FIN 3312 TXST Exam 3 Review

Based on the information in the previous question, what is the current price of the Three Amigos' stock. Assume that the price in three years is $40.00 regardless of your answer to the previous question. A. $43.08 B. $38.88. C. $36.76 D. $42.45 E. $31.33

B. $38.88. 40.00 + 2.50 = 42.50 so NPV( 12, 0, {4.75,5.50,42.50}) = 38.88

Regardless of your answer to the previous question, assume the price of Mannkind stock in three-years (P3) is $50.00. What is the current intrinsic value of the firm's stock given all the other assumptions? A. $48.25 B. $42.70 C. $38.72 D. $50.00 E. $45.63

B. $42.70 50.00 + 4.25 = 54.25 NPV( 13, 0, {2.45, 3.75, 54.25}) = 42.70

You are thinking about buying some common stock of MagnaChip, Inc. The actual current market price is $33. MagnaChip has a long history of paying a dividend that steadily increases each year. Next year's dividend is anticipated to be $2.50 per share and you expect it to grow at 4% per year forever. If you purchase MagnaChip's stock for $33 per share, what rate of return do you expect to earn? A. 11.88% B. 11.58% C. 4.08% D. 7.58% E. Cannot solve for expected return without knowing the CAPM inputs.

B. 11.58% R= div/market price + growth rate 2.50/33 + 0.04

The next dividend payment for J&J's common stock will be $2.45 per share. The firm's dividends are expected to grow at a constant rate of 4.50% forever. If the stock current sells for $61.25, what is the dividend yield? A. 4.50% B. 4.00% C. 4.18% D. 7.35% E. Cannot solve without know the required return.

B. 4.00% Dividend yield = D0/P0 2.45/61.25 = .04

Assume a constant growth stock has a total expected return (𝑅̂) of 12.50%. The dividend yield is 7.50%. What is the capital gains yield (g)? A. 20.00% B. 5.00% C. 7.50% D. 12.50% E. Cannot be determine without more information

B. 5.00% Dont change percentage 12.50 - 7.50 = 5

As discussed in class, an inverted yield curve implies _____ according to the pure expectations theory? A. Higher interest rates in the future. B. Lower interest rates in the future. C. An increase in expected inflation. D. The economy is most likely going into a strong expansion. E. Investors expect inflation to be constant.

B. Lower interest rates in the future.

Computing the present value of a perpetuity is most similar to computing the current value of which one of the following? A. Stock with a decreasing dividend B. Stock with a zero growth dividend C. Stock with irregular dividends D. Stock with a constant growth dividend E. Stock with growing dividends for a limited period of time

B. Stock with a zero growth dividend

As discussed in class, if the yield curve is normal, then it is likely that: A. The economy is going into a recession B. The economy is basically good C. The market expects lower inflation in the future D. We cannot say anything about the economy E. Inflation is currently extremely high

B. The economy is basically good

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 ten years. If the yields to maturity on the 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.

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

Von Bora Corporation (VBC) is expected to pay a $.77 dividend at the end of this year. If you expect VBC's dividend to grow by 5% per year forever and the required return is 10%, then the current value of a share of VBS stock is closest to: A. $25.00 B. $40.00 C. $15.40 D. $11.10 E. $16.17

C. $15.40 Po = .77/0.10-.05 = 15.4

I recently read a bond quote stating the current price of the bond was $875.00. The bond had 15 years until maturity and a coupon rate of 6%. Assume the bond pays interest semiannually and has a par value of $1,000. What is the bond's yield to maturity (YTM)? A. 6% B. 5.45% C. 7.39% D. 4.27% E. 8.53%

C. 7.39% Solve I% KEY WORD SEMI-annual N = 2x15 I% = ?? PV = -875 PMT = 0.06 x 1000 / 2 FV = 1000 I% = 3.696 x 2 = 7.392

Which one of the following types of securities has no priority in a bankruptcy proceeding? A. Convertible bond B. Senior debt C. Common stock D. Preferred stock E. Straight bond

C. Common stock

All else equal, which of the following is a correct statement? A. Investors should demand a higher return on a bond with a sinking fund versus one without a sinking fund. B. Investors should demand a higher return on a senior bond versus a subordinate bond. C. Investors should demand a higher return on a callable bond versus a non-callable bond. D. Investors should demand a higher return on a company's bond versus its common stock. E. Investors should demand a higher return on a secured bond versus an unsecured bond.

