EASTERN ILLINOIS UNIVERSITY
BUS 3710
Name: ____________________________
Row No.: _____
1) If you want to have $600,000 in 25 years and you can average an 8% return, how much do you need to invest
now?
2)
The “financial crisis” during 2008 – 2009 had what impact on the required rate of return for stocks in the United
States (select one only)?
___ Increase
___ No Change
___ Decrease
3)
Bernie Cohorst has won the Sangamon County Lottery. He is offered a choice between $92 today or receiving $10
a year for the next 50 years. If Mr. Cohorst can earn a 20% rate of return on his investments, which alternative
should he select?
_____ $92 Today
_____ $ 10 A Year
4)
Mildred McNamara wants to have $800,000 when she retires. She plans to invest $4,000 each year and $1,000
now. If she can average a 7% rate of return on her investments, how many years will be required for her funds to
grow to the desired amount? Calculate your answer to the nearest tenth of a year, for example, 13.4 years.
5)
Sally Streuter invested $1,000 a year for 40 years but she withdrew $13,000 from her investments 30 years ago to
buy an ATV. If Streuter averages an 11% rate of return, how much will she have after 40 years?
6)
Beatrice Burkitt borrows $200,000 at 9% interest from the Very Last National Bank of Jerseyville to buy a home. If
she repays the loan over 30 years, what will her annual payments be assuming the payments are the same
every year?
7)
What will the remaining loan balance be after Ms. Burkitt makes her ninth payment?
8)
What is the amount of interest expense Ms. Burkitt will pay in the first year?
9)
How much interest will Ms. Burkitt pay over the life of the loan?
10) The price of James Junk bonds was quoted as $24. These bonds have a face value of $1,000, a coupon rate of 9%
and mature in 23 years. What is the required rate of return (YTM) on the bonds?
11) Ralphetta Race asks you which of the following bonds in the table below will provide the highest after-tax return.
Her marginal Federal income tax rate is 30%. She pays no state income taxes. Place a checkmark (√ ) in the table
below for the one bond that would have the highest after-tax return. Place a checkmark (√ ) in the table below
for the bond(s) that have no default risk. Place a checkmark (√ ) in the table below for the bond(s) that would
decrease in price if inflation increases.
Coupon
Face
Highest
No Default
Rate
Matures
Value
Return
Risk
Decrease in Price
U.S. Treasury Bond
6%
20 years
$1,000
City of St. Louis Housing
5%
15 years
$1,000
Bond
Intel Bond
7%
10 years
$1,000
12) Place a checkmark (√ ) in the table below for the bond(s) that would have a price greater than $1,000.
13) Place a checkmark (√ ) in the table below for the one bond that has the least maturity risk.
14) Place a checkmark (√ ) in the table below for the bond that would buy if you knew interest rates were going to
increase (you must select one bond).
Required Rate of
Price >
Face Value
Coupon Rate
Return (YTM)
Maturity
$1,000
Less Risk
Buy
$1,000
3%
6%
30 years
$1,000
10%
5%
30 years
$1,000
12%
44%
30 years
$1,000
6%
5%
5 years
$1,000
8%
8%
15 years
$1,000
11%
6%
2 years
1
.
15) Place a checkmark (√ ) in the table below for the one bond that would have the lowest required rate of return
(YTM).
16) Place a checkmark (√ ) in the table below for the bond(s) that would increase in price on year from now if the
required rate of return (YTM) remains the same for each bond.
Lowest
Increase in
Price
Coupon Rate
Maturity
YTM
Price
$800
9%
3 years
$1,200
9%
3 years
$800
9%
25 years
$1,200
9%
25 years
17) Place a checkmark (√ ) in the table below for each of the item(s) that would increase stock prices under the
dividend growth model.
Increase stock prices
The required rate of return decreases
The dividend growth rate decreases
18) Stocks Salmon, Inc. just paid a dividend of $2.00 per share. The dividends are expected to grow by 3% per year. If
investors require an 11% rate of return, what is the current price of the stock?
19) What is the dividend yield for Stocks Salmon stock?
20) What is the capital gains yield for Stocks Salmon stock?
21) What is the current shape of the yield curve?
___ upward slope
___ flat
___ inverted
22) List an example of a negative bond covenant.
23) Why would investors buy callable bonds?
24) List two advantages of investing in a bond mutual fund.
25) A rapid increase in inflation would have what impact on the required rate of return for bonds in the United States?
___ Increase
___ No Change
___ Decrease
26) Barnes and Noble announced on February 22, 2011, it was suspending its quarterly dividend to “conserve cash”.
What message does this announcement send about the future of the company?
27) Cohorst Cows calculated a new dairy in Jerseyville would have a NPV of $983 based on a $12,500,000 investment
and a 10% required rate of return.
a) What is the maximum price the company should pay for the dairy?
b) The IRR of the dairy is:
___ much less than 10%
___ slightly less than 10%
___ slightly more than 10%
____ much more than 10%
28) In 2009, McClatchy Company, a newspaper publisher announced it would most likely violate its debt covenants by
the end of 2009. What actions could this cause by the holders of the company’s bonds?
29) On October 4, 2011, the price of AMR 9% noncallable bonds maturing on September 15, 2016 were quoted at 48.5.
How much would it cost you to buy five bonds? What is the YTM on the bonds?
30) In March 2005, the railroad company Norfolk Southern issued bonds maturing in 100 years. Why would an
individual investor buy this bond?
31) At Thanksgiving dinner your aunt, Wanda Worst, mentions she is considering opening a tattoo parlor for dairy cows.
Her nephew, Not Two Bright, a recent University of Chicago graduate, advised her that he believes the project will
have an IRR of 43.2%, an NPV of $-6,874, a payback period of 21.459 years, a Profitability Index of .31 and a cost
of $823,515. As a bright EIU finance student you ask your cousin, Mr. Bright, the required rate of return for the
project. Mr. Bright, states “I used a three percent required rate of return since the idea seems very risky”. List
three things that make your head hurt.
2
.
3
.