Finance Practice Exam 2

The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for thefollowing two years, and then cease paying dividends altogether. How much is one share of this stock worth toyou today if you require a 19 percent rate of return?A. $2.31B. $2.36C. $2.56D. $2.60E. $2.64 A
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing for the next 48 months.Which one of the following terms best describes these scholarship payments?A. Ordinary annuityB. Annuity dueC. ConsolD. Ordinary perpetuityE. Perpetuity due B
Christie is buying a new car today and is paying a $500 cash down payment. She will finance the balance at 7.25percent interest. Her loan requires 36 equal monthly payments of $450 each with the first payment due 30 days fromtoday. Which one of the following statements is correct concerning this purchase?A. The present value of the car is equal to $500 + (36 × $450).B. The $500 is the present value of the purchase.C. The car loan is an annuity due.D. To compute the initial loan amount, you must use a monthly interest rate.E. The future value of the loan is equal to 36 × $450. D
The manager of Gloria’s Boutique has approved Carla’s application for credit. The maximum payment that has beenapproved is $65 a month for 24 months. The APR is 15.7 percent. What is the maximum initial purchase that Carlacan make given this credit approval?A. $1,288.90B. $1,300.00C. $1,331.42D. $1,350.00E. $1,428.46 C
Today is your 21st birthday and you just decided to start saving money so you can retire early. Thus, you are goingto save $500 a month starting one month from now. You plan to retire as soon as you can accumulate $1 million. Ifyou can earn an average of 8 percent on your savings, how old will you be when you retire?A. 33.39 years oldB. 42.87 years oldC. 54.39 years oldD. 64.71 years oldE. 63.87 years old C
What is the future value of $20 a week for 10 years at 6 percent interest? Assume the first payment occurs at the endof this week.A. $14,239.14B. $14,361.08C. $14,727.15D. $15,003.14E. $15,221.80 A
hich one of the following statements is correct?A. The APR is equal to the EAR for a loan that charges interest monthly.B. The EAR is always greater than the APR.C. The APR on a monthly loan is equal to (1 + monthly interest rate)12 – 1.D. The APR is the best measure of the actual rate you are paying on a loan.E. The EAR, rather than the APR, should be used to compare both investment and loan options. E
What is the effective annual rate of 6.5 percent compounded quarterly?A. 6.02 percentB. 6.29 percentC. 6.54 percentD. 6.66 percentE. 6.83 percent D
A loan that compounds interest monthly has an EAR of 14.40 percent. What is the APR?A. 13.53 percentB. 13.59 percentC. 13.96 percentD. 14.07 percentE. 14.10 percent A
A credit card has a stated interest rate of 14.56 percent. What is the APR if interest is compounded monthly?A. 13.09 percentB. 13.46 percentC. 13.90 percentD. 14.56 percentE. 14.82 percent D
Scott borrowed $2,500 today. The loan agreement requires him to repay $2,685 in one lump sum payment one yearfrom now. This type of loan is referred to as a(n):A. interest-only loan.B. pure discount loan.C. quoted rate loan.D. compound interest loan.E. amortized loan. B
Bill just financed a used car through his credit union. His loan requires payments of $275 a month for five years.Assuming that all payments are paid on time, his last payment will pay off the loan in full. What type of loan does Billhave?A. AmortizedB. ComplexC. Pure discountD. Lump sumE. Interest-only A
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basis and the principal atthe end of three years. What type of loan did you obtain?A. Interest-onlyB. AmortizedC. PerpetualD. Pure discountE. Lump sum A
When you refer to a bond’s coupon, you are referring to which one of the following?A. Difference between the purchase price and the face valueB. Annual interest divided by the current bond priceC. Difference between the bid and ask priceD. Annual interest paymentE. Principal amount of the bond D
The current yield on a bond is equal to the annual interest divided by which one of the following?A. Issue priceB. Maturity valueC. Face amountD. Current market priceE. Current par value D
