MANAGERIAL FINANCE: FIN 350
Spring Semester 2019
Problems Include:
Chapter Five: Time Value of Money
Chapter Six: Interest Rates and Bond Valuation
Chapter Seven: Stock Valuation
Name: __________________________________
Instructions: You may complete it by typing in the answers of your choice into the Microsoft
Word file containing this Assignment. Then, save this file. Thank you!
A. TRUE / FALSE QUESTIONS
Enter “True” or “False” on the blank preceding each question.
______ 1. An “annuity” is a series of equal, periodic payments that has a specified end-point
or conclusion.
______ 2. The “future value” technique uses a process called “discounting” to calculate the
future value of each cash flow at the end of an investment’s life.
______ 3. An “ordinary (i.e., deferred) annuity” has cash flows that occur at the beginning of
each time period.
______ 4. An “annuity due” will always have a greater value than an otherwise equivalent
“ordinary annuity,” because interest will compound for an additional time period on
the “annuity due.”
______ 5. Compounding interest more frequently than once per year results in a higher
“effective annual rate” (EAR) for an investor.
______ 6. When the inflation rate in the economy increases, the level of interest rates
in the economy generally declines.
______ 7. A downward sloping yield curve (i.e., an “inverted” or “abnormal” yield curve)
is often a sign that the economy is weakening.
______ 8. The conversion feature of a convertible bond allows the bondholder to exchange
the bond for a specified number of shares of common stock.
______ 9. Most corporate bonds are purchased and held by individual investors.
______ 10. Rising interest rates in the economy reduce the market value of outstanding bonds.
1
______ 11. Holders of debt instruments, such as bonds, have a voice in the management of the
corporation, as they are given one vote for each bond held.
______ 12. Interest which a corporation pays to bondholders is not tax-deductible on the
firm’s Income Statement.
______ 13. Common stock is a “permanent” form of financing for a corporation, as it has
no specified “maturity date.”
______ 14. The par value of a common stock share is generally low (i.e., $1.00 or less) and
is specified in the firm’s Corporate Charter.
______ 15. Payment of dividends to common shareholders is determined solely by the
corporation’s Chief Executive Officer (CEO).
______ 16. The dividend paid to preferred stockholders varies from year to year and is set by
the corporation’s Board of Directors.
B. MULTIPLE CHOICE QUESTIONS
For each question, enter the letter of the best response on the blank preceding the question.
______ 17. “Time value of money” problems can be solved using
A.
B.
C.
D.
E.
F.
mathematical formulas.
interest factor tables.
a “financial” calculator with built-in “time value of money” functions.
a spreadsheet program, such as Microsoft Excel.
A and B and C and D.
A and B and C.
______ 18. The interest rate used to calculate the “present value” today of an amount expected
at a future point in time may be labelled as each of the following EXCEPT
A.
B.
C.
D.
opportunity cost.
inflation rate.
required return.
cost of capital.
______ 19. With a “perpetuity,” the periodic cash flow stream continues
A. only one year.
B. only 10 years.
C. only 30 years.
D. forever (i.e., indefinitely).
______ 20. The contractual interest rate specified in a loan agreement between a lender
2
and a borrower is the
A.
B.
C.
D.
nominal annual rate.
effective annual rate (EAR).
Weighted Average Cost of Capital (WACC).
inflation rate.
______ 21. A loan amortization schedule breaks the loan payment into its two components,
which are
A.
B.
C.
D.
Sales; Net Income.
Assets; Liabilities.
Operations; Financing.
Principal; Interest.
______ 22. In general, the highest risk and the highest return often result from securities that
A.
B.
C.
D.
E.
are issued by firms that have a high risk of default.
have long-term maturities with unfavorable contract provisions.
are issued by the U.S. government.
A and B and C.
A and B.
______ 23. For a bond, the _______________ is multiplied by the bond’s par or face value
to calculate the interest payment (PMT) that must be paid to the bondholder
periodically over the life of the bond.
A.
B.
C.
D.
nominal interest rate
effective annual rate (EAR)
coupon interest rate
inflation rate
______ 24. A “yield curve” graphically shows the relationship between ________________
and ____________________ for outstanding debt securities at a given
point in time.
A. time to maturity; the percentage yield
B. debt; equity
C. the inflation rate; effective annual rate (EAR)
D. the inflation rate; the unemployment rate
______ 25. _________________ are(is) a long-term debt instrument used by businesses and
government to raise large sums of money from investors.
