Corporate and International Finance (N1563)

Seminar 2

SHORT ANSWER/MULTIPLE CHOICE/PROBLEMS

Chapter 5 the Time Value of Money

1) A car's price is currently $20,000 and is expected to rise by 4% a year. If the interest rate is 6%, how much do you need to put aside today to buy the car one year from now?

A) $18,182

B) $19,623

C) $19,231

D) $4,080.08

2) If the future value of an annuity due is $25,000 and $24,000 is the future value of an ordinary annuity that is otherwise similar to the annuity due, what is the implied discount rate?

A) 8.19%

B) 4.17%

C) 1.04%

D) 5.00%

3) Your car loan requires payments of $200 per month for the first year and payments of $400 per month during the second year. The APR is 12% and payments begin in one month. What is the present value of this 2-year loan?

A) $6,389.78

B) $6,753.05

C) $6,428.57

D) $6,246.34

4) How much can be accumulated for retirement if $2,000 is put aside at the end of each of the next 40 years? Assume that you can earn 9% a year on your savings.

A) $736,583.73

B) $87,200.00

C) $675,764.89

D) $802,876.27

5) On the day you retire you have $1,000,000 saved. You expect to live another 25 years during which time you expect to earn 6.19% on your savings while inflation averages 2.5% annually. Assume you want to spend the same amount each year in real terms and die on the day you spend your last dime. What real amount will you be able to spend each year?

A) $61,334.36

B) $79,644.58

C) $61,931.78

D) $79,211.09

6) If the effective annual rate of interest is known to be 16.08% on a debt that has quarterly payments, what is the annual percentage rate?

A) 15.19%

B) 4.02%

C) 14.50%

D) 10.02%

7) Due to the Covid-19 crisis, Bank of England cuts the interest rate so banks are offering good rate on mortgage. You are considering the purchase of a 2-bed room house that would require a mortgage of $350,000. How much more in total interest will you pay if you select a 30-year mortgage at 3.50% rather than a 15-year mortgage at 1.50%? (Round the monthly payment amount to 2 decimal places.)

Chapter 6 Valuing Bonds

8) Discuss five principles associated with bond price and interest rates in marketplace.

9) A bond with face value $1,000 has a current yield of 6% and a coupon rate of 8%.

a. If interest is paid annually, what is the bond’s price?

b. Is the bond’s yield to maturity more or less than 8%?

10) How much should you pay for a $1,000 bond with 10% coupon, annual payments, and 5 years to maturity if the interest rate is 12%?

11) Suppose that you purchased 8% coupon, 10-year bonds for $1,324.4 when they were yielding 4% (we assume annual coupon payments). One year later, you receive the annual coupon payment of $80, but the yield to maturity has risen to 6%. Confirm that the rate of return on your bond over the year is less than the original 4% yield to maturity.

12.1) Consider a 3-year bond with a par value of $1,000 and an 8% annual coupon. If interest rates change from 8 to 6% the bond's price will:

A. increase by $51.54.

B. decrease by $51.54.

C. increase by $53.46.

D. decrease by $53.46.

12.2) Calculate durations and modified durations of a 3% bonds with the yield to maturity of 4% a year. Interpret the results.

Chapter 7 Valuing Stocks

13) Briefly explain why firm’s book value differ from its market value.

14) Trend-Line Inc. has been growing at a rate of 6% per year and is expected to continue to do so indefinitely. The next dividend is expected to be $5 per share.

a. If the market expects a 10% rate of return on Trend-Line, at what price must it be selling?

b. If Trend-Line’s earnings per share will be $8, what part of Trend-Line’s value is due to assets in place?

c. What part of its value is due to growth opportunities?

15) What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate in each of years 2 and 3, and then grow at a constant rate of 5% if the stock's required return is 13% and next year's dividend will be $4.00?

A. $67.60

B. $62.08

C. $68.64

D. $73.44