The value of money increases if it earns a certain interest over a given period of time; this forms the fundamental concept of the time value of money. Your uncle wants to give you a $1,000 cash gift...

The value of money increases if it earns a certain interest over a given period of time; this forms the fundamental concept of the time value of money.
Your uncle wants to give you a $1,000 cash gift for your birthday. You could get it today or take it from him after a year. All other things being equal, you should prefer to receive $1,000
If you invest $1,000 at 5% annual compound interest, how much would you save in 8 years?

1. $1,400.00


2. $1,738.73


3. $1,477.46


4. $1,147.75

Each line on the following graph corresponds to one of the following interest rates: 0%, 9%, or 19%. Identify the interest rate that corresponds with each line.

Line A:

Line B:

Line C:

Attempts: •:* You have the opportunity to invest in several annuities. Which of the following 10-year annuities has the greatest present value (PV)? Assume that all annuities have the same positive interest rate.

1. An annuity that pays $1,000 at the beginning of each year


2. An annuity that pays $1,000 at the end of each year

• An annuity that pays $500 at the beginning of every six months

1. An annuity that pays $500 at the end of every six months

You bought an annuity selling at $3,905.82 today that promises to make equal payments at the beginning of each year for the next seven years (N). If the annuity's appropriate interest rate (I) remains at 5.00% during this time, what will be the value of the annual annuity payment (PMT)?

1. $803.58


2. $2,148.20


3. $932.15


4. $642.86

You just won the lottery. Congratulations! The jackpot is $60 million, paid In seven equal, annual payments. The first payment on the lottery jackpot will be made today. In PV terms, how much did you really win? Use an annual interest rate (I) of 5.00%.
In PV terms you won million. Attempts: QNA 3.10 tr) 2004-2012 Apii;3. Ali rights reserved. Mortgages, loans taken to purchase a property, involve regular payments at fixed intervals and are treated as reverse annuities. Mortgages are the reverse of annuities, because you get a lump-sum amount as a loan in the beginning and then you make monthly payments to the lender.
You've decided to buy a house that is valued at $1 million, You have $300,000 to use as a down payment on the house, and you take out a mortgage for the rest, Your bank has approved your mortgage for the balance amount of $700,000 and is offering you a standard 30-year mortgage with 12% fixed nominal interest rate, According to this proposal, what will be your monthly mortgage payment?

1. $9,000,36

• $9,720,39

1. $7,200,29

• $11,160.45

Your friends suggest that you take a 15-year mortgage, because a 30-year mortgage is too long and you will lose a lot of money on interest. If your bank approves a 15-year, $700,000 loan at a fixed nominal interest rate of 12%, how much larger will your monthly payment be?
It is likely that you won't like the prospect of paying more money each month, but if you do take out a 15-year mortgage, you will make far fewer payments and will pay a lot less in interest. How much more interest will you pay if you take out a 30-year mortgage instead of a 15-year mortgage?
Which of the following statements is
not
true about mortgages?

1. The payment allocated toward principal in an amortized loan is the residual balance—that is, the difference between total payment and the interest due.

• The ending balance of an amortized loan contract will be zero,

1. Mortgages are examples of amortized loans.

1. Mortgages always have a fixed nominal interest rate,

Attempts: e:+
4. More on time value of money
Aa Aa
Lloyd is a divorce attorney who practices law in Florida. He wants to join the American Divorce Lawyers Association (ADLA), a professional organization for divorce attorneys. The membership dues for the ADLA are $750 per year and must be paid at the beginning of each year. For instance, membership dues for the first year are paid today, and dues for the second year are payable one year from today. However, the ADLA also has an option for members to buy a lifetime membership today for $8,000 and never have to pay annual membership dues.
Obviously, the lifetime membership isn't a good deal if you only remain a member for a couple of years, but if you remain a member for 40 years, it's a great deal. Suppose that the appropriate interest rate is 7.1%. What is the minimum number of years that Lloyd must remain a member of the ADLA so that the lifetime membership is cheaper (on a present value basis) than paying $750 in annual membership dues?
(Note:
Round your answer up to the nearest year.)

1. 18 years

1. 22 years

1. 16 years 20 years

In 1626, Dutchman Peter Minuit purchased Manhattan Island from a local Native American tribe. Historians estimate that the price he paid for the island was about $24 worth of goods, including beads, trinkets, cloth, kettles, and axe heads. Many people find it laughable that Manhattan Island would be sold for $24, but you need to consider the future value (FV) of that price in more current times. If the $24 purchase price could have been invested at a 4.25% interest rate, what is its value as of 2012 (386 years later)?