A. Commercial paper
B. Marketable securities
C. Bonds
3
D. Common stock
______ 26. Most bonds have the following characteristic(s):
A. They pay interest semi-annually (i.e., every six months) at a stated coupon
interest rate.
B. They have an initial maturity of 10 to 30 years.
C. They have a par value of $1,000 that must be repaid at maturity.
D. They are required to pay dividends every third year to the bondholders.
E. A and B and C and D.
F. A and B and C.
______ 27. Common stockholders expect to be compensated for their investment via
A.
B.
C.
D.
E.
dividend payments.
a capital gain when the investor sells the stock shares he or she owns.
interest payments.
A and B and C.
A and B.
______ 28. The common stock of a corporation can be
A. privately owned by an individual.
B. closely owned by a small group of investors, such as a family.
C. publicly owned by a broad group of investors when traded on a
stock exchange.
D. A and B and C.
______ 29. The _______________ right allows a corporation’s current common
shareholders to maintain their proportionate ownership in the firm
when the firm issues new shares of common stock.
A.
B.
C.
D.
preemptive
maintenance
absolute
non-negotiable
______ 30. Preferred stock is often referred to as a __________________ security,
as preferred stock has characteristics of both common stock and bonds.
A.
B.
C.
D.
non-conforming
hybrid
disjointed
outmoded
4
______ 31. Most public offerings of common stock are made with the assistance of
an investment banker which
A. “underwrites” the security issue by purchasing the stock shares from
the issuing corporation at an agreed-upon price.
B. bears the risk of selling the stock shares to the public at a profit.
C. requires representation on the Board of Directors of the corporation
that is issuing the stock.
D. A and B and C.
E. A and B.
______ 32. Each of the following is a variable that is included in the “constant growth
stock model” EXCEPT
A.
B.
C.
D.
the required rate of return (rs).
the next expected dividend (D1).
the constant annual dividend growth rate (g).
the risk-free rate of return (RF).
C. CALCULATION SECTION
Instructions: In this section, please show all calculations. Partial credit will be given
wherever possible, when your calculations are shown and they are completed correctly.
33. Peter and Amy Chambers have saved $2,500. They are accumulating funds for a
down payment on a house. If they can invest these funds at 5% annual interest
for 6 years, how much money will they have accumulated at the end of this five-year
time-frame?
34. Janice is hoping to save $400,000 by the time she retires in 25 years. How much must
Janice deposit annually at the end of each year to reach this retirement goal on
December 31, Year 25, assuming she can earn a 8% annual rate of return on her
retirement account?
35—37. Assume that you have saved $5,000 to invest today. At an annual interest rate of 6%,
how much money will you have accumulated at the conclusion of each of the following
time-frames?
a. 5 years:
5
b. 10 years:
c. 15 years:
38. Angela has a trust fund that will mature in three years with a value of $25,000. If this
trust fund is earning a 4% rate of return annually, what is the value of this trust fund
in today’s dollars (i.e., the trust fund’s present value)?
39. Bill is the owner of an ordinary annuity that will pay him $10,000 at the end of each of the
next four years. This annuity has an annual rate of return of 9%. Given this information,
what is the present value today of this annuity?
40.—42. Crown Enterprises recently issued a bond that has a $1,000 face or par value. This
bond has a coupon interest rate of 6% and has a life of 8 years. If interest is paid annually on
this bond, calculate the market value today at t = 0 of this bond, assuming a required return for
this bond of 5%.
6
a. Now, assume that the required return on this bond increases to 8%. Assume also that the
bond pays interest semi-annually, rather than annually. Given this new information,
calculate the market value of this bond today at t = 0.
43. Home and Hardware, Inc. recently issued a bond with a $20,000 par or face value. The bond
has a six-year life and a coupon interest rate of 4%. Assume that the required return on the
market for this bond is 10%. Given this information, calculate the market value of this bond
today. The bond pays interest annually.
44. Family Foods, Inc. has a preferred stock issue outstanding that has a par value per share of
$65.00. This preferred stock pays an annual divided that is 8% of its par value. Calculate the
annual dividend paid per share on this preferred stock.
45.—46. Milford Masonry, Inc. expects to pay a dividend per share of $1.50 next year on its
common stock. The firm has enjoyed a 3% annual growth rate over the past decade. If you can
earn an 8% rate of return on other investments having similar risk, how much would you be
willing to pay per share for Milford Masonry’s stock?
