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1. What would the future value of $125 be after 8 years at 8.5% compound interest?

a. $205.83

b. $216.67

c. $228.07

d. $240.08

e. $252.08

2. Suppose a U.S. treasury bond will pay $2,500 five years from now. If the going interest rate on 5-year treasury bonds is 4.25%, how much is the bond worth today?

a. $1,928.78

b. $2,030.30

c. $2,131.81

d. $2,238.40

e. $2,350.32

3.

Last year Mason Corp’s earnings per share were $2.50, and its growth rate during the prior 5 years was 9.0% per year. If that growth rate were maintained, how many years would it take for Mason’s EPS to double?

a. 5.86

b. 6.52

c. 7.24

d. 8.04

e. 8.85

4.

You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning one year from today. You plan to deposit the funds in a mutual fund which you expect to return 8.5% per year. Under these conditions, how much will you have just after you make the 5th deposit, 5 years from now?

a. $18,368.66

b. $19,287.09

c. $20,251.44

d. $21,264.02

e. $22,327.22

5. You want to buy a new sports car 3 years from now, and you plan to save $4,200 per year, beginning immediately. You will make 3 deposits in an account that pays 5.2% interest. Under these assumptions, how much will you have 3 years from today?

a. $13,956.42

b. $14,654.24

c. $15,386.95

d. $16,156.30

e. $14,202.21

6. At a rate of 6.25%, what is the present value of the following cash flow stream? $0 at Time 0; $75 at the end of Year 1; $225 at the end of Year 2; $0 at the end of Year 3; and $300 at the end of Year 4?

a. $411.57

b. $433.23

c. $456.03

d. $480.03

e. $505.30

7. After graduation, you plan to work for Dynamo Corporation for 12 years and then start your own business. You expect to save and deposit $7,500 a year for the first 6 years and $15,000 annually for the following 6 years, with the first deposit being made a year from today. In addition, your grandfather just gave you a $25,000 graduation gift which you will deposit immediately. If the account earns 9% compounded annually, how much will you have when you start your business 12 years from now?

a. $238,176

b. $250,712

c. $263,907

d. $277,797

e. $291,687

8. You are negotiating to make a 7-year loan of $25,000 to Breck Inc. To repay you, Breck will pay $2,500 at the end of Year 1, $5,000 at the end of Year 2, and $7,500 at the end of Year 3, plus a fixed but currently unspecified cash flow, X, at the end of Years 4 through 7. Breck is essentially riskless, so you are confident the payments will be made, and you regard 8% as an appropriate rate of return on low risk 7-year loans. What cash flow must the investment provide at the end of each of the final 4 years, that is, what is X?

a. $4,271.67

b. $4,496.49

c. $4,733.15

d. $4,969.81

e. $5,218.30

9. John and Daphne are saving for their daughter Ellen’s college education. Ellen is now 10 years old and will be entering college 8 years from now (t = 8). College tuition and expenses at State U. are currently $14,500 a year, but they are expected to increase at a rate of 3.5% a year. They expect Ellen to graduate in 4 years. (If Ellen wants to go to graduate school, she will be on her own.) Tuition and other costs will be due at the beginning of each school year (at t = 8, 9, 10, and 11). So far, John and Daphne have accumulated $15,000 in the college savings account. Their long-run financial plan is to add an additional $5,000 at the beginning of each of the next 4 years (at t = 0, 1, 2, and 3). Then they plan to make 4 equal annual contributions at the end of each of the following 5 years (t = 4, 5, 6, 7, and 8). They expect their investment account to earn 9%. How large must the annual payments be at t = 4, 5, 6, 7, and 8 to meet Ellen’s anticipated college costs?

a. $777.96

b. $818.91

c. $862.01

d. $907.38

e. $955.13

10. Assume that Pappas Company commenced operations on January 1, 2007, and it was granted permission to use the same depreciation calculations for shareholder reporting and income tax purposes. The company planned to depreciate its fixed assets over 15 years, but in December 2007 management realized that the assets would last for only 10 years. The firm’s accountants plan to report the 2007 financial statements based on this new information. How would the new depreciation assumption affect the company’s financial statements?

a. The firm’s reported net fixed assets would increase.

b. The firm’s EBIT would increase.

c. The firm’s reported 2007 earnings per share would increase.

d. The firm’s cash position in 2007 and 2008 would increase.

e. The firm’s net liabilities would increase.

11. Which of the following statements is CORRECT?

a. One way to increase EVA is to achieve the same level of operating income but with more investor-supplied capital.

b. If a firm reports positive net income, its EVA must also be positive.

c. One drawback of EVA as a performance measure is that it mistakenly assumes that equity capital is free.

d. One way to increase EVA is to generate the same level of operating income but with less investor-supplied capital.

e. Actions that increase reported net income will always increase net cash flow.