The written agreement that contains the specific details related to a bond issue is called the bond:A. indenture.B. debenture.C. document.D. registration statement.E. issue paper. A
A note is a(n):A. unsecured debt that is generally payable within the next 10 years.B. formal type of loan that is secured by real estate.C. long-term debt secured by part, or all, of the assets of the borrower.D. debt that is secured by a borrower’s accounts receivable.E. written agreement that details the information relative to a bond issue. A
Which one of the following is the price that an investor pays to purchase an outstanding bond?A. Dirty priceB. Face valueC. Call priceD. Bid priceE. Clean price A
A real rate of return is defined as a rate that has been adjusted for which one of the following?A. InflationB. Interest rate riskC. TaxesD. LiquidityE. Default risk A
he Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ of those securities.A. face valueB. market priceC. maturityD. coupon rateE. issue date C
Which one of the following represents additional compensation provided to bondholders to offset the possibility thatthe bond issuer might not pay the interest and/or principal payments as expected?A. Interest rate risk premiumB. Inflation premiumC. Liquidity premiumD. Taxability premiumE. Default risk premium E
Generally speaking, bonds issued in the U.S. pay interest on a(n) _____ basis.A. annualB. semiannualC. quarterlyD. monthlyE. daily B
bond has a make-whole call provision. Given this, you know that the:A. bond will always sell at par.B. call premium must equal the annual coupon payment.C. call price is directly related to the market rate of interest.D. call price is inversely related to the market rate of interest.E. bond must be a zero coupon bond D
What is the primary purpose of bond covenants?A. Meet regulatory requirementsB. Describe repayment termsC. Protect the lenderD. Define a bond’s ratingE. Increase a bond’s seniority position C
A 7 percent bond has a yield to maturity of 6.5 percent. The bond matures in seven years, has a face value of$1,000, and pays semiannual interest payments. What is the amount of each coupon payment?A. $30.00B. $35.00C. $60.00D. $65.00E. $70.00 B
A bond has a par value of $1,000, a current yield of 7.5 percent, and semiannual interest payments. The bond quoteis 98.6. What is the amount of each coupon payment?A. $32.07B. $36.98C. $37.50D. $72.31E. $75.00 B
Whitts BBQ would like to issue some semiannual coupon bonds at par. Comparable bonds have a current yield of9.16 percent, an effective annual yield of 9.68 percent, and a yield to maturity of 9.50 percent. What coupon rateshould Whitts BBQ set on its bonds?A. 9.00 percentB. 9.16 percentC. 9.50 percentD. 9.68 percentE. 10.00 percent C
Last year, you earned a rate of return of 12.37 percent on your bond investments. During that time, the inflation ratewas 3.6 percent. What was your real rate of return?A. 6.30 percentB. 7.60 percentC. 7.75 percentD. 8.47 percentE. 8.70 percent D
Jeffries, Inc. has 6 percent coupon bonds on the market that have 11 years left to maturity. The bonds make annualpayments. If the YTM on these bonds is 7.4 percent, what is the current bond price?A. $895.88B. $897.08C. $903.14D. $921.42E. $933.33 B
If Treasury bills are currently paying 3.2 percent and the inflation rate is 2.8 percent, what is the approximate real rateof interest? The exact real rate?A. 0.40 percent; 3.89 percentB. 0.40 percent; 3.98 percentC. 6.00 percent; 5.67 percentD. 6.00 percent; 5.87 percentE. 6.00 percent; 5.92 percent A
Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interestannually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the current yield?A. 5.39 percentB. 5.43 percentC. 5.50 percentD. 5.61 percentE. 5.77 percent B
One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of 6.5 percent and payinterest annually. Today, the market rate of interest on these bonds is 7.2 percent. How does the price of thesebonds today compare to the issue price?A. 4.99 percent lowerB. 5.38 percent lowerC. 6.05 percent lowerD. 0.07 percent higherE. 1.36 percent higher C
