Problems 1. What is the value of the following investments in the future? (show your work): a) $6,900 invested for 5 years at 16% compounded quarterly? b) $3,500 invested for 7 years at 8% compounded semi-annually? c) $50 invested for 1year at 12% compounded monthly? d) $22,000 invested for 5 years at 5% compounded annually? e) How long will it take to double your investment if the interest rate is 3%? 15pts 2. Answer the following: a) Suppose you were considering 3 credit card offers all of which charge 8.99% interest; WSFS Bank compounds annually, Sovereign Bank compounds monthly and PNC Bank compounds daily. Which card should you accept (all things being equal)? Why? 4pts b) If you made your first annual contribution of $12,000 in January 2020 to your retirement account, and assuming you will earn a return of 8% annually (compounded annually), what will your retirement account be worth when your retire in 40 years? 4pts c) The local Buffalo Wild Wings is considering borrowing $75,000 from PNC Bank at 9% compounded annually to purchase some new equipment. This loan will have to be repaid in equal annual installments at the end of each year over the next 10 years. How much will Buffalo have to pay back each year? 4pts d) Jason Mollett has the following choices: • He can be offered $2,900 today, • or $11,000 at the end of 12 years, • or $15,533 at the end of 13 years. Assuming that the interest rate is 11%, which offer should he accept? Why? 8pts 3. Suppose you plan to invest $50,000 in a portfolio with a beta of no more than 1.4 and an expected return of 12.4%. Fat Brands Inc, has a beta of 1.2 and an expected return of 11.2%, and Shake Shack has a beta of 1.8 and an expected return of 14.8%. The risk-free rate of return is 4%. How much money will you invest in Fat Brands and how much in Shake Shack? 5pts 4. Assume you’ve recently purchased a home for $129,000 and you will be making monthly payments on the mortgage. If the mortgage is for 30 years at an interest rate of 5%, what will be the monthly payment? For the first monthly payment, how much will go towards interest payment and how much will go towards repayment of the principal? Show your work. 5pts 5. M&T Bank pays 7% simple interest on its savings account balances, while Citizens Bank pays 7% interest compounded annually. If you made a $5,400 deposit in each bank, how much more money would you earn from your Citizens Bank account at the end of 9 years? 5pts 6. a) Southwest Airlines has a beta of 1.13, the S&P 500 return is 11% and the risk-free rate of return is 5.2%. What should the expected return be? 4pts b) Texas Roadhouse’s beta is 0.27. If the T-bill rate is 5.5% and the company’s expected return is 13.5%, what is the S&P 500 return? 4pts c) A stock has an expected return of 14%, a beta of 1.45 and a market return of 11.5%. What is the risk-free rate of return? 4pts d) Chipotle Mexican Grill has a beta of 2.1 and an actual return of 20.51%. If the riskfree rate is 6% and the market risk premium is 8%, is the stock over-priced, under-priced or correctly priced? 4pts e) Waste Management Company has 20,000,000 shares of common stock outstanding, its net income is $51,750,000, and its P/E is 8. What is the company's stock price? What is its dividend payout ratio if it paid $0.90 per share? 4pts 7. Classify the following events as creating mostly systematic risk or creating mostly unsystematic risk: 5pts a) Oil prices unexpectedly decline. b) The Federal Reserve increases short-term interest rates. c) Wyndham Hotels loses a multi-million dollar racial discrimination lawsuit. d) A U.S. Supreme Court decision substantially broadens manufacturer liability for injuries suffered by product users. e) JP Morgan Chase has decided to raise the interest rate on short-term borrowing for Chipotle Mexican Grill restaurant chain. Multiple Choice (2 pts each) 8. The Timothy’s Bar and Grill has requested a loan from Citizens Bank to pay for a new set of furniture in its dining room in Wilmington. The loan is for $25,000 for 7 years at 6% interest. What will be the annual payment on the loan (to the nearest dollar)? a) b) c) d) e) $5185 $7317 $6886 $4478 $4800 9. Waste Management Corporation has 1,000,000 shares of common stock outstanding, its net income is $1,750,000, and its P/E is 8. What is the company's stock price? a) b) c) d) e) $14.00 $ 9.90 $17.60 $20.00 $11.00 10. What is the future sum of $11,000 to be deposited at PNC Bank for 5 years at an annual interest of 10% if it is compounded quarterly (to nearest dollar)? a) b) c) d) e) $18716 $18106 $17518 $19237 $17058 11. Bruster’s Ice Cream had sales of $995,500 last year, its operating costs were $450,778, and its interest charges were $49,025. What was Bruster’s times interest earned (TIE) ratio? a) b) c) d) e) 12.29 10.42 9.55 8.68 11.11 12. What is the role of the stock exchange in the U.S. financial markets? a) b) c) d) e) Provide liquidity Ensure fair security prices Provide capital to corporations All of the above B and C only 13. What is the future value of $21,000 invested for 5 years at 6% compounded semiannually? a) b) c) d) e) $29,500 $24,350 $26,802 $25,913 $28,222 14. How many years will it take $100 to grow to $298 if invested at 20% compounded annually? a) b) c) d) e) 2 years 4 years 6 years 8 years 10 years 15. If your grandmother’s estate will pay you $280 a year for 7 years, at an interest rate of 6%, what will the present value of these payments? a) b) c) d) e) $1444 $1608 $1398 $1563 $1700 16. When the economy is in a recession, the following tools are available to the government to revive the economy by managing the supply of money, a) buy more bonds from commercial banks b) lower the federal funds rate and federal discount rate c) raise the reserve requirement d) A and B only e) A, B and C 17. The following policies are used by any government to manage its economy, a) monetary policy b) quantitative easing policy c) fiscal policy d) A and C only e) A, B and C Short essays (10 points each). At least half a page per essay. 18. Explain the 3 roles that the stock exchanges play. 19. Explain the two laws that regulate the stock market in the U.S. and why they are important. What is illegal insider trading and why is it prohibited?
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