11 Jan Determinants of Interest

Buying Stock with a Market Order You would like to buy shares of International Business Machines (IBM). The current bid and ask quotes are $96.18 and $96.26, respectively. You place a market buy-order for 200 shares that executes at these quoted prices. How much money did it cost to buy these shares?

$16

$19,236

$19,252

$38,488

Value of a Preferred Stock If a preferred stock from Ecology and Environment, Inc. (EEI) pays $15.50 in annual dividends, and the required return on the preferred stock is 7.10 percent, what’s the value of the stock?

$1.10

$2.18

$110.05

$218.31

Expected Return Circuit City Stores (CC) recently paid a $.18 dividend. The dividend is expected to grow at a 23.20 percent rate. At the current stock price of $8.16, what is the return shareholders are expecting?

23.22%

23.20%

25.92%

2.21%

Selling Stock with a Limit Order You would like to sell 400 shares of Pfizer, Inc.(PFE). The current bid and ask quotes are $27.35 and $27.38, respectively. You place a limit sell-order at $27.37. If the trade executes, how much money do you receive from the buyer?

$10,940

$10,952

$21,892

$10,948

Five Years Future Value What is the future value of $600 deposited for five years earning 5% interest rate annually?

$166

$766

$600

$1,366

Liquidity and Asset Management Ratios Oasis Products, Inc. has current liabilities = $11.1 million, current ratio = 1.60 times, inventory turnover ratio = 12.1 times, average collection period = 21 days, and sales = $113 million. What is the value of their cash and marketable securities? (Consider a 365 days a year.)

$9,338,843

$1,919,787

$18,519,056

$17,760,000

P/E Ratio and Stock Price International Business Machines (IBM) has earnings per share of $7.00 and a P/E ratio of 15.22. What is the stock price?

$44.44

$.46

$106.54

$2.17

Debt Management Ratios Trina’s Trikes, Inc. reported a debt-to-equity ratio of 1.91 times at the end of 2008. If the firm’s total debt at year-end was $10.90 million, how much equity does Trina’s Trikes have?

$20.82 million

$10.90 million

$1.91 million

$5.71 million

Determinants of Interest Rate for Individual Securities The Wall Street Journal reports that the rate on 3-year Treasury securities is 7.30 percent, and the 6-year Treasury rate is 7.55 percent. From discussions with your broker, you have determined that expected inflation premium is 2.80 percent next year, 3.05 percent in Year 2, and 3.25 percent in Year 3 and beyond. Further, you expect that real interest rates will be 3.65 percent annually for the foreseeable future. What is the maturity risk premium on the 6-year Treasury security?

.65%

.85%

.40%

1.10%

Compounding with Different Interest Rates A deposit of $710 earns interest rates of 10.1 percent in the first year and 7.1 percent in the second year. What would be the second year future value?

$1,542.12

$832.12

$837.21

$782.35

Future Value of an Annuity What is the future value of a $1,200 annuity payment over 10 years if the interest rates are 8 percent?

$13,723.07

$2,590.71

$17,383.87

$12,960.00

Debt Management Ratios Tierre’s Ts, Inc. reported a debt to equity ratio of 4.1 times at the end of 2008. If the firm’s total assets at year-end were $14.9 million, how much of their assets are financed with equity?

$61.09 m

$2.92 m

$11.98 m

$3.63 m

Time to Maturity A bond issued by a corporation on September 1, 1989 is scheduled to mature on September 1, 2058. If today is September 2, 2009, what is this bond’s time to maturity?

20 years

69 years

49 years

58 years

Present Value of a Perpetuity A perpetuity pays $200 per year and interest rates are 6.5 percent. How much would its value change if interest rates increased to 9.0 percent?

$854.70 decrease

$500.00 decrease

$500.00 increase

$854.70 increase

Present Value of an Annuity What is the present value of a $2,200 annuity payment over 8 years if interest rates are 12 percent?

$11,722.15

$888.54

$10,928.81

$5,447.12

Free Cash Flow You are considering an investment in Crew Cut, Inc. and want to evaluate the firm’s free cash flow. From the income statement, you see that Crew Cut earned an EBIT of $23.18 million, paid taxes of $3.82 million, and its depreciation expense was $7.82 million. Crew Cut’s gross fixed assets increased by $10.18 million from 2007 to 2008. The firm’s current assets increased by $6.18 million and spontaneous current liabilities increased by $3.82 million. What is Crew Cut’s operating cash flow, investment in operating capital and free cash flow for 2008, respectively in millions?

$23.18, $10.18, $13.00

$27.18, $10.18, $17.00

$27.18, $12.54, $14.64

$23.18, $11.64, $11.54

Interest-on-Interest Consider a $2,800 deposit earning 10 percent interest per year for 7 years. How much total interest is earned on interest (excluding interest earned on the original deposit)?

$696.41

$196.00

$1,960.00

$2,656.41

Internal Growth Rate Last year Umbrellas Unlimited Corporation had an ROA of 10% and a dividend payout ratio of 50%. What is the internal growth rate?

100%

1%

2.25%

5.26%

Future Value of an Annuity Due If the future value of an ordinary, 5-year annuity is $7,200 and interest rates are 8 percent, what’s the future value of the same annuity due?

$6,666.67

$7,200

$7,776.02

$7,560

Determinants of Interest Rate for Individual Securities A particular security’s default risk premium is 4.00 percent. For all securities, the inflation risk premium is 2.75 percent and the real interest rate is 3.25 percent. The security’s liquidity risk premium is .95 percent and maturity risk premium is 1.25 percent.
The security has no special covenants. What is the security’s equilibrium rate of return?

11.25%

12.20%

2.44%

8.20%