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Exam 2 with Answers Key - Business Finance I | FINC 3131, Exams of Finance

Georgia College & State University (GCSU)Finance

Material Type: Exam; Class: Business Finance I; Subject: Finance; University: Georgia College & State University; Term: Fall 2007;

Typology: Exams

Pre 2010

Uploaded on 08/03/2009

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FI3300 – Fall 2007
Exam Two
1) You are considering buying a new car. The sticker price is $20,000 and you have $2,000 to put toward
a down payment. If you can negotiate a nominal annual interest rate of 12 percent and you wish to pay for
the car over a 5-year period, what is your monthly car payment?
A. 264.18
B. 400.40
C. 789.25
D. 1593.01
E. 2446.93
B
Amount of loan = 20,000 – 2,000 = 18,000
The loan is a monthly payment loan. Therefore adjust the nominal interest rate and no. of payment
periods.
Periodic interest rate = 12/12 = 1%
Number of periods = 5 x 12 = 60
PV = 18000, FV = 0, I/Y = 1, N = 60. Then CPT, and PMT.
PMT = -400.40
2) What is the present value of a security that pays $900 per year for 10 years (with the first payment to be
made today and the last payment to be made 9 years from today) given an interest rate of 5.75 percent
p.a.?
A. 6721.34
B. 6955.02
C. 7088.68
D 7376.67
E 123.05
C
This is an annuity due. So use the relationship between an ordinary annuity and an annuity due to find the
present value.
Find present value of the corresponding ordinary annuity.
PMT = -900, N = 10, I/Y = 5.75, FV = 0. Then CPT and PV.
PV = 6,703.2482
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Download Exam 2 with Answers Key - Business Finance I | FINC 3131 and more Exams Finance in PDF only on Docsity!

Exam Two

  1. You are considering buying a new car. The sticker price is $20,000 and you have $2,000 to put toward a down payment. If you can negotiate a nominal annual interest rate of 12 percent and you wish to pay for the car over a 5-year period, what is your monthly car payment? A. 264. B. 400. C. 789. D. 1593. E. 2446. B Amount of loan = 20,000 – 2,000 = 18, The loan is a monthly payment loan. Therefore adjust the nominal interest rate and no. of payment periods. Periodic interest rate = 12/12 = 1% Number of periods = 5 x 12 = 60 PV = 18000, FV = 0, I/Y = 1, N = 60. Then CPT, and PMT. PMT = -400.
  2. What is the present value of a security that pays $900 per year for 10 years (with the first payment to be made today and the last payment to be made 9 years from today) given an interest rate of 5.75 percent p.a.? A. 6721. B. 6955. C. 7088. D 7376. E 123. C This is an annuity due. So use the relationship between an ordinary annuity and an annuity due to find the present value. Find present value of the corresponding ordinary annuity. PMT = -900, N = 10, I/Y = 5.75, FV = 0. Then CPT and PV. PV = 6,703.

Exam Two Therefore, present value of the annuity due = 6,703.2482 x (1.0575) = 7,088. So final answer (to 2 decimal places) = $7,088.

  1. You plan to deposit $150 every month for 22 years (with the first deposit made one month from today) into an account that pays 6 percent p.a. What is the future value of this annuity at the end of year 30? A 149,070. B 132,252. C 95,360. D 81,933. E 77,512. B No. of periods = 22 x 12 = 264 Periodic interest rate, (what you put into I/Y) = 6/12 = 0.5% N = 264, I/Y = 0.5, PMT = -150, PV = 0. Then CPT and FV = 81,933. Now, move your focus to the end of year 22 and make that your starting point. You want to find the future value of 81,933.8801 at the end of year 30. No. of periods between the end of year 30 and the end of year 22 = ( 30 – 22 ) x 12 = 96 Key in the following to get the future value of 81,933.8801 at the end of year 32. N = 96, PV = -81,933.8801, I/Y = 0.5, PMT = 0. Then CPT and FV = 132,252.
  2. Ira Longview wishes to save money to provide for his retirement. Beginning one year from now, he will deposit the same fixed amount each year for the next 20 years into a retirement savings account. Starting one year after making his final deposit, he will withdraw $135,000 annually for each of the following 15 years (i.e. he will make 15 withdrawals in all). Assume that the retirement fund earns 6% annually over both the period that he is depositing money and the period he makes withdrawals. In order for Ira to have sufficient funds in his account to fund his retirement, how much should he deposit annually? A 15,856. B 21,270.