7
a. Now, assume that you can only earn 5% on similar-risk investments. How much
would you now be willing to pay for Milford Masonry’s stock?
47.—48. Urban Utilities, Inc. has an outstanding common stock that is not growing. The firm
has been paying an annual $3 dividend each year. No growth in this dividend payment is
expected for the foreseeable future. Investors require an annual 10% rate of return on this stock,
due to its risk level. Given this information, calculate the market value per share of this firm’s
outstanding common stock.
a. Now, assume that a large competitor enters the market, taking 15% of Urban
Utilities’ market share. With this increase in risk, investors now require a 12%
annual rate of return on Urban Utilities common stock. Given this information,
calculate the market value per share of Urban Utilities’ common stock.
49.—50. John Adams borrowed $25,000 at a 6% annual interest rate for a vehicle purchase
from First State Bank. This loan is to be repaid over a three-year time-frame. The loan will be
amortized in three equal, end-of-year payments.
a. Calculate the annual, end-of-year loan payment that John will make each year.
b. Calculate the amount of “Interest Expense” that will be paid in the first year that this
loan is outstanding.
8
MANAGERIAL FINANCE: FIN 350
Spring Semester 2019
Problems Include:
Chapter Five: Time Value of Money
Chapter Six: Interest Rates and Bond Valuation
Chapter Seven: Stock Valuation
Name: __________________________________
Instructions: You may complete it by typing in the answers of your choice into the Microsoft
Word file containing this Assignment. Then, save this file. Thank you!
A. TRUE / FALSE QUESTIONS
Enter “True” or “False” on the blank preceding each question.
______ 1. An “annuity” is a series of equal, periodic payments that has a specified end-point
or conclusion.
______ 2. The “future value” technique uses a process called “discounting” to calculate the
future value of each cash flow at the end of an investment’s life.
______ 3. An “ordinary (i.e., deferred) annuity” has cash flows that occur at the beginning of
each time period.
______ 4. An “annuity due” will always have a greater value than an otherwise equivalent
“ordinary annuity,” because interest will compound for an additional time period on
the “annuity due.”
______ 5. Compounding interest more frequently than once per year results in a higher
“effective annual rate” (EAR) for an investor.
______ 6. When the inflation rate in the economy increases, the level of interest rates
in the economy generally declines.
______ 7. A downward sloping yield curve (i.e., an “inverted” or “abnormal” yield curve)
is often a sign that the economy is weakening.
______ 8. The conversion feature of a convertible bond allows the bondholder to exchange
the bond for a specified number of shares of common stock.
______ 9. Most corporate bonds are purchased and held by individual investors.
______ 10. Rising interest rates in the economy reduce the market value of outstanding bonds.
1
______ 11. Holders of debt instruments, such as bonds, have a voice in the management of the
corporation, as they are given one vote for each bond held.
______ 12. Interest which a corporation pays to bondholders is not tax-deductible on the
firm’s Income Statement.
______ 13. Common stock is a “permanent” form of financing for a corporation, as it has
no specified “maturity date.”
______ 14. The par value of a common stock share is generally low (i.e., $1.00 or less) and
is specified in the firm’s Corporate Charter.
______ 15. Payment of dividends to common shareholders is determined solely by the
corporation’s Chief Executive Officer (CEO).
______ 16. The dividend paid to preferred stockholders varies from year to year and is set by
the corporation’s Board of Directors.
B. MULTIPLE CHOICE QUESTIONS
For each question, enter the letter of the best response on the blank preceding the question.
______ 17. “Time value of money” problems can be solved using
A.
B.
C.
D.
E.
F.
mathematical formulas.
interest factor tables.
a “financial” calculator with built-in “time value of money” functions.
a spreadsheet program, such as Microsoft Excel.
A and B and C and D.
A and B and C.
______ 18. The interest rate used to calculate the “present value” today of an amount expected
at a future point in time may be labelled as each of the following EXCEPT
A.
B.
C.
D.
opportunity cost.
inflation rate.
required return.
cost of capital.
______ 19. With a “perpetuity,” the periodic cash flow stream continues
A. only one year.
B. only 10 years.
C. only 30 years.
D. forever (i.e., indefinitely).
______ 20. The contractual interest rate specified in a loan agreement between a lender
2
and a borrower is the
A.
B.
C.
D.
nominal annual rate.
effective annual rate (EAR).
Weighted Average Cost of Capital (WACC).
inflation rate.
______ 21. A loan amortization schedule breaks the loan payment into its two components,
which are
A.