You’ve just found a 7 percent coupon bond on the market that sells for par value. What is the maturity on this bond?A. The bond must mature in 1 year.B. The bond could have any maturity date.C. The bond must be maturing today.D. The bond must mature in 10 years.E. None of these are correct. B
. Which one of the following statements is correct?A. From a legal perspective, preferred stock is a form of corporate equity.B. All classes of stock must have equal voting rights per share.C. Common shareholders elect the corporate directors while the preferred shareholders vote on mergers andacquisitions.D. Dividends are tax-free income for individual investors.E. Shareholders prefer noncumulative dividends over cumulative dividends. A
. Which one of the following will increase the current value of a stock?A. Decrease in the dividend growth rateB. Increase in the required returnC. Increase in the market rate of returnD. Decrease in the expected dividend for next yearE. Increase in the capital gains yield E
Which one of the following statements is correct?A. Both preferred stock and corporate bonds can be callable.B. Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each.C. Interest payments to bondholders as well as dividend payments to preferred shareholders are tax-deductibleexpenses for the issuing firm.D. Bondholders generally receive a fixed payment while preferred shareholders receive a variable payment.E. Preferred shareholders receive preferential treatment over bondholders in a liquidation. A
This morning, you purchased a stock that will pay an annual dividend of $1.90 per share next year. You require a 12percent rate of return and the annual dividend increases at 3.5 percent annually. What will your capital gain be onthis stock if you sell it three years from now?A. $2.43B. $2.51C. $2.63D. $2.87E. $2.92 A
Horseshoe Stables is losing significant market share and thus its managers have decided to decrease the firm’sannual dividend. The last annual dividend was $0.90 a share but all future dividends will be decreased by 10 percentannually. What is a share of this stock worth today at a required return of 15 percent?A. $3.06B. $3.24C. $3.41D. $3.59E. $3.95 B
Lamey Headstones increases its annual dividend by 1.5 percent annually. The stock sells for $28.40 a share at arequired return of 14 percent. What is the amount of the last dividend this company paid?A. $3.50B. $3.55C. $3.60D. $3.65E. $3.70 A
The Sports Club plans to pay an annual dividend of $1.20 per share next year, $1.00 per share a year for thefollowing two years, and then cease paying dividends altogether. How much is one share of this stock worth toyou today if you require a 19 percent rate of return?A. $2.31B. $2.36C. $2.56D. $2.60E. $2.64 A
General Importers announced today that its next annual dividend will be $2.60 per share. After that dividend ispaid, the company expects to encounter some financial difficulties and is going to suspend dividends for fiveyears. Following the suspension period, the company expects to pay a constant annual dividend of $1.30 pershare. What is the current value of this stock if the required return is 18 percent?A. $3.01B. $3.55C. $3.89D. $4.27E. $4.88 E
Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share three years from now.Starting in year 6, the company is expected to start increasing the dividend by 2 percent per year. What is thevalue of this stock today at a required return of 12 percent?A. $7.70B. $8.09C. $8.29D. $9.03E. $9.34 A
New Gadgets is growing at a very fast pace. As a result, the company expects to pay annual dividends of $0.55,0.80, and $1.10 per share over the next three years, respectively. After that, the dividend is projected to increaseby 5 percent annually. The last annual dividend the firm paid was $0.40 a share. What is the current value of thisstock if the required return is 16 percent?A. $8.50B. $9.67C. $10.46D. $12.23E. $12.49 A
A firm expects to increase its annual dividend by 20 percent per year for the next two years and by 15 percent peryear for the following two years. After that, the company plans to pay a constant annual dividend of $3 a share.The last dividend paid was $1 a share. What is the current value of this stock if the required rate of return is 12percent?A. $17.71B. $18.97C. $20.50D. $21.08E. $21.69 C
