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Exam 3
| Question | Answer |
|---|---|
| the cash flows from preferred stock are evaluated as an | perpetuity |
| The credit terms 2/15, net 30 are interpreted as | 2% cash discount if the amount is paid within 15 days, or the balance due in 30 days |
| Discount a loan | Increases the effective interest rate |
| Which of the following is most likely to be used for short-term financing | Commerical paper issuance |
| What is the effective interest rate on a 120 day loan for $1000 that requires payment of $20 in interest? | 6% |
| The cost of not talking the discount on trade credit of 2/10, net 30 is approximately | 36.73 |
| In a general sense, the value of any asset is the | present value of the cash flows expected to be received from the asset |
| Which of the following is an asset that is usually valued using time value of money? | Investments |
| A large manufacturing firm has been selling on a 3/10, net 30 basis. The firm changes its credit terms to 4/8, net 25. What change might be expected on the balance sheets of the manufacturing firm? | Decreased Receivables |
| General Rent-Alls officers arrange a $50,000 loan for the company. The company is required to maintain a minimum checking account balance of 10% of the outstanding loan. This practice is called: | A compensating Balance |
| You wish to calculate how much you would be willing to pay today for the right to receive a payment of $8,000 in 10 years. You need to compute: | the present value of a single amount of money |
| An annuity may best be defined as: | A series of consecutive payments of equal amounts |
| as the time period until receipt decreases, the present value of a future single amount: | Increases |
| An annuity due: | has cash flows at the beginning of the time period |
| To save for retirement, John Smith will invest $1,000 at the end of each year for the next 40 years. The interest rate is 10%. In order to determine the amount that will be available when he retires you need to calculate: | The future value of an annuity |
| Which is NOT a variable typically found in time value of money computations | INF (The rate of inflation) |
| You wish to withdraw $12,000 from an investment account at the end of each of the next 5 years. The interest rate is 7%. To compute how you need to deposit today you need to compute: | Present value of an annuity of $12,000 |
| As the discount rate decreases, the present value of a future amount: | Increases |
| An issue of preferred stock is paying an annual dividend of $3.00. The growth rate for the firm's common stock is 6%. What is the preferred stock price if the required rate of return is 8%? | $37.50 |
| An issue of common stock's most recent dividend is $3.95. Its growth rate is 4%. What is its price if the market's rate of return is 9.4%? | $76.07 |
| A 20 year bond pays a 6% contract rate annually on a par value of $1,000. The discount rate is 6%. The market value of this bond will be: | $1,000 |
| A 20 year bond pays a 6% contract rate annually on a par value of $1,000. The discount rate is 8%. the market value of this bond will be: | less than $1,000 |
| An issue of preferred stock is paying an annual dividend of $3.50. What is the perferred stock price if the required rate of return is 7%? | $50.00 |
| Valuation of financial assests using the model discussed in class requires knowledge of: | Future cash flows and an appropriate discount rate |
| Which of the following financial assets is likely to have the highest required rate of return based on risk? | Common Stock |
| Which of the following financial assets has the most certain and clearly defined future cash flows? | Corporate Bonds |
| Which is NOT a component of determination of the required rate of return? | Longevity premium |
| The value of a common stock is based on its | value of future benefits to the holder |
| Star Corp. issued bonds for $1000 two years ago with a 7% coupon rate. The bonds are currently trading for $928 in the market. Which of the following most likely has occured since the time of issue? | Risk Increased |
| You are hiking with a friend when she mentions she has a $500,000 nest egg that she is letting sit and grow at 7% a year. She wonders how long it will take that investment to double to $1,000,000, you tell her that her balance should double in about: | 10 years |
| WilCorp has preferred stock with an annual dividend of $5.70. The current required rate of return is 7%. What is the price of the preferred stock? | $81.43 |
| A few years later, WilCorp discovers that the preferred stock is trading at a price of $95 a share. The annual dividend is still $5.70. What is the new required rate of return? | 6% |
| This common stock will pay a dividend of $3.00 at the end of the year. The required rate of return for WilCorp's common stock is 14%. WilCorp will experience a constant dividend growth rate of 9%. What is the current price of WilCorp's Common stock? | $60.00 |
| assume the same facts as in the pervious question, except now investors determine that WilCorp's common stock will only grow at a constant rate of 3%. What will be the new price of WilCorp's common stock? | $27.27 |
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