B.
C.
D.
Sales; Net Income.
Assets; Liabilities.
Operations; Financing.
Principal; Interest.
______ 22. In general, the highest risk and the highest return often result from securities that
A.
B.
C.
D.
E.
are issued by firms that have a high risk of default.
have long-term maturities with unfavorable contract provisions.
are issued by the U.S. government.
A and B and C.
A and B.
______ 23. For a bond, the _______________ is multiplied by the bond’s par or face value
to calculate the interest payment (PMT) that must be paid to the bondholder
periodically over the life of the bond.
A.
B.
C.
D.
nominal interest rate
effective annual rate (EAR)
coupon interest rate
inflation rate
______ 24. A “yield curve” graphically shows the relationship between ________________
and ____________________ for outstanding debt securities at a given
point in time.
A. time to maturity; the percentage yield
B. debt; equity
C. the inflation rate; effective annual rate (EAR)
D. the inflation rate; the unemployment rate
______ 25. _________________ are(is) a long-term debt instrument used by businesses and
government to raise large sums of money from investors.
A. Commercial paper
B. Marketable securities
C. Bonds
3
D. Common stock
______ 26. Most bonds have the following characteristic(s):
A. They pay interest semi-annually (i.e., every six months) at a stated coupon
interest rate.
B. They have an initial maturity of 10 to 30 years.
C. They have a par value of $1,000 that must be repaid at maturity.
D. They are required to pay dividends every third year to the bondholders.
E. A and B and C and D.
F. A and B and C.
______ 27. Common stockholders expect to be compensated for their investment via
A.
B.
C.
D.
E.
dividend payments.
a capital gain when the investor sells the stock shares he or she owns.
interest payments.
A and B and C.
A and B.
______ 28. The common stock of a corporation can be
A. privately owned by an individual.
B. closely owned by a small group of investors, such as a family.
C. publicly owned by a broad group of investors when traded on a
stock exchange.
D. A and B and C.
______ 29. The _______________ right allows a corporation’s current common
shareholders to maintain their proportionate ownership in the firm
when the firm issues new shares of common stock.
A.
B.
C.
D.
preemptive
maintenance
absolute
non-negotiable
______ 30. Preferred stock is often referred to as a __________________ security,
as preferred stock has characteristics of both common stock and bonds.
A.
B.
C.
D.
non-conforming
hybrid
disjointed
outmoded
4
______ 31. Most public offerings of common stock are made with the assistance of
an investment banker which
A. “underwrites” the security issue by purchasing the stock shares from
the issuing corporation at an agreed-upon price.
B. bears the risk of selling the stock shares to the public at a profit.
C. requires representation on the Board of Directors of the corporation
that is issuing the stock.
D. A and B and C.
E. A and B.
______ 32. Each of the following is a variable that is included in the “constant growth
stock model” EXCEPT
A.
B.
C.
D.
the required rate of return (rs).
the next expected dividend (D1).
the constant annual dividend growth rate (g).
the risk-free rate of return (RF).
C. CALCULATION SECTION
Instructions: In this section, please show all calculations. Partial credit will be given
wherever possible, when your calculations are shown and they are completed correctly.
33. Peter and Amy Chambers have saved $2,500. They are accumulating funds for a
down payment on a house. If they can invest these funds at 5% annual interest
for 6 years, how much money will they have accumulated at the end of this five-year
time-frame?
34. Janice is hoping to save $400,000 by the time she retires in 25 years. How much must
Janice deposit annually at the end of each year to reach this retirement goal on
December 31, Year 25, assuming she can earn a 8% annual rate of return on her
retirement account?
35—37. Assume that you have saved $5,000 to invest today. At an annual interest rate of 6%,
how much money will you have accumulated at the conclusion of each of the following
time-frames?
a. 5 years:
5
b. 10 years:
c. 15 years:
38. Angela has a trust fund that will mature in three years with a value of $25,000. If this
trust fund is earning a 4% rate of return annually, what is the value of this trust fund
in today’s dollars (i.e., the trust fund’s present value)?
39. Bill is the owner of an ordinary annuity that will pay him $10,000 at the end of each of the
next four years. This annuity has an annual rate of return of 9%. Given this information,
what is the present value today of this annuity?
40.—42. Crown Enterprises recently issued a bond that has a $1,000 face or par value. This
bond has a coupon interest rate of 6% and has a life of 8 years. If interest is paid annually on
this bon ...

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