The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expected to pay annualdividends of $4.40 and $4.50 per share the next two years, respectively. After that, the firm expects to maintain aconstant dividend growth rate of 2 percent per year. What is the value of this stock today if the required return is15 percent?A. $27.64B. $29.61C. $30.66D. $33.05E. $33.93 E
Last year, when the stock of Alpha Minerals was selling for $55 a share, the dividend yield was 3.2 percent.Today, the stock is selling for $41 a share. What is the total return on this stock if the company maintains aconstant dividend growth rate of 2.5 percent?A. 6.13 percentB. 6.58 percentC. 6.90 percentD. 7.47 percentE. 7.40 percent C
Laura Lynn owns 20,700 shares of Global Exporters. Her shares have a total market value of $787,270. In total,the firm has 65,000 shares outstanding. Each share is entitled to one vote under the straight voting policy of thefirm. The next election is in four months at which time two directors are up for election. How much more mustLaura Lynn invest in this firm to guarantee that she is elected to the board?A. $0B. $396,554C. $448,820D. $498,406E. $547,478 C
Spiral Staircase is offering preferred stock which is commonly referred to as 10-10 stock. This stock will pay anannual dividend of $10 a share starting 10 years from now. What is this stock worth to you today if you desire a15 percent rate of return?A. $16.70B. $18.95C. $19.63D. $20.52E. $20.94 B
Classic Pickles is a mature manufacturing firm. The company just paid a $4 annual dividend, but managementexpects to reduce the payout by 4 percent per year, indefinitely. If you require a 12 percent return on this stock,what will you pay for a share today?A. $21.42B. $24.00C. $25.24D. $28.56E. $30.02 B
Granger Corp. stock currently sells for $48.29 per share. The market requires a 13 percent return on the firm’sstock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent annualdividend per share paid on the stock?A. $3.43B. $3.57C. $3.90D. $4.15E. $4.36 A
The Dairy Delight wants to raise $1.0 million by selling some coupon bonds at par.Comparable bonds in the market have a 6.5 percent annual coupon, 15 years to maturity, andare selling at 98 percent of par. What coupon rate should The Dairy Delight set on its bonds?A. 6.48 percentB. 6.25 percentC. 6.72 percentD. 6.67 percentE. 6.50 percent C
Business Solutions, Inc. is expected to pay its first annual dividend of $1.00 per share threeyears from now. Starting in year 6, the company is expected to start increasing the dividend by2 percent per year. What is the value of this stock today at a required return of 12 percent?A. $9.03B. $7.70C. $8.29D. $9.34E. $8.09 B
You purchase a bond with a coupon rate of 7 percent, semiannual coupons, and a clean priceof $1,011. If the next coupon payment is due in four months, what is the invoice price?A. $1,031.00B. $1,044.33C. $1,037.67D. $1,029.36E. $1,022.67 E
Today, you are borrowing $13,800 to purchase a car. What will be your monthly paymentamount if the loan is for four years at 7.5 percent interest?A. $298.40B. $400.10C. $380.24D. $321.150E. $333.67 E
The current yield on a bond is equal to the annual interest divided by which one of thefollowing?A. Current par valueB. Issue priceC. Current market priceD. Face amountE. Maturity value C
What is the primary purpose of bond covenants?A. Meet regulatory requirementsB. Describe repayment termsC. Increase a bond’s seniority positionD. Protect the lenderE. Define a bond’s rating D
One year ago, Alpha Supply issued 15-year bonds at par. The bonds have a coupon rate of6.5 percent and pay interest annually. Today, the market rate of interest on these bonds is 7.2percent. How does the price of these bonds today compare to the issue price?A. 5.38 percent lowerB. 1.36 percent higherC. 4.99 percent lowerD. 6.05 percent lowerE. 0.07 percent higher D
. At the end of this month, Les will start saving $150 a month for retirement through hiscompany’s retirement plan. His employer will contribute an additional $0.50 for every $1.00that he saves. If he is employed by this firm for 30 more years and earns an average of 10.5percent on his retirement savings, how much will Les have in his retirement account 30 yearsfrom now?A. $389,406.19B. $566,190.22C. $401,005.25D. $540,311.67E. $603,289.01 B