1. $300,708,524.85


2. $261,980,911.81

• $193,638,065.25

1. $227,809,488.53 Attempts: .1*

QNA 3,10 .T) 7004-2012 Aplio, tail rights reserved,	!"'"__..:&E

1. Constant growth stocks
Aa Aa
Super Carpeting Inc. just paid a dividend (Do) of $2.88, and its dividend is expected to grow at a constant rate (9) of 6.00% per year. If the required return (r_e) on Super's stock is 15.00%, what is the intrinsic value of Super's shares?

1. $19.20 0 $39.01


2. $33.92


3. $36.80

Which of the following statements is true about the constant growth model?

1. When using a constant growth model to analyze a stock, if an increase in the growth rate occurs while the required return remains the same, this will lead to a decreased value of the stock.


2. When using a constant growth model to analyze a stock, if an increase in the growth rate occurs while the required return remains the same, this will lead to an increased value of the stock.

MENU'
EMEMBEEME__NEEEN7iBEEL_ E
NEMNRE MOM

Use the constant growth model to calculate the appropriate values to complete the following statements about Super Carpeting Inc.:

• If Super's stock is in equilibrium, the current expected dividend yield on the stock will be


• Super's expected stock price one year from today will be


• If Super's stock is in equilibrium, the current expected capital gains yield on Super's stock will be

Flash Player WIN 11,1,102,62 Q3 327 2004-2012 Aplia. All rights rE'served, ti,-77.> 2012 Cerigage Learning except as noted. All rights reserved,	Attempts: •

As companies evolve, certain factors can drive sudden growth, This may lead to a period of nonconstant, or variable, growth, This would cause the expected growth rate to increase or decrease, thereby affecting the valuation model. For companies in such situations, you would refer to the variable, or nonconstant, growth model for the valuation of the company's stock.
Consider the case of Portman Industries.
Portman Industries just paid a dividend of $2.40 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Portman's dividend is expected to grow at a constant rate of 3.20% per year.

Term Dividends one year from now (Di) Horizon value (151) Intrinsic value of Portman's stock	Value

The risk-free rate (rRF) is 4.00%, the market risk premium (RPM) is 4.80%, and Portman's beta is 2.00.
Assuming that the market is in equilibrium, use the information just given to complete the table, Portman has 800,000 shares outstanding, and Judy Davis, an investor, holds 12,000 shares at the current price as just found. Suppose Portman is considering issuing 100,000 new shares at a price of $22.75 per share. If the new shares are sold to outside investors, by how much will Judy's investment in Portman be diluted on a per-share basis?

1. $0.95 per share


2. $0.55 per share


3. $0.45 per share


4. $0.38 per share

Thus, Judy's investment will be diluted, and Judy will experience a total of

Flash Player WIN 11,1,102„62 Q3 127 (.l-D 2004-2012 Aplia. AU rights resered, 2012 Cengagc, Learning except as noted, All rights reserved,	Attempts: 4.*

3. Efficient markets hypothesis
Aa Aa
When markets are efficient, the stock price is considered to be the intrinsic value of the stock.
The informational efficiency of financial markets determines the ability of investors to beat the market and earn abnormal returns on their investments. If the markets are efficient, they will react rapidly as new relevant information becomes available.
Financial theorists have identified three levels of informational efficiency that reflect what information is incorporated into stock prices. Consider the following:
AC_ iit.taMn
Current market prices reflect all relevant publicly available information.

^..:1:11ESSEE=
Identify the form of capital market efficiency based on the preceding statement.

• Semistrong-form efficiency

1. Weak-form efficiency


2. Strong-form efficiency

Consider that there is a strong form of efficiency in the markets.
A pharmaceutical company announces that it has received FDA approval for a new allergy drug that completely prevents hay fever. The consensus analyst forecast for the company's earnings per share (EPS) is $5.00, and insiders agree with analyst expectations. They too expect that, with this new drug, earnings will drive the EPS to $5.00. What will happen when the company releases its next earnings report?

1. The stock price will increase and settle at a new equilibrium level.


2. The stock price will not change, because the market already incorporated that information into the stock price when the announcement was made.


3. There will be some volatility in the stock price when the earnings report is released; it is difficult to determine the impact on the stock price.

An analyst who attempts to find undervalued securities by analyzing basic information, such as accounting data, business operations, and future prospects, performs a

flash Player WIN 11,1,102,62 Q3 327 2004-2012 Aplk3, reserved, 2012 Cengage Learning except as noted, Alt rights reserved,	Attempts: •

Erik has $5,000 that he can invest. He has three scenarios to choose from. Each option is described below:

Option Scenarios 1 Keep the $5,000 in cash for one year. 2 Invest in a friend's business with a 50% chance of getting $10,000 after one year and a 50% chance of getting nothing. 3 Invest in a relative's business with a 30% chance of getting $15,000 after one year, 20% chance of getting $2,500 after one year, 50% chance of getting nothing.

