Sample Problems for Mid-term Financial Management S. Yoon 1.

What is the value today of a 15-year annuity that pays $800 a year? Assume that the annuitys first payment occurs at the end of year 6. The annual interest is 9 percent for years 1 through 5, and 12 percent thereafter. (1) $48,018.00 (2) $38,118.23 (3) $12,600.00 (4) $95,000.00 2. A 5-year annuity of ten $10,000 semiannual payments will begin 8 years from now, with the first payment coming 8.5 years from now. If the discount rate is 11 percent compounded monthly, what is the current value of the annuity? (1) $53,940.69 (2) $74,917.08 (3) $32,508.51 (4) $31,199.15

3. You want to lease a set of golf clubs from Pings Ltd. The lease contract is in the form of 24 equal monthly payments at a 10.25 percent stated annual interest rate, compounded monthly. Since the clubs cost $3,000 retail, Pings wants the PV of the lease payments to equal $3,000. Suppose that your first payment is due immediately. What will your monthly lease payments be? (1) $137.61 (2) $125.00 (3) $138.78 (4) $130.00

4. A Japanese company has a bond outstanding that sells for 87 percent of its 100,000 par value. The bond has a coupon rate of 5.4 percent paid annually and matures in 21 years. What is the yield to maturity of this bond? (1) 7.04% (2) 6% (3) 5.72% (4) 6.56%

5. Say you own an asset that had a total return last year of 14.1 percent. If the inflation rate last year was 6.8 percent, what was your real return? (1) 2.33% (2) 20.9% (3) 6.84% (4) 7%

6. Hacker Software has 7.4 percent coupon bonds on the market with 9 years to maturity. The bonds make semiannual payments and currently sell for 96 percent of par. What is the current yield on the bonds? (1) 8.03% (2) 4.016% (3) 7.71% (4) 8.19%

7. Argos Corp. has 9 percent coupon bonds making annual payments with a YTM of 7.81 percent. The current yield on these bonds is 8.42 percent. How many years do these bonds have left until they mature? (1) 9 years (2) 8 years (3) 7 years (4) 6 years

8. Suppose that today you buy a 9 percent annual coupon bond for $1,140. The bond has 10 years to maturity. What rate of return do you expect to earn on your investment? (1) 3.24% (2) 9% (3) 4.5% (4) 7%

9. White Wedding Corporation will pay a $3.05 per share dividend next year. The company pledges to increase its dividend by 5.25 percent per year, indefinitely. If you require an 11 percent return on your investment, how much will you pay for the companys stock today? (1) $27.73 (2) $53.04 (3) $3.05 (4) $30.50

10. Hughes Co. is growing quickly. Dividends are expected to grow at a 25 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 12 percent and the company just paid a $2.40 dividend, what is the current share price? (1) $80.40 (2) $100.31 (3) $51.36 (4) $40.20