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Principles of Finance DANTES Practice Test
1) All variables being equal, a/an __________ will be worth more in the future.
A) Ordinary annuity
B) Annuity due
C) Both will be equal
D) There is not enough information to answer
The correct answer is B:) Annuity due. Because we know the annuity due assumes
payments occur at the beginning of a time period, if two investments have all the same
variables with the exception of timing, the annuity due will always be worth more.
2) Your bank is advertising a 5% loan program, only you read the fine print and realize
the loan is compounded quarterly. How much will you really be paying in
interest per year on an annualized basis?
A) 5%
B) 5.02%
C) 5.09%
D) 5.25%
The correct answer is C:) 5.09%. See work below.
EAR = [ (1 + .05/4)^4] -1
EAR = [1.0125^4]-1
EAR = [1.0509]-1
EAR = .0509 or 5.09%
3) You just saw a car commercial that announces an introductory APR of 0% for the
first three months, with .75% APR per month thereafter. You think this is a great
deal, so you quickly calculate the APR on an annual basis and get:
A) 0.75%
B) 5.00%
C) 9.00%
D) 12.00%
The correct answer is C:) 9.00%. 12 x 0.75% = 9.00%.
4) What is the yield on a 6% coupon with a bond trading at $1,112?
A) 6%
B) 6.12%
C) 5%
D) 5.4%
The correct answer is D:) 5.4%. Solution: $60 / $1,112 = 5.4%.
5) What is the price of a stock that has a required rate of return of 8%, will pay a
dividend of $4 next year, and has a growth rate of 2%?
A) $50.00
B) $51.00
C) $66.67
D) $68.00
The correct answer is C:) $66.67 Solution: $4/ .08-.02 = $4/.06 = $66.67. Be careful
with the wording in this problem. Notice the dividend figure stated "next year," so you
should know that this is D1 and you do not need to determine a new dividend figure
here.
6) A preferred stock pays a dividend of $4 and is priced at $56, what is the cost of
preferred equity?
A) 4.5%
B) 7.14%
C) 12.24%
D) 12.60%
The correct answer is B:) 7.14%. $4/$56 = 7.14%.
7) A preferred stock is trading at $84 and pays a dividend of $5, what is the cost of
preferred stock to the company?
A) 6.00%
B) 7.14%
C) 12.24%
D) 12.00%
The correct answer is A:) 6.00%. $5/$84 = 6.00%.
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