Exam 2 Sample

1.
Which one of these equations applies to a bond that currently has a market price that exceeds
par value?
A) Market value < Face value
B) Yield to maturity = Current yield
C) Market value = Face value
D) Current yield > Coupon rate
E) Yield to maturity < Coupon rate
2. Which bond would you generally expect to have the highest yield?
A) Risk-free Treasury bond
B) Nontaxable, highly liquid bond
C) Long-term, high-quality, tax-free bond
D) Short-term, inflation-adjusted bond
E) Long-term, taxable junk bond
3. The City of Pawnee offers 5.65 percent coupon bonds with semiannual payments and a
yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market
price per bond if the face value is $1,000?
A) $949.70
B) $929.42
C) $936.48
D) $902.60
E) $913.48
4. Very Good Building and Development Company’s made two announcements concerning
its common stock today. First, the company announced that the next annual dividend will
be $1.58 a share. Secondly, all dividends after that will decrease by 1.15 percent
annually. What is the value of this stock at a discount rate of 15.5 percent?
A) $9.49
B) $10.10
1
C) $9.82
D) $10.51
E) $11.01
5. Gryzzl pays an annual dividend that increases by 1.8 percent per year, commands a
market rate of return of 13.8 percent, and sells for $19.08 a share. What is the expected
amount of the next dividend?
A) $2.24
B) $2.29
C) $2.37
D) $2.32
E) $2.17
6. Rent-a-Swag just paid an annual dividend of $4.12. The company has a policy of
increasing the dividend by 2.5 percent annually. You would like to purchase shares of
stock in this firm but realize that you will not have the funds to do so for another four
years. If you require a rate of return of 16.7 percent, how much will you be willing to pay
per share when you can afford to make this investment?
A) $32.03
B) $32.83
C) $33.12
D) $33.65
E) $32.47
7. Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project
A provides cash inflows of $34,000 a year for three years while Project B produces a
cash inflow of $115,000 in Year 3. Which project(s) should be accepted if the discount
rate is 11.7 percent? What if the discount rate is 13.5 percent?
A) Accept A at both discount rates
B) Accept A at 11.7 percent and neither at 13.5 percent
C) Accept B at both discount rates
D) Accept both at 11.7 percent and neither at 13.5 percent
E) Accept B at 11.7 percent and neither at 13.5 percent
2
8. You are considering two independent projects. Project A has an initial cost of $125,000
and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project
B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and
$100,000, respectively. The required return for both projects is 16 percent. Based on IRR,
you should:
A) accept both projects.
B) accept Project A and reject Project B.
C) accept Project B and reject Project A.
D) reject both projects.
E) accept either one of the projects, but not both.
3
9. Ron’s Barbeque purchased a lot in Eagleton six years ago at a cost of $98,700. Today,
that lot has a market value of $128,900. At the time of the purchase, the company spent
$6,500 to level the lot and another $12,000 to install storm drains. The company now
wants to build a new facility on the site at an estimated cost of $494,200. What amount
should be used as the initial cash flow for this project?
A) −$611,400
B) −$623,100
C) −$641,600
D) −$592,900
E) −$582,400
10. Better Beverages purchased $139,700 of fixed assets that are classified as five-year
MACRS property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for Years
1 to 6, respectively. What will the accumulated depreciation be at the end of Year 4 if the
tax rate is 21 percent?
A) $76,269.49
B) $16,093.44
C) $24,140.16
D) $48,755.09
E) $115,559.84
11. The $1,000 par value bonds of the city of Indianapolis have a coupon rate of 6.5 and a
current price quote of 101.23. What is the current yield?
A) 6.60 percent
B) 6.37 percent
C) 6.42 percent
D) 6.49 percent
E) 6.58 percent
12. Ann's Fashions is considering a project that will require $39,000 in net working capital
and $68,000 in fixed assets. The project is expected to produce annual sales of $78,500
with associated cash costs of $41,000. The project has a four-year life. The company uses
straight-line depreciation to a zero book value over the life of the project. The tax rate is
25 percent. What is the operating cash flow for this project?
A) $33,325
4
B) $27,580
C) $32,545
D) $25,760
E) $32,375
13. Country Breads uses specialized ovens to bake its bread. One oven costs $249,000 and
lasts about 15 years before it needs to be replaced. The annual operating cost per oven is
$34,300. What is the equivalent annual cost of an oven if the required rate of return is 14
percent?
A) −$74,839.43
B) −$48,349.72
C) −$82,800.19
D) −$50,560.08
E) −$28,729.77
14. Which one of the following rates represents the change, if any, in your purchasing power
as a result of owning a bond?
A) Risk-free rate
B) Realized rate
C) Nominal rate
D) Real rate
E) Current rate

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