BBUS3120-04 Quiz1 (Sept.

26,2012) Name: __________________________ Student #: _____________

1. An example of a firm's financing decision would include: A. Acquisition of a competitive firm. B. How much to pay for a specific asset. C. The issuance of ten-year versus twenty-year bonds. D. Whether or not to increase the price of its products. 2. Which of the following is least likely to represent an agency problem? A. Lavish spending on expense accounts. B. Plush remodeling of the executive suite. C. Excessive investment in "safe" projects. D. Executive incentive compensation plans. 3. The primary distinction between securities sold in the primary and secondary markets is the: A. Riskiness of the securities. B. Previous issuance of the securities. C. Price of the securities. D. Profitability of the issuing corporation. 4. The cost of capital: A. Is the expected rate of return on capital investment B. Is an opportunity cost determined by the risk-free rate of return. C. Is the interest rate that the firm pays on a loan from a bank or insurance company. D. For risky investments is normally higher than the firm's borrowing rate. 5. The purpose of a floating-rate bond is to: A. Offer rates adjusted to current market conditions B. Save interest expense for corporate issuers C. Avoid making interest payments until maturity D. Shift the yield curve 6. How long must one wait (to the nearest year) for an initial investment of $1,000 to triple in value if the investment earns 8 percent compounded annually? A. 9 B. 14 C. 22 D. 25 $3,000 = 1,000(1.08)n 3 = (1.08)n 14.27, or approx. 14 yrs. = N Solved with financial calculator; can also be solved with tables or logarithms.

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7. Other things being equal, the more frequent the compounding period, the: A. Higher the APR B. Lower the APR C. Higher the effective annual interest rate D. Lower the effective annual interest rate 8. What happens to the price of a three-year bond with an 8 percent coupon when interest rates change from 8 percent to 6 percent? A. A price increase of $51.54 B. A price decrease of $51.54 C. A price increase of $53.47 D. No change in price 9. If a condo is torn down in 20 years, what is the approximate present value of the cash flow if the first annual cash flow is $10,000, the growth rate of the annual cash flow is 3 percent and the interest rate is 5 percent? A. $174,000 B. $204,000 C. $160,000 D. $200,000

10. Which of the following statements is INCORRECT? A. Changes in interest rates also change coupon payments for already-issued bonds. B. An upward-sloping yield curve tells you that investors expect short-term interest rate to rise. C. Bonds that are included in the same yield curve differ only in their maturity dates D. Zero-coupon bonds are issued at prices considerably below face value, and the investor's return comes from the difference between the purchase price and the payment of face value at maturity.
11. (Stakeholder ) is a party that has an interest in the firm or its project such as investors, employees, customers, suppliers, the community, government and trade associations. When the coupon rate is (higher) than the required return, the bond sells above face value. 12. IBM offers a lifetime annuity to retiring worker. For a payment of $100,000 at age 65, the firm will pay the retiring worker $700 a month for 20 years a. What is the monthly rate on this annuity? What is the EAR and the APR? ( 1.5 points ) N=20*12=240 PMT=700 PV= -100,000 FV=0 I/Y=0.4761, APR=0.4761*12=5.7135%, EAR= (1+0.057135/12)^12-1=5.87% b. If the monthly interest rate is 0.3%, what monthly annuity payment can the firm offer to the retiring worker? (1 point ) PMT=585.1115

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13. a. Today you purchased a 3-year corporate bond (face value =$1000) paying 2% coupon annually. The market interest rate is currently 3%. How much did you pay for the bond? ( 1 point ) N=3 PMT=20 FV=1000 I/Y=3 PV=-971.714 b. One year later, you sold the bond when the market interest rate decreases to 1%. Calculate your before-tax rate of return and after-tax return for the holding period. Marginal tax rate is assumed to be 30 percent ( 2.5 points ). N=2 PMT=20 FV=1000 I/Y=1 PV= 1019.70 Before-Tax Rate of Return = (20+1019.70-971.714)/971.714=0.06997 (7%) After-Tax Rate of Return= (20*0.7+ 47.98647.986*0.5*0.3)/971.714=54.7881/971.714=0.05638 (5.64%) 14. A 5-year IBM bond pays interest rate of $50 annually and sells for $900. What is its coupon rate, current yield? (1 point ) Coupon Rate = 50/1000=5%, Current Yield = 50/900= 5.56% 15. Suppose that you are planning a one-month European trip when you graduate two year from now. The cost of trip will be $8000. Right now you have $1000 and will put it into a savings account that pays 2 percent interest rate annually. How much more money will you need to deposit one year from now to have enough money for the trip? ( 2 points ) Your $1000 will be 1000*(1.02)^2=1040.4 Then you require 8000-1040.4=$6959.6 To have 6959.6 after two year, you must deposit 6959.6/(1.02)=$6823.14 one year from now.