Brandon Powell
FIN 534 Chapter 4
Question 1
Answer: C
A, D, and E can be ruled out as incorrect by simple reasoning. “B” is also incorrect because interest in the first year would be Loan amount × interest rate regardless of the life of the loan, so the interest payment would be identical for the first payment. Think about the situation where r = 0%, statement “C” is the "most logical guess." One could also set up an amortization schedule and change the numbers to confirm that only c is correct. Question 2

Answer: C
To solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is essentially a trial and error procedure that is easy with a computer or financial calculator but difficult otherwise. Question 3

Answer: D
Effect Annual Rate of Riverside Bank:
rR = (1 + (0.065 / 12)) ^ 12 = 1.067
Effective Annual rate of Midwest Bank
rM = (1 = (0.07 / 1)) ^ 1 = 1.07
Effective Annual Rate of Midwest Bank is higher by (1.07 – 1.067) 0.003 or 0.3%

Question 4
Answer: A
8 i (interest earned)
46 n (periods remaining)
-2500 pmt (payment made into the account each period)
0 PV (starting balance of account)
solve for FV
FV = $1,129,750.38

We can now use this value to solve backwards

8 i
41 n (only 41 more payments here)
0 PV (starting balance)
1,129,750.38 FV (ending value)
solve for pmt
pmt = 3,725.55 ~ 3,726

Question 5
Answer: D
They need to study:
14,500 * ((1.035)^8) + 14,500 * ((1.035)^9) + 14,500 * ((1.035)^10) + 14,500 * ((1.035)^11) = 80,479 Tuition of the beginning of t=8: 14,500 * ((1.035)^7) = 18,448.05 Tuition of the beginning of t=9: 14,500 * ((1.035)^8) = 19,093.73 Tuition of the beginning of t=9: 14,500 * ((1.035)^9) = 19,762.01 Tuition of the beginning of t=10: 14,500 * ((1.035)^10) = 20,453.68 Before study begins:

For accumulations they have: 1,500 * 1097^7 = 27,420.59
For regular additions: 5,000 * 1.09^7 + 5,000 * 1.09^6 +5,000...

...statements is CORRECT?
c. Stock repurchases can be used by a firm that wants to increase its debt ratio. Stock repurchases reduce the number of shares outstanding and are often accompanied by a stock price increase.
3. Which of the following statements is CORRECT?
e. If a firm’s stock price is quite high relative to most stocks—say $500 per share—then it can declare a stock split of say 10-for-1 so as to bring the price down to something close to $50. Moreover, if the price is relatively low—say $2 per share—then it can declare a ―reverse split‖ of say 1-for-25 so as to bring the price up to somewhere around $50 per share.
The stock price will decline and the quantity of shares outstanding will increase, the ratio does not matter.
4. Which of the following statements is CORRECT?
a. If a firm follows the residual dividend policy, then a sudden increase in the number of profitable projects is likely to reduce the firm’s dividend payout.
Large investment opportunities coupled with low funds will have a low dividend payout.
5. DeAngelo Corp.'s projected net income is $150.0 million, its target capital structure is 25% debt and 75% equity, and its target payout ratio is 65%. DeAngelo has more positive NPV projects than it can finance without issuing new stock, but its board of directors had decreed that it cannot issue any new shares in the foreseeable future. The CFO now wants to determine how the maximum capital budget would be affected by...

...FIN534 – HomeworkChapter4
Directions: Answer the following five questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points for this homework assignment.
1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?
a. The annual payments would be larger if the interest rate were lower.
b. If the loan were amortized over 10 years rather than 7 years, and if the interest rate were the same in either case, the first payment would include more dollars of interest under the 7-year amortization plan.
c. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower.
d. The last payment would have a higher proportion of interest than the first payment. e. The proportion of interest versus principal repayment would be the same for each of the 7 payments.
2. Which of the following statements is CORRECT?
a. If you have a series of cash flows, each of which is positive, you can solve for I, where the solution value of I causes the PV of the cash flows to equal the cash flow at Time 0.
b. If you have a series of cash flows, and CF0 is...

...FIN534 Midterm Exam 1
1. Of the following investments, which would have the lowest present value? Assume that the effective annual rate for all investments is the same and is greater than zero.
2. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would increase the calculated value of the investment?
3. Which of the following statements regarding a 20-year monthly payment amortized mortgage with a nominal interest rate of 10% is CORRECT?
4. Which of the following statements is CORRECT, assuming positive interest rates and holding other things constant?
5. You are considering two equally risky annuities, each of which pays $25,000 per year for 10 years. Investment ORD is an ordinary (or deferred) annuity, while Investment DUE is an annuity due. Which of the following statements is CORRECT?
6. Ellen now has $125. How much would she have after 8 years if she leaves it invested at 8.5% with annual compounding?
7. Which of the following statements is CORRECT?
8. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?
9. Which of the following statements is CORRECT?
10. Bonds A and B are 15-year, $1,000 face value bonds. Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both...

