Fin 325, 9/10/2020 QUIZ 1—in class version
30 pts. total
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True/False (2 points for each question, 6 questions, 12 points total)
Indicate whether the sentence or statement is true (write “T” below) or false (“F”). Choose “A” on your iClicker for True responses and “B” for False responses.
Question Block 1 Cash flow (1 of the 5 following questions, drawn at random)
increase in dividends paid
decrease in inventory
decrease in A/P (accounts payable)
increase in A/R (accounts receivable)
increase in accrued wages
Question Block 2 Duration (1 of the 2 following questions, drawn at random)
The following Excel formula will properly calculate the Present Value of the annuity displayed in this spreadsheet: =(B4/B5)*(1-1/(1+B5)^B6)
It is very likely that Team Central had a much lower gross profit percentage than all of the other teams and that was the main reason it had such a large loss.
If actual inflation is less than expected inflation, then–considering only their mortgages–homeowners will be better off due to their paying of a lower real interest rate.
Multiple Choice (3 points for each question, 6 questions, 18 points total)
Identify the letter of the choice that best completes the statement or answers the question. For numerical problems, choose the response closest to the number you calculate.
Question Block–Delayed Perpetuity (1 of the 2 following questions, drawn at random)
a. | 5,500 | d. | 5,800 |
b. | 5,600 | e. | 5,900 |
c. | 5,700 |
a. | 5,200 | d. | 5,500 |
b. | 5,300 | e. | 5,600 |
c. | 5,400 |
a. | “S” corporation | d. | Limited partnership |
b. | Limited liability company | e. | All of these organizational forms avoid double taxation. |
c. | “C” corporation |
a. | If the bond trades at a discount, an investor who s the bond will expect to earn a return both from receiving the coupons and from receiving a face value that exceeds the price paid for the bond. | d. | At any point in time, changes in market interest rates affect a bond’s yield to maturity and its price. |
b. | A coupon bond trades at a discount when its yield is less than its coupon rate. | e. | All of the other responses are TRUE. |
c. | Most coupon bond issuers choose a coupon rate so that the bonds will initially trade at, or very near to, par. |
A global pandemic hits and your landlord gives you a two-month grace period on each of the remaining 12 payments. The first payment, otherwise due today, is now due 2 months from now. Each of the 12 lease payments can now be paid 2 months later.
Using a 12% APR (i.e. 1% per month) what is the change in present value of the cost of the lease due to the more favorable terms. (Hint: the present value of the lease will decrease, so the change will be a negative number.)
a. | -$400 | d. | -$700 |
b. | -$500 | e. | -$800 |
c. | -$600 |
a. | $8,000 | d. | $11,000 |
b. | $9,000 | e. | $12,000 |
c. | $10,000 |
a. | $27.50 | d. | $25.00 |
b. | $30.00 | e. | $35.00 |
c. | $32.50 |
Finance 325, Fa 20, Quiz 1
Answer Section
TRUE/FALSE
A higher coupon rate returns a greater percentage of the bond’s present value earlier than bonds with lower coupon rates.
PTS: 1
A higher coupon rate returns a greater percentage of the bond’s present value earlier than bonds with lower coupon rates.
PTS: 1
PV = (PMT/r)*(1-1/(1+r)^N)
PMT is in B4
r is in B5
N is in B6
Also see Holden Ch. 2 spreadsheet.
PTS: 1
If g = r, then all the terms of the perpetuity have the same present value and then you are adding up the present values of an infinite number of such terms and that would give you an infinite present value.
If g>r, then you have the same situation only it’s worse as the present values of each of the terms are getting larger. Also makes no economic sense.
If g<r, then the present value of each successive term is getting smaller. This enables the infinite sum of these decreasingly-small present values to add up to a single number. (In math terms that is called “convergence.”)
PTS: 1
Team Central had no inventory remaining, i.e. they sold out. They would have very likely sold out had their price been $20/unit higher at $90, to take a simple example.
With a $20 higher price, they would have generated ($20/unit)(333,333 units) $6.67M more gross profit.
PTS: 1
Homeowners will be worse off with lower inflation.
Keep in mind that in other areas of their life, homeowners may be hurt by inflation. For example, if their wages do not increase as quickly as inflation then their real income will fall. So the total net impact of changes in inflation should consider these effects.
PTS: 1
MULTIPLE CHOICE
PV_2010 = (1193248.20/0.08)*(1-1/1.08^25) = $12.737M
PV_2000 = $12.737M/1.08^10 = $5.9M
From ESPN: “The Mets famously bought out the final year of Bobby Bonilla’s contract in January 2000 and deferred the $5.9 million deal into 25 payments of $1,193,248.20 that began in 2011 and end in 2035. By deferring, Bonilla turned the $5.9 million into $29.8 million after negotiating an 8 percent interest rate on the deferral.”
Of course, there is some risk to Bonilla that the Mets will default before 2035. But so far so good.
PTS: 1
PV2 = 400 / 0.06 = 6667
PV0 = 6667 / (1.06)^2 = 5933
PTS: 1
PV2 = 400 / 0.06 = 6667
PV0 = 6667 / (1.06)^4 = 5281
PTS: 1
MFL 3A, #5
PTS: 1
Regular lease terms:
PV = $3K plus an 11-month annuity of $3k/month.
PV = 3 + (3/0.01)(1-1/1.01^11) = 34.102K
Alternatively, find the PV of an annuity due:
PV = 1.01*((3/0.01)(1-1/1.01^12)) = $34.102K
Delayed lease terms:
Simply discount the PV of the regular lease terms by 2 months
PV = 34.102K/1.01^2 = 33.430
Change in PV = $33,430 – $34,102 = -$671
PTS: 1
FV = 100K
PV = 100K/1.03^10 = 74.409
You will make 10 annuity payments having a PV of 74.409K. Need to solve for the payment:
74.409K = (PMT/0.03)(1 – 1/1.03^10)
PMT = 8.723K = $8,723
PTS: 1
This is a delayed, growing perpetuity. At t=5, the value is $3.00/(0.09 – 0.03) = $50.00. Discounting that by five years gives
$50.00 / 1.09^5 = $32.50.
PTS
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