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1. Your lease calls for payments of $500 a the end of each month for the next 12 months. Now your landlord offers you a new 1-year lease which calls for zero rent for 3 months, then rental payments of $700 at the end of each month for the next 9 months. You keep your money in a bank time deposit that pays a nominal annual rate of 5 percent. By what amount would your net worth change if you accept the new lease?

1. -$509.81
2. -$253.62
3. $125.30
4. $253.62
5. $509.81

answer: b

1. A baseball player is offered a 5 year contract which pays him the following amounts:

Year 1: 1.2 million

Year 2: 1.6 million

Year 3: 2.0 million

Year 4: 2.4 million

Year 5: 2.8 million

    Under the terms of the agreement all payments are made at the end of each year.

Instead of accepting the contract, the baseball player asks his agent to negotiate contract which has a present value $1 million more than that which has been offered. Moreover, the player wants to receive his payments in the form of a 5 year annuity due. All cash flows are discounted at 10 percent.  If the team were to agree to the players terms, what would be the player's annual salary (in millions of dollars)?

1. $1.500
2. $1.659
3. $1.989
4. $2.343
5. $2.500

answer: c

1. You have just noticed in the financial pages of the local newspaper that you can buy a $1,000 par value bond for $800. If the coupon rate is 10 percent, with annual interest payments, and there are 10 year to maturity, you should make the purchase if your required return on investments of this type is 12 percent.

1. True
2. False

answer: a

1. When a firm's derivative securities are reported at cost rather than at market value, it is possible that a firm could actually be insolvent yet have its financial statement show a positive net worth.

1. True
2. False

Answer: a

1. S. Claus and Company is planning a zero coupon bond issue. The bond has a par value of $1,000, matures in 2 years, and will be sold at a price of $826.45. The firm's marginal tax rate is 40 percent. What is the annual after-tax cost of debt to the company on this issue?

1. 4%
2. 6%
3. 8%
4. 10%
5. 12%

answer: b

1. Assume that markets are semistrong-form efficient. Which of the following statements is most correct?

1. All stocks should have the same expected return.
2. All stocks should have the same realized return.
3. Past stock prices can be successfully used to forecast future stock returns.
4. Answers A and C are correct.
5. Returns will be a function of risks.

Answer: e

1. Suppose a stock is not currently paying dividends, and its management has announced that it will not pay a dividend for at least 5 years, but that it does expect to start paying dividends sometime in the future. Under these conditions, which of the following statements is most correct?

1. Since it is expected to someday pay dividends, the value of the stock today can be found with the equation: Po=D1/(k-g).
2. The value of the stock cannot be found, even theoretically, by finding the present value of the expected future dividends.
3. This stock would have a value of zero. Any actual value could only come from bids by people who want to control the company in order to draw salaries.
4. The value of the stock could be found by DCF procedures, but we would have to insert zeros for Dt until such time as we expect the company to begin paying dividends.
5. The Value of the stock would be Po=(D1(1+r))/g

Answer: D

1. Which of the following is/are call options?

1. Warrants.
2. Executive stock options.
3. The abandonment option on investment project.
4. Stand-by underwritting.
5. A patent.
6. The company's option to redeem its bonds at a premium before maturity.
7. All of the above.

Answer: A, B, C, E, F

1. A warrant with a $5 exercise price is issued when the stock price is $3.50. Two years later, the warrant is exercised after the stock price has increased to $8.

1. The company has "won". It ended up issuing stock at $5 (the exercise price), rather than at the $3.50 stock price prevailing when the warrants were issued.
2. The company has lost. It ended up issuing shares at $5 when it could have issued them at $8.
3. The company has neither won nor lost. Issuing warrants is a zero- NPV transaction in efficient capital markets.

Answer: B

1. True/ False: For financial futures, spot price/(1+rf)= Futures price - PV(dividends or interest forgone).