Question

14. An example of an ordinary annuity would be

a.              Dinner at McDonald’s in which you pay for your food before you receive it.

b.            Your rent, which you pay on the first of the month.

c.            Admission to a movie, where you pay before seeing the movie.

d.            Your “A” grade which you receive after working hard all semester.

e.            None of the above.

15. Ben has computed the value of a stock to be $69.32 using the things he learned in BA3500.  His stock broker is on the phone asking if he would like to buy some shares at a price of $69.25.  What should Ben do?

a.  Tell the broker to buy him 100 shares.

b.  Tell the broker that he does not want to buy any.

c.  Tell the broker that if he calls him again with a bad recommendation, he will change brokers.

d.  Tell the broker that he is using false advertising and Ben will report him to the Better Business Bureau.

e.  None of the above.

16. Which of the following is an assumption of the dividend growth model?

a. G must be greater than R.

b.The stock must pay dividends.

c.Both price and dividend will grow at R indefinitely.

d.The price and dividend will increase gradually over the years.

e.The current dividend divided by 1+g equals the next dividend.

17.  A stock with a dividend yield of 4% and a total yield of 9%

a.Must have a share price greater than $100.

b.Must have a capital gains yield of 13%.

c.Must have a capital gains yield of 5%.

d.Must be growing at 4%.

e.None of the above.

18. You would use the dividend growth model (DGM) method to determine the value of a stock

a.for a stock that does not pay dividends.

b.with an unusual or non-constant growth pattern

c.when the growth rate of the stock is greater than the rate expected in the marketplace.

d.with the same dividend every time.

e.with a very stable, nominal growth pattern.

19.  A certain investment has an APR of 7% and an EAR of 7%.  From this information we know that:

a.One of the rates must be incorrect.

b.The investment actually earns 7.2%

c.This is not a good investment for several reasons.

d.The investment compounds quarterly.

e.The investment compounds annually.

20.  A grandmother would like to start a savings account for her grandchild when it is born and deposit $1,000, but then add no more to the account and let it earn interest at 5% until the child is 21. To find out how much will be in the account when the grandchild turns 21, you would do a

a.  multiple payment time value of money computation for future value.

b.  single payment time value of money computation for future value.

c.  multiple payment time value of money computation for present value.

d.  single payment time value of money computation for present value.

e.  None of the above will get to the value of the account after 21 years.

Answer 1

14.

Annuity is defined as series of similar cash flow for specified limited period. There are two types of annuity, Ordinary annuity and annuity due. In the ordinary annuity payment is made at the end of the period and in the annuity due payment is made at the beginning of the year.

in given option only rent payment is annuity (because series of payment). all other option are not annuity. since rent paid at begining of period, so it is annuity due. So, None of the given options are ordinary annuity.

Option (E) is correct answer.

15.

Intrinsic value calculated for stock is $69.32 and broker sale stock at $69.25 that is lower than intrinsic value. So, Tell the broker to buy him 100 shares.

Option (A) is correct answer.

16.

Basic assumption of the dividend growth model is The current dividend divided by 1+g equals the next dividend.

Option (E) is correct answer.

17.

Total Yield = 9%

Dividend Yield = 4%

Capital gain yield = 9% - 4%

= 5%

Capital gain yield is 5%.

Option (C) is correct answer.