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FIN 101 – Fall 2008 Practice Exam #2 - KEY CHAPTER 5 - Discounted Cash Flow Valuation c 1. Which one of the following best defines an annuity? a. a stream of increasing annual dividend payments over an infinite period of time b. a stream of decreasing payments occurring at regular intervals for a fixed period of time c. a level stream of payments occurring at equal intervals of time d. a level stream of payments occurring at random intervals for an infinite period of time e. a series of equal payments occurring at random intervals over a fixed period of time c 2. An annuity for which the cash flows occur at the beginning of each time period is called a(n): a. ordinary annuity. b. beginning annuity. c. annuity due. d. perpetuity. e. perpetuity due. d 3. An annuity where the cash flows continue forever is called a(n): a. ordinary annuity. b. annuity due. c. absolute annuity. d. perpetuity. e. perpetuity due. d 6. The effective annual rate is defined as the interest rate that is: a. compounded at regular intervals throughout the year. b. equal to a monthly rate multiplied by twelve. c. computed by multiplying the rate per period by the number of periods per year. d. expressed as if it were compounded once per year. e. compounded only once over a multi-year period. b 7. The annual percentage rate is the interest rate: a. that is compounded annually and equals a stated rate compounded multiple times per year. b. charged per period multiplied by the number of periods per year. c. per period raised to a power which equates to the number of periods per year. d. per a stated period of time compounded such that the time period equals one year. e. applied annually which equates to a monthly rate compounded over a twelve-month period. b 10. A type of loan where the principal amount is reduced over the life of the loan by the borrower making regular payments is called a(n): a. multi-period loan. b. amortized loan. c. interest-only loan. d. net loan. e. pure discount loan. c 11. The future value of a series of cash flows over time can be computed by: a. finding the future value of the first cash flow and multiplying that amount by the number of cash flows which occur. b. summing the amount of each of the individual cash flows and multiplying the summation by (1+r)t. c. summing the future values of each of the individual cash flows. d. discounting each of the individual cash flows and summing the results. e. multiplying each individual cash flow by (1 + rt) and summing the results. 4fd96133-931a-4370-bc21-e0865538586b.DOC - 1 - FIN 101 – Fall 2008 Practice Exam #2 - KEY c 12. All else constant, the present value of a stream of equal cash flows occurring at equal intervals of time will increase when the: I. discount rate is increased. II. discount rate is decreased. III. number of time periods is increased. IV. number of time periods is decreased. a. I only b. III only c. II and III only d. II and IV only e. I and III only e 14. The present value of an annuity considers which of the following factors? I. the timing of each cash flow II. the amount of each cash flow III. the discount rate IV. the number of cash flows a. I and II only b. II and IV only c. I, II, and IV only d. II, III, and IV only e. I, II, III, and IV d 16. Which of the following will increase the value of an annuity present value interest factor? I. an increase in the interest rate II. a decrease in the interest rate III. an increase in the number of time periods IV. a decrease in the number of time periods a. I only b. I and III only c. I and IV only d. II and III only e. II and IV only e 23. The future value of an annuity will decrease when either the: a. interest rate rises or the number of periods rises. b. interest rate rises or the amount of the annuity payment rises. c. interest rate declines or the amount of the annuity payment rises. d. amount of the annuity payment declines or the interest rate rises. e. number of periods decreases or the interest rate declines. b 44. The Caulkins Co. is considering a project that will produce cash inflows of $36,000 in year one, $54,800 in year two, and $72,900 in year three. What is the present value of these cash inflows if the company assigns the project a discount rate of 14 percent? a. $106,713.06 b. $122,951.19 c. $131,333.33 d. $167,098.12 e. $189,370.87 4fd96133-931a-4370-bc21-e0865538586b.DOC - 2 - FIN 101 – Fall 2008 Practice Exam #2 - KEY c 46. You are considering an investment which will pay $5,000 a year for 25 years, starting 1 year from today. How much should you pay for this investment