Exam 2- Chapter 14 and 18

If a 7.25% coupon bond is trading for $982.00, it has a current yield of ______ percent.

7.38 =72.50/982

A coupon bond that pays interest annual is selling at par value of $1,000, matures in five years, and has a coupon rate of 9%. The yield to maturity on this bond is

9.0%

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $1.25 in dividends and $32 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 10% return. A. $30.23 B. $24.11 C. $26.52 D. $27.50 E. None of these is correct

A. $30.23 .10 = (32 − P + 1.25)/P; .10P = 32 − P + 1.25; 1.10P = 33.25; P = 30.23.

Low Fly Airline is expected to pay a dividend of $7 in the coming year. Dividends are expected to grow at the rate of 15% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Low Fly Airline has a beta of 3.00. The intrinsic value of the stock is _____. A. $46.67 B. $50.00 C. $56.00 D. $62.50 E. None of these is correct

A. $46.67 6% + 3(14% - 6%) = 30%; P = 7/(.30 − .15) = $46.67.

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is _____ if you wanted to earn a 12% return. A. $23.91 B. $14.96 C. $26.52 D. $27.50 E. None of these is correct

B. $14.96 .12 = (16 − P + 0.75)/P; .12P = 16 − P + 0.75; 1.12P = 16.75; P = 14.96.

Suppose that the average P/E multiple in the gas industry is 17. KMP is expected to have an EPS of $5.50 in the coming year. The intrinsic value of KMP stock should be ____. A. $28.12 B. $93.50 C. $63.00 D. $72.00 E. None of these is correct

B. $93.50 17 × $5.50 = $93.50.

The _______ is defined as the present value of all cash proceeds to the investor in the stock. A. dividend payout ratio B. intrinsic value C. market capitalization rate D. plowback ratio E. None of these is correct

B. intrinsic value

30. A preferred stock will pay a dividend of $3.50 in the upcoming year, and every year thereafter, i.e., dividends are not expected to grow. You require a return of 11% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock. A. $0.39 B. $0.56 C. $31.82 D. $56.25 E. None of these is correct

C. $31.82 3.50/.11 = 31.82

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. The markets required rate of return on Sure's stock is: The market's required rate of return on Sure's stock is ____. A. 14.0% B. 17.5% C. 16.5% D. 15.25% E. None of these is correct

C. 16.5% 4% + 1.25(14% − 4%) = 16.5%.

You wish to earn a return of 11% on each of two stocks, C and D. Stock C is expected to pay a dividend of $3 in the upcoming year while Stock D is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock C _____. A. will be greater than the intrinsic value of stock D B. will be the same as the intrinsic value of stock D C. will be less than the intrinsic value of stock D D. will be greater than the intrinsic value of stock D or will be the same as the intrinsic value of stock D E. None of these is correct.

C. will be less than the intrinsic value of stock D

You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X _____. A. will be greater than the intrinsic value of stock Y B. will be the same as the intrinsic value of stock Y C. will be less than the intrinsic value of stock Y D. will be greater than the intrinsic value of stock Y or will be the same as the intrinsic value of stock Y E. None of these is correct.

C. will be less than the intrinsic value of stock Y

Low Tech Chip Company is expected to have EPS of $2.50 in the coming year. The expected ROE is 14%. An appropriate required return on the stock is 11%. If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be A. $22.73 B. $27.50 C. $28.57 D. $38.46 E. None of these is correct

D. $38.46 g = 14% X 0.6 = 8.4%; Expected DPS = $2.50(0.4) = $1.00; P = 1/(.11 − .084) = $38.46.

The Gordon model A. is a generalization of the perpetuity formula to cover the case of a growing perpetuity. B. is valid only when g is less than k. C. is valid only when k is less than g. D. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k. E. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when k is less than g.

D. is a generalization of the perpetuity formula to cover the case of a growing perpetuity and is valid only when g is less than k.

