Exam 3 Fin 301

How much are you willing to pay for one share of Govender stock if the company just paid an annual dividend of $1.61, the dividends increase by 4.2 percent annually, and you require a return of 16.4 percent? a. $13.75 b. $15.36 c. $10.23 d. $13.20 e. $9.82

a. $13.75 DO(1+g)/r-g 1.16(1+.042/(0.164-.042)

A relative will support your education by paying you $500 a month for 50 months. If you can earn 7 percent on your money, what is this gift worth to you today? a. $21,629.93 b. $18,411.06 c. $21,338.40 d. $20,333.33 e. $19,450.25

a. $21,629.93

Werden Drilling offers 5.5 percent coupon bonds with semiannual payments and a yield to maturity of 7 percent. The bonds mature in 10 years. What is the market price per bond if the face value is $1,000? a. $893.41 b. $894.65 c. $937.63 d. $671.36 e. $1,114.20

a. $893.41 fv= 1000 pmt= 55/2= 27.5 i/y= 7/2= 3.5 n=10*2= 20 CPT= pv

Rao Investments has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent, and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature? a. 17.84 years b. 14.19 years c. 17.41 years d. 16.16 years e. 18.32 years

a. 17.84 years 2nd fv pmt= 65 i/y 13.2 pv= -548 fv= 1000 cpt= n

Castillo Corporation common stock is currently priced at $39.75 per share. The company just paid $4.35 per share as its annual dividend. The dividends have been increasing by 7.5 percent annually and are expected to continue doing the same. What is the cost of equity? a. 19.26% b. 8.25% c. 18.44% d. 10.92% e. 11.74%

a. 19.26% [4.35*(1 + .075)/39.75]+.075=.1926

Lichtenfeld has a bond issue outstanding that matures in 19 years. The bonds pay interest semiannually. The bonds have a face value of $1,000 and are currently priced at $995.28. The bonds carry a coupon rate of 3.5 percent. What is the aftertax cost of debt if the total tax rate is 22 percent? a. 2.76% b. 3.53% c. 1.38% d. 2.75% e. 3.28%

a. 2.76%

The 30-year, 5.5 percent bonds issued by Modern Kitchens pay interest semiannually, mature in four years, and have a $1,000 face value. Currently, the bonds sell for $1,020.66. What is the yield to maturity? a. 4.92% b. 4.41% c. 2.46% d. 2.68% e. 5.39%

a. 4.92% 1000*5.5%= 55(PMT) n=4 pv-1020.66 fv1000 Comput for i/y

Nazarian's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate? a. 6.40% b. 6.33% c. 6.60% d. 6.67% e. 6.50%

a. 6.40% fv= 1000 pv= -901.98 i/y= 7.6/2= 3.8 n=13*2=26 cpt pmt= 32 32*c/fv(1000)

Which of the following statements regarding unsystematic risk is accurate? a. It can be effectively eliminated by portfolio diversification. b. It is compensated for by the risk premium. c. It is measured by beta. d. It is measured by standard deviation. e. It is related to the overall economy.

a. It can be effectively eliminated by portfolio diversification.

________ risk is measured using the standard deviation. a. Total b. Nondiversifiable c. Unsystematic d. Systematic e. Economic

a. Total

A ________ is the market's measure of systematic risk. a. beta of 1 b. beta of 0 c. standard deviation of 1 d. standard deviation of 0 e. variance of 1

a. beta of 1

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment. a. coupon b. face value c. discount d. call premium e. yield

a. coupon

Sai purchased a car today at a price of $8,500. He paid $600 down in cash and financed the balance for 48 months at 5.4 percent per year compounded monthly. What is the amount of each monthly loan payment? a. $1,997.27 b. $183.37 c. $463.75 d. $197.29 e. $187.39

b. $183.37

Altitude Group is expected to pay an annual dividend next year of $2.71 per share. Dividends are expected to increase by 4.3 percent annually. What is one share of this stock worth at a required rate of return of 13.9 percent? a. $29.44 b. $28.23 c. $32.15 d. $20.33 e. $19.50

b. $28.23 2.71/(.139-.043)

Walker Systems has an issue of preferred stock outstanding with a stated annual dividend of $2.60 that just sold for $23.85 per share. What is the bank's cost of preferred stock? a. 8.39% b. 10.90% c. 7.06% d. 2.51% e. 9.17%

b. 10.90% 2.60/23.85=.1090

Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 per share, and 42,000 shares of common stock valued at $44 per share. What weight should be assigned to the preferred stock when computing the weighted average cost of capital? a. 6.08% b. 5.40% c. 6.67% d. 5.00% e. 5.75%

b. 5.40% 1007*650=654550 68+2100=142800 44*4200=184800 142800/(654550=142800=184800) .0540

