If you were to invest $1,000 each year for the next 40 years, then what rate of return is required for your investment to be worth $1,000,000? (Assume the first payment will begin one year from today)

10.51%

18.85%

14.80%

21.25%

None of the above

Bookmark question for laterSuppose you can afford to invest $1,000 each month into an account that pays 15% per year.  How many years will you need to make this monthly investment for your account to be worth $2,000,000? (Assume the first investment will begin one month from today)

21.86 years

20.08 years

16.55 years

13.33 years

None of the above

Bookmark question for laterWhat is the present value of following streams of future cash flows if the discount rate is 10%?Year 1: $10,000Year 2: $11,000Year 3: $13,000

$35,847

$27,949

$33,521

$29,067

None of the above

Bookmark question for laterWhat is the present value of an annual payment of $50,000 that is received in perpetuity if the discount rate is 11%?

$368,710

$550,000

$454,545

$794,910

None of the above

Bookmark question for laterWhat is the present value of following streams of future cash flows if the discount rate is 15%?Year 1: $0Year 2: $0Year 3: $0Year 4: $30,000Year 5: $30,000Year 6:  $30,000Year 7:  $30,000

$56,315.84

$58,919.43

$67,475.75

$50,251.91

None of the above

Bookmark question for laterMarie is putting together a retirement plan and is scheduled to retire in 40 years.  She is planning to open a retirement account and invest an equal amount each month into the retirement account.  If she expects to earn 10.5% per year in the account and is planning to have $3,000,000 in the account at retirement, what is the amount of the monthly investment?

$407.11

$474.07

$667.71

$743.34

None of the above

Bookmark question for laterBob is planning to retire in 36 years.  He is thinking about opening a retirement account and plans to invest an equal amount each year into the account.  He expects to earn 11% per year in the account and is planning to have $2,500,000 in the account at retirement, what is the amount of Bob’s annual investment?

$6,576

$7,931

$5,315

$4,704

Bookmark question for laterTRU Inc. is planning to issue a $1,000 face-value bond with an annual coupon rate of 7.5% that matures in 5 years.  TRU is planning to pay quarterly interest payments.  Similar TRU bonds are quoting at 97.5% of par.  What is the price that bond holders will pay for this bond?

$97.50

$1,000.00

$975.00

$750.00

None of the above

Bookmark question for laterBOM Co. is currently issuing a $1,000 face-value bond that has an annual coupon of 7.5% and matures in 15 years.  Interest payments are made annually.  If the yield to maturity is 8%, then what is the current price of the bond?

$741.35

$888.74

$910.77

$957.20

None of the above

Bookmark question for laterDMC Inc. is planning to issue a $1,000 face-value bond with an annual coupon rate of 10% that matures in 20 years.  DMC is planning to pay semi-annual interest payments.  Similar DMC bonds are quoting at 95% of par.  What is yield to maturity for this bond?

5.3%

11.2%

7.5%

10.6%

None of the above

Bookmark question for laterPGP Co. expects to issue a $1,000 face-value bond that matures in 8 years.  The annual coupon rate is 9% and interest payments are expected to be paid annually.  Similar bonds are currently priced at 101.4% of face value.  Given this information, what is the required return by bond holders?

8.49%

8.75%

9.08%

9.26%

None of the above

Bookmark question for laterSuppose you bought a 15-year $1,000 face-value bond for $945 one year ago.  The annual coupon rate is 7% and interest payments are paid annually.  If the price today is $995, the yield to maturity must have changed from _____________ to ______________.

8.12%; 6.94%

7.12%; 8.11%

7.63%; 7.06%

9.11%; 9.35%

None of the above

Bookmark question for later

If returns required by bond holders have decreased 1% from last year, we should expect bond prices to have _______________.

Increased

Decreased

Remain unchanged

Decreased by more than 1%

None of the above

Bookmark question for laterSuppose you bought a 20-year, $1,000 face-value bond for par 5 years ago.   The annual coupon rate on this bond is 8.5% and interest payments are paid annually.  If returns required by bond holders are now 1.5% higher than they were 5 years ago, then how much of a decrease have you experienced in the price of your bond?

$84.11

$114.09

$94.55

$99.79

None of the above

Bookmark question for laterBond STQ has duration of 2.  Given this information, a one percent increase in the return required by bond holders will:

Increase the bond price by 2%.

Decrease the bond price by 2%.

Increase the coupon rate by 2%.

Decrease the coupon rate by 2%

None of the above

Bookmark question for laterWhich of the following statements correctly defines the difference between preferred stock and common stock?

Preferred shareholders have more of a claim to dividends than common stock holders.

Preferred shareholders have the voting rights that common stock holders have.