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Sure's stock today? A. $20.60 B. $20.00 C. $12.12 D. $22.00 E. None of these is correct.

a) $20.60

A Treasury bone due in one year has a yield of 4.6%; a Treasury bond due in five years has a yield of 5.6%. A bond issued by Lucent Technologies due in five years has a yield of 8.9%; a bond issued by Exxon due in one year has a yield of 6.2%. The default risk premiums on the bonds issues by Exxon and Lucent Technologies , respectively, are a) 1.6% and 3.3% b) 0.5% and 0,7% c) 3.3% and 1.6% d) 0.7% and 0.5% e) None of the options

a) 1.6% and 3.3%

If a coupon bond pays annual interest, has a par value of $1,000, matures in four years, has a coupon rate of 10%, and has a yield to maturity of 12%. The current yield on this bond is: a) 10.65% b) 10.45% c) 10.95% d) 10.52% e) none of the option

a) 10.65%

Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Old Quartz Gold Mining Company has a beta of -0.25. The intrinsic value of the stock is _____. A. $80.00 B. $133.33 C. $200.00 D. $400.00 E. None of these is correct

b) $133.33 k = 6% + [−0.25(14% − 6%)] = 4%; P = 8/[.04 − (−.02)] = $133.33.

You are considering acquiring a common stock that you would like to hold for one year. You expect to receive both $0.75 in dividends and $16 from the sale of the stock at the end of the year. The maximum price you would pay for the stock today is ____ if you wanted to earn a 12% return. a) $23.91 b) $14.96 c) $26.52 d) $27.50 e none of the options

b) $14.96

A zero-coupon bond has a yield to maturity of 9% and a par value of $1,000. If the bond matures in eight years, the bond should sell for a price of ____ today. a) $422.41 b) $501.87 c) $513.16 d) $489.49 e) None of the options

b) $501.87

Fools Gold Mining Company is expected to pay a dividend of $8 in the upcoming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Fools Gold Mining Company has a beta of −0.25. The return you should require on the stock is _______. A. 2% B. 4% C. 6% D. 8% E. None of these is correct

b) 4% 6% + [−0.25(14% − 6%)] = 4%.

Consider two bonds, A and B. Both bonds presently are selling at their par value of $1,000. Each pays interest of $120 annually. Bond A will mature in five years, while bond B will mature in six years. If the yields to maturity on these two bonds change from 12% to 10%, a) both bonds will increase in value, but bond A will increase more than bond B b) both bonds will increase in value, but bond B will increase more than bond A c) both bonds will decrease in value, but bond A will decrease more than bond B d) both bonds will decrease in value, but bond B will decrease more than bond A e) None of the options

b) both bonds will increase in value, but bond B will increase more than bond A

Ceteris paribus, the price and yield on a bond are a) positively related b) negatively related c) sometimes positively and sometimes negatively related d) not related e) indefinitely related

b) negatively related

High Tech Chip Company paid a dividend last year of $2.50. The expected ROE for next year is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 60%, the dividend in the coming year should be A. $1.00 B. $2.50 C. $2.69 D. $2.81 E. None of these is correct

c) $2.69

Consider the free cash flow approach to stock valuation. Utica Manufacturing Company is expected to have before-tax cash flow from operations of $500,000 in the coming year. The firm's corporate tax rate is 30%. It is expected that $200,000 of operating cash flow will be invested in new fixed assets. Depreciation for the year will be $100,000. After the coming year, cash flows are expected to grow at 6% per year. The appropriate market capitalization rate for unleveraged cash flow is 15% per year. The firm has no outstanding debt. The projected free cash flow of Utica Manufacturing Company for the coming year is ______. A. $150,000 B. $180,000 C. $300,000 D. $380,000 E. None of these is correct

c) $300.000 ***See problem

A coupon that pays interest of $100 annually has a par value of $1,000, matures in 5 years, and is selling today at $72 discount from the par value. The yield to maturity on this bond is: a) 6.00% b) 8.33% c) 12.00% d) 60.00% e) None of the options

