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Zuo-mba finance 614 > Course Packet Practice > Flashcards

Course Packet Practice Flashcards

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1
Q

América Móvil (a Mexican telecommunications corporation) had sales of $10,000 in 2022. The cost of goods sold was $6,500, general and administrative expenses were $1,000, and depreciation was $1,000. Assume the Mexican corporate income tax (CIT) rate is 28%.
What is Earnings before interest and taxes (EBIT)?
What is the unlevered net income?
What is the free cash flow?

A

ebit: $1,500
unlevered income: $1,080
free cash flow: $2,080

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2
Q

You have a choice between receiving $100 today or $110 one year from now. If interest rates are 6%, which should you choose? Focus on the method here rather than the answer.

A

Option 1: FV = 106
Option 2: PV = $103.77

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3
Q

Your daughter decides she is going to help save for her upcoming college expenses. She currently has $200 that she can invest for the next five years until she’s off to school. While it won’t put much of a dent in tuition, you appreciate the thought and are pleased to see your frugal values reflected in her. How much will she have saved from that $200 after five years if it is invested at an 8% interest rate compounded annually? What if interest is compounded quarterly? What does this imply about more frequent compounding if you are investing money? What if you were borrowing money?

A

5 years: $293.87
Quarterly: $297.18

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4
Q

Instead of just idly investing the $200, you encourage her to get a job at local supermarket. This way you expect her to be able to make three savings deposits and make an advanced tuition payment in year 4. What is the future value four years from now of the following deposits she will be able to make: $100 today, $300 in one year, and $600 in three years? Assume an 8% semi-annually compounded interest rate.

A

= $1,165.42

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5
Q

Your company is planning a new product that you expect to pull in the following cash flows: $1,200 received one year from now, $1,500 received two years from now and $2,000 received four years from now. What can you say this will add to shareholder value today if projects of similar risk are earning 10% compounded monthly?

A

A = 3658.22

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6
Q

You currently have $600,000 saved in your retirement account and you’re thinking about quitting your job. You want your account to grow to $900,000 in 8 years as you forecast that is when you will need to start drawing on it. You won’t make any further deposits. What is the rate of interest you must earn to achieve this if there is annual compounding?

A

5.199%

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7
Q

Suppose you plan to put $8,000 down on a car today and make payments of $4,000 in each of the next two years, which will pay off the car. If interest rates are 8%, what is the value of your car today?

A

$15,133.06

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8
Q

Suppose you are looking to purchase a share of preferred stock which offers $2.50 dividends each year, forever. If interest rates in the market for investments of similar risk are 4%, what price would you be willing to pay today for this stock?

A

$62.50

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9
Q

You have $500,000 today and can invest your funds at an annual interest rate of 9%. If you want to provide a scholarship to some worthy students with these funds, what will the scholarship payments be if they begin today?

A

41,284.40

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10
Q

Suppose you forecast the dividend one-year from now to be $3.00. The expected growth rate of dividends is 8% and the discount rate is 12%. What is the stock price today? How about in 5 years?

A

PV = $75
PV5= $110.2

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11
Q

How would things be different if you had a delayed perpetuity? For instance, what if the stock above does not start paying dividends until year 6? What would the value of the stock be today?

A

$42.56

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12
Q

What is the present value of a $100 perpetuity if interest rates are 10%?

A

1,000

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13
Q

Suppose you are looking to purchase a share of preferred stock which offers $2.50 dividends each year, forever. If interest rates in the market for investments of similar risk are 4%, what price would you be willing to pay today for this stock?

A

62.50

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14
Q

You invest $500,000 today at an annual interest rate of 9%. If you want to provide a scholarship that starts today, what will the scholarship payments be?

A

$41,284.40

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15
Q

A share of preferred stock that sells for $40 and pays $2 dividends forever is offering what rate of return?

A

5%

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16
Q

Suppose you win the lottery and they give you a choice between $1,000,000 and $C per year forever, with the first payment given immediately. At an annual interest rate of 8%, for what value of $C are you indifferent between the two choices?

