# Mba 505 – The Bonds Issued By Jensen & Son Bear A 6 Percent Coupon,

Question 1The bonds issued by Jensen &, Son bear a 6 percent coupon, payable semiannually. The bond matures in8 years and has a $1,000 face value. Currently, the bond sells at par. What is the yield to maturity?A. 5. 87 percentB. 5. 97 percentC. 6. 00 percentD. 6. 09 percentE. 6. 17 percent2 pointsQuestion 2A General Co. bond has an 8 percent coupon and pays interest annually. The face value is $1,000 and thecurrent market price is $1,020. 50. The bond matures in 20 years. What is the yield to maturity?A. 7. 79 percentB. 7. 82 percentC. 8. 00 percentD. 8. 04 percentE. 8. 12 percent2 pointsQuestion 3Winston Enterprises has a 15-year bond issue outstanding that pays a 9 percent coupon. The bond iscurrently priced at $894. 60 and has a par value of $1,000. Interest is paid semiannually. What is the yieldto maturity?A. 8. 67 percentB. 10. 13 percentC. 10. 16 percentD. 10. 40 percentE. 10. 45 percent2 pointsQuestion 4Wine and Roses, Inc. offers a 7 percent coupon bond with semiannual payments and a yield to maturityof 7. 73 percent. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?A. $953. 28B. $953. 88C. $1,108. 16D. $1,401. 26E. $1,401. 862 pointsQuestion 5Your firm offers a 10-year, zero coupon bond. The yield to maturity is 8. 8 percent. What is the currentmarket price of a $1,000 face value bond?A. $473. 26B. $430. 24C. $835. 56D. $919. 12E. $1,088. 002 pointsQuestion 6You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months(semiannual). If your nominal annual required rate of return is 10 percent with semiannual payments,how much should you be willing to pay for this bond?A. $ 826. 31B. $1,086. 15C. $ 957. 50D. $1,431. 49E. $1,124. 622 pointsQuestion 7The Seattle Corporation has been presented with an investment opportunity which will yield end-of-yearcash flows as follows: Years 1 through 4$30,000 per yearYears 5 through 9$35,000 per yearYear 10$40,000 per yearThis investment will cost the firm $150,000 today, and the firm’s cost of capital is 10 percent. What isthe NPV for this investment?A. $135,984B. $ 18,023C. $219,045D. $ 51,138E. $ 92,1462 pointsQuestion 8Your firm wants to save $250,000 to buy some new equipment three years from now. The plan is to setaside an equal amount of money on the first day of each year starting today. The firm can earn a 4. 7percent rate of return. How much does the firm have to save each year to achieve their goal?A. $75,966. 14B. $76,896. 16C. $78,004. 67D. $81. 414. 14E. $83,333. 332 pointsQuestion 9Your great-aunt left you an inheritance in the form of a trust. The trust agreement states that you are toreceive $2,500 on the first day of each year, starting immediately and continuing for fifty years. What isthe value of this inheritance today if the applicable discount rate is 6. 35 percent?A. $36,811. 30B. $37,557. 52C. $39,204. 04D. $39,942. 42E. $40,006. 092 pointsQuestion 10Your car dealer is willing to lease you a new car for $299 a month for 60 months. Payments are due onthe first day of each month starting with the day you sign the lease contract. If your cost of money is 4. 9percent, what is the current value of the lease?A. $15,882. 75B. $15,906. 14C. $15,947. 61D. $16,235. 42E. $16,289. 542 pointsQuestion 11Toni adds $3,000 to her savings on the first day of each year. Tim adds $3,000 to his savings on the lastday of each year. They both earn a 9 percent rate of return. What is the difference in their savingsaccount balances at the end of thirty years?A. $35,822. 73B. $36,803. 03C. $38,911. 21D. $39,803. 04E. $40,115. 312 pointsQuestion 12You borrow $149,000 to buy a house. The mortgage rate is 7. 5 percent and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much totalinterest will you pay?A. $138,086B. $218,161C. $226,059D. $287,086E. $375,0592 pointsQuestion 13Marko, Inc. is considering the purchase of ABC Co. Marko believes that ABC Co. can generate cash flowsof $5,000, $9,000, and $15,000 over the next three years, respectively. After that time, they feel thebusiness will be worthless. Marko has determined that a 14 percent rate of return is applicable to thispotential purchase. What is Marko willing to pay today to buy ABC Co. ?A. $19,201. 76B. $21,435. 74C. $23,457. 96D. $27,808. 17E. $31,758. 002 pointsQuestion 14You have some property for sale and have received two offers. The first offer is for $189,000 today incash. The second offer is the payment of $100,000 today and an additional $100,000 two years fromtoday. If the applicable discount rate is 8. 