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# Value of Financial Instrument

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Assume the following data: Current assets = 500; Current liabilities = 250; Inventory = 200; Account receivables = 200. Calculate the current ratio.

a) 2.0

b) 1.5

c) 1.0

d) 2.5

Assets are listed on the balance sheet in order of:

I) decreasing liquidity;
II) decreasing size;
III) increasing size;
IV) relative life

a) I only

b) III and IV only

c) II only

d) IV only

What is the present value of \$10,000 per year in perpetuity at an interest rate of 10%?

a) \$10,000

b) \$100,000

c) \$200,000

d) \$1,000

You just inherited a trust that will pay you \$100,000 per year in perpetuity. However, the first payment will not occur for exactly four more years. Assuming an 8% annual interest rate, what is the value of this trust?

a) \$918,787

b) \$992,290

c) \$1,000,000

d) \$1,250,000

What is the present value of a six-year, \$5,000 per year annuity at a discount rate of 10%?

a) \$21,776.30

b) \$3,371.91

c) \$16,760.78

d) \$18,327.82

A three-year bond with 10% coupon rate and \$1,000 face value yields 8%. Assuming annual coupon payments, calculate the price of the bond.

a) \$857.96

b) \$951.96

c) \$1,000.00

d) \$1,051.54

A five-year bond with a 10% coupon rate and \$1,000 face value is selling for \$1,123. Calculate the yield to maturity on the bond assuming annual interest payments.

a) 10.0%

b) 8.9%

c) 7.0%

d) 5.0%

Which of the following statements about the relationship between interest rates and bond prices is true?

I) There is an inverse relationship between bond prices and interest rates.
II) There is a direct relationship between bond prices and interest rates.
III) The price of short-term bonds fluctuates more than the price of long-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).
IV) The price of long-term bonds fluctuates more than the price of short-term bonds for a given change in interest rates (assuming that the coupon rate is the same for both).

a) I and IV only

b) I and III only

c) II and III only

d) II and IV only

World-Tour Co. has just now paid a dividend of \$2.83 per share (D0); its dividends are expected to grow at a constant rate of 6% per year forever. If the required rate of return on the stock is 16%, what is the current value of the stock, after paying the dividend?

a) \$70

b) \$56

c) \$30

d) \$48

The In-Tech Co. just paid a dividend of \$1 per share. Analysts expect its dividend to grow at 25% per year for the next three years and then 5% per year thereafter. If the required rate of return on the stock is 18%, what is the current value of the stock?

a) \$12.97

b) \$11.93

c) \$15.20

d) \$15.78

For each additional 1% change in market return, the return on a stock having a beta of 2.2 changes, on average, by:

a) 1.00%.

b) 0.55%.

c) 2.20%.

d) 1.10%.

Suppose the beta of Exxon-Mobil is 0.65, the risk-free rate is 4%, and the expected market rate of return is 14%. Calculate the expected rate of return on Exxon-Mobil.

a) 12.6%

b) 10.5%

c) 13.1%

d) 6.5%

Assume the following data for a stock: Beta = 1.5; Risk-free rate = 4%; Market rate of return = 12%; and Expected rate of return on the stock = 15%. Then the stock is:

a) overpriced.

b) underpriced.

c) correctly priced.

d) cannot be determined.

#### Solution Summary

This posting shows how to calculate the present value of perpetuity and bond, how bond price is affected by interest rate change and how to value a stock with beta and market return.

\$2.19

## Derivative Financial Instrument, Trading Securities Entries, Journal Entries for Fair Value and Equity Methods

13. Derivative Financial Instrument - The treasurer of Miller Co. has read on the Internet that the stock price of Ewing Inc. is about to take off. In order to profit from this potential development, Miller Co. purchased a call option on Ewing common shares on July 7, 2002, for \$240. The call option is for 200 shares (notional value), and the stike price is \$70. The option expires on January 31, 2003. The following data are available with respect to the call option.
Prepare the journal entries for Miller Co. for the following dates (see attachment)

7. Trading Securities Entries - On December 21, 2003, Tiger Company provided you with the following information regarding its trading securities (see attached)
During 2004, Colorado Company stock was sold for \$9,400. The fair value of the stock on December 31, 2004, was: Clemson Corp. stock - \$19,100; Buffaloes Co. stock - \$20,500.
a. Prepare the adjusting journal entry needed on December 31, 2003.
b. Prepare the journal entry to record the sale of the Colorado Company stock during 2004.
c. Prepare the adjusting journal entry needed on December 31, 2004

12. Journal Entries for Fair Value and Equity Methods - Presented below are two independent situations. Prepare all necessary journal entries in 2003 for both situations.