Managerial Finance HW

A.  TRUE / FALSE QUESTIONS

Enter “True” or “False” on the blank preceding each question.

______  1.  A “time line” can be drawn to illustrate the cash flows associated with a given

investment.

______  2.  Calculating the present value of an expected cash flow is also known as

“compounding.”

______  3.  An “annuity due” will always be worth less than an otherwise comparable

“ordinary annuity,” because interest will compound for an additional time period.

______  4.  With a “perpetuity,” the periodic cash flow stream continues without end.

______  5.  Compounding more frequently than once per year results in a lower effective

interest rate, because you are earning interest on interest more frequently.

______  6.  U.S. Treasury bills (T-bills) are considered to be a very safe investment in

terms of being risk-free.

______  7.  A downward-sloping yield curve reflects expectations of higher future inflation

and higher future interest rates.

______  8.  The “bond indenture” is a legal document that specifies the rights of the

bondholders and the duties of the issuing corporation.

______  9.  In general, the shorter a bond’s maturity, the higher the interest rate or cost

to the issuing corporation.

______  10.  Rising interest rates in the economy cause the market value of outstanding bonds

to also increase.

______  11.  The holders of bonds issued by a given corporation are also the owners of the firm.

______  12.  Equity capital, such as common stock, is a permanent form of financing for a

corporation, as it never has to be repaid and it has no maturity date.

______  13.  Interest paid to bondholders is tax-deductible to the issuing corporation, which

lowers the cost of debt financing if the firm is profitable.

______  14.  The payment of dividends to common stockholders by a corporation is at the

discretion of the firm’s Board of Directors.

______  15.  Similar to common stock, the dividend payment on preferred stock typically varies

from year to year.

______  16.  Preferred stock is often referred to as a “hybrid” security, as it has characteristics of

both common stock and bonds.

B.  MULTIPLE  CHOICE  QUESTIONS

For each question, enter the letter of the best response on the blank preceding the question.

______  17.  Time-value-of-money problems can be solved using

1. mathematical formulas.
2. interest factor tables.
3. the Texas Instruments’ BA-II Plus financial calculator.
4. the Microsoft Excel spreadsheet program.
5. B and C and D.
6. A and B and C and D.

______  18.  A cash flow pattern that consists of a series of equal, periodic payments that

continue for a stated, finite time-frame is a(n)

3. loan principal.

______  19.  The _________________________  technique uses compounding to

measure the value of cash flows as of the end of an investment’s life.

1. future value
2. present value
3. perpetuity
4. debenture

______  20.  The “discount rate” used in a present value calculation may also be referred to as

1. the opportunity cost.
2. the required return.
3. the cost of capital.
4. A and B and C.

______  21.  Annuities

1. are equally-spaced cash flows.
2. consist of payments of equal amount.
3. occur over a specified time-frame.
4. A and B and C.
5. A and C.

______  22.  The ______________ frequently interest is compounded, the _____________ the

amount of money accumulated.

1. less; greater.
2. more; greater.
3. more; lower.

______  23.  Each of the following is a factor that may influence the equilibrium interest rate in

the economy EXCEPT

1. the number of common stock shares which a given firm has outstanding.
2. the inflation rate.
3.   the “liquidity preference” of investors for short-term vs. long-term securities.
4. the risk level associated with a given security.

______  24.  According to the “liquidity preference theory,” investors find short-term securities

attractive because

1. short-term securities tend to be highly liquid.
2. prices of short-term securities are not as volatile vs. prices for long-term securities.
3. common stocks tend to have a short life-span.
4. A and B and C.
5. A and B.

______  25.  In general, the highest risk premiums and the highest returns result from securities

that

1. are issued by firms with a high risk of default.
2. have long-term maturities with unfavorable contract provisions.
3. have a low par or face value.
4. are issued by the U.S. government.
5. A and B and D.
6. A and B.

______  26.  A bond’s principal or par value is

1. the amount borrowed by the company that issues the bond.
2. the amount owed to the bondholder on the maturity date.
3. often unspecified.
4. A and B.
5. A and B and C.

______  27.  Stockholders in a given corporation generally have voting rights that allow them to

1. elect the firm’s Board of Directors.
2. vote on special issues facing the firm.
3. A and B.
4. none of the above.

______  28.  Common stockholders may receive compensation for their investment in the

form of

1. dividend payment(s).
2. capital gains when the stock is sold.
3. interest earnings.
4. A and B and C.
5. A and B.

______  29.  The common stock of a corporation may be

1. privately owned by an individual.
2. closely owned by a small group of investors, such as a family.
3. publicly owned by a broad group of investors.
4. B and C.
5. A and B and C.

______  30.  The ____________________ allows common stockholders to maintain their

proportionate ownership in a corporation when new shares are issued.

1. preemptive right
2. sinking fund
3. debenture clause
4. collateral right

______  31.  Since most shareholders in a corporation do not attend the annual meeting to vote,

they may assign their voting rights to another party via a ___________________.

1. no-fault clause.
2. proxy statement.
3. preemptive right.
4. trustee lien.

______  32.  When a corporation decides to “go public” and sell its common stock on the

public equity market for the first time

1. it must obtain approval from its current shareholders.
2. the firm’s auditors and lawyers must certify that all documents for the

company are legitimate.

1. the firm must hire an investment bank to underwrite the stock offering.
2. A and B and C.
3. A and B.

C.  CALCULATION SECTION

 

Instructions:  In this section, please show all calculations.  Partial credit will be given wherever possible, when your calculations are shown and they are completed correctly.

33. Peter and Amy Chambers have saved $4,500.  They are accumulating funds for a

down payment on a house.  If they can invest these funds at 3% annual interest

for 5 years, how much money will they have accumulated at the end of this five-year

time-frame?

 

34. Janice is hoping to save $200,000 by the time she retires in 20 years. How much must

Janice deposit annually at the end of each year to reach this retirement goal on

December 31, Year 20, assuming she can earn a 4% annual rate of return on her

retirement account?

 

35—37.  Assume that you have saved $2,000 to invest today.  At an annual interest rate of 8%,

how much money will you have accumulated at the conclusion of each of the following

time-frames?

 

1. 4 years:

 

1. 8 years:

 

1. 12 years:

 

38. Angela has a trust fund that will mature in three years with a value of $15,000. If this

trust fund is earning a 5% rate of return annually, what is the value of this trust fund

in today’s dollars (i.e., the trust fund’s present value)?

 

39. Bill is the owner of an ordinary annuity that will pay him $12,000 at the end of each of the

next three years.  This annuity has an annual rate of return of 7%.  Given this information,

what is the present value today of this annuity?

 

40.—42.  Crown Enterprises recently issued a bond that has a $1,000 face or par value.  This bond has a coupon interest rate of 8% and has a life of 10 years.  If interest is paid annually on this bond, calculate the market value today at t = 0 of this bond, assumed a required return for this bond of 6%.

 

1. Now, assume that the required return on this bond increases to 10%.  Assume also that the bond pays interest semi-annually, rather than annually.  Given this new information, calculate the market value of this bond today at t = 0.

 

43. Home and Hardware, Inc. recently issued a bond with a $20,000 par or face value. The bond has a five-year life and a coupon interest rate of 6%.  Assume that the required return on the market for this bond is 8%.  Given this information, calculate the market value of this bond today.  The bond pays interest annually.

 

 

 

 

 

 

44. Family Foods, Inc. has a preferred stock issue outstanding that has a par value per share of $75.00. This preferred stock pays an annual divided that is 10% of its par value.  Calculate the annual dividend paid per share on this preferred stock.

 

45.—46.  Milford Masonry, Inc. expects to pay a dividend per share of $2.50 next year on its common stock.  The firm has enjoyed a 4% annual growth rate over the past decade.  If you can earn a 10% rate of return on other investments having similar risk, how much would you be willing to pay per share for Milford Masonry’s stock?

 

1. Now, assume that you can only earn 6% on similar-risk investments.  How much would you now be willing to pay for Milford Masonry’s stock?

 

47.—48.  Urban Utilities, Inc. has an outstanding common stock that is not growing.  The firm has been paying an annual $4 dividend each year.  No growth in this dividend payment is expected for the foreseeable future.  Investors require an annual 8% rate of return on this stock, due to its risk level.  Given this information, calculate the market value per share of this firm’s outstanding common stock.

 

1. Now, assume that a large competitor enters the market, taking 20% of Urban Utilities’ market share.  With this increase in risk, investors now require a 10% annual rate of return on Urban Utilities common stock.  Given this information, calculate the market value per share of Urban Utilities’ common stock.

 

49.—50.  John Adams borrowed $25,000 at a 10% annual interest rate for a vehicle purchase from First  State Bank.  This loan is to be repaid over a three-year time-frame.  The loan will be amortized in three equal, end-of-year payments.

 

1. Calculate the annual, end-of-year loan payment that John will make each year.

 

1. Calculate the amount of “Interest Expense” that will be paid in the first year that this loan is outstanding.