一、Multiple choices
1. Your grandfather placed $5,000 in a trust fund for you. In 12 years the fund will be worth $10,000. What is the rate of return on the trust fund?
A) 3.70% B) 4.16% C) 5.95% D) 6.90% E) 8.42%
2. You are supposed to receive $3,000 four years from now. At an interest rate of 8%, what is that $3,000 worth today?
A) $1,591.97 B) $1,892.43 C) $2,205.09 D) $2,497.91 E) $2,699.01
3. The company you work for will deposit $150 at the end of each month into your retirement fund. Interest is compounded monthly. You plan to retire 25 years from now and estimate that you will need $2,000 per month out of the account for the ensuing 20 years. If the account pays 10% compounded monthly, how much do you need to put into the account each month, in addition to your company's deposit, in order to meet your objective?
A) $ 0.00; the company's deposit fully funds your retirements objective B) $105.42 C) $ 6.20 D) $21.96
E) $34.33
4. Given the following information, what is the firm's weighted average cost of capital? Market value of equity = $30 million; market value of debt = $20 million; cost of equity = 15%; cost of debt = 9%; equity beta = 1.4; tax rate = 35%.
A) 11.34%
B) 12.60% C) 12.97% D) 13.32% E) 14.08%
5. What is the future value in 12 years of $800 payments received at the
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beginning of each year for the next 12 years? Assume an interest rate of 8.25%.
A) $14,259.63 B) $15,408.65 C) $16,679.86 D) $18,495.48 E) $20,782.15
6. At the end of each year for the next 8 years you will receive cash flows of $500. If the appropriate discount rate is 7.5%, how much would you pay for this annuity?
A) $4,000.00 B) $5,841.22 C) $1,259.47 D) $2,928.65 E) $3,148.30
7. Your parents agree to pay half of the purchase price of a new car when you graduate from college. You will graduate and buy the car two years from now. You have $9,000 to invest today and can earn 12% on invested funds. If your parents match the amount of money you have in two years, what is the maximum you can spend on the new car?
A) $ 7,260 B) $11,290 C) $15,000 D) $19,250 E) $22,579
8. You need $3,000 to buy a new stereo for your car. If you have $1,200 to invest at 6% compounded annually, how long will you have to wait to buy the stereo?
A) 6.58 years B) 8.42 years C) 11.60 years D) 14.58 years E) 15.73 years
9. Cornerstone Industries has a bond outstanding with an 8% coupon rate and a market price of $874.68. If the bond matures in 6 years and interest is
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paid semiannually, what is the YTM?
A) 4.9% B) 6.9% C) 8.9% D) 10.9% E) 12.9%
Use the following to answer questions 10-14:
A firm has an expected perpetual EBIT = $4,000. The unlevered cost of capital = 15% and there are 20,000 shares of stock outstanding. The firm is considering issuing bonds of $8,800 to add financial leverage to the firm. The cost of debt = 10%, and the tax rate = 34%. There are no flotation costs. 10. What is the value of the firm before the restructuring? Assume there are no taxes.
A) $15,930 B) $17,600 C) $18,519 D) $26,667 E) $30,000
11. Considering taxes, what is the value of the firm before the restructuring?
A) $15,930 B) $17,600 C) $18,519 D) $26,667 E) $30,000
12. What is the value of the firm after the restructuring? Taxes are considered.
A) $15,930 B) $17,600 C) $18,519 D) $20,592 E) $22,461
13. What is the value of the equity after the restructuring?
A) $11,792 B) $12,600 C) $12,819 D) $13,592 E) $16,461
14. What is the cost of equity after the restructuring?
A) 14.8% B) 17.5% C) 18.4% D) 20.0% E) 22.5%
Use the following to answer questions 15-17:
Rob and Laura wish to buy a new home. The price is $387,500 and they plan to pay 20% of it as down payment. New Rochelle Savings and Loan will lend them the remainder at a 9% fixed APR for 30 years, with monthly payments to begin
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in one month. (Ignore taxes.)
15. How much will their monthly payments be?
A) $2,494.33 B) $2,825.99 C) $3,512.56 D) $3,645.45 E) $3,760.45
16. What will the outstanding balance of the loan be after ten years assuming you make the first 120 payments exactly on time?
A) $ 99,610 B) $135,467 C) $277,232 D) $239,144 E) $170,509
17. Suppose Rob wants to pay off the loan in 15 years. How much extra must he pay each month to do so?
A) $311.25 B) $501.19 C) $649.90 D) $811.35 E) $914.47
18. Given the following cash flows, what is the present value if the discount rate is 8%?
YearCash Flow1$4002$2503$9004$1925
A) $1,415.07 B) $2,714.09 C) $2,865.70 D) $3,058.96 E)
$3,222.62
19. King Noodles' bonds have a 9% coupon rate. Interest is paid quarterly and the bonds have a maturity of 10 years. If the appropriate discount rate is 10% on similar bonds, what is the price of King Noodles' bonds?
A) $937.24 B) $938.55 C) $971.27 D) $989.63 E) $991.27
20. The bonds of Microhard, Inc. carry a 12% annual coupon, have a $1,000 face value, and mature in 5 years. Bonds of equivalent risk yield 9%. What is the market value of Microhard's bonds?
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A) $1,011.20 B) $1,087.25 C) $1,095.66 D) $1,116.69 E) $1,160.25
21. A firm's stock has a required return of 12%. The stock's dividend yield is 5%. What dividend did the firm just pay if the current stock price is $50?
A) $2.18 B) $2.34 C) $2.50 D) $2.87 E) $3.60
22. Etling Inc.'s dividend is expected to grow at 5% for the next 2 years and then at 3% forever. If the current dividend is $2 and the required return is 14%, what is the price of the stock?
A) $19.43 B) $23.82
C) $25.15
D) $27.58
E) $29.70
23. Asset A has an expected return of 10%. The expected market return is 14% and the risk-free rate is 5%. What is asset A's beta?
A) 0.33
B) 0.56 C) 0.67 D) 0.88 E) 1.15
Use the following to answer questions 24-25
A firm needs to purchase equipment for a new project. The total cost of the equipment is $2 million. It is estimated that the aftertax cash inflows from the project will be $210,000 annually in perpetuity. The market value debt-to-assets ratio is 40%. The firm's cost of equity is 13% and its pretax cost of debt is 8%. The tax rate is 34%. Assume the project is of similar risk to the firm's existing operations.
24. What is the weighted average cost of capital?
A) 6.09% B) 8.73% C) 8.95% D) 9.05% E) 9.91%
25. What is the NPV of the proposed project?
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