Question 1

How did the instructor differentiate between investing versus speculating?

Group of answer choices

Investing is where there is a greater than 50% probability of receiving an excellent cash return; Speculating is where there is a lower than 50% probability of receiving an excellent cash return;

Investing is where there is a greater than 50% probability of receiving a fair/just cash return; Speculating is where there is a lower than 50% probability of receiving a fair/just cash return;

Investing is where there is a greater than 80% probability of receiving a fair/just cash return; Speculating is where there is a lower than 10% probability of receiving a fair/just cash return;

The instructor actually said there was no significant difference between investing and speculating.

Flag question: Question2

Why is it reasonable to assume $1.00 in excess cash/cash flow today can/should/will be more valuable in the future?

Group of answer choices

Because the U.S. federal government provides insurance to commercial banks to guarantee that all persons with a bank account will receive some kind of investment return on their cash balances.

We are assuming this only for theoretical/analytical purposes for illustrating basic investment principles.

Because there are thousands of investable assets available; most adults produce some amount of cash in excess of their total expenses; and, most adults invest in some kind of investable assets that earn a positive return.

It is not reasonable to assume $1.00 in excess cash/cash flow can/will be more valuable in the future because inflation causes the value of currency to depreciate.

Flag question:3

Elena Steelworks, Inc. (ESI) is planning to sell $40 million of preferred stock (with no maturity date) to Eastern Asset Management (EAM), a private equity investor. At first, EAM wanted a fixed dividend rate of 7.25%, which means it would receive each year $2.9 million in annual dividends from ESI forever. Today, EAM called ESI and said it wanted to make some changes to the deal; EAM said it wanted to receive initially $2.9 million in dividends in Year 1, but after the first year EAM wanted the cash dividends to grow by 2.5% per year. How can ESI respond to this change request?

Group of answer choices

It should say no because equity instruments cannot have a variable dividend.

It should require the total price of the preferred stock be increased to $55,238,095.24.

It should require the total price of the preferred stock be increased to $61,052,631.58.

It should require the dividend rate be increased each year sufficient to increase its dividend payments by 2.5% per year.

Flag question:4

Madison wants to retire in 35 years (i.e., at the end of the next 35 years). Beginning in the 36^th year, she wants to be able to have retirement income beginning in Year 36 and for all years thereafter equal to $350,000 per year. Her retirement income would come from the annual interest income from a portfolio of AAA-rated U.S. Treasury bonds, and she estimates U.S. Treasury bonds will earn an average of 5.50% per year at that time. How much will Madison need to save and invest each month if she can earn an average annual return of 13.80% in order to provide enough funds at the end of Year 35 to finance her retirement?

Group of answer choices

$ 865.63

$ 605.77

$ 712.54

$ 285.53

$ 387.44

Flag question: 5

As described in the textbook, when the Federal Reserve System in the U.S. is taking significant actions to increase economic growth, it may _____ the money supply by purchasing short-term securities. At the least, the initial impact of these purchases is to _____.

Group of answer choices

increase; increase interest rates.

decrease; increase interest rates.

increase; lower interest rates.

stabilize; stabilize interest rates.

Flag question: 6

As described in the textbook and the instructor: When consumers increase their savings rate, theoretically the cost of money will ___ because ____.

Group of answer choices

increase; the demand for goods/services will decrease, so the demand for loans will increase.

decrease; the supply of money available for lending/investing will increase.

decrease; the demand for money will decrease.

increase; the supply of money available for lending/investing will decrease.

Flag question: 7

Kerrville Development Inc. issued a long-term corporate bond with a fixed interest rate. When the chief financial officer of the company asked the investment banker (IB) what factors determined the interest rate, the IB said, The underlying nominal U.S. Treasury Bill rate is 3.25%, the default risk premium is 1.85%, the liquidity risk premium is 0.73%, and the maturity risk premium is 0.45%. The embedded inflation risk premium is 2.50%, so the real risk-free rate of interest is 0.75%. What is the interest rate on this corporate bond (based on the formula we studied in Chapter 6)?

Group of answer choices

8.78%

7.03%

4.43%

6.28%

7.00%