Preferred shareholders have more exposure to variable share prices than common share holders.

All of the above

None of the above

Bookmark question for laterA preferred stock pays a dividend of $7.50 in perpetuity.  If the return required by shareholders is 11%, then the price per share for this preferred stock is:

$53.33

$41.66

$75.11

$68.18

None of the above

Bookmark question for later

GHI Co. is planning to pay a dividend of $3.20 in the next year and expects to grow the dividend at a constant rate of 4% per year, indefinitely.  If the required rate of return buy shareholders is 12%, then the price the price of this stock should be:

$40.00

$43.10

$53.66

$57.31

None of the above

Bookmark question for later

MCMC has just paid a dividend of $4.10 and is expected to increase the future dividends at a rate of 4% per year indefinitely.  If the current share price is $40, what is the return required by shareholders?

12.65%

13.52%

13.99%

14.66%

None of the above

Bookmark question for laterMadison’s Inc. has a beta of 1.3.  The market risk premium is expected to 10.5% and the risk-free rate is 3.5%.  What is the cost of equity for Madison’s?

14.50%

15.95%

17.15%

17.41%

None of the above

Bookmark question for laterABC Co. is expecting to pay a dividend of $1.98 in the upcoming year and further anticipates growing the dividend at a constant rate of 3.5% per year, indefinitely.  If the current share price is $25, then what is the cost of equity according to the Gordon Growth Model?

10.99%

11.42%

12.33%

14.56%

None of the above

Bookmark question for laterGFE Inc. has a beta of 1.61.  The expected return on the market is 14% while the risk-free rate is 3%.  Given this information, what is the return required by share holders?

24.10%

22.01%

20.71%

18.76%

None of the above

Bookmark question for laterA company is looking to invest in new machinery.  The current financing is 40% debt, 40% common stock, and 20% preferred stock.  The company anticipates the new debt issue will consist of 15-year $1,000 face-value bonds that will be priced at par.  The bonds will pay an annual coupon of $75.  Flotation costs for this new bond issue will be $15 per bond. The company has recently paid a dividend of $3.50 and is expecting to increase the dividend by 5% per year, indefinitely.  The current share price for the company’s common stock is $32.  The company also plans to issue preferred stock that will pay a dividend per share of $7 per year in perpetuity. The market price of the preferred stock will be $60.  The flotation costs of both the common stock issue and preferred stock issue will be $2.50 per share.  If the company’s marginal tax rate is 39%, then what is the Weighted Average Cost of Capital for this company?

9.95%

12.55%

11.29%

13.84%

10.51%

Bookmark question for laterRightOn Inc. is looking to acquire a small competitor.  The market value of RightOn’s common stock is $100 million and the market value of their debt is $200 million. Analysts have calculated the cost of common equity to be 17.2% and the cost of debt to be 10%.  If the marginal tax rate of RightOn Inc. is 34%, then what is the weighted average cost of capital?

13.21%

10.13%

12.14%

9.81%

14.70%

Bookmark question for laterWhich of the following is an ideal criteria for the methods used to evaluate a capital investment project?

The method should consider the timing of the project’s cash flows.

The method must account for the success of previous projects.

All cash flows should be included, which might consist of opportunity costs, sunk costs, and cannibalization costs.

The method should set require risk to be constant for all projects that will be considered.

None of the above

Bookmark question for laterWhat is the internal rate of return for the following stream of cash?Year 0: -$20 MillionYear 1: $5 MillionYear 2: $8 MillionYear 3: $10 MillionYear 4: $3 Million

13.84%

15.99%

11.68%

12.52%

14.02%

Bookmark question for laterWhat is the payback period for the following stream of cash flows?Year 0: -$20 MillionYear 1: $5 MillionYear 2: $8 MillionYear 3: $10 MillionYear 4: $3 Million

3.33 years

2.15 years

3.11 years

2.70 years

4.12 years

Bookmark question for laterWhat is the net present value of the following stream of cash flows if the discount rate is 15%?Year 0: -$350 MYear 1: $101 MYear 2: $88 MYear 3: $77 MYear 4: $75 MYear 5: $75 MYear 6: $70 M

$28.41 M

$10.21M

-$34.57 M

-$55.41 M

-$44.20 M

Bookmark question for laterWhat is the net present value of the following stream of cash flows if the discount rate is 11.5%?Year 0: -$96,000Year 1: $38,000Year 2: $38,000Year 3: $38,000

-$3,940

-$6,588

-$205

$5,127

$9,541

Bookmark question for laterThe decision rule for the IRR states that when the IRR is greater than ______________ the project should be accepted.

The discount rate

The rate of return required by providers of capital.

The WACC

All of the above

None of the above