A

$74,074.07

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17
Q

Example: Your revenue next year is expected to be $1000. You expect it to grow at 3% per year. If your discount rate is 7%, what is the present value of the perpetual stream of revenue?

A

25,000

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18
Q

If I pay Kavu Auto $4,000 in each of the next three years to pay off my car and interest rates are 10% annually, what is the value of the car today?

A

$9,947.41

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19
Q

In order to have enough breathing room at retirement, Tamika, a neurosurgeon, determines that she must receive $60,000 per year at the end of each year for 30 years. If Tamika can earn 8 percent compounded annually on her money during retirement, find the present value, or the amount that Tamika needs in her account at retirement.

A

$675,467

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20
Q

Rushi Liu qualifies for a Roth IRA and determines that she can invest $5,000 of after-tax money at the end of each year for the next 10 years. If her IRA can earn 6 percent compounded annually, how much will Rushi have in her account at the end of 10 years?

A

$65,903.97

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21
Q

You want to buy a car and it costs $15,000. The dealer will finance the car for you at an interest rate of 7.5%. You decide you want a five-year loan where payments will be due at the end of each month. What will your monthly payments be? What’s the difference, conceptually, between all of those payments you make and the $15,000 cost of the car?

A

$300.57

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22
Q

Your credit card has a minimum monthly payment of $40. The balance is $2000 and the APR is currently 18%. If you make the minimum payment every month, how many years until your credit card is paid off? Assume that your next payment is exactly 1 month from today.

A

7.76 Years

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23
Q

Happily imagine you have a trust fund left to you. Suppose you will receive payments of $10,000 for 10 years with the first payment being received 7 years from now. If interest rates are 6% annually, what is the present value of this payment stream?

A

$51,885.71

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24
Q

Suppose your company is deciding whether to lease a truck from a leasing company for six years. Payments are $8000 per year, beginning next year.

Alternatively, the company can buy a new truck for $40,000.

Assume the value of the truck is worthless after six years under both payment options. Which is preferred if the opportunity cost of capital is 7% annually?

What if the first payment must be made immediately instead of in one year? Does this change the decision to lease or buy?

A
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25
Q

What is the present value of a 30 year $1,500 annuity if interest rates are 12% annually?

A

$12,087.78

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26
Q

You purchase a new car that costs $25,000. You finance the car through the dealer who is charging you 2% interest with monthly compounding. What will your monthly payments be if you choose a 4 year loan?

A

$542.38

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27
Q

You want to purchase a new home and need to save money for a down payment. You would like to have $15,000 saved for this purpose and will deposit $800 monthly at an interest rate of 5%. How long will it take to save the money for the down payment?

A

1.51 Years

28
Q

If you save $200 every month for 2 years earning 2% interest how much will you end up with?

A

4,893.13

29
Q

You currently have $20,000 in credit card debt which is accruing monthly interest at a 15% annual rate. You would like to pay off this debt over the next 3 years. What monthly payments will you need to make to achieve this goal?

A

693.31

30
Q

Suppose you will receive payments of 5,000 for 8 years with the first payment being received 4 years from now. If interest rates are 6% annually, what is the present value of this payment stream?

A

$26,069.31

31
Q

Suppose you buy a condo that costs $125,000 and put a cash down payment of $25,000. What are your monthly payments if you finance condo over 30 years and the monthly interest rate is 1%?

A

$1,028.60

32
Q

In the U.S. in 2022, the interest rate on 1-year government borrowing was 3.9%. The inflation rate was 2.3%. Therefore, the real rate of interest was what?

A

= 1.564%
I can buy 1.564% more in goods and services

33
Q

Currently your student loans charge you 5.3% APR, compounded monthly. You have a $20,000 outstanding balance and you get an opportunity to consolidate. The offer is for 5.4% APR, compounded annually, there are no fees involved. Should you consolidate?