75 percent, which offer should you accept and why?A. You should accept the $189,000 today because it has the higher net present value. B. You should accept the $189,000 today because it has the lower future value. C. You should accept the second offer because you will receive $200,000 total. D. You should accept the second offer because you will receive an extra $11,000. E. You should accept the second offer because it has a present value of $194,555. 42. 2 pointsQuestion 15On August 1, you borrow $160,000 to buy a house. The mortgage rate is 7. 5 percent. The loan is to berepaid in equal monthly payments over 15 years. The first payment is due on September 1. How much ofthe third payment applies to the principle balance?A. $483. 22B. $486. 24C. $489. 28D. $492. 30E. $495. 322 pointsQuestion 16On December 1, you borrow $210,000 to buy a house. The mortgage rate is 8. 25 percent. The loan is tobe repaid in equal monthly payments over 20 years. The first payment is due on January 1. Which one ofthe following statements is true assuming that you repay the loan as agreed?A. The total amount paid is about $429,442. B. The monthly payment is $2,037. 30. C. The total interest paid is $278,952. D. The monthly interest rate is . 75 percent. E. The first payment reduces the principle balance by $1,443. 75. 2 pointsQuestion 17What is the net present value of a project that has an initial cash outflow of $12,670 and the followingcash inflows? The required return is 11. 5 percent. YearCash Inflows12$8,7504B. $768. 20$3A. $370. 16$4,375$4,1000C. $218. 68D. $1,249. 65E. $1,371. 022 pointsQuestion 18You are considering two mutually exclusive projects with the following cash flows. Will your choicebetween the two projects differ if the required rate of return is 8 percent rather than 11 percent? If so,what should you do?YearProject AProject B0-$240,000-$198,0001$2$3$325,00000$110,800$ 82,500$ 45,000A. yes, Select A at 8 percent and B at 11 percent. B. yes, Select B at 8 percent and A at 11 percent. C. yes, Select A at 8 percent and select neither at 11 percent. D. no, Regardless of the required rate, project A always has the higher NPV. E. no, Regardless of the required rate, project B always has the higher NPV. 2 pointsQuestion 19It will cost $2,600 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for threeyears. After the three years, the cart is expected to be worthless as that is the expected remaining life ofthe cooling system. What is the payback period of the ice cream cart?A. . 86 yearsB. 1. 46 yearsC. 1. 86 yearsD. 2. 46 yearsE. 2. 86 years2 pointsQuestion 20Yancy is considering a project which will produce cash inflows of $900 a year for 4 years. The project hasa 9 percent required rate of return and an initial cost of $2,800. What is the discounted payback period?A. 3. 11 yearsB. 3. 18 yearsC. 3. 82 yearsD. 4. 18 yearsE. never2 pointsQuestion 21Braun Industries is considering an investment project which has the following cash flows: Year0Cash Flow-$1,0001400230035004400The company’s cost of funds is 10 percent. What is the project’s payback, internal rate of return, and netpresent value?A. Payback = 2. 4, IRR = 10. 00%, NPV = $600. B. Payback = 2. 4, IRR = 21. 22%, NPV = $260. C. Payback = 2. 6, IRR = 21. 22%, NPV = $300. D. Payback = 2. 6, IRR = 21. 22%, NPV = $260. E. Payback = 2. 6, IRR = 24. 12%, NPV = $300. 2 pointsQuestion 22As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusiveprojects with the following net cash flows: Project X Project ZYear0Cash Flow Cash Flow-$100,000 -$100,000150,00010,000240,00030,000330,00040,000410,00060,000If Denver’s cost of capital is 15 percent, which project would you choose?A. Neither project. B. Project X, since it has the higher IRR. C. Project Z, since it has the higher NPV. D. Project X, since it has the higher NPV. E. Project Z, since it has the higher IRR. 2 pointsQuestion 23Two projects being considered are mutually exclusive and have the following projected cash flows: Project A Project BYear Cash Flow Cash Flow0-$50,000115,625-$50,0000215,6250315,6250415,6250515,62599,500If the required rate of return on these projects is 10 percent, which would be chosen and why?A. Project B because it has the higher NPV. B. Project B because it has the higher IRR. C. Project A because it has the higher NPV. D. Project A because it has the higher IRR. E. Neither, because both have IRRs less than the cost of capital. 