Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

MANY INVESTORS ARE WORRIED THAT THE CREDIT RATING OF U.S. TREASURY BONDS WILL FA

ID: 2623704 • Letter: M

Question

MANY INVESTORS ARE WORRIED THAT THE CREDIT RATING OF U.S. TREASURY BONDS WILL FALL. IF THAT HAPPENS, THE REQUIRED RETURN (YIELD) OF U.S. TREASURY BONDS WILL ______ AND THEIR PRICES WILL ______.

FALL; RISE

RISE; RISE

FALL; FALL

RISE; FALL

THE FIN 301 CORPORATION HAS NET INCOME OF $2,000,000, PAID PREFERRED STOCK DIVIDENDS OF $200,000 AND PAID COMMON STOCK DIVIDENDS OF $500,000. IF THE COMMON STOCK HAS A PRICE OF $150 PER SHARE WITH 60,000 SHARES OUTSTANDING, ITS PRICE TO EARNINGS RATIO MUST BE _______?

4

5

6

3

GIVEN SOME POSITIVE RATE OF INTEREST, WHICH OF THE FOLLOWING WILL BE TRUE?

I.    PRESENT VALUES WILL EXCEED FUTURE VALUES
II.   FUTURE VALUES WILL EXCEED PRESENT VALUES
III. THE FUTURE VALUE OF AN ANNUITY WILL ALWAYS EXCEED THE
      PRESENT VALUE OF THAT SAME ANNUITY
IV. THE NOMINAL RATE OF INTEREST WILL EXCEED THE EFFECTIVE
      ANNUAL RATE OF INTEREST

I AND IV

I ONLY

II AND III

IV ONLY

WHICH OF THE FOLLOWING IS TRUE FOR PROJECT A IF ITS NET PRESENT VALUE IS $100,000 WHEN A DISCOUNT RATE OF 10% IS USED?

I.    THE PROJECT'S IRR IS HIGHER THAN 10%
II.   THE PROJECT'S IRR IS LESS THAN 10%
III.   THE PROJECT'S PAYBACK PERIOD MUST BE MORE THAN 5 YEARS
IV. THE PROJECT'S PROFITABILITY INDEX IS GREATER THAN 1
V.   THE PROJECT'S PROFITABILITY INDEX IS LESS THAN 1.

I AND IV

II, III AND V

III ONLY

II ONLY

A MONTHLY ANNUITY PAID OVER 30 YEARS HAS A FUTURE VALE OF $1,373,242.74 WHEN THE INTEREST RATE IS 14%. THE EQUAL MONTHLY PAYMENTS MUST BE ________.

$300

$200

$225

$250

YOU DECIDE TO SAVE $5,000 PER YEAR FOR THE NEXT 50 YEARS WITH THE FIRST PAYMENT TO OCCUR AT THE END OF THIS YEAR. IF THE INTEREST RATE ON YOUR SAVINGS IS 2%, HOW MUCH WILL YOU HAVE IN 50 YEARS?

$397,183.28

$422,897.01

$538,297.17

$292,371.31

SUPPOSE YOU PLAN TO SAVE $500 PER MONTH FOR YOUR RETIREMENT IN 40 YEARS. ASSUMING YOU EARN AN AVERAGE ANNUAL RATE OF RETURN OF 10% PER YEAR, HOW MUCH MORE WILL YOU HAVE IF YOU START INVESTING NOW RATHER THAN TEN YEARS FROM NOW?

$4,297,149.27

$251,938.27

$1,297,391.37

$2,031,795.83

RETAINED EARNINGS IS A SOURCE OF CASH THE FIRM CAN USE FOR SUCH PURPOSES AS PAYING EMPLOYEES AND MAKING DIVIDEND PAYMENTS TO SHAREHOLDERS.

True

False

AFTER FORTY YEARS OF WORK, YOU ARE FINALLY READY TO RETIRE. YOU WOULD LIKE TO USE PART OF YOUR SAVINGS TO PURCHASE AN ANNUITY FROM THE GAMECOCK INSURANCE COMPANY THAT WILL PAY YOU $6,000 PER MONTH FOR THE NEXT THIRTY YEARS. WHAT IS THE MOST YOU WOULD BE WILLING TO PAY FOR THIS ANNUITY IF ITS REQUIRED RATE OF RETURN IS 5%?

$3,302,185.27

$1,117,689.70

$2,003,927.18

$5,207,959.41

SUPPOSE YOU PLAN TO INVEST $200 PER MONTH FOR THE NEXT 40 YEARS. HOW MUCH MORE WILL YOU HAVE IN 40 YEARS IF YOU INVEST TO EARN 12% RATHER THAN 10%?

$36,196.25

$64,899.77

$929,174.52

$1,088,138.59

WHAT AVERAGE ANNUAL RATE OF RETURN WOULD YOU NEED TO EARN TO TRIPLE YOUR MONEY IN 10 YEARS?

11.61%

15.94%

28.61%

12.32%

ALL OTHER THINGS REMAINING THE SAME, AS A STOCK'S BETA RISES, ITS REQUIRED RETURN _______ AND ITS PRICE _______.