A

5.4% apr compounded annually is preferred

34
Q

If you are investing money, you want ______ interest rates and _______ frequent compounding.

A

If you are investing money, you want HIGH interest rates and MORE frequent compounding.

35
Q

If you are borrowing money you want _______ interest rates and ________ frequent compounding.

A

If you are borrowing money, you want LOW interest rates and LESS frequent compounding.

36
Q

A 7 year bond is issued today that has a coupon rate of 9%. The face value of the bond is $1,000. At the time of issue, the average market interest rate is 9%. Coupons are paid at the end of each year. What is the value of the bond today?

A

PV = $1,000

37
Q

You are considering the purchase of a 3-year, 10% coupon bond. The bond pays coupons annually. The discount rate for similar bonds is 8%. Par value is $1,000. What price are you willing to pay for the bond today?

A

$1051.54 Premium
10% > 8%

38
Q

You are considering the purchase of a 3-year, 10% coupon bond. The bond pays coupons semi-annually. The discount rate for similar bonds is 8% and there will be semi-annual compounding due to the semi-annual payments. Par value is $1,000. What price are you willing to pay for the bond?

A

A = $1052.42
m = 2 in steps 1 & 2

39
Q

You buy a 5 year 10% coupon bond which pays annual coupons. When you buy the bond, the market interest rate is 9%. You decide to sell the bond 1 year later when the market interest rate is 10%. Assume you received one coupon payment. What is your rate of return?

A

5.88%

40
Q

Why might interest rates vary among maturities?

A

1) Interest rates are expected to rise in the future

2) Lower prices paid for longer maturities because they are riskier

3) Purchasers value short-term bonds more than long-term bonds

41
Q

What should the price of a two-year, $1000 par, 9% coupon bond with annual coupons be? (The next coupon is due in one year.)

A

Approx. = $1019.41

42
Q

What happens to a bonds value when interest rates rise?

A

The bonds value decreases

43
Q

When is a bond priced at a discount? Premium? Par value?

A

Discount: A bond is priced at a discount when its market price is lower than its par value. This usually happens when the bond’s coupon rate is less than current market interest rates.

Premium: A bond is priced at a premium when its market price is higher than its par value. This occurs when the bond’s coupon rate is higher than current market interest rates.

Par Value: A bond is priced at its par value when its market price is exactly equal to its par value. This typically happens when the bond’s coupon rate is equal to current market interest rates.

44
Q

Which is riskier: short term or long term bonds?

A

Long Term Bonds

45
Q

What is the value of a 5 year 10% annual coupon bond if interest rates are 7%?

A

1123

46
Q

You buy an 8% coupon, 10-year maturity bond when its yield to maturity is 9%. A year later, the yield to maturity is 10%. What is your rate of return over the year?

A

$935.82
$884.82 END
Return 3.1%

47
Q

What are the advantages and disadvantages common stockholders face regarding their claim on residual income?

A

Advantages for Common Stockholders regarding Residual Income:

Unlimited Upside: Common stockholders are entitled to any residual income (profits) after all other financial obligations are met. If the company does well, this can result in substantial dividends or capital appreciation.

Voting Rights: Common stockholders often have the right to vote on corporate matters, including the distribution of residual income, giving them some control over the company’s financial decisions.

Disadvantages for Common Stockholders regarding Residual Income:

Last in Line: Common stockholders are last in the hierarchy to receive any form of payment. If a company faces financial trouble, creditors, bondholders, and preferred stockholders are paid before any residual income is distributed to common stockholders.

No Guarantee: There is no obligation for a company to distribute residual income to common stockholders. The board may decide to reinvest profits rather than pay dividends.

48
Q

What is the order of repayment in bankruptcy for preferred stockholders, bondholders, and common stockholders? What does this imply about the riskiness of each of these securities?

A

Order of Repayment in Bankruptcy:

Bondholders
Preferred Stockholders
Common Stockholders

Implications for Risk:

Bondholders: Least risky, paid first.
Preferred Stockholders: Moderate risk, paid second.
Common Stockholders: Most risky, paid last.