...HomeworkChapter4, Week 3
1. A $50,000 loan is to be amortized over 7 years, with annual end-of-year payments. Which of these statements is CORRECT?
C. The proportion of each payment that represents interest as opposed to repayment of principal would be lower if the interest rate were lower. If the interest rate is low on a loan, the amount of repayment is low.
2. Which of the following statements is CORRECT?
C. to solve for I, one must identify the value of I that causes the PV of the positive CFs to equal the absolute value of the PV of the negative CFs. This is, essentially, a trial-and-error procedure that is easy with a computer or financial calculator but quite difficult otherwise. I must say finding the PV (present value of money) seems to be much easier to me using a financial calculator, you just must learn how to put the correct information in the system.
3. Riverside Bank offers to lend you $50,000 at a nominal rate of 6.5%, compounded monthly. The loan (principal plus interest) must be repaid at the end of the year. Midwest Bank also offers to lend you the $50,000, but it will charge an annual rate of 7.0%, with no interest due until the end of the year. How much higher or lower is the effective annual rate charged by Midwest versus the rate charged by Riverside?
D. 0.30%
rM = (1 + (0.07/1))^1 = 1.07
(1.07 – 1.067) 0.003 or 0.3%
4. Steve and Ed are cousins who were both...

...FIN534 Week 3 HW Chapter 5
1. Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?
Answer: D. Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.
Explanation: Discount because As' return is lower than the one demanded by market. Price will increase because the smaller YTM the smaller discount (or bigger premium) for difference in bonds' and market returns.
2. Which of the following statements is CORRECT?
Answer: E. The actual life of a callable bond will always be equal to or less than the actual life of a noncallable bond with the same maturity. Therefore, if the yield curve is upward sloping, the required rate of return will be lower on the callable bond.
Explanation: A callable bond (also called redeemable bond) is a type of bond (debt security) that allows the issuer of the bond to retain the privilege of redeeming the bond at some point before the bond reaches its date of maturity. In other words, on the call date(s), the issuer has the right, but not the obligation, to buy back the bonds from the bond holders at a defined call price. Technically speaking, the bonds are...

...FIN534 Quiz 1 Week 1
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Question 1
You recently sold 100 shares of your new company, XYZ Corporation, to your brother at a family reunion. At the reunion your brother gave you a check for the stock and you gave your brother the stock certificates. Which of the following statements best describes this transaction?
1) This is an example of an exchange of physical assets.
2) This is an example of a primary market transaction.
3) This is an example of a direct transfer of capital.
4) This is an example of a money market transaction.
5) This is an example of a derivatives market transaction.
Question 2
Which of the following statements is CORRECT?
1) While the distinctions are blurring, investment banks generally specialize in lending money, whereas commercial banks generally help companies raise capital from other parties
2) A liquid security is a security whose value is derived from the price of some other "underlying" asset
3) Money market mutual funds usually invest most of their money in a well-diversified portfolio of liquid common stocks.
4) Money markets are markets for long-term debt and common stocks.
5) The NYSE operates as an auction market, whereas the Nasdaq is a dealer market
Question 3
Which of the following statements is...

...Cinthia Gutierrez
Acc 307
HomeworkChapter4
3. Allen visits Reno, Nevada, once a year to gamble. This year his gambling loss was $25,000. He commented to you, “At least I didn’t have to pay for my airfare and hotel room. The casino paid that because I am such a good customer. That was worth at least $3,000. “What are the relevant tax issues for Allen?
Allen received something of value from the casino. Under the broad concept of income, the airfare and hotel accommodations would be considered income. However, Allen could argue that the income should be matched with his $25,000 in gambling losses on the trip, and when the income and losses are combined, the net effect is an economic loss
7. Why does the constructive receipt doctrine apply to cash basis taxpayers but not to accrual basis taxpayers?
The cash method taxpayer is subject to the constructive receipt doctrine. Generally, the cash basis taxpayer does not recognize income until it is collected. Under the constructive receipt concept, when the taxpayer has earned the income and the customer has offered to pay, the taxpayer cannot defer its recognition by postponing the date when the income is collected. The constructive receipt doctrine is not relevant to accrual basis taxpayers, who must recognize income when the taxpayer has a right to receive it even though the income has not been collected
12. Wade paid $7,000 for an automobile that needed substantial...

...large, discrete units as a company grows, the assumption of
constant ratios is more appropriate than if assets are relatively small and can be added in
small increments as sales grow.
c. Firms whose fixed assets are “lumpy” frequently have excess capacity, and this should be
accounted for in the financial forecasting process.
d. For a firm that uses lumpy assets, it is impossible to have small increases in sales without
expanding fixed assets.
e. There are economies of scale in the use of many kinds of assets. When economies occur
the ratios are likely to remain constant over time as the size of the firm increases.
Economic Ordering Quantity model for establishing inventory levels demonstrates this
relationship.
ANSWER: C
4. Last year Jain Technologies had $250 million of sales and $100 million of fixed assets, so its
FA/Sales ratio was 40%. However, its fixed assets were used at only 75% of capacity. Now the
company is developing its financial forecast for the coming year. As part of that process, the
company wants to set its target Fixed Assets/Sales ratio at the level it would have had had it been
operating at full capacity. What target FA/Sales ratio should the companyset?
a. 28.5%
b. 30.0%
c. 31.5%
d. 33.1%
e. 34.7%
ANSWER: B
5. Howton & Howton Worldwide (HHW) is planning its operations for the coming year, and the CEO
wants you to forecast the firm's additional funds needed (AFN). The firm is operating at...