if you wish to earn a 7.5 percent rate of return? a. $54,960.00 b. $55,217.81 c. $55,734.73 d. $57,120.16 e. $57,908.86 b 47. How much money does Albert need to deposit into his investment account today if he wishes to withdraw $15,000 a year for twenty-five years? He expects to earn an average rate of return of 7 percent. a. $163,008.06 b. $174,803.75 c. $175,000.00 d. $176,317.17 e. $182,500.00 CHAPTER 6 - Interest Rates and Bond Valuation c 1. The stated interest payment made on a bond is called the: a. face value. b. yield to maturity. c. coupon. d. maturity rate. e. discount rate. b 2. The principal amount of a bond that is repaid at the end of term is called the par value or the: a. discount amount. b. face value. c. back-end amount. d. coupon. e. coupon rate. e 3. The coupon rate is best defined as the: a. annual coupon divided by the current price of a bond. b. periodic payment divided by the premium value of a bond. c. semi-annual interest payment divided by the market price. d. semi-annual interest payment divided by the par value. e. annual coupon divided by the face value of a bond. a 5. The rate required in the market on a bond is called the: a. yield to maturity. b. call yield. c. current yield. d. liquidity premium. e. risk premium. c 6. A premium bond is a bond that: a. is callable within 12 months or less. b. has a face value in excess of $1,000. c. has a market price which exceeds the face value. d. is selling for less than par value. e. has a par value which exceeds the face value. 4fd96133-931a-4370-bc21-e0865538586b.DOC - 3 - FIN 101 – Fall 2008 Practice Exam #2 - KEY d 7. A bond which sells for less than the face value is called a: a. par value bond. b. perpetuity. c. debenture. d. discount bond. e. premium bond. a 9. The written agreement between the corporation and its creditors is called the bond: a. indenture. b. debenture. c. security. d. face. e. structure. d 10. When interest payments on a bond are made directly to the owner of record, the bond is said to be in _____ form. a. bearer b. coupon c. street d. registered e. secure b 19. The stipulations in a bond indenture agreement which limit the actions a firm can take while the bond issue is outstanding are called: a. term structures. b. protective covenants. c. liquidity conditions. d. binding agreements. e. debenture laws. d 25. An interest rate that has been adjusted for inflation is called a _____ rate. a. deflated b. coupon c. nominal d. real e. premium a 26. The rate of return you earn on an investment before adjusting for inflation is called the _____ rate. a. nominal b. real c. premium d. coupon e. discount c 29. The Fisher effect addresses the relationship between: a. a bond’s dirty price and its clean price. b. Treasury yields and corporate yields. c. inflation, real, and nominal rates. d. short-term and long-term yields. e. the yield to call and the yield to maturity. 4fd96133-931a-4370-bc21-e0865538586b.DOC - 4 - FIN 101 – Fall 2008 Practice Exam #2 - KEY e 34. The portion of a bond’s yield that compensates investors for the possibility that the bond’s interest or principal might not be paid is called the: a. interest rate risk premium. b. missed coupon rate. c. liquidity premium. d. yield to maturity. e. default risk premium. d 37. A bond that is selling at par value has a: I. market price equal to the face value. II. market price which exceeds the face value. III. yield to maturity that exceeds the coupon rate. IV. yield to maturity that equals the coupon rate. a. I only b. I and III only c. II and III only d. I and IV only e. II and IV only d 91. A bond has a $1,000 face value, a market price of $980, and pays interest payments of $35 every six months. What is the coupon rate? a. 3.50 percent b. 3.57 percent c. 6.86 percent d. 7.00 percent e. 7.14 percent a 93. A 6.5 percent bond has a yield to maturity of 7.25 percent, 12 years to maturity, a face value of $1,000, and pays interest annually. What is the amount of each coupon payment? a. $65.00 b. $68.23 c. $69.10 d. $72.50 e. $77.00 c 95. An 8 percent $1,000 bond matures in 13 years, pays interest semi-annually, and has a yield to maturity of 9.45 percent. What is the current market price of the bond? a. $601.58 b. $647.76 c. $892.76 d. $909.09 e. $930.75 b 96. A $1,000 face value bond currently has a yield to maturity of 11.62 percent. The bond matures in 16 years and pays interest annually. The coupon rate is 9.75 percent. What is the current price of this bond? a. $865.48 b. $866.79 c. $1,124.50 d. $1,148.51 e. $1,176.67 4fd96133-931a-4370-bc21-e0865538586b.DOC - 5 - FIN 101 – Fall 2008 Practice