FINANCE 301 Practice Exam Questions Solved
100% Correct | Verified Answers
Royce receives a $10,000 savings bond from his grandmother that matures in 8 years
when Royce turns 25. Royce's older brother, Ben, offers Royce $11,000 to purchase the
savings bond today, but Royce declines the offer. Assuming Royce made the correct
choice in refusing Ben's offer, what do you know about Royce's annual required return
(r) over the next 8 years? - ANSWER r < 0%
Royce received a $10,000 savings bond from his grandmother one year ago that
matures when Royce turns 25, seven years from now. Royce's older brother, Ben,
offered Royce $11,000 to purchase the savings bond a year ago, but Royce declined the
offer. Today, one year later, Ben offers to buy the savings bond from Royce for $10,500
and Royce accepts. Assuming Royce was correct to decline the offer a year ago and also
correct to accept the offer today, how has Royce's annual required return (r) changed
over the last year? - ANSWER r has increased
Lannie receives two annuities, A and B. She will deposit the money she receives from
each annuity in a separate bank account, both earning the same interest rate. Annuity A
begins in 2 years and pays Lannie $1,000 each year for 6 years. Annuity B begins in 5
years and pays Lannie $1,000 each year for 6 years. Which bank account will have more
money, A or B, at the time Lannie receives the last annuity payment for each respective
annuity and deposits it in the respective bank account? - ANSWER A = B
Peter is set to receive $X in two years and $Y in four years. If the interest rate is 0%,
which of the following is true about the present value (PV) of future cash flows X and Y?
- ANSWER PV = X + Y
Peter is set to receive $X in two years and $Y in four years. If the interest rate is
negative, which of the following is true about the present value (PV) of future cash flows
X and Y? - ANSWER PV > X + Y
,Lilly is evaluating a new car purchase. She is provided with two options by the
dealership: $3,000 cash back or 0% financing for 60 months on the $35,000 car that she
wants to buy. Lilly determines that the 0% financing with the dealership is the best
option, as her alternative choice is to borrow from the bank at 7.99% for a loan term
between 48 and 72 months. Prior to finalizing her choice, the dealership calls Lilly back
and tells her that the 0% financing is now only offered for a 72 month term. With this
new loan term, should Lilly reconsider her choice of the 0% financing? - ANSWER No, the
value of the 0% financing increases with the longer term
A business venture offers Dalton future cash flows of $M in three years and $P in seven
years. Assuming an interest rate of 10% throughout the entire time, Dalton will pay up
to $15,000 to receive these future cash flows. Assuming the same future cash flows $M
and $P, what will Dalton be willing to pay for these cash flows at an interest rate of
13%? - ANSWER Less than $15,000
Patrice borrowed $10,000 from the bank for a European vacation. She arranges to make
quarterly payments for each of the next three years (12 quarters) at an APR of 16%. All
else equal (APR, loan size and loan term), if the bank starts requiring monthly payments
instead of quarterly, what will happen to the size of each payment and the effective
annual rate (EAR) on the loan? - ANSWER Payments are smaller, EAR increases
Marci bought Bond M for $1,200 one year ago. The bond currently has six years to
maturity and has an annual coupon rate of 10%, making semi-annual coupon payments.
If the current price of the bond is $960, what do you know about Marci's rate of return
over the past year compared to the yield to maturity (YTM) of the bond today? -
ANSWER Rate of return < YTM today
Marci bought Bond M for $1,200 one year ago. The bond currently has six years to
maturity and has an annual coupon rate of 10%, making semi-annual coupon payments.
If the current price of the bond is $960, what do you know about Marci's current yield
compared to the yield to maturity (YTM) of the bond today? - ANSWER Current yield <
YTM
, Marci bought Bond M four years ago, when the market interest rate was 12% APR.
Today, the bond currently has eight years to maturity and has an annual coupon rate of
10%, making semi-annual coupon payments. If the current price of the bond is $1,140,
what do you know about the market interest today? - ANSWER Market interest rate <
10%
Marci bought Bond M four years ago, when the market interest rate was 12% APR.
Today, the bond currently has eight years to maturity and has an annual coupon rate of
10%, making semi-annual coupon payments. If the yield to maturity on the bond is
currently 8.5% APR, and assuming the bond is priced correctly, what do you know about
the price today? - ANSWER Price > $1,000
Marci bought Bond M four years ago, when the market interest rate was 12% APR.