c) 12.00% N=5 I=? PV=-928 PMT=100 FV=1000

A________ bond is a bond where the bondholder has the right to cash in the bond before maturity at a specified price after a specific date. a) callable b) coupon c) put d) treasury e) zero-coupon

c) put

You wish to earn a return of 10% on each of two stocks, C and D. Each of the stocks is expected to pay a dividend of $2 in the upcoming year. The expected growth rate of dividends is 9% for stock C and 10% for stock D. The intrinsic value of stock C a) will be greater than the intrinsic value of stock D b) will be the same as the intrinsic value of stock D c) will be less than the intrinsic value of stock D d) will be the same or greater than the intrinsic value of stock D e) none of the options

c) will be less than the intrinsic value of stock D

A company paid a dividend last year of $1.75. The expected ROE for next year is 14.5%. An appropriate required return on the stock is 10%. If the firm has a plowback ratio of 75%, the dividend in the coming year should be A. $1.80 B. $2.12 C. $1.77 D. $1.94 E. None of these is correct

d) $1.94 g = .145 × .75 = 10.875%; $1.75(1.10875) = $1.94

53. Suppose that the average P/E multiple in the oil industry is 16. Shell Oil is expected to have an EPS of $4.50 in the coming year. The intrinsic value of Shell Oil stock should be ____. A. $28.12 B. $35.55 C. $63.00 D. $72.00 E. None of these is correct

d) $72.00

A coupon bond that pays interest annually has a par value of $1,000, matures in five years, and has a yield to maturity of 10%. The intrinsic value of the bond today will be ______ if the coupon rate is 7% a) $712.99 b) $620.92 c)$1,123.01 d) $886.28 e) $1,000.00

d) $886.28

Medtronic Company has an expected ROE of 16%. The dividend growth rate will be ________ if the firm follows a policy of paying 70% of earnings in the form of dividends. A. 3.0% B. 6.0% C. 7.2% D. 4.8% E. None of these is correct

d) 4.8% 16% × 0.30 = 4.8%.

A coupon bond pays annual interest, has a par value of $1,000, matures in 4 years, has a coupon rate of 8.25%, and has a yield to maturity of 8.64%. The current yield on this bond is _____. a) 8.65% b) 8.45% c) 7.95% d) 8.36% e) None of these is correct

d) 8.36%

The ______ is a measure of the average rate of return an investor will earn if the investor buys the bond now and holds until maturity. a) current yield b) dividend yield c) P/E ratio d) yield to maturity e) discount yield

d) yield to maturity

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today. A. $33.00 B. $39.86 C. $55.00 D. $66.00 E. $40.68

e) $40.68 Calculations are shown in the table below. P3 = 2 (1.10)/(.14 − .10) = $55.00; PV of P3 = $55/(1.14)3 = $37.12; PO = $3.56 + $37.12 = $40.68. ** See problem

Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. If Sure's intrinsic value is $21.00 today, what must be its growth rate? A. 0.0% B. 10% C. 4% D. 6% E. 7%

e) 7%

If a 7% coupon bond is trading for $975.00, it has a current yield of ____ percent a) 7.00 b) 6.53 c) 7.24 d) 8.53 e) 7.18

e) 7.18 =70/975

High Tech Chip Company is expected to have EPS in the coming year of $2.50. The expected ROE is 12.5%. An appropriate required return on the stock is 11%. If the firm has a plowback ratio of 70%, the growth rate of dividends should be A. 5.00% B. 6.25% C. 6.60% D. 7.50% E. 8.75%

e) 8.75%

A preferred stock will pay a dividend of $7.50 in the upcoming year and every year thereafter; I.e., dividends are not expected to grow. You require a return of 10% on this stock. Use the constant growth DDM to calculate the intrinsic value of this preferred stock a) $0.75 b) $7.50 c) $64.12 d) $56.25 e) None of the options

e) None of the options ***