** You should show your steps and comment upon required questions:

1. Which one of the following indicates a project has an internal rate of return that exceeds its required return? Comment on your answer a. a positive NPV b. a payback period that exceeds the required period c. a PI less than 1.0 d. a positive accounting rate of return e. an AAR that is less than the required rate

2. Which of the following can generally be found in a bond's indenture agreement? Comment on your answer I. description of any loan collateral II. call provisions III. total amount of the bond issue IV. protective covenants a. I and II only b. II and III only c. I, III, and IV only d. II, III, and IV only e. I, II, III, and IV only

3. Which of the following are generally structured as annuity payments? Comment on your answer I. weekly grocery bill II. repayment of auto loan III. car repairs IV. monthly rent a. I only b. II only c. I and III only d. II and IV only e. I, II, and IV only

4. You are considering the following two mutually exclusive projects. The required return on each project is 11 percent. Which project should you accept and what is the best reason for that decision? Show your steps a. Project A; because it pays back faster b. Project A; because it has the higher profitability index c. Project B; because it has the higher profitability index d. Project A; because it has the higher net present value e. Ill select both projects; because they have positive net present value

5. One year ago, Auto Land issued 10-year bonds at par. The bonds have a coupon rate of 6.5 percent and pay interest annually. Today, the market rate of interest on these bonds is 6.25 percent. How does today's price of this bond compare to the issue price? Show your steps a. 1.82 percent lower b. 1.68 percent lower c. .25 percent higher d. 1.68 percent higher e. 1.82 percent higher

6. Capello's Deli traditionally pays an annual dividend of $1.65 per share. The firm is projecting dividends of $1.80 and $2.05 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.25 a share. What is the maximum amount you are willing to pay for one share of this stock if your required return is 10 percent? Show your steps a. $19.87 b. $20.29 c. $21.93 d. $23.73 e. $24.12

7. The Plush Toy Co. is considering a new toy that will produce the following cash flows. Should the company produce this toy based on its internal rate of return if the required return is 10 percent? Show your steps a. yes; the project's rate of return is 11.90 percent b. yes; the project's rate of return is 21.03 percent c. no; the project's internal rate of return is 8.23 percent d. no; the project's rate of return is 9.48 percent e. The project's rate of return cannot be determined as the cash flows are unconventional

8. The condominium at the beach that you want to buy costs $249,500. You plan to make a cash down payment of 20 percent and finance the balance over 10 years at 6.75 percent. What will be the amount of your monthly mortgage payment? Show your steps a. $2,291.89 b. $2,809.10 c. $3,287.46 d. $3,412.67 e. $4,145.68

9. A net present value of zero implies that an investment: Comment on your answer a. has no initial cost. b. has an expected return that is less than the required return. c. should be rejected even if the discount rate is lowered. d. never pays back its initial cost. e. is earning a return that exactly matches the requirement.

10. Which one of the following is an ordinary annuity, but not a perpetuity? Comment on your answer a. $75 paid at the beginning of each monthly period for one year b. $125 paid at the end of each monthly period for an infinite period of time c. $430 paid at the beginning of every quarter for five years, starting today d. $550 paid every year for ten years, starting today e. $110 paid weekly for one year, starting one week from today

11. A premium bond has a: Comment on your answer I. market price equal to the face value. II. market price that exceeds the face value. III. yield to maturity that exceeds the coupon rate. IV. yield to maturity that is less than the coupon rate. a. I only b. I and III only c. II and III only d. I and IV only e. II and IV only

12. The common stock of Carter & Sons is selling for $29 a share and has a 17 percent rate of return. The growth rate of the dividends is 12 percent annually. What is the amount of the current dividend? Show your steps a. $1.38 b. $1.45 c. $1.29 d. $4.25 e. $4.34

13. Which of the following affect the current price of a stock? Comment on your answer I. dividend growth rate II. required return III. dividend paid this year IV. expected dividend next year a. I and III only b. II and IV only c. I, II, and IV only d. II, III, and IV only e. I, II, III, and IV

14. You want to save $75 a month for the next 15 years and hope to earn an average rate of return of 14 percent. How much more will you have at the end of the 15 years if you invest your money at the beginning of each month rather than the end of each month? Show your steps a. $0 b. $514.29 c. $530.06 d. $562.50 e. $1,125.00

15. The Electrical Engineering Company is considering a new project that will require an initial cash investment of $575,000. The project will produce no cash flows for the first three years. The projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000, $136,000, and $145,000, respectively. How long will it take the firm to recover its initial investment in this project? Show your steps a. 5.81 years b. 6.05 years c. 6.96 years d. 7.90 years e. This project never pays back

16. Sander's Supplies has paid a constant dividend of $2.15 a share for the past 20 years. Yesterday, the firm announced that the dividend will increase next year by 5 percent and will stay at the level for three years, after which time the dividends will increase by 4 percent annually. The required return on this stock is 9 percent. What is the current value per share? Show your steps a. $41.97 b. $43.49 c. $48.82 d. $54.07 e. $56.42

17. Which type of loan is comparable to the present value of a future lump sum? Comment on your answer a. effective annual rate b. amortized c. interest-only d. annual percentage e. pure discount

18. Preferred stock: Comment on your answer I. generally has a fixed dividend. II. generally has a dividend that increases annually. III. receives preference in bankruptcy over bonds. IV. receives preference in bankruptcy over common stock. a. I only b. I and III only c. I and IV only d. II and III only e. II and IV only

19. Square Industries does not expect to pay any dividends for the next three years. Four years from now, the firm hopes to pay $.60 a share and double that amount each year for the following three years. After that, the dividend is expected to increase in value by 3 percent annually. What is the value of this stock today if the required return is 12 percent? Show your steps a. $27.13 b. $29.30 c. $30.38 d. $31.76 e. $32.81

20. Roger just financed some new furniture through his credit union. His loan requires payments of $185 a month for 3 years. Assuming that all payments are paid timely, his last payment will pay off the loan in full. What type of loan does Roger have? Comment on your answer a. amortized b. perpetual c. pure discount d. lump sum e. interest-only

State whether the following statements are true or false and comment on both (10 marks):

1. When comparing loans of equal amounts and equal time periods, you should select the loan that has the lowest quoted rate.
2. Scott borrowed $1,800 today. The loan agreement requires him to repay $2,120 in one lump sum payment one year from now. This type of loan is referred to as pure-discount loan.
3. A call provision in a bond agreement grants the issuer the right to buy back the bonds on the open market prior to maturity.
4. The primary purpose of bond covenants is to protect the lender.
5. The dividend growth rate is referred to as the market rate.
6. The security that represents the residual ownership of a firm and has no priority in bankruptcy is called callable bond.
7. Julie owns a stock with a market price of $43 per share. This stock pays a constant annual dividend of $1.34 a share. If the price of the stock suddenly falls to $31 a share, you would expect the capital gain yield to fall.
8. If by accepting one investment you eliminate the option of another investment, you are dealing with conventional cashflows.
9. Payback is the preferred method of analyzing a proposed investment.
10. The lowest rating a bond can receive from Standard & Poor's and still be classified as investment grade is Baa.