Exam Two A 9.50% p.a. B 9.77% p.a. C 10.00% p.a. D 10.50% p.a. E 11.00% p.a. B

PV = -1019.7694, FV = 1000, N = 40, PMT = (0.1 x 1000)/2 = 50.

CPT, then I/Y = 4.

Yield to maturity = 4.8866 x 2 = 9.7732 = 9.77% p.a.

  1. Winshaw Manufacturing needs to raise $100,000,000 for an expansion project. The CFO is debating whether to issue zero-coupon bonds or semi-annual coupon bonds. In either case the bonds would have the SAME nominal required rate of return, a 30-year maturity and a par value of $1,000. If he issues the zero-coupon bonds, they would sell for $212.56. If he issues the semi-annual coupon bonds, they would sell for $1003.89. What annual coupon rate is Winshaw planning to offer on the coupon bonds? State your answer in percentage terms, rounded to 2 decimal places. [Hint1: Use annual compounding for the zero-coupon bonds and use semi-annual compounding for the semi-annual fixed coupon bonds] A 7.00% B 6.30% C 6.00% D 5.60% E 5.32% E Find the required rate of return on the zero-coupon bonds. FV=1000, N=30, PV=-212.56, PMT=0. CPT then I/Y. The required rate of return on the zero-coupon bonds = 5.2973% p.a. (to 4 decimal places) Use the required rate of return to solve for the semi-annual coupon payment. FV=1000, N=60, PV = -1003.89, I/Y = 5.2973/2 = 2.64865. CPT then PMT. PMT = 26.6166. This is the SEMI-ANNUAL payment.

Exam Two To get the annual coupon rate, multiply PMT by 2 and then divide by the par value of $1000. Then express answer as a percentage. Coupon rate = (26.6166 x 2)/1000 = 0.0532332 or 5.32% p.a.

  1. Davidson Company will pay an annual dividend of $6 per share one year from today. The dividend is expected to grow at a constant rate of 15 percent permanently. The market requires 24 percent return on the company. What is the current price of the stock (to 2 decimal places)? A $47. B $50. C $66. D $78. E $90. C Use the constant dividend growth model. D 1 = 6, k = 0.24, g = 0.15. Price = 6 / (0.24 – 0.15) = $66.
  2. The price of a stock in the market is $32. You know that the firm has just paid a dividend of $0.75 per share (i.e., D 0 = 0.75). The dividend growth rate is expected to be 6 percent forever. What is the investors’ required rate of return for this stock? A 8.48% B 9.15% C 7.62% D 7.55% E 7.23% A P = 32, D 1 = 0.75 x (1.06) = 0.795. Required rate of return = 0.795/32 + 0.06 = 0.02484 + 0.06 = 0.08484 or 8.48%
  3. rett Creative Media is expected to pay dividends at the end of the next three years of $0.5, $1.5, $2, respectively. After three years, the dividend is expected to grow at a 5% constant annual rate forever. If the required rate of return on this stock is 10%, what is the current stock price?

Exam Two of each of following five years, $9,000. You require a 10% rate of return. What is the maximum price you would pay for this asset? A 46612. B 46712. C 46812. D 46912. E 47112. A See my slides.

  1. Compute the yield to maturity of Arundel bonds based on the following information: Arundel bonds have a $1000 par value, 25 years remaining until maturity, an 11% coupon rate, paid semi-annually, and a current market price of $1,187. A. 4.55% p.a B. 9.09% p.a C. 5.50% p.a D. 11% p.a E. 12.5% p.a B pv=-1187, FV=1000, N=25X2=50, PMT=1000X11% / 2=55, I/Y=4. 4.5466% is periodic rate, so 4.5466x2=9.
  2. One year ago Pell Inc. sold 20-year, $1,000 par value, annual coupon bonds at a price of $931.54 per bond. At that time the market rate was 9 percent. Today the market rate is 9.5 percent; therefore the bonds are currently selling: A. at a discount. B. at a premium. C. at par. D. above the market price. E. not enough information. A

Exam Two

  1. You have borrowed $11,500 from a bank and have promised to repay the loan in 10 equal yearly payments. The first payment is at the end of the first year. The interest rate is 5 percent p.a.. How much interest will you pay at the 6th^ payment? A 286. B 296. C 322. D 343. E 405. C PV=11500, N=10, I/Y=5, FV=0, PMT=-1489.30, PUSH key on the BAII Plus, 2ND^ and AMORT, input p1=6, p2=6, will find the interest amount.