49
Q

When stock is sold on the primary market, who receives the cash from the sale? Who receives the cash from the sale when stock is sold on the secondary market?

A

Primary Market:

Cash goes to the issuing company.

Secondary Market:

Cash goes to the selling shareholder.

50
Q

Suppose you bought a stock one year ago for $5.00 per share and today its price per share is $6.00. During the year you received $0.75 in dividends. What was your return over this one year holding period?

A

.35

51
Q

One share of Lufthansa is selling today for $157. You expect it to pay a dividend of $2.50 over the next year, and you expect the stock to sell for $185 in one year. What is the stock’s expected rate of return over this one year holding period?

A

19.42

52
Q

You are evaluating Nike, Inc. stock and expect that it will pay a dividend of $1.00 over the next year. The price of the stock is expected to be $81.00 one year from now. Stocks of similar risk offer an expected return of 12%. What should the price of this stock be today?

A

73.21

53
Q

Suppose you chatted with your aunt who is a stock analyst and she told you her following expectations about Nike, Inc.:

Div1 = $1.00, Div2 = $1.24, Div3 = $1.54

P1 = $81 P3 = $98.67

And r = .12

Assuming you will only own the stock for one year, what is the value of the stock today (P0)?

Assuming you will own the stock for all three years, what is the value of the stock today (P0)?

A

73.21

And

54
Q

What would happen if a company paid out all of its earnings?

The stock would offer a perpetual stream of level cash flows where:

Div1 =Div2=Div3= . . . . =Divn

How would we value this?

A

Pv=c/r

55
Q

What is the value of a stock that pays annual dividends of $1.50 and has an expected rate of return of 12%?

A

12.50 stock price remains the same if dividend stays the same

56
Q

A company pays a $3.00 dividend in year 1. The growth rate of dividends going forward
will be 8%. What are our future dividends?

Given: Div1 = $3.00

A

Div2= 3.24
Div3=3.50
Div4=3.78

57
Q

Suppose you forecast the dividend one-year from now to be $3.00. The expected growth rate of dividends is 8% and the discount rate is 12%. What is the stock price today?

What will the stock price be in 5 years?

A

75

110.20

58
Q

Suppose the dividend at the end of the first year is expected to be $3.00. Dividends are expected to be $3.50 at the end of the second year. Also at the end of the second year, the company does not expect to grow. This indicates that the company will continue to pay a $3.50 dividend forever. The discount rate is 12%, what is the price of the stock today?

A

28.72

59
Q

Under what conditions would reinvesting make sense?

A
60
Q

Find Dividend 8 given Div 3 is $2.60 and dividends are growing at a constant rate of 3%.

A

3.01

61
Q

Suppose you forecast the dividend one-year from now to be $3.00. The expected growth rate of dividends is 8% and the discount rate is 12%. What is the stock price today?

A

75

62
Q

A company paid a $2 per share dividend yesterday (Div0). You expect the dividend to grow steadily at a rate of 3% per year. If the discount rate for the stock is 9%, what is the stock’s current price?

A

34.3

63
Q

What is the expected price of the stock from above in year 3?

A

37.51 Approx

64
Q

What is the value today of a stock that pays a dividend of $5.00 every year and has an expected rate of return of 10%? What is this stock’s value 10 years from now?

A

50 I 50

65
Q

What is the value today of a stock that will pay a dividend of $1.00 next year, $1.40 in two years, if its expected price in two years is $40 and it has a required rate of return of 6%?

A

37.79

66
Q

A company will pay the following dividends per share in the next three years respectively: $1.00, $1.20, and $1.60. After year 3 the company will grow its dividend at 2% for 5 years. Then, the company will maintain a constant dividend of $2.75 each year forever. If the required return on this stock is 12% what is the stock price today?

A

16.58

Zuo-mba finance 614 (8 decks)

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