You recently purchased a stock that is expected to earn 12 percent in a booming economy, 6.5 percent in a normal economy, and lose 1.5 percent in a recessionary economy. The probability of a booming economy is 14 percent while the probability of a normal economy is 65 percent. What is your expected rate of return on this stock? a. 6.22% b. 5.59% c. −2.24% d. 0.35% e. 5.67%

b. 5.59% booming 0.12*0.14= 0.0168 normal 0.065*0.65= 0.0423 recessionary -.015*0.21= -0.0032 .0168+.21+.0032= .0559

Montez Supply is expected to pay an annual dividend of $.95 per share next year. The market price of the stock is $43.50 and the growth rate is 4.5 percent. What is the cost of equity? a. 2.28% b. 6.68% c. 8.69% d. 6.78% e. 2.18%

b. 6.68% (.95 / 43.50) + .045 = .0668

The stock of Yakir Development has a beta of 1.31. The risk-free rate of return is 1.5 percent and the market rate of return is 8 percent. What is the risk premium on this stock? a. .9% b. 8.5% c. 6.5% d. 6.7% e. 5.0%

b. 8.5% 1.5+1.31(8-1.5)=10.0150 10.0150-1.5= 8.515

Of the options listed below, which is the best measure of systematic risk? a. The weighted average standard deviation b. Beta c. The geometric average d. The standard deviation e. The arithmetic average

b. Beta

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? a. Maximal growth model b. Constant growth model c. Capital pricing model d. Realized earnings model e. Realized growth model

b. Constant growth model

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium? a. Diversified portfolio with returns similar to the overall market b. Stock with a beta of 1.24 c. Stock with a beta of .63 d. U.S. Treasury bill e. Portfolio with a beta of 1.12

b. Stock with a beta of 1.24

When calculating a firm's weighted average cost of capital, the capital structure weights: a. are based on the book values of debt and equity. b. are based on the market values of the outstanding securities. c. depend upon the financing obtained to fund each specific project. d. remain constant over time unless new securities are issued or outstanding securities are redeemed. e. are restricted to debt and common stock.

b. are based on the market values of the outstanding securities.

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return. a. expected market rate of return b. risk-free rate c. inflation rate d. standard deviation e. variance

b. risk-free rate

Murchison preferred stock pays an annual dividend of $4.45. What is the current price of this stock at a discount rate of 12.5 percent? a. $40.05 b. $60.08 c. $35.60 d. $44.50 e. $53.40

c. $35.60 4.45/.125

You just obtained a loan of $17,200 with monthly payments for three years at 5.5 percent interest compounded monthly. What is the amount of each payment? a. $1,107.10 b. $467.43 c. $519.37 d. $1,995.70 e. $439.96

c. $519.37

Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the aftertax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent? a. 9.89% b. 10.43% c. 11.02% d. 11.38% e. 12.17%

c. 11.02% 100-46-5 (.46*15.8)+(.05*8.3)+(.49*6.8)=11.02

In a booming economy, the stock of Pattee Productions is expected to return 17 percent. It is expected to return 9 percent in a normal economy and will decline 18 percent in a recessionary economy. The probability of a recession is 18 percent while the probability of a boom is 22 percent. What is the standard deviation of the returns on this stock? a. 13.71% b. 15.83% c. 11.65% d. 12.08% e. 14.77%

c. 11.65%

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. a. a premium; less than b. a premium; equal to c. a discount; less than d. a discount; higher than e. par; less than

c. a discount; less than

Bonds issued by the U.S. government: a. are considered to be free of interest rate risk. b. generally have higher coupons than comparable bonds issued by a corporation. c. are considered to be free of default risk. d. pay interest that is exempt from federal income taxes. e. are called "munis."

c. are considered to be free of default risk.

While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: a. arithmetic return. b. historical return. c. expected return. d. geometric return. e. required return.

c. expected return.

A bond's principal is repaid on the ________ date. a. coupon b. yield c. maturity d. dirty e. clean

c. maturity

Municipal bonds: a. are totally risk free. b. generally have higher coupon rates than corporate bonds. c. pay interest that is free from federal taxation. d. are rarely callable. e. are free of default risk.

c. pay interest that is free from federal taxation.