A credit card has a stated interest rate of 14.56 percent. What is the APR if interest iscompounded monthly?A. 13.46 percentB. 14.82 percentC. 13.09 percentD. 14.56 percentE. 13.90 percent D
You want to buy a new sports car from Roy’s Cars for $51,800. The contract is in the form of a48-month annuity due at a 9.2 percent APR. What will your monthly payment be?A. $1,284.13B. $1,345.70C. $1,384.32D. $1,352.98E. $1,309.29 A
The Food Store is planning a major expansion for four years from today. In preparation forthis, the company is setting aside $35,000 each quarter, starting today, for the next four years.How much money will the firm have when it is ready to expand if it can earn an average of6.25 percent on its savings?A. $610,411.20B. $640,516.63C. $528,409.29D. $662,009.14E. $540,288.16 B
Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15years. Yesterday, the firm announced the dividend will increase next year by 10 percent andwill stay at the level through year 3, after which time the dividends will increase by 2 percentannually. The required return on this stock is 12 percent. What is the current value per share?A. $26.84B. $26.02C. $24.57D. $26.08E. $25.51 E
You just borrowed $3,000 from your bank and agreed to repay the interest on an annual basisand the principal at the end of three years. What type of loan did you obtain?A. Interest-onlyB. Pure discountC. AmortizedD. Lump sumE. Perpetual A
This morning, you purchased a stock that will pay an annual dividend of $1.90 per share nextyear. You require a 12 percent rate of return and the annual dividend increases at 3.5 percentannually. What will your capital gain be on this stock if you sell it three years from now?A. $2.51B. $2.87C. $2.43D. $2.92E. $2.63 C
The written agreement that contains the specific details related to a bond issue is called thebond:A. document.B. debenture.C. issue paper.D. indenture.E. registration statement D
Which one of the following bonds is the least sensitive to changes in market interest rates?A. Zero coupon, 4 yearB. 8 percent annual coupon, 4 yearC. Zero coupon, 10 yearD. 6 percent annual coupon, 10 yearE. 6 percent annual coupon, 4 year B
A real rate of return is defined as a rate that has been adjusted for which one of the following?A. InflationB. TaxesC. Interest rate riskD. LiquidityE. Default risk A
Which one of the following statements is correct?A. Interest payments to bondholders as well as dividend payments to preferred shareholdersare tax-deductible expenses for the issuing firm.B. Both preferred stock and corporate bonds can be callable.C. Bondholders generally receive a fixed payment while preferred shareholders receive avariable payment.D. Both preferred stock and corporate bonds have a stated liquidation value of $1,000 each.E. Preferred shareholders receive preferential treatment over bondholders in a liquidation. B
Laura Lynn owns 20,700 shares of Global Exporters. Her shares have a total market value of$787,270. In total, the firm has 65,000 shares outstanding. Each share is entitled to one voteunder the straight voting policy of the firm. The next election is in four months at which timetwo directors are up for election. How much more must Laura Lynn invest in this firm toguarantee that she is elected to the board?A. $0B. $396,554C. $498,406D. $547,478E. $448,820 E
Christie is buying a new car today and is paying a $500 cash down payment. She will financethe balance at 7.25 percent interest. Her loan requires 36 equal monthly payments of $450each with the first payment due 30 days from today. Which one of the following statements iscorrect concerning this purchase?A. To compute the initial loan amount, you must use a monthly interest rate.B. The $500 is the present value of the purchase.C. The car loan is an annuity due.D. The present value of the car is equal to $500 + (36 × $450).E. The future value of the loan is equal to 36 × $450. A