2 pointsQuestion 24Use this information for the next 3 questions: Lugar Industries is considering an investment in a new machine with the following information: Machine cost225,000Setup cost25,000Salvage value50,000Life5 yearsNet operating expense savings: End of Year 1$ 50,000End of Year 2$ 90,000End of Year 3$110,000End of Year 4$120,000End of Year 5$120,000WACC10%Tax rate40%Assumed value of the machineat end of 5 years is$50,000If Lugar buys the machine, calculate the following answers. Remember to include the impact ofdepreciation, taxes, and salvage value. Calculate the NPV. You need to take into account depreciation, taxes and salvage value into accountwhen calculating this problem. Round you answer to the nearest whole number. Do not use $, commas,or decimal points)1089527 pointsQuestion 25Based on the above information, calculate the IRR. Round you answer to the nearest two decimalplaces. Do not use %) (For example, 34. 4550% would be entered as 34. 46. 23. 717 pointsQuestion 26Based on your calculations, should Lugar buy the machine?YesNo2 pointsQuestion 27Lucinda Diamanti is 10 years old today (August 15th) and while all she’s interested in is her new bike, herparents Mr. &, Mrs. Diamanti are considering how they will pay for her college education beginning in 8years. They decide to set up a meeting with their financial adviser Cindy Morgan to discuss an educationsavings plan. During the meeting, the Diamanti’s inform Cindy that they have $8,000 they can use tobegin the savings plan, and from what they can determine, Lucinda will require 4 years to complete herundergraduate degree in molecular biology. Cindy consults a reputable college reference to see thattuition costs are currently estimated at $32,000 per year and are expected to grow at 4% each year forthe foreseeable future. The Diamanti’s are concerned that they won’t have enough money and ask Cindyhow to make sure they have enough to completely pay for Lucinda’s undergraduate education. TheDiamanti’s inform Cindy that they want to make deposits into the education savings plan on an annualbasis until Lucinda’s first year in college at which point they will stop making contributions. Cindy tellsthem they can earn 8% annual interest on their savings plan. Your job to answer the following twoquestions (You may assume there are 8 years between today and the beginning of Lucinda’s first day incollege): Assuming the estimates on tuition costs are correct, how much money needs to be in the account whenLucinda begins college in 8 years to fund 4 years of college? Round your answer to a whole number. (No$ signs, commas, or decimal points)1656837 pointsQuestion 28How much money do the Diamanti’s need to deposit annually in order to reach their goal to fundLucinda’s education fully? Remember that the Diamanti’s have $8,000 to invest today. Round youranswer to a whole number. (No $ signs, commas, or decimal points)141857 pointsQuestion 29Please use the following facts to analyze this nest two questions: Assume you just received a bill for services you and have the following two payment options: Option 1: Pay the entire bill of $600 nowOrOption 2: Pay: $130 nowAnd$130 for each of the next 4 monthsWhat annual interest rate (APR) are you paying if you choose Option 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do not use $, commas or %. For example, 25. 34%would be entered as 25. 34. 50. 046 pointsQuestion 30What Effective Annual Rate are you paying if you choose Option 2? Assume monthly compounding. Round you answer to the nearest two decimal points. Do not use $, commas or %. For example, 25. 34%would be entered as 25. 34. 63. 276 pointsQuestion 31Please use the following facts to analyze the next two questions: Facts and Assumptions: Lease Term in Months24Lease Down Payment$500. 00Monthly Lease Payments$300. 00Sales Tax Rate8%Lease Buyout at End$ 15,000. 00Title Fee$Car Loan Market Rate7%Outright Purchase Price BeforeTax and Title$ 19,500. 0025. 00What is the NPV of the lease? Round you answer to the nearest whole number. Do not use $, commas,or decimal points and enter as a positive number. For example, -$34,567. 50 would be entered as 34568. 8396 pointsQuestion 32What would it cost you to buy the car today if you were paying cash? Round you answer to the nearestwhole number. Do not use $, commas, or decimal points and enter as a positive number. For example,$34,567. 50 would be entered as 34568. 21085