Another 6 questions from QBank following, payments, correct, factors

Flok

1)
Which of the following factors will NOT impact the classification of deferred tax liabilities?
A) Growth of the firm.
B) Changes in firm operations.
C) Present value of the future payments.
Your answer: B was incorrect. The correct answer was C) Present value of the future payments.
The present value of the future payments will not impact the classification of deferred tax liabilities. Growth of the firm and the firm’s operations can each have an impact on classification of deferred tax liabilities. These can result in nonpayment of deferred taxes even if they are reversed.
Q: Can anyone explain?

2)
If households are holding larger real money balances than they desire, which of the following is least likely?
A) The central bank must sell securities to absorb the excess money supply and establish equilibrium.
B) The interest rate is higher than its equilibrium rate in the market for real money balances.
C) The opportunity cost of holding money balances will decrease.
Your answer: B was incorrect. The correct answer was A) The central bank must sell securities to absorb the excess money supply and establish equilibrium.
If households’ real money balances are larger than they desire, the interest rate (opportunity cost of holding money balances) is higher than its equilibrium rate. Households will use their undesired excess cash to buy securities, bidding up securities prices and reducing the interest rate toward equilibrium. This market process does not require any action by the central bank.
Q: I attempted this question with the thinking that when household’s real money balances are larger than desire, it means that interest rate are not high enough to induce them to invest. Whats wrong with this approach?

3)
A company says that whether it increases its dividends depends on whether its earnings increase. From this we know:
A) P(both dividend increase and earnings increase) = P(dividend increase).
B) P(earnings increase | dividend increase) is not equal to P(earnings increase).
C) P(dividend increase | earnings increase) is not equal to P(earnings increase).
Your answer: C was incorrect. The correct answer was B) P(earnings increase | dividend increase) is not equal to P(earnings increase).
If two events A and B are dependent, then the conditional probabilities of P(A | B) and P(B | A) will not equal their respective unconditional probabilities (of P(A) and P(B), respectively). Both remaining choices may or may not occur, e.g., P(A | B) = P(B) is possible but not necessary.
Q: Shouldn’t “whether it increases its dividends depends on whether its earnings increase” means “P(dividend increase | earnings increase)”?

4)
The financial manager at Genesis Company is looking into the purchase of an apartment complex for $550,000. Net aftertax cash flows are expected to be $65,000 for each of the next five years, then drop to $50,000 for four years. Genesis’ required rate of return is 9% on projects of this nature. After nine years, Genesis Company expects to sell the property for aftertax proceeds of $300,000. What is the respective internal rate of return (IRR) and net present value (NPV) on this project?
A) 13.99%; $166,177.
B) 7.01%; ?$53,765.
C) 6.66%; ?$64,170.
Your answer: C was incorrect. The correct answer was B) 7.01%; ?$53,765.
IRR Keystrokes: CF0 = $550,000; CF1 = $65,000; F1 = 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 = 1.
NPV Keystrokes: CF0 = $550,000; CF1 = $65,000; F1 = 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 = 1.
Q: Shouldn’t F2 be 4 instead of 3?

5)
The price value of a basis point (PVBP) for a 7year, 10% semiannual pay bond with a par value of $1,000 and yield of 6% is closest to:
A) $0.92.
B) $0.28.
C) $0.64.
Your answer: A was incorrect. The correct answer was C) $0.64.
PVBP = initial price – price if yield changed by 1 bps.
Initial price: Price with change:
FV = 1000 FV = 1000
PMT = 50 PMT = 50
N = 14 N = 14
I/Y = 3% I/Y = 3.005
CPT PV = 1225.92 CPT PV = 1225.28
PVBP = 1,225.92 – 1,225.28 = 0.64
PVBP is always the absolute value.
Q: Why is the new I/Y 3.005 instead of 3.01 since 1bps is 0.01%?

6)
If a stock decreases in one period and then increases by an equal dollar amount in the next period, will the respective arithmetic average of the continuously compounded and holding period rates of return be positive, negative, or zero?
A) Zero; zero.
B) Positive; zero.
C) Zero; positive.
Your answer: C was correct!
The holding period return will have an upward bias that will give a positive average. For example, a fall from 100 to 90 is 10%, and the rise from 90 to 100 is an increase of 11.1%. The continuously compounded return will have an arithmetic average of zero. Since we can sum continuously compounded rates for multiple periods, the continuously compounded rate for the two periods (0%), means the rates for the two periods must sum to zero, and their average must therefore be zero.
Q: Anyone understand the explanation?
Thank you.

simeezee

So are you indirectly saying, using your example, 5% is the equilibrium whereas 7% is the market expectation?

hanvinh

Thanks cfagoal2.
Anyone can shed some light for question 1, 2 and 3?

EastCoastJ

Continuously compounded return
Period 1 = ln(90/100)=.1054
Period 2 = ln(100/90)=.1054
Average is 0

nixie24

Thanks cfagoal2.
Forgot to mention, I had problem understanding the explanation for continuously compounded return. No problem with the holding period.

Gypsy

6)
If a stock decreases in one period and then increases by an equal dollar amount in the next period, will the respective arithmetic average of the continuously compounded and holding period rates of return be positive, negative, or zero?
I think the explanation given for this one is pretty straight forward, maybe it helps if you think of the two hold periods as two different investments.
First investment of $100 lost $10 which is 10% to $90.
Second investment(second period of original investment) of $90 earned $10. $10/$90 is around 11%. If you take average of both even though the nominal dollar amount is the same, percentage wise the increase is greater than the decrease

scr879

Thanks guys, questions 4 and 5 done.
Anyone can help with the rest? thanks again.

chetan86

#5) You’re right that 0.01 is a 1bps change…but remember this question is asking about semi annual bonds. A 1bps change would be 6.01/2 = 3.05

kamara5

4)
The financial manager at Genesis Company is
looking into the purchase of an apartment complex
for $550,000. Net aftertax cash flows are
expected to be $65,000 for each of the next five
years, then drop to $50,000 for four years.
Genesis’ required rate of return is 9% on projects
of this nature. After nine years, Genesis Company
expects to sell the property for aftertax
proceeds of $300,000. What is the respective
internal rate of return (IRR) and net present
value (NPV) on this project?
>
A) 13.99%; $166,177.
B) 7.01%; ?$53,765.
C) 6.66%; ?$64,170.
>
Your answer: C was incorrect. The correct answer
was B) 7.01%; ?$53,765.
IRR Keystrokes: CF0 = $550,000; CF1 = $65,000; F1
= 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 =
1.
NPV Keystrokes: CF0 = $550,000; CF1 = $65,000; F1
= 5; CF2 = $50,000; F2 = 3; CF3 = $350,000; F3 =
1.
>
Q: Shouldn’t F2 be 4 instead of 3?
You have 5 cash flows of 65K follwed by 3 cash flows of 50 k. The fourth 50k cashflow comes with the 300k return from the sale of the property for a last cash flow of 350K

robjames1984

5) it is paying semiannual coupon so you need to divide 1 bp by 2 to make it compatible with the bond yield.