The Chip Dip Co. has 15,500 shares of stock outstanding, grants one vote per share, anduses straight voting. How many shares must you control to guarantee that you will be electedto the firm’s board of directors if there are three open seats?A. 7,134 sharesB. 3,876 sharesC. 5,134 sharesD. 5,167 sharesE. 7,751 shares E
The Three Amigos Restaurant just paid an annual dividend of $4.20 per share and is expectedto pay annual dividends of $4.40 and $4.50 per share the next two years, respectively. Afterthat, the firm expects to maintain a constant dividend growth rate of 2 percent per year. Whatis the value of this stock today if the required return is 15 percent?A. $29.61B. $33.93C. $30.66D. $27.64E. $33.05 B
Which one of the following statements is correct?A. From a legal perspective, preferred stock is a form of corporate equity.B. Dividends are tax-free income for individual investors.C. Common shareholders elect the corporate directors while the preferred shareholders voteon mergers and acquisitions.D. All classes of stock must have equal voting rights per share.E. Shareholders prefer noncumulative dividends over cumulative dividends A
Last year, you earned a rate of return of 12.37 percent on your bond investments. During thattime, the inflation rate was 3.6 percent. What was your real rate of return?A. 8.70 percentB. 6.30 percentC. 7.75 percentD. 8.47 percentE. 7.60 percent D
New Gadgets is growing at a very fast pace. As a result, the company expects to pay annualdividends of $0.55, 0.80, and $1.10 per share over the next three years, respectively. Afterthat, the dividend is projected to increase by 5 percent annually. The last annual dividend thefirm paid was $0.40 a share. What is the current value of this stock if the required return is 16percent?A. $12.23B. $9.67C. $12.49D. $10.46E. $8.50 E
General Importers announced today that its next annual dividend will be $2.60 per share. Afterthat dividend is paid, the company expects to encounter some financial difficulties and is goingto suspend dividends for five years. Following the suspension period, the company expects topay a constant annual dividend of $1.30 per share. What is the current value of this stock if therequired return is 18 percent?A. $3.89B. $3.01C. $3.55D. $4.27E. $4.88 E
Which one of the following refers to the relationship between nominal returns, real returns, andinflation?A. Fisher effectB. Clean-dirty spreadC. Bid-ask spreadD. Conversion ratioE. Call premium A
You are buying a bond at a clean price of $1,140. The bond has a face value of $1,000, an 8percent coupon, and pays interest semiannually. The next coupon payment is one month fromnow. What is the dirty price of this bond?A. $1,180.00B. $1,000.00C. $1,173.33D. $1,146.67E. $1,176.67 C
Jeffries, Inc. has 6 percent coupon bonds on the market that have 11 years left to maturity.The bonds make annual payments. If the YTM on these bonds is 7.4 percent, what is thecurrent bond price?A. $897.08B. $921.42C. $933.33D. $895.88E. $903.14 A
Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a 6percent coupon and pays interest semiannually. There are two months until the next coupondate. What is the clean price of this bond?A. $987B. $967C. $947D. $957E. $977 B
When you refer to a bond’s coupon, you are referring to which one of the following?A. Difference between the bid and ask priceB. Principal amount of the bondC. Annual interest divided by the current bond priceD. Difference between the purchase price and the face valueE. Annual interest payment E
Janis just won a scholarship that will pay her $500 a month, starting today, and continuing forthe next 48 months. Which one of the following terms best describes these scholarshippayments?A. Annuity dueB. Ordinary annuityC. Perpetuity dueD. Ordinary perpetuityE. Consol A
The Treasury yield curve plots the yields on Treasury notes and bonds relative to the ____ ofthose securities.A. coupon rateB. maturityC. face valueD. issue dateE. market price B
Spiral Staircase is offering preferred stock which is commonly referred to as 10-10 stock. Thisstock will pay an annual dividend of $10 a share starting 10 years from now. What is this stockworth to you today if you desire a 15 percent rate of return?A. $19.63B. $18.95C. $20.52D. $20.94E. $16.70 B

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