Today, the bond currently has eight years to maturity and has an annual coupon rate of
10%, making semi-annual coupon payments. If the current yield on the bond is 10%
APR, and assuming the bond is priced correctly, what do you know about the price
today? - ANSWER Price = $1,000
Marci bought Bond M four years ago, at a price of $1,000. Today, the bond currently has
eight years to maturity and has an annual coupon rate of 6%, making semi-annual
coupon payments. If the yield to maturity on the bond is currently 8.5% APR, and
assuming the bond is priced correctly, how has the price changed from four years ago to
today? - ANSWER Price has decreased
Trent is considering buying shares of Armen Pharma Inc. Trent estimates that the
company will pay a $1.25 per share dividend next year, with a constant dividend growth
rate of 4%. Using the constant growth dividend discount model, Trent values the shares
at $32.50. If the shares currently sell in the market for $30.00, should Trent buy shares
of Armen? Why or why not? - ANSWER Yes, the shares are undervalued according to
Trent's calculations
Trent is considering buying shares of Armen Pharma Inc. Trent estimates that the
company will pay a $1.25 per share dividend next year, with a constant dividend growth
100% Correct | Verified Answers
Royce receives a $10,000 savings bond from his grandmother that matures in 8 years
when Royce turns 25. Royce's older brother, Ben, offers Royce $11,000 to purchase the
savings bond today, but Royce declines the offer. Assuming Royce made the correct
choice in refusing Ben's offer, what do you know about Royce's annual required return
(r) over the next 8 years? - ANSWER r < 0%
Royce received a $10,000 savings bond from his grandmother one year ago that
matures when Royce turns 25, seven years from now. Royce's older brother, Ben,
offered Royce $11,000 to purchase the savings bond a year ago, but Royce declined the
offer. Today, one year later, Ben offers to buy the savings bond from Royce for $10,500
and Royce accepts. Assuming Royce was correct to decline the offer a year ago and also
correct to accept the offer today, how has Royce's annual required return (r) changed
over the last year? - ANSWER r has increased
Lannie receives two annuities, A and B. She will deposit the money she receives from
each annuity in a separate bank account, both earning the same interest rate. Annuity A
begins in 2 years and pays Lannie $1,000 each year for 6 years. Annuity B begins in 5
years and pays Lannie $1,000 each year for 6 years. Which bank account will have more
money, A or B, at the time Lannie receives the last annuity payment for each respective
annuity and deposits it in the respective bank account? - ANSWER A = B
Peter is set to receive $X in two years and $Y in four years. If the interest rate is 0%,
which of the following is true about the present value (PV) of future cash flows X and Y?
- ANSWER PV = X + Y
Peter is set to receive $X in two years and $Y in four years. If the interest rate is
negative, which of the following is true about the present value (PV) of future cash flows
X and Y? - ANSWER PV > X + Y
,Lilly is evaluating a new car purchase. She is provided with two options by the
dealership: $3,000 cash back or 0% financing for 60 months on the $35,000 car that she
wants to buy. Lilly determines that the 0% financing with the dealership is the best
option, as her alternative choice is to borrow from the bank at 7.99% for a loan term
between 48 and 72 months. Prior to finalizing her choice, the dealership calls Lilly back
and tells her that the 0% financing is now only offered for a 72 month term. With this
new loan term, should Lilly reconsider her choice of the 0% financing? - ANSWER No, the
value of the 0% financing increases with the longer term
A business venture offers Dalton future cash flows of $M in three years and $P in seven
years. Assuming an interest rate of 10% throughout the entire time, Dalton will pay up
to $15,000 to receive these future cash flows. Assuming the same future cash flows $M
and $P, what will Dalton be willing to pay for these cash flows at an interest rate of
13%? - ANSWER Less than $15,000
Patrice borrowed $10,000 from the bank for a European vacation. She arranges to make
quarterly payments for each of the next three years (12 quarters) at an APR of 16%. All
else equal (APR, loan size and loan term), if the bank starts requiring monthly payments
instead of quarterly, what will happen to the size of each payment and the effective
annual rate (EAR) on the loan? - ANSWER Payments are smaller, EAR increases
Marci bought Bond M for $1,200 one year ago. The bond currently has six years to
maturity and has an annual coupon rate of 10%, making semi-annual coupon payments.
If the current price of the bond is $960, what do you know about Marci's rate of return
over the past year compared to the yield to maturity (YTM) of the bond today? -
ANSWER Rate of return < YTM today
Marci bought Bond M for $1,200 one year ago. The bond currently has six years to
maturity and has an annual coupon rate of 10%, making semi-annual coupon payments.
If the current price of the bond is $960, what do you know about Marci's current yield
compared to the yield to maturity (YTM) of the bond today? - ANSWER Current yield <
YTM
, Marci bought Bond M four years ago, when the market interest rate was 12% APR.
Today, the bond currently has eight years to maturity and has an annual coupon rate of
10%, making semi-annual coupon payments. If the current price of the bond is $1,140,
what do you know about the market interest today? - ANSWER Market interest rate <
10%
Marci bought Bond M four years ago, when the market interest rate was 12% APR.
Today, the bond currently has eight years to maturity and has an annual coupon rate of
10%, making semi-annual coupon payments. If the yield to maturity on the bond is
currently 8.5% APR, and assuming the bond is priced correctly, what do you know about
the price today? - ANSWER Price > $1,000
Marci bought Bond M four years ago, when the market interest rate was 12% APR.
Today, the bond currently has eight years to maturity and has an annual coupon rate of
10%, making semi-annual coupon payments. If the current yield on the bond is 10%
APR, and assuming the bond is priced correctly, what do you know about the price
today? - ANSWER Price = $1,000
Marci bought Bond M four years ago, at a price of $1,000. Today, the bond currently has
eight years to maturity and has an annual coupon rate of 6%, making semi-annual
coupon payments. If the yield to maturity on the bond is currently 8.5% APR, and
assuming the bond is priced correctly, how has the price changed from four years ago to
today? - ANSWER Price has decreased
Trent is considering buying shares of Armen Pharma Inc. Trent estimates that the
company will pay a $1.25 per share dividend next year, with a constant dividend growth
rate of 4%. Using the constant growth dividend discount model, Trent values the shares
at $32.50. If the shares currently sell in the market for $30.00, should Trent buy shares
of Armen? Why or why not? - ANSWER Yes, the shares are undervalued according to
Trent's calculations
Trent is considering buying shares of Armen Pharma Inc. Trent estimates that the
company will pay a $1.25 per share dividend next year, with a constant dividend growth