RISES; RISES

FALLS; FALLS

RISES; FALLS

FALLS; RISES

FALL; RISE

RISE; RISE

FALL; FALL

RISE; FALL

Explanation / Answer

1.       MANY INVESTORS ARE WORRIED THAT THE CREDIT RATING OF U.S. TREASURY BONDS WILL FALL. IF THAT HAPPENS, THE REQUIRED RETURN (YIELD) OF U.S. TREASURY BONDS WILL ______ AND THEIR PRICES WILL ______.

FALL; RISE

RISE; RISE

FALL; FALL

RISE; FALL

1.       THE FIN 301 CORPORATION HAS NET INCOME OF $2,000,000, PAID PREFERRED STOCK DIVIDENDS OF $200,000 AND PAID COMMON STOCK DIVIDENDS OF $500,000. IF THE COMMON STOCK HAS A PRICE OF $150 PER SHARE WITH 60,000 SHARES OUTSTANDING, ITS PRICE TO EARNINGS RATIO MUST BE _______?

4

5

6

3

1.       GIVEN SOME POSITIVE RATE OF INTEREST, WHICH OF THE FOLLOWING WILL BE TRUE?

I.    PRESENT VALUES WILL EXCEED FUTURE VALUES
II.   FUTURE VALUES WILL EXCEED PRESENT VALUES
III. THE FUTURE VALUE OF AN ANNUITY WILL ALWAYS EXCEED THE
      PRESENT VALUE OF THAT SAME ANNUITY
IV. THE NOMINAL RATE OF INTEREST WILL EXCEED THE EFFECTIVE
      ANNUAL RATE OF INTEREST

I AND IV

I ONLY

II AND III

IV ONLY

1.       WHICH OF THE FOLLOWING IS TRUE FOR PROJECT A IF ITS NET PRESENT VALUE IS $100,000 WHEN A DISCOUNT RATE OF 10% IS USED?

I.    THE PROJECT'S IRR IS HIGHER THAN 10%
II.   THE PROJECT'S IRR IS LESS THAN 10%
III.   THE PROJECT'S PAYBACK PERIOD MUST BE MORE THAN 5 YEARS
IV. THE PROJECT'S PROFITABILITY INDEX IS GREATER THAN 1
V.   THE PROJECT'S PROFITABILITY INDEX IS LESS THAN 1.

I AND IV

II, III AND V

III ONLY

II ONLY

1.       A MONTHLY ANNUITY PAID OVER 30 YEARS HAS A FUTURE VALE OF $1,373,242.74 WHEN THE INTEREST RATE IS 14%. THE EQUAL MONTHLY PAYMENTS MUST BE ________.

$300

$200

$225

$250

1.       YOU DECIDE TO SAVE $5,000 PER YEAR FOR THE NEXT 50 YEARS WITH THE FIRST PAYMENT TO OCCUR AT THE END OF THIS YEAR. IF THE INTEREST RATE ON YOUR SAVINGS IS 2%, HOW MUCH WILL YOU HAVE IN 50 YEARS?

$397,183.28

$422,897.01

$538,297.17

$292,371.31

1.       SUPPOSE YOU PLAN TO SAVE $500 PER MONTH FOR YOUR RETIREMENT IN 40 YEARS. ASSUMING YOU EARN AN AVERAGE ANNUAL RATE OF RETURN OF 10% PER YEAR, HOW MUCH MORE WILL YOU HAVE IF YOU START INVESTING NOW RATHER THAN TEN YEARS FROM NOW?

$4,297,149.27

$251,938.27

$1,297,391.37

$2,031,795.83

1.       RETAINED EARNINGS IS A SOURCE OF CASH THE FIRM CAN USE FOR SUCH PURPOSES AS PAYING EMPLOYEES AND MAKING DIVIDEND PAYMENTS TO SHAREHOLDERS.

True

False

1.       AFTER FORTY YEARS OF WORK, YOU ARE FINALLY READY TO RETIRE. YOU WOULD LIKE TO USE PART OF YOUR SAVINGS TO PURCHASE AN ANNUITY FROM THE GAMECOCK INSURANCE COMPANY THAT WILL PAY YOU $6,000 PER MONTH FOR THE NEXT THIRTY YEARS. WHAT IS THE MOST YOU WOULD BE WILLING TO PAY FOR THIS ANNUITY IF ITS REQUIRED RATE OF RETURN IS 5%?

$3,302,185.27

$1,117,689.70

$2,003,927.18

$5,207,959.41

1.       SUPPOSE YOU PLAN TO INVEST $200 PER MONTH FOR THE NEXT 40 YEARS. HOW MUCH MORE WILL YOU HAVE IN 40 YEARS IF YOU INVEST TO EARN 12% RATHER THAN 10%?

$36,196.25

$64,899.77

$929,174.52

$1,088,138.59

1.       WHAT AVERAGE ANNUAL RATE OF RETURN WOULD YOU NEED TO EARN TO TRIPLE YOUR MONEY IN 10 YEARS?

11.61%

15.94%

28.61%

12.32%

1.       ALL OTHER THINGS REMAINING THE SAME, AS A STOCK'S BETA RISES, ITS REQUIRED RETURN _______ AND ITS PRICE _______.

RISES; RISES

FALLS; FALLS

RISES; FALLS

FALLS; RISES

Finance

FALL; RISE

RISE; RISE

FALL; FALL

RISE; FALL