Multiple Choices Finance Multiple Choice Questions - 825 Words

Multiple Choices Finance Multiple Choice Questions (Multiple Choice Questions Sample) Content: NameProfessorCourseDateMultiple Choices Finance Questions 1 You are 21 years old and are concerned about your retirement. You want to live comfortably when you retire 49 years from now. Since you wonà ¢Ã¢â€š ¬t have a house payment (you expect to have the mortgage paid off by then), you figure you will need only $4,000 a month (current dollars) on which to live. You expect inflation to remain at 2.25% for the 49-year period, and you expect $1,850 (current dollars) in social security when you retire at 70 years of age. You expect to live 20 years in retirement. How much do you need to save every month, assuming a 6% annual return on your savings, beginning now?Remaining time=49 yearsTotal period of saving=49x12month =588 monthsTotal amount expected to be used before tax and inflation=20years x 12months x $4000=$960000Considering inflation of 2.25%Amount =$960000 x 102.25%=$981600Less social security after retirement=$981600-$1,850=$979750Hence, savings per month=6% an nual return, =94% x $1666.24=$1567 per month 2 What is the value of a 12-year zero coupon bond, assuming current YTM is 2.95%?Zero-coupon bonds pay no coupons, but instead pay a par value at maturityThe value of coupon bond, given Yield to Maturity of 2.95%Use semi-annual compounding: 3 Given information on the following three investments. The first is a preferred stock, redeemed in 15 years at $25 per share, currently selling at $26.57 and has a current annual dividend yield of 7.527%. The second is a common stock trading at $125.32 per share, but pays no dividend now nor is expected to pay one within your 15-year investment horizon. The share price is expected to grow at 8% for 5 years and 4% for ten years, when you are determined to sell the shares. The third investment is a new bond which you can buy at par with a coupon of 7.25%. Assume there are no taxes (!) and that you are risk-neutral. If your discount rate is 3.5%, which has the highest return? 1 First investmentDividend=7 .527%+ additional profit on each share 2 Second investmentProfit per share=25.32% of the total investmentsThe second investment has the highest return compared to the other two investment plans. 4 What is the value of an account ten years from now, which has an opening balance of $500, to which you contribute $50 per month, and which grows at a 7.5% annualized rate?Principle amount =opening balance=$500At the end of first year, contributions=$600Solution,P = 500. PMT = 10. r = 7.5/100 = 0.075 (decimal). n = 12. t = 10.Substituting the figures results in:Total = [ Compound interest for principal ] + [ Future value of a series ]Total = [ P(1+r/n)^nt ] + [ PMT * (((1 + r/n)^nt - 1) / (r/n)) ]Total = [ 500 (1 + 0.075 / 12) ^ 12(10) ] + [ 50 * (((1 + 0.00625)^120 - 1) / (0.00625)) ]Total = [ 1,056.03 ] + [ 50 * (1.112064 / 0.00625) ]Total = [ 1,056.03 ] + [ 8896.52 ]Total = [ $9,952.55 ] 5 Given the answer in 4, above, if you reinvest the amount into an annuity paid out over four years, how much will your payment be, assuming it carries a guaranteed 4% annualized interest rate, and that it is paid at the beginning of each period?SolutionP = (((PV) / (1-(1+r)-n)), where P = payment, PV = present value, r = rate per period, n = number of periods. Given that, present value (answer in 4) =$9,952.55, rate per period = 4% and the number of periods = 4 years.Then, P = (((PV) / (1-(1+r)-n)) = 9,952.55/ (1-(1+4/100)-4 = 9,952.55 / 0.9615 = $10,51.06 6 Note the following cash flows:Year PROJECT A PROJECT B PROJECT C PROJECT D 0 -$35,000 -$75,000 -$10,000 -$150,000 1 $0 -$4,350 $0 -$12,500 2 $5,000 -$1,250 $0 -$15,000 3 $7,500 $0 $0 -$20,000 4 $12,500 $5,000 $0 $3,500 5 $12,500 $7,500 $0 $24,000 6 $12,500 $12,500 $0 $30,000 7 $12,500 $20,000 $0 $45,000 8 $12,500 $25,000 $0 $95,000 9 $68,500 $164,500 $60,000 $315,000 As long as the discount rate is a positive value of 12.5%, Project B, C and D will ...