Exam #2 - KEY CHAPTER 7 - Equity Markets and Stock Valuation d 1. The stock valuation process which determines the price of a stock by dividing the next period’s dividend by the discount rate less the dividend growth rate is called the: a. stock price model. b. pricing formula. c. capital gain model. d. dividend growth model. e. gains formula. a 2. A stock which pays a constant dollar dividend over an extended period of time is referred to as a _____ stock. a. zero growth b. constant growth c. regular d. minimal e. diminishing d 3. The Bigelow Co. increases their annual dividend by 3 percent each and every year. This stock is referred to as a(n) _____ stock. a. increasing gains b. constant dividend c. regular d. constant growth e. variable c 11. Payments to shareholders by a corporation that represent a return on capital are called: a. payouts. b. capital gains. c. dividends. d. treasury distributions. e. required returns. e 12. Stock which generally pays a fixed dividend and receives priority in the payment of dividends and the distribution of corporate assets is called _____ stock. a. convertible b. common c. priority d. senior e. preferred b 34. The capital gains yield, as used in the dividend growth model, is symbolized as: a. r. b. g. c. D1 / P0. d. r − g. e. g − r. b 36. The required return for a stock is based on the dividend yield: a. minus the capital gains yield. b. plus the capital gains yield. c. divided by the capital gains yield. d. multiplied by (1 + capital gains yield). e. plus (1 + capital gains yield). 4fd96133-931a-4370-bc21-e0865538586b.DOC - 6 - FIN 101 – Fall 2008 Practice Exam #2 - KEY b 54. The common stock of Connor, Inc., is selling for $16 a share and has a dividend yield of 3.5 percent. What is the dividend amount? a. $.46 b. $.56 c. $.92 d. $1.84 e. $2.24 d 55. Beets and Cabbage paid an annual dividend of $1.20 per share last year. Management just announced that future dividends will increase by 2.5 percent annually. What is the amount of the expected dividend in year 3? a. $1.21 b. $1.23 c. $1.26 d. $1.29 e. $1.32 e 58. One share of Kilo, Inc., stock is selling for $43.60 a share. The company pays a constant annual dividend and has a rate of return of 8 percent. What is the amount of Kilo’s dividend? a. $1.74 b. $2.20 c. $2.67 d. $3.10 e. $3.49 d 59. Winslow and Daughters just paid their annual dividend of $2.20 a share. They recently announced that all future dividends will be increased by 2 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return? a. $18.27 b. $18.33 c. $18.14 d. $18.70 e. $18.87 d 60. Mr. Money, Inc., announced yesterday that their next annual dividend will be $1.40 and that future dividends will be increasing by 3 percent annually. How much are you willing to pay for one share of this stock if your required return is 18 percent? a. $7.78 b. $8.01 c. $8.87 d. $9.33 e. $9.61 e 62. The common stock of Kangaroo Tours is selling for $24 a share and has a 12 percent rate of return. One-third of the return on this stock is derived from dividends and the other two-thirds is derived from capital gains. What is the amount of the next dividend? a. $.67 b. $.72 c. $.78 d. $.84 e. $.96 4fd96133-931a-4370-bc21-e0865538586b.DOC - 7 - FIN 101 – Fall 2008 Practice Exam #2 - KEY b 65. The Blue Hats common stock will pay an annual dividend of $2.20 one year from now. The company increases the dividends by 2.5 percent annually. Your required return on this stock is 15 percent. Assume that you purchase the stock today and sell it three years from now. What will be the dollar amount of your capital gain for those three years? a. $1.32 b. $1.35 c. $2.92 d. $2.99 e. $3.06 c 69. Davis and Sons just paid an annual dividend of $1.40. The company has increased their dividend by 2 percent a year for the past twenty years and expects to continue doing so. What will a share of this stock be worth five years from now if the required return is 12 percent? a. $14.28 b. $15.46 c. $15.77 d. $15.89 e. $16.09 d 83. Dots and More pays an annual dividend of $1.10 per share and sells for $28.60 a share based on a market rate of return of 11 percent. What is the capital gains yield? a. 6.89 percent b. 7.01 percent c. 7.08 percent d. 7.15 percent e. 7.27 percent c 84. Investors require a 10 percent rate of return on the common stock of Plants and Trees, Inc., which is selling for $51.30 a share. What is the growth rate of the firm if the company plans to pay an annual dividend of $2.10 a share next year? a. 5.37 percent b. 5.49 percent c. 5.91 percent d. 6.08 percent e. 6.50 percent 4fd96133-931a-4370-bc21-e0865538586b.DOC - 8 -