cash flows. What is the internal rate of return?
Year 0 1 2 3
Cash flow -$121,000 68,150 $42,200 $39,100

6. ABC is reviewing a project that will cost $1,431.The project will produce cash flows $210 at the end of each year for the first two years and $772 at the end of each year for the next two years. What is the profitability index? Assume interest rate is 4%.

7. A 8.9 percent $1,000 bond matures in 17 years, pays interest semiannually, and has a yield to maturity of 16.02 percent. What is the current market price of the bond?

8. ABC Corp. just paid a dividend of $2.4 per share at the end of the year. The stock has a required rate of return is 18%. The dividend is expected to grow at 6.9%. What is dividend at time = 8? (solve for D8?)

9. Uptown Insurance offers an annuity due with semi-annual payments for 19 years at 4.9 percent interest. The annuity costs $176,239 today. What is the amount of each annuity payment?

10. The principal amount of a bond that is repaid at the end of term is called the par value or the:
call premium
perpetuity value
face value
back-end value
coupon value

11. ABC’s last dividend paid was $4.4, its required return is 13%, its growth rate is 6%, and its growth rate is expected to be constant in the future. What is ABC’s expected stock price in 19 years?

12. What is the effective rate of 18% compounded monthly?

13. Suppose an investment offers to double your money in 39 years. What annual rate of return are you being offered if interest is compounded semi-annually?

14. A cost that has already been incurred and cannot be recouped is called as a(n):
Answer
financial cost
opportunity cost
side cost
relevant cost

15. Suppose the real rate is 9.83% and the inflation rate is 4.65%. Solve for the nominal rate.

16. The common stock of ABC Industries is valued at $49 a share. The company increases their dividend by 3.1 percent annually and expects their next dividend to be $1.84. What is the required rate of return on this stock?

17. A bond that sells for less than face value is called as:
discount bond
premium bond
par value bond
debenture
perpetuity

18. How many years will it take to quadruple (i.e. 4 times) your money at 9% compounded quarterly?

19. Suppose that today’s stock price is $49.8. If the required rate on equity is 18.6% and the growth rate is 7.9%, compute the expected dividend (i.e. compute D1)

20. Given the following cash flows, calculate the payback period:
Year CF
0 -921
1 368
2 253
3 291
4 784

21. An investment is acceptable if the profitability index (PI) of the investment is:
less than the net present value (NPV).
less than one.
greater than one.
greater than the internal rate of return (IRR).
greater than a pre-specified rate of return.