HW3 3610 solution

QUESTION 1

The price sensitivity of a bond increases in response to a change in the market rate of interest as the:

Coupon rate increases.

Time to maturity decreases.

Coupon rate decreases and the time to maturity increases.

Time to maturity and coupon rate both decrease.

Coupon rate and time to maturity both increase.

Answer                                                                                      .

QUESTION 2

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,032. What is the yield to maturity?

6.87 percent

6.92 percent

6.08 percent

6.48 percent

7.20 percent

Answer                                                                                      .

QUESTION 3

A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. What is the current yield?

4.24 percent

4.85 percent

5.36 percent

5.62 percent

4.66 percent

Answer                                                                                      .

QUESTION 4

You want to have $2 million in real dollars in an account when you retire in 43 years. The nominal return on your investment is 9.939 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal?

$10,403

$10,878

$9,210

$8,887

$9,711

Answer                                                                                      .

QUESTION 5

The UpTowner just paid a $3.45 annual dividend. The company has a policy of increasing the dividend by 4.5 percent annually. You would like to purchase 100 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 14.8 percent rate of return, how much will you be willing to pay per share for the 100 shares when you can afford to make this investment?

$42.50

$41.74

$43.12

$38.78

$44.47

Answer                                                                                      .

QUESTION 6

AC Electric just paid a $2.10 per share annual dividend. The firm pledges to increase its dividend by 2.4 percent for the next 5 years and then maintain a constant 2 percent rate of dividend growth. If the required return is 15 percent, what is the current value of one share of this stock?

$25.07

$23.09

$22.22

$18.47

$16.74

Answer                                                                                      .

QUESTION 7

K’s Fashions is growing quickly. Dividends are expected to increase by 15 percent annually for the next three years, with the growth rate falling off to a constant 5 percent thereafter. The required return is 16 percent and the company just paid a $3.80 annual dividend. What is the current share price?

$28.96

$31.11

$46.55

$48.87

$52.20

Answer                                                                                      .

QUESTION 8

The Dry Dock is considering a project with an initial cost of $118,400. The project’s cash inflows for years 1 through 3 are $37,200, $54,600, and $46,900, respectively. What is the IRR of this project?

8.42 percent

8.04 percent

7.48 percent

8.22 percent

8.56 percent

Answer                                                                                      .

QUESTION 9

A project has cash flows of -$152,000, $60,800, $62,300 and $75,000 for years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value?

.93; accept

1.07; accept

1.02; accept

.93; reject

1.07 reject

Answer                                                                                      .

QUESTION 10

HH Companies has identified two mutually exclusive projects. Project A has cash flows of -$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively. Project B has a cost of $40,000 and annual cash inflows of $25,500 for 2 years. At what rate would you be indifferent between these two projects?

16.34 percent

−12.72 percent

9.41 percent

5.70 percent

8.28 percent

Answer                                                                                      .