# Principles of Finance

 Networking Capital Current assets- current liabilities (positive in a healthy company) Book value Balance sheet value of assets, liabilities, and stockholders equity Market Value True value price at which A,L, & SE can be sold at Marginal Taxes % of tax paid on next dollar Average taxes Total tax bill/ Taxable income Future Value equation PV(1+r)^t Present value FV/(1+r)^t R equation (FV/PV)^1/t-1 T equation ln(Fv/Pv)/ln(1+r) Annuity Finite series of equal payments. First payment occurs at end of period=Ordinary Annuity Payment occurs at beginning of the month= Annuity due Perpetuity Infinite series of equal payments Perpetual formula Pv=PMT/r Cash Inflow + Outflow – Yield to maturity Market required rate of return implied by the current bond price Municipal security Debt of state & local govt usually exempt from state tax Treasurer Security Federal govt debt Pure discount bonds Original market of 1 year or less Treasury Notes Coupon debt Original maturity between 1-10 years Treasury bond Coupon debt Maturity more than 10 years Zero coupon bonds Makes no periodic interest Coupon rate = 0%Entire YTM comes from difference between purchase price or par value Cannot sell for more than par value Other bond types Income bond PV bond 1. The Coupon rates of a bond equals: a percentage of its face value 2.How much should you pay for a \$1,000 bond with 10% coupon, annual payments, and five years to maturity if the interest rate is 12%? \$927.90 3. … 4.Which of the following is correct for a bond priced at \$1,100 that has ten years remaining until maturity, and a 10% coupon, with semiannual payments? Each payment of interest equals \$50. 5.U.S. Treasury bond yields do not contain a: Default premium 6.Capital losses will automatically be the case for bond investors who buy: Premium bonds 7.What is the amount of the annual coupon payment for a bond that has six years until maturity, sells for \$1,050, and has a yield to maturity of 9.37%? \$105.00 8.Which of the following is correct concerning real interest rates? Real interest rates, if positive, indicate increased purchasing power. 9.How much should you be prepared to pay for a 10-year bond with a 6% coupon and a yield to maturity to maturity of 7.5%? \$897.04 10. … 11. … 12.What is the value of the expected dividend per share for a stock that has a required return of 16%, a price of \$45, and a constant growth rate of 12%? \$1.80 13.What should be the current price of a share of stock if a \$5 dividend was just paid, the stock has a required return of 20%, and a constant dividend growth rate of 6%? \$37.86 14.What should be the price for a common stock paying \$3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? \$43.75 15.Lee pays one percent per month interest on his credit card account. When his monthly rate is multiplied by 12, the resulting answer is referred to as the:-annual percentage rate.-compounded rate.-effective annual rate.-perpetual rate.-simple rate. Annual percentage rate 16.Jenny needs to borrow \$16,000 for 3 years. The loan will be repaid in one lump sum at the end of the loan term. Which one of the following interest rates is best for Jenny? 8 percent simple interest 17. … 18.By definition, a bank that pays simple interest on a savings account will pay interest: only on the principal amount originally invested. 19.Which one of the following can be classified as an annuity but not as a perpetuity? Equal annual payments for life 20.Which one of the following has the highest effective annual rate? 6 percent compounded monthly 21. … 22. … 24. … 23.What is the correct formula for computing the present value of \$600 to be received in 6 years? The discount rate is 7 percent. PV = \$600/(1 + 0.07)6 25.Which one of the following is the annuity present value formula?C {{1 [1 / (1 + r)t]} / r}C {1 [1 / (1 + r)t]} rC {1 [r / (1 + r)t]} / rC {{1 [1 / (1 r)t]} r}C {1 [r / (1 r)t]} / r C {{1 [1 / (1 + r)t]} / r}
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