Quiz #1 - Finance 351: Financial Management Fall 2011...

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1 Finance 351: Financial Management Fall 2011 Instructor: Shuming Liu QUIZ 1 QUIZ PAPER A 1 B 6 D 11 C 16 D 2 B 7 B 12 A 17 D 3 A 8 B 13 B 18 D 4 A 9 A 14 C 19 C 5 D 10 A 15 D 20 A QUIZ PAPER B 1 C 6 B 11 D 16 D 2 A 7 B 12 D 17 B 3 B 8 A 13 D 18 B 4 C 9 A 14 C 19 A 5 D 10 D 15 A 20 A See the next few pages for detailed answers.
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2 QUIZ 1 For all the questions related to coupon bonds, the face value of a bond is always $1,000 and coupons are paid annually. Quiz Paper A 1, Quiz Paper B 6 Converting an annuity to an annuity due _________ the present value. A) decreases B) increases C) does not change D) none of the above Answer: B Quiz Paper A 2, Quiz Paper B 7 Large Industries bonds sell for $1,065.15. The bond life is 9 years, and the yield to maturity is 7%. What must be the coupon rate on the bonds? A) 6% B) 8% C) 10% D) 11% Answer: B Solve the following equation for PMT: 9 9 ) 07 . 1 ( 000 , 1 $ (1.07) 0.07 1 0.07 1 PMT $1,065.15 + × × = PMT = $80.00 Using a financial calculator, compute the annual payment by entering: n = 9; PV = ( )1065.15; FV = 1000; i = 7, compute PMT = $80.00 Since the annual payment is $80, the coupon rate is 8%. Quiz Paper A 3, Quiz Paper B 8 The firm should always plow back some earnings if A) ROE is greater than the firm’s required return. B) ROE is equal to the firm’s required return. C) ROE is less than the firm’s required return. D) All of the above. Answer: A Quiz Paper A 4, Quiz Paper B 9 If an investor purchases a bond when its current yield is lower than the coupon rate, then the bond’s price will be expected to: A) decline over time, reaching par value at maturity. B) increase over time, reaching par value at maturity. C) remain constant over time.
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3 D) None of the above. Answer: A Quiz Paper A 5, Quiz Paper B 10 What should be the price for a common stock paying $3.50 annually in dividends if the growth rate is zero and the discount rate is 8%? A) $22.86 B) $28.00 C) $42.00 D) $43.75 Answer: D Quiz Paper A 6, Quiz Paper B 16 Web Cites Research expects that the return on equity will be 20 percent. Management plans to plow back 30 percent of all earnings into the firm. Earnings this year will be $3 per share, and investors expect a 12 percent rate of return on the stock. What is the
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Quiz #1 - Finance 351: Financial Management Fall 2011...

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