12.

The CFO of Shalit Industries plans to have the company issue $300 million of new common stock and use the proceeds to pay off some of its outstanding bonds. Assume that the company, which does not pay any dividends, takes this action, and that total assets, operating income (EBIT), and its tax rate all remain constant. Which of the following would occur?

a. The company’s taxable income would fall.

b. The company’s interest expense would remain constant.

c. The company would have less common equity than before.

d. The company’s net income would increase.

e. The company would have to pay less taxes.

13. Walter Industries’ current ratio is 0.5. Considered alone, which of the following actions would increase the company’s current ratio?

a. Borrow using short-term notes payable and use the cash to increase inventories.

b. Use cash to reduce accruals.

c. Use cash to reduce accounts payable.

d. Use cash to reduce short-term notes payable.

e. Use cash to reduce long-term bonds outstanding.

14. Companies HD and LD have the same total assets, sales, operating costs, and tax rates, and they pay the same interest rate on their debt. However, company HD has a higher debt ratio. Which of the following statements is CORRECT?

a. Given this information, LD must have the higher ROE.

b. Company LD has a higher basic earning power ratio (BEP).

c. Company HD has a higher basic earning power ratio (BEP).

d. If the interest rate the companies pay on their debt is more than their basic earning power (BEP), then Company HD will have the higher ROE.

e. If the interest rate the companies pay on their debt is less than their basic earning power (BEP), then Company HD will have the higher ROE.

15. Companies HD and LD have the same sales, tax rate, interest rate on their debt, total assets, and basic earning power. Both companies have positive net incomes. Company HD has a higher debt ratio and, therefore, a higher interest expense. Which of the following statements is CORRECT?

a. Company HD pays less in taxes.

b. Company HD has a lower equity multiplier.

c. Company HD has a higher ROA.

d. Company HD has a higher times interest earned (TIE) ratio.

e. Company HD has more net income.

16. Which of the following statements is CORRECT?

a. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond’s coupon rates.

b. All else equal, an increase in interest rates will have a greater effect on the prices of short-term than long-term bonds.

c. All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.

d. If a bond’s yield to maturity exceeds its coupon rate, the bond’s price must be less than its maturity value.

e. If a bond’s yield to maturity exceeds its coupon rate, the bond’s current yield must be less than its coupon rate.

17. Assuming all else is constant, which of the following statements is CORRECT?

a. A 20-year zero coupon bond has more reinvestment rate risk than a 20-year coupon bond.

b. For any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate.

c. From a corporate borrower’s point of view, interest paid on bonds is not tax-deductible.

d. Price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond’s maturity increases.

e. For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.

All are incorrect.

18. Which of the following statements is CORRECT?

a. If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then the yield curve will have an upward slope.

b. If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope.

c. Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be higher than yields on short-term T-bonds.

d. If the maturity risk premium (MRP) equals zero, the yield curve must be flat.

e. The yield curve can never be downward sloping.

19. Garvin Enterprises’ bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

a. 7.39%

b. 7.76%

c. 8.15%

d. 8.56%

e. 8.98%

20. Moerdyk Corporation’s bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond’s price?

a. 1,063.09

b. 1,090.35

c. 1,118.31

d. 1,146.27

e. 1,174.93

21. Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT?

All common stocks fall into one of three classes: A, B, and C.

b. All common stocks, regardless of class, must have the same voting rights.

c. All firms have several classes of common stock.

d. All common stock, regardless of class, must pay the same dividend.

e. Some class or classes of common stock may be entitled to more votes per share than other classes.

22. Stocks A and B have the same required return and the same price, $25. Stock A’s dividend is expected to grow at a constant rate of 10% per year, while Stock B’s dividend is expected to grow at a constant rate of 5% per year. Which of the following statements is CORRECT?

Stock A’s expected dividend at t = 1 is only half that of Stock B.

b. Stock A has a higher dividend yield than Stock B.

c. Currently the two stocks have the same price, but over time Stock B’s price passes that of A.

d. Since Stock A’s growth rate is twice that of Stock B, Stock A’s future dividends will always be twice as high as Stock B’s.

e. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium exists.

23. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year?

a. 7.54%

b. 7.73%

c. 7.93%

d. 8.13%

e. 8.34%

24. Gary Wells Inc. plans to issue perpetual preferred stock with an annual dividend of $6.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

a. $90.37

b. $92.69

c. $95.06

d. $97.50

e. $100.00