FINANCE 5023Dr. P. Kadapakkam
Part A. 10 questions worth 6 points each (10 X 6 = 60 points).
Enter answers on this line. 1. 2. 3. 4. 5. .
1. You received a $500 savings account earning 5% compounded annually on your 1st birthday. How much will you have in the account on your 21st birthday if you don't withdraw any money before then?
A. $1915.89 B. $302.29 C. $1216.97 D. $2003.12 E. $1,326.65
2. You decide to set aside money for the down payment on a house. You will need $20,000 in 5 years. You can earn 6% compounded annually. How much do you need to invest today?
A. $ 3,547.93 B. $ 11,863.07 C. $14,945.16 D. $13,258.17 E. $30,322.98
3. If a company’s earnings grew at a constant rate and doubled in 8 years, what is the growth rate?
A. 5% B. 6% C. 7% D. 8% E. 9%
4. In how many years will your money triple, if invested at 10.5%?
A. 7B. 9 C. 11 D. 13 E. 15
5. You are going to receive $1000 at the end of each year for the next three years. If the annual discount rate is 6%, what is the present value of this income stream?
A. $ 3,000.00 B. $3,577.10 C. $2,673.01 D. $2,713.75 E. $2,775.67
Enter answers on this line. 6. 7. 8. 9. 10. .
6.Mr. Dubofsky just won a "Name That Tune" contest with a grand prize of $100,000. However, the contest stipulates that the winner will receive $10,000 immediately, and $10,000 at the end of each of the next 9 years. Assuming that he can earn 10% on his money, how much has he actually won?
A.$100,000.01
B.$ 78,225.11
C.$ 67,590.24
D.$ 55,911.23
E.$ 34,987.65
7. You take a loan of $24,000 from your bank at 12%. The loan is to be repaid in 5 equal annual installments, with the first payment starting at the end of the year. What will be the loan balance after you make the second payment?
A. $ 8,000
B. $14,400
C. $18,240
D. $ 15,990
E. $16,712
8.Assume that you wish to purchase a bond with a 30-year maturity, an annual coupon rate of 10 percent, a face value of $1,000, and semiannual interest payments. If you require a 9 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?
A.$905.35
B.$1,102.74
C.$1,103.19
D.$1,106.76
E.$1,149.63
9.A bond has an annual 8 percent coupon rate, a maturity of 10 years, a face value of $1,000, and makes semiannual payments. If the price is $934.96, what is the annual nominal yield to maturity on the bond?
A. 8% B. 9% C. 10% D.11% E.12%
10.The Textbook Production Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever. Assume that rs = 11 percent and D0 = $2.00. What will be the price of the company's stock three years from now?
A.$27.17 B. $ 6.23 C. $28.50 D.$10.18 E.$20.63
Part B.
11. (10 points) Jack expects to receive 5 payments of $100 each starting at the beginning of the sixth year. (Convention: Note, the first year starts today and ends 1 year from now). What is the value of the payments two years from now? What is the value of the payments 10 years from now? Jack expects to earn 10% a year on his investments.
12. (15 points) Your uncle wants to retire in 2 years. Suppose he wants to have a real retirement income of $40,000 in today’s dollars each year. His retirement income will start 2 years from today, and he will receive a total of 3 payments. (After that, he plans to live on pension he expects from his employer.) Inflation is expected to be constant at 5%. Your uncle has $100,000 in savings now, and can earn 8% on his money. What should be the size of his 3 annual savings deposits to meet his goals? The first payment will be made today.
13. (15 points) Club Auto Parts' last dividend, D0, was $0.50, and the company expects to experience no growth for the next 2 years. However, Club will grow at an annual rate of 5 percent in the third and fourth years, and, beginning with the fifth year, it should attain a 10 percent growth rate which it will sustain thereafter. Club has a required rate of return of 12 percent. What should be the price per share of Club stock at the end of the second year, P2?