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Finance: Net Present Value Measurements

11. The yield to maturity is: (Points: 3)
the rate that equates the price of the bond with the discounted cash flows.
the expected rate to be earned if held to maturity.
the rate that is used to determine the market price of the bond.
equal to the current yield for bonds priced at par.
All of the above.

12. Can't Hold Me Back, Inc. is preparing to pay its first dividends. It is going to pay $1.00, $2.50, and $5.00 a share over the next three years, respectively. After that, the company has stated that the annual dividend will be $1.25 per share indefinitely. What is this stock worth to you per share if you demand a 7% rate of return? (Points: 3)

13. A supplier, who requires payment within ten days, is most concerned with which one of the following ratios when granting credit? (Points: 3)
total debt

14. An increase in which one of the following accounts increases a firm's current ratio without affecting its quick ratio? (Points: 3)
accounts payable
accounts receivable
fixed assets

15. Thorton will receive an inheritance of $500,000 three years from now. Thorton's discount rate is 10% interest rate compounded semiannually. Which of the following values is closest to the amount that Thorton should accept today for the right to his inheritance? (Points: 3)
$ 373,108.
$ 375,657.
$ 665,500.
$ 670,048.
None of the above is within $10 of the correct answer.

16. What is the present value of a payment of $21,000 three years from now if the effective annual interest rate is 4%? (Points: 3)

17. Martha receives $100 on the first of each month. Stewart receives $100 on the last day of each month. Both Martha and Stewart will receive payments for five years. At an 8% discount rate, what is the difference in the present value of these two sets of payments? (Points: 3)

18. You are the beneficiary of a life insurance policy. The insurance company informs you that you have two options for receiving the insurance proceeds. You can receive a lump sum of $50,000 today or receive payments of $641 a month for ten years. You can earn 6.5% on your money. Which option should you take and why? (Points: 3)
You should accept the payments because they are worth $56,451.91 today.
You should accept the payments because they are worth $56,523.74 today.
You should accept the payments because they are worth $56,737.08 today.
You should accept the $50,000 because the payments are only worth $47,757.69 today.
You should accept the $50,000 because the payments are only worth $47,808.17 today.

19. You hope to buy your dream house six years from now. Today your dream house costs $189,900. You expect housing prices to rise by an average of 4.5% per year over the next six years. How much will your dream house cost by the time you are ready to buy it? (Points: 3)

20. Which one of the following statements concerning the annual percentage rate is correct? (Points: 3)

The annual percentage rate considers interest on interest.
The rate of interest you actually pay on a loan is called the annual percentage rate.
The effective annual rate is lower than the annual percentage rate when an interest rate is compounded quarterly.
When firms advertise the annual percentage rate they are violating U.S. truth-in-lending laws.
The annual percentage rate equals the effective annual rate when the rate on an account is designated as simple interest.

Solution Summary

This solution identifies the correct answer for each net present value measurement with justifications and calculations.