Suppose Erik cares about the risk involved in option 2 and option 3 and decides to chooses option 1 because it has no risk. Which of the following statements would be true about Erik?

1. He is risk-averse.


2. He is risk-neutral.


3. He is risk-loving.


4. None of these

Later, in a subsequent conversation. Erik's brother, Devin, clearly expressed a preference for Option 1, Which of the following statements is true about Devin?

He is risk-averse. He is risk-neutral. He is risk-loving. None of the above. Flash Player WIN 11,1,102,62 Q3 3,27 iT:-) 2004-2012 Aplia, A0 rights reserved. n* 2012 Cenaage Learning except as noted, Ail rights reserved.	Attempts: +
46;

2. Portfolio risk and return
Aa Aa
Elle holds a $5,000 portfolio that consists of four stocks. Her investment in each stock, as well as each stock's beta, is the following:

Stock	Investment	Beta	Standard Deviation
Omni Consumer Products Co. (OCP)	$1,750	0.80	12.00%
Zaxatti Enterprises (ZE)	$1,000	1.70	11.00%
Water and Power Co. (WPC)	$750	1.10	16.00%
Flitcom Corp. (FC) - -	$1,500	0.40	25.50%
-

Suppose all stocks in Elle's portfolio were equally weighted. Which of these stocks would contribute the
least
market risk to the portfolio?

• Zaxatti Enterprises

1. Water and Power Co.


2. Omni Consumer Products Co.

• Flitcom Corp.

Suppose all stocks in the portfolio were equally weighted. Which of these stocks would have the
least
amount of stand-alone risk?

• Zaxatti Enterprises

1. Omni Consumer Products Co.

• Flitcom Corp.

1. Water and Power Co.

If the risk-free rate is 4% and the market risk premium is 6⁰/0, what is Elle's portfolio's beta and required return? Fill in the following table,

Flash Player WIN 11,1,102,62 Q3 3,27 © 2004-2012 Aplia, right$: reserved. 2012 Cengage Learning except as noted, MI rights reserved.	Attempts: •

Keith holds a portfolio that is invested equally in three stocks (WD = wq = WI = 1/3). Each stock is described in the following table:

Stock Beta Standard Deviation Expected Return
DET	0.7	25%	8.0%
AIL	1.0	38%	10.0%
INO	1.6	34%	13.5%

An analyst has used market- and firm-specific information to make expected return estimates for each stock. The analyst's expected return estimates may or may not equal the stocks' required returns.
The risk-free rate [rRF.] is 6%, and the market risk premium [RPM] is 4%. Use the following graph with the Security Market Line (SML) to plot each stock's beta and expected return.
Tool tip: Mouse over the points on the graph to see their coordinates.
A stock is in equilibrium if its required return equals its expected return. In general, we assume that markets and stock are in equilibrium (or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either undervalued or overvalued), Use the analyst's expected return estimates to determine whether this analyst thinks that each stock in Keith's portfolio is undervalued, overvalued, or fairly valued.

Undervalued	Fairly Valued Overvalued
Stock DET	0	0
Stock AIL	0	0
Stock INO	Q	0	0

4. Risk and Return: Implications for managers and investors
Aa
Aa

The concept of risk and return is subjective for different people, as well as for corporations.
Read and assess the following financial decisions. Keeping everything else constant, are the following actions good financial decisions? Base your decisions on the understanding of risk and return, solely from a theoretical finance perspective. Bill is a small-business owner. He has some cash flow and wants to invest in a new project. Bill's assistant provides an evaluation and estimates the nominal returns that Bill would earn if he invests in the project. Bill reads the evaluation and makes the decision based on the real terms after factoring in inflation. The technology boom in the late 1990s enticed everyone. Wilson is an average investor, and he invested all his money in technology stocks.

Erin wants to invest in a hedge fund that has had a very strong performance track record. The hedge fund has given its investors a return of over 60% for the past five years. Although Erin is tempted to put her money in the fund, she decides to conduct due diligence on the hedge fund's assets, because she is aware that past performance is no guarantee of future results.

Flash Player WIN 11,1,102,62 Q3 3,27 C 2004-2012 Aplia, All rights reserved. 201.2 Cork gage Learning except as noted. All rights reserved,	Attempts: +