Nasafi Lumber paid an annual dividend of $1.37 per share yesterday. Today, the company announced that future dividends will be increasing by 3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today? a. $11.81 b. $13.53 c. $9.67 d. $12.16 e. $9.38

d. $12.16

Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price? a. $27.42 b. $27.09 c. $26.08 d. $26.42 e. $28.13

d. $26.42 12.7= ?/ 2.08 12.7*2.08=

Nguyen Corporation's common stock has a beta of 1.38. The risk-free rate is 1.78 percent and the expected return on the market is 14.6 percent. What is the cost of equity? a. 20.15% b. 22.51% c. 17.69% d. 19.47% e. 21.93%

d. 19.47% .0178+1.38*(.146-.0178)=.1947

The rate of return on the common stock of Luna Lights is expected to be 11.5 percent in a boom economy and 4.5 percent in a normal economy. The probability of a boom is 23 percent. What is the standard deviation of the returns on this common stock? a. 5.63% b. 6.11% c. 2.47% d. 2.95% e. 8.68%

d. 2.95%

Ahmad Couture has bonds outstanding with a face value of $1,000, 11 years to maturity, and a coupon rate of 6 percent paid semiannually. What is the company's pretax cost of debt if the bonds currently sell for $1,067.12? a. 2.60% b. 5.34% c. 2.67% d. 5.19% e. 4.60%

d. 5.19% fv=1000 pv=-1067.12 pmt=66/2=33 n=11*2=22 cpt= i/y i/y=2.60*2

The Downtowner has 168,000 shares of common stock outstanding valued at $53 per share along with 13,000 bonds selling for $1,008 each. What weight should be given to the debt when the company computes its weighted average cost of capital? a. 46.67% b. 65.05% c. 51.79% d. 59.54% e. 48.27%

d. 59.54% 1300*1008=1310400 16800*53=890400 1310400+890400=2200800 1310400/22008000

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? a. Electing the board of directors b. Receiving a distribution of company profits c. Voting either for or against a proposed merger or acquisition d. Determining the amount of the dividend to be paid per share e. Having first chance to purchase any new equity shares that may be offered

d. Determining the amount of the dividend to be paid per share

Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the: a. coupon rate will also increase. b. current yield will decrease. d. yield to maturity will be less than the coupon rate. d. market price of the bond will decrease. e. coupon payment will increase.

d. market price of the bond will decrease.

The cost of preferred stock is equivalent to the: a. pretax cost of debt. b. rate of return on an annuity. c. aftertax cost of debt. d. rate of return on a perpetuity. e. cost of an irregular growth common stock.

d. rate of return on a perpetuity.

To determine a firm's cost of capital, one must include: a. only the return required by the firm's current shareholders. b. only the current market rate of return on equity shares. c. the weighted costs of all future funding sources. d. the returns currently required by both debtholders and stockholders. e. the company's original debt-equity ratio.

d. the returns currently required by both debtholders and stockholders.

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the: a. coupon rate. b. face rate. c. call rate. d. yield to maturity. e. current yield.

d. yield to maturity.

You estimate that you will owe $28,200 in student loans by the time you graduate. If you want to have this debt paid in full within 10 years, how much must you pay each month if the interest rate is 5.4 percent per year compounded monthly? a. $2,890.27 b. $1,525.57 c. $310.28 d. $3,723.31 e. $304.65

e. $304.65

Your portfolio is comprised of 22 percent of Stock X, 32 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.04, Stock Y has a beta of .96, and Stock Z has a beta of 1.24. What is the beta of your portfolio? a. 1.163 b. 1.092 c. 1.127 d. 1.178 e. 1.106

e. 1.106 .22*1.04=.229 .32*.96=.307 .46=.24=.570 .229+.307+.570=1.106

Espy Hotels has bonds outstanding that mature in 9 years, pay interest semiannually, and have a coupon rate of 5.5 percent. These bonds have a face value of $1,000 and a current market price of $989.28. What is the company's aftertax cost of debt if its tax rate is 22 percent? a. 5.61% b. 2.19% c. 4.37% d. 5.65% e. 4.41%

e. 4.41%

Florida Groves has a $380,000 bond issue outstanding that is selling at 97.4 percent of face value. The firm also has 2,600 shares of preferred stock valued at $61 per share and 37,500 shares of common stock valued at $19 per share. What weight should be assigned to the common stock when computing the weighted average cost of capital? a. 55.75% b. 62.20% c. 58.75% d. 61.03% e. 57.40%

e. 57.40% 380000*.974=370120 2600*61=158600 37500*19=712500 370120+158600+712500=1241220 712500/1241220=.5740

With respect to returns, which one of the following statements is accurate? a. The unexpected return is always negative. b. The expected return minus the unexpected return is equal to the total return. c. Over time, the average return is equal to the unexpected return. d. The expected return includes the surprise portion of news announcements. e. Over time, the average unexpected return will be zero.

e. Over time, the average unexpected return will be zero.

Assume the current market price of a bond exceeds its par value. Which one of these equations applies? a. Market value < Face value b. Yield to maturity = Current yield c. Market value = Face value d. Current yield > Coupon rate e. Yield to maturity < Coupon rate

e. Yield to maturity < Coupon rate

If a poorly-diversified portfolio becomes well diversified, we would expect the portfolio's: a. beta to increase. b. beta to decrease. c. rate of return to increase. d. standard deviation to increase. e. standard deviation to decrease.

e. standard deviation to decrease.