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Time Value of Money, Stocks, Bonds & Bond Refunding

1.Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment?

A. 566,400
B. 681,550
C. 150,000
D. 162,000

2. An issue of common stock has just paid a dividend of $4.00. Its growth rate is equal to 8%. If the required rate of return is 13%, What is its current price?
A. $19.04
B. $80
C. $86.40
D. none of these

3. Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12th year (10 payments). The discount rate is 10%. The present value today of this deferred annuity is:

A. $61,450
B. $42,185
C. $46,149
D. $50,757

4.The growth rate for the firm's common stock is 7%. The firm's preferred stock is paying an annual dividend of $5. What is the preferred stock price if the required rate of return is 8%?

A. $5
B. $62.50
C. $500
D. none of these

5.A ten-year bond, with a par value $ of $ 1,000, pays 10% annually. If similar bonds are currently yielding 6% annually, what is the market value of the bond? Use semi-annual analysis.
A. $1,000
B. $1,127.50
C. $1297.85
D. $2,549.85

6.An issue of common stock is expected to pay a dividend of $4.80 at the end of the year. Its growth rate is equal to 8%. If the required rate of return is 13%, What is its current price?

A. $103.68
B. $36.92
C. $96.00
D. none of these

Dairy Corp. has a $10 million bond obligation outstanding which it is considering refunding. The bonds were issued at 10% and the interest rates on similar bonds have declined to 8%. The bonds have five years of their 20 year maturity remaining. The new bond will have a 5-year maturity. Dairy will pay a call premium of 5% and will incur new underwriting costs of $400,00 immediately. There is no underwriting cost consideration on the old bond. The company is in a 40% tax bracket. To analyze the refunding decision, use a 6% discount rate.

Use this information to answer the questions below.

7.What is the present value of the cash outflows related to the call premium and underwriting cost?

8.Round to the nearest dollar and omit commas and dollar signs (example: $25,000 would be entered as 25,000.

answer___________________________-

9.What is the present value of the cash inflows related to the refunding decision?
Round to the nearest dollar and omit commas and dollar signs(example: $25,000 would be entered as 25000

Answer__________________________

10.Should Dairy Corp. refund the old bond issue and replace it with the new issue?
A) yes
B) NO
C) There is not enough information to make a decision.

11.Investors consider which of the following to be the most important measure of bond returns?
A) coupon rate
B) yield to maturity
C) current yield
D) none of these

12. Buchanan Corp. is refunding $12 million worth of 10% debt. The new bonds will be issued for 8%. The corporation's tax rate is 35%. The call premium is 9%. What is the net cost of the call premium?
A) $390,000
B)$1,080,000
C)$600,000
D) $702,000

13.A bond with a coupon rate of 7.5% maturing in 10 years at a value of $1,000 and current market price of $776 will have a current yield of
A)11.3%
B)10.2%
C)9.7%
D)8.5%

14. A bond with a coupon rate of 7.2%, maturing in 10 years at a value of $1,000 and a current market price of $ 800, will have a yield to maturity (using the approximation formula)of
A) between 10% and 10.5%
B) between 10.5% and 11%
C) between 11% and 11.5%
D) between 11.5% and 12%

15.Market Enterprises would like to issue bonds and needs to determine the approximate rate they would need to pay investors. A firm with similar risk recently issued bonds with the following current features: a 7% coupon rate, 20 years until maturity, and current price of # 1,150. At what rate would Market Enterprises expect to issue their bonds, assuming annual interest payments?
A) 5.7%
B) 5.9%
C)7%
D)7.1%

16.The dividend valuation model stresses the
A) importance of earnings per share
B) importance of dividends and legal rules for maximum payment.
C) relationship of dividends to market price
D) relationship of dividends to earnings per share

Solution Preview

Please see the attached file:
1.Luke believes that he can invest $5,000 per year for his retirement in 30 years. How much will he have available for retirement if he can earn 8% on his investment?

A. 566,400
B. 681,550
C. 150,000
D. 162,000

Answer: A. 566,400

n= 30
r= 8.00%
FVIFA (30 periods, 8.% rate ) = 113.2832

Annuity= $5,000
Therefore, future value= $566,416 =5000x113.2832

2. An issue of common stock has just paid a dividend of $4.00. Its growth rate is equal to 8%. If the required rate of return is 13%, What is its current price?
A. $19.04
B. $80
C. $86.40
D. none of these

Answer: C. $86.40

Using the Dividend Discount (Constant Growth) Model
Po= Div1/ (r-g)
Div0 = $4.00 (dividend at time 0)

Dividend for next year= Div1 = $4.32 =(1+8.%) *4
Cost of equity= r= 13.00%
growth rate of dividends/earnings= g= 8%
Current stock price= Po=
Plugging in the values:
Po= $86.40 =4.32/(13.%-8.%)

3. Mike Carlson will receive $10,000 a year from the end of the third year to the end of the 12th year (10 payments). The discount rate is 10%. The present value today of this deferred annuity is:

A. $61,450
B. $42,185
C. $46,149
D. $50,757

Answer: D. $50,757

We first calculate the value of annuity at the end of year 2 and then discount it to time 0
Value at time t= 2
n= 10
r= 10.00%
PVIFA (10 periods, 10.% rate ) = 6.144567

Annuity= $10,000
Therefore, present value= 61,446 =10000x6.144567

Value at the end of year 2= $61,446

Value at time t=0

n= 2
r= 10.00%
PVIF (2 periods, 10.% rate ) = 0.826446

Future value= 61,446
Therefore, present value= $50,782 =61446x0.826446

Value at time t=0 is $50,782

4.The growth rate for the firm's common stock is 7%. The firm's preferred stock is paying an annual dividend of $5. What is the preferred stock price if the required rate of return is 8%?

A. $5
B. $62.50
C. $500
D. none of these

Answer: B. $62.50

Price of preferred stock = Dividend on preferred stock / required rate of return on preferred stock= $62.50 =$5 / 8%

5.A ten-year bond, with a par value $ of $ 1,000, pays 10% annually. If similar bonds are currently yielding 6% annually, what is the market valu of the bond? Use semi-annual analysis.
A. $1,000
B. $1,127.50
C. $1297.85
D. ...

Solution Summary

Answers multiple choice questions on Time Value of Money, Stocks, Bonds, Bond Refunding etc.

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