Beruflich Dokumente
Kultur Dokumente
3. You are evaluating two annuities. They are identical in every way, except that one is an ordinary
annuity and one is an annuity due. Which of the following is FALSE?
A. The ordinary annuity must have a lower present value than the annuity due.
B. The ordinary annuity must have a lower future value than the annuity due.
C. The annuity due must have the same present value as the ordinary annuity.
D. The two annuities will differ in present value by the amount (1 + R).
E. The annuity due and the ordinary annuity will make the same number of total payments over
time.
4. A firm has a current ratio of 1.5, a quick ratio of 1.2, net income of $40,000, a profit margin of 9%,
and an accounts receivable balance of $20,000. What is the firm’s average collection period?
A. 51.3 days
B. 72.6 days
C. 16.4 days
D. 24.5 days
E. 30.0 days
5. All else the same, a(n) _______ will decrease the required return on a bond.
A. call provision
B. lower bond rating
C. sinking fund
D. increase in inflation
E. increase in the size of the bond issue
6. The ______ component of the term structure does not influence the shape of the term structure;
rather it affects the overall level of interest rates.
7. You have decided to refinance your home. Exactly five years ago, you obtained a $100,000 30-
year mortgage with a fixed rate of 10%. Today you can refinance the loan with a 25-year fixed rate
mortgage of 8% on the outstanding balance. How much will your payments be after you refinance
your mortgage? Assume monthly payments.
A. $877.57
B. $733.76
C. $745.37
D. $771.82
E. $832.45
10. Which of the following assets is generally considered the most liquid?
A. A warehouse.
B. Accounts receivable.
C. Inventory.
D. Manufacturing equipment.
E. A patent.
Partial Credit Problems --- SHOW ALL WORK
Problem 1 (8 points) What is the ask yield of the bond listed below? Did interest rates move up or
down on this day?
Maturity Ask
Rate Mo./Yr. Bid Asked Chg Yld.
7.375 Feb34 124:09 124:12 +6
Problem 2 (10 points) You plan to save $750 per month in real terms until you retire in 30 years. You
currently have $40,000 in your retirement account. Before you retire, your return will be an 11 percent
nominal EAR and after your retire you will earn a 7 nominal percent EAR. The effective annual inflation
rate over this entire period will be 3.9 percent. How much will you be able to withdraw each month in real
terms if you make equal monthly withdrawals for 30 years? How much will your last withdrawal be in
nominal terms?
Problem 3 (10 points) You have won the Perpetual Winner Lottery. The lottery will make payments of
$100,000 every other year beginning one year from now, and payments of $200,000 every other year
beginning two years from now. Both payments last forever. If the interest rate is an 8 percent APR
compounded quarterly, what is the value of your winnings today?
Problem 4 (10 points) Elizabeth Hughes is responsible for financial planning at the Faulty Widget
Company. The company has just developed a new widget and Elizabeth has been instructed to develop a
fund to cover all necessary repair costs over the next two years. Below are the estimated repair costs each
month:
Month Repair cost per month
1–4 $250,000
5 – 18 $500,000
19 – 24 $400,000
Elizabeth already has $1,500,000 in a fund to cover repair costs. The appropriate interest rate is a 6
percent EAR. How much does the company have to deposit each month in order to cover all repair costs?
Problem 5 (10 points) You have decide to buy a house at a price of $250,000. The mortgage broker has
informed you that the APR for a 30-year mortgage with monthly payments is 5.75 percent, with 2.5
points. One point means you pay one percent of the loan amount up front. What interest rate are you
actually paying? Assume you are borrowing the full purchase price of the house. Assuming all the other
information is the same, how would this rate change if the loan term was 25 years?
Problem 6 (12 points) The Alfred Bowles Company (ABC) is offering an 8-year bond for sale at a par
value of $1,000 and semi-annual interest payments. The bond is unusual in that the interest rate is based
on the federal deficit, Super Bowl winners and Hillary Clinton’s personality index (which has to
increase). After you examine the features of the bond, you feel that it will have an annual interest rate of
10% for the first four years and 12% for the last four years. Since these interest payments are too small to
invest in more bonds, you will put your interest payments into a savings account. The savings account
will pay a 5% effective annual rate the first three years and a 7% effective annual rate for the last five
years. Assuming all these facts are correct, what is your effective annualized return on this investment?
NOTE: This is a time value of money problem, not a typical bond problem.
Problem 7 (10 points) The most recent financial statements for 3 Doors Down, Inc., follow. Sales for
next year are projected to grow by 20 percent. Interest expense will remain constant; the tax rate and the
dividend payout rate will also remain constant. Costs, other expenses, current assets, and accounts
payable increase spontaneously with sales. If the firm is operating at 80 percent capacity and no new debt
or equity is issued, what is the external financing needed to support the 20 percent growth rate in sales?
Assume the company does not sell any fixed assets. Show the pro forma financial statements for next year
and calculate the EFN.
Sales $805,000
COGS 634,000
Other expenses 15,000
EBIT $156,000
Interest 43,500
Taxable income $112,500
Taxes (35%) 39,375
Net income $73,125
Dividends $29,250
Add to RE 43,875
1. D 6. B
2. E 7. C
3. C 8. D
4. C 9. D
5. C 10. B
Problem #1
Enter 48 ±$1,243.75 $36.875 $1,000
N I/Y PV PMT FV
Solve for 2.76%
2.76% × 2 = 5.53%
Since the price increased, interest rates decreased.
Problem #2
Real return pre-retirement: 1 + .11 = (1 + r)(1 + .039); r = 6.8334937%
Enter 6.8334937% 12
NOM EFF C/Y
Solve for 6.6284%
Retirement savings
Enter 360 6.6284%/12 $40,000 $750
N I/Y PV PMT FV
Solve for $1,141,224.39
Real withdrawal
Enter 360 2.9436%/12 $1,141,224.39
N I/Y PV PMT FV
Solve for $4,776.80
PV of $100,000:
PV = $100,000/.17166 = $582,549.00
This is the value one year ago. The value today is:
Enter 4 2% $582,549.00
N I/Y PV PMT FV
Solve for $630,569.77
PV of $200,000:
PV = $200,000/.17166 = $1,165,097.99
Problem #4
Enter 6% 12
NOM EFF C/Y
Solve for 5.84106%
CFo $0
C01 $250,000
F01 4
C02 $500,000
F02 14
C03 $400,000
F03 6
I = 5.84106% / 12
NPV CPT
$9,771,196.40
Since you are required to pay $6,250 in points, you are effectively borrowing only $243,750, so:
Enter 360 –$243,750 $1,458.93
N I/Y PV PMT FV
Solve for 0.4987 %
Since you are required to pay $6,250 in points, you are effectively borrowing only $243,750, so:
Enter 300 –$243,750 $1,572.77
N I/Y PV PMT FV
Solve for 0.50130%
Enter 7% 2
NOM EFF C/Y
Solve for 6.8816%
In 3 years:
Enter 6 4.9390 / 2 $50
N I/Y PV PMT FV
Solve for $319.14
In 4 years:
Enter 2 6.8816 / 2 $319.14 $50
N I/Y PV PMT FV
Solve for $443.20
In 7 years:
Enter 8 6.8816 / 2 $443.20 $60
N I/Y PV PMT FV
Solve for $1,122.90
Since the company will still not be at full capacity, no new fixed assets are needed. The fixed assets will
remain constant, so: