Question 1 1.        What is the net present value of a project with the following cash flows if the discount rate...

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Question 1

1.       

What is the net present value of a project with the following cash flows if the discount rate is 17 percent?
 
 

Answer

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-$8,406.11

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-$7,231.71

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-$3,089.16

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$1,407.92

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$3,508.01

Question 2

1.       

A 6 percent $1,000 bond matures in 4 years, pays interest semiannually, and has a yield to maturity of 6.85 percent. What is the current market price of the bond?

Answer

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$768.76

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$801.38

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$869.15

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$910.27

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$970.69

Question 3

1.       

 

Use the S-1/A filed by Twitter dated October 24, 2013 to answer this question.

The planned IPO of Twitter common stock will be the first round of equity financing for the company. Previously the company’s only source of external capital came from bank loans and corporate bonds.

Answer[removed] True 
[removed] False

Question 4

1.       

Adams Enterprises’ noncallable bonds currently sell for $1,030.  They have a 15-year maturity, an annual coupon of $85, and a par value of $1,000.  What is their yield to maturity?

Answer

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9.53%

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8.15%

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8.88%

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8.55%

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7.41%

Question 5

1.       

You are considering the following two mutually exclusive projects. The required return on each project is 11 percent. Which project should you accept and what is the best reason for that decision? 

 
 

Answer

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Project A; because it pays back faster

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Project A; because it has the higher profitability index

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Project B; because it has the higher profitability index

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Project A; because it has the higher net present value

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Project B; because it has the higher net present value

Question 6

1.       

A 25-year, $1,000 par value bond has an 8.5% annual payment coupon.  The bond currently sells for $900.  If the yield to maturity remains at its current rate, what will the price be 5 years from now?

Answer

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$1,069.75

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$698.06

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$1,096.95

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$906.57

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$688.99

Question 7

1.       

A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond matures in 3 years and pays interest annually. The coupon rate is 7 percent. What is the current price of this bond?

Answer

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$948.01

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$949.60

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$1,005.26

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$1,008.18

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$1,010.13

Question 8

1.       

You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows.  Which of the following would increase the calculated value of the investment?

Answer

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The cash flows are in the form of a deferred annuity, and they total to $100,000.  You learn that the annuity lasts for 10 years rather than 5 years, hence that each payment is for $10,000 rather than for $20,000.

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The discount rate decreases.

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The riskiness of the investment's cash flows increases.

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The total amount of cash flows remains the same, but more of the cash flows are received in the later years and less are received in the earlier years.

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The discount rate increases.

Question 9

1.       

Benny's is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 14 percent rate of return?
 
 

Answer

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$2,336.29

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$2,511.49

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$2,874.21

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$3,013.05

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$3,268.47

Question 10

1.       

What is the present value of the following cash flow stream at a rate of 10.0%?

Years:

0

1

2

3

CFs:

$750

$2,450

$3,175

$4,400

     

 

Answer

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$8,907.02

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$7,660.04

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$10,866.57

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$8,639.81

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$7,303.76

Question 11

1.       

The greater the number of compounding periods within a year, then (1) the greater the future value of a lump sum investment at Time 0 and (2) the greater the present value of a given lump sum to be received at some future date.

Answer[removed] True 
[removed] False

Question 12

1.       

Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity?

Answer

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5.77 percent

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5.84 percent

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6.00 percent

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6.13 percent

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6.27 percent

Question 13

1.       

What is the net present value of a project with the following cash flows if the discount rate is 10 percent? 

 
 

Answer

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$1,085.25

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$1,193.77

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$3,498.28

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$4,102.86

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$4,513.15

Question 14

1.       

The market value of any real or financial asset, including stocks, bonds, or art work purchased in hope of selling it at a profit, may be estimated by determining future cash flows and then discounting them back to the present.

Answer[removed] True 
[removed] False

Question 15

1.       

Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation?

Answer

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Sensitivity analysis

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Capital rationing

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Soft rationing

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Contingency planning

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Sunk cost

Question 16

1.       

All other things held constant, the present value of a given annual annuity decreases as the number of periods per year increases.

Answer[removed] True 
[removed] False

Question 17

1.       

What's the present value of $13,000 discounted back 5 years if the appropriate interest rate is 4.5%, compounded semiannually?

Answer

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$9,886.30

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$10,198.50

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$10,406.63

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$10,718.83

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$11,655.43

Question 18

1.       

A 5.5 percent $1,000 bond matures in 7 years, pays interest semiannually, and has a yield to maturity of 6.23 percent. What is the current market price of the bond?

Answer

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$945.08

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$947.21

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$959.09

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$959.60

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$962.40

Question 19

1.       

 

Use the S-1/A filed by Twitter dated October 24, 2013 to answer this question.

Net cash flow provided from operating activities for the nine months ended of September 13th, 2013 was positive for Twitter.

Answer[removed] True 
[removed] False

Question 20

1.       

 

Use the S-1/A filed by Twitter dated October 24, 2013 to answer this question.

One problem with Twitter IPO is that the current executive compensation plan of the company is designed to only reward conservative behavior that assures creditors that they will be repaid. Value creation is not rewarded and this is a problem for those who will invest in the IPO.   

Answer[removed] True 
[removed] False

Question 21

1.       

 

Use the S-1/A filed by Twitter dated October 24, 2013 to answer this question.

As of September 30th, 2013 Twitter had cash, cash equivalents and marketable securities of less than $500 million.

Answer[removed] True 
[removed] False

Question 22

1.       

Net present value is:

Answer

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negative when a project's benefits exceed its costs.

[removed]

 

equal to the present value of an investment's benefits.

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equal to zero when the discount rate equals the IRR.

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negative when a project's IRR exceeds the required rate of return.

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the current measure of a project's cash inflows.

Question 23

1.       

If the appropriate discount rate for the following cash flows is 11.7 percent per year, what is the present value of the cash flows?
 
 

Answer

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$71,407.19

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$74,221.80

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$78,270.77

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$80,407.16

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$81,121.03

Question 24

1.       

What is the present value of the following cash flow stream at a rate of 16.00%?

Years:

0

1

2

3

4

CFs:

$0

$75

$225

$0

$300

      

 

Answer

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$397.55

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$441.29

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$322.02

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$401.53

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$469.11

Question 25

1.       

Your firm has been told that it needs $100,000 today to fund a $150,000 expansion project 8 years from now. What rate of interest was used in the present value computation?

Answer

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5.20 percent

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6.83 percent

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7.94 percent

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9.08 percent

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10.40 percent

Question 26

1.       

Use the S-1/A filed by Twitter dated October 24, 2013 to answer this question.

After the IPO there will be 70 million shares of Twitter Common Stock outstanding.

 

Answer[removed] True 
[removed] False

Question 27

1.       

Curtis is considering a project with cash inflows of $918, $867, $528, and $310 over the next four years, respectively. The relevant discount rate is 11 percent. What is the net present value of this project if it the start up cost is $2,100?

Answer

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$20.98

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$46.48

[removed]

 

$52.14

[removed]

 

$74.22

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$80.81

Question 28

1.       

Joe and Rich are both considering investing in a project with the following cash flows. Joe is content earning a 9 percent return but Rich desires a return of 16 percent. Who, if either, should accept this project?
 
 

Answer

[removed]

 

Joe, but not Rich

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Rich, but not Joe

[removed]

 

neither Joe nor Rich

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both Joe and Rich

[removed]

 

Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero

Question 29

1.       

What's the present value of $1,675 discounted back 5 years if the appropriate interest rate is 6%, compounded monthly?

Answer

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$1,440.49

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$1,241.80

[removed]

 

$1,179.71

[removed]

 

$1,266.63

[removed]

 

$1,279.05

Question 30

1.       

 

Once the Twitter IPO is completed banks will charge Twitter a higher interest rate on its revolving credit facility because the dividends paid to owners of common stock use up cash that would otherwise be used to pay creditors.

Answer[removed] True 
[removed] False

Question 31

1.       

Assume the total cost of a college education will be $285,000 when your child enters college in 22 years. You presently have $35,000 to invest. What annual rate of interest must you earn on your investment to cover the cost of your child's college education?

Answer

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8.65 percent

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9.40 percent

[removed]

 

10.00 percent

[removed]

 

10.60 percent

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11.00 percent

Question 32

1.       

Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?

Answer

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The present value of a 5-year, $250 annuity due will be lower than the PV of a similar ordinary annuity.

[removed]

 

A 30-year, $150,000 amortized mortgage will have larger monthly payments than an otherwise similar 20-year mortgage.

[removed]

 

A bank loan's nominal interest rate will always be equal to or less than its effective annual rate.

[removed]

 

If an investment pays 10% interest, compounded annually, its effective annual rate will be less than 10%.

[removed]

 

Banks A and B offer the same nominal annual rate of interest, but A pays interest quarterly and B pays semiannually.  Deposits in Bank B will provide the higher future value if you leave your funds on deposit.

Question 33

1.       

A U.S. Treasury bond will pay a lump sum of $1,000 exactly 3 years from today.  The nominal interest rate is 6%, semiannual compounding.  Which of the following statements is CORRECT?

Answer

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The periodic interest rate is greater than 3%.

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The periodic rate is less than 3%.

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The present value would be greater if the lump sum were discounted back for more periods.

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The present value of the $1,000 would be smaller if interest were compounded monthly rather than semiannually.

[removed]

 

The PV of the $1,000 lump sum has a higher present value than the PV of a 3-year, $333.33 ordinary annuity.

 

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