C. Investors should demand a higher return on a callable bond versus a non-callable bond.

As discussed in class, when a fixed coupon bond has a coupon rate less than its YTM, the bond price must: A. sell at par B. sell at a discount C. sell at a premium D. decrease each year as time passes E. not change since it's a fixed coupon

C. sell at a premium

B&T, Inc. is expected to pay its first annual dividend five years from now. That payment will be $3.10 a share. From that point forward, the company will increase the dividend by 3 percent per year forever. The required return is 15 percent. What is the value of this stock today? Hint: you can solve for P4 first knowing dividend 5. A. $11.86 B. $12.09 C. $13.63 D. $14.77 E. $15.71

D. $14.77 1) P4 = 3.10/0.15-.0.03 = 25.83 2) Solve PV N = 4 I% = 15 PV = ?? PMT = 0 FV = -25.83 I% = 1 PV + 14.76

Gamma Corp. is expected to pay the following dividends over the next four years: $5, $12, $18, and $1.80. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends, forever. If the required return on the stock is 14 percent, what is the price in four years? A. $17.92 B. $21.06 C. $23.18 D. $18.72 E. $9.31

D. $18.72 P4 = D5 /R-G 1.88(1.04)/.14-0.04 = 18.72

Santa Klaus Toys just paid its annual dividend of $1.40. The required return is 8 percent and the dividend growth rate is 2 percent. What is the expected value of this stock four years from now? A. $32.38 B. $21.23 C. $28.04 D. $25.76 E. $28.40

D. $25.76 1) D5 =1.40(1.02)^% = 1.55 2) Dividen / R - G 1.55/0.08-0.02

The Three Amigos Restaurant is expected to pay annual dividends of $4.75, $5.50, and $2.50 per share for the next three years, respectively. After that, the firm expects to maintain a constant dividend growth rate of 4 percent per year. What is the price in three years if the required return is 12 percent? A. $27.64 B. $49.61 C. $30.66 D. $32.50 E. $33.93

D. $32.50 p3 = d4/ r-g 2.50(1+ 0.04) / .12-0.4 =32.5

Assume a firm's common stock is valued according to the constant growth model. THE FIRM JUST PAID a dividend of $2.76 per share. Dividends are expected to grow at 3% forever. If investors require a 10% return, what should be the price of this STOCK IN FOUR YEARS (P4)? A. $52.63 B. $44.38 C. $37.85 D. $45.71 E. Cannot solve without knowing the current stock price.

D. $45.71 KEY: so i guess when it says just paid add the year later than it says EX: 4 = ^5 2.76(1.03)^5 / .10 -.03 = 45.708

MannKind, Inc. is a fast-growing company and is expected to quickly increase dividends over the next three years. The firm expects to pay a dividend of $2.45 in one-year, $3.75 in two-years, and $4.25 in three-years. After these dividend payments, dividends will grow at a constant rate of 4.00% forever. If investors require a 13% return on the firm's stock, what is the price in three-years (P3)? A. $51.08 B. $47.22 C. $37.45 D. $49.11 E. $41.34

D. $49.11 P3 = D4(1+g)/R-G 4.25(1+-.04)/.13-0.04 =49.11

The next dividend payment by Swenson, Inc. will be $1.80 per share. The dividends are anticipated to maintain a 5.5 percent growth rate, forever. If the stock currently sells for $48.50 per share, what is the dividend yield? A. 8.20 percent B. 5.50 percent C. 9.21 percent D. 3.71 percent E. 10.02 percent

D. 3.71 percent 1.80/48.50

The rate at which a stock's price is expected to appreciate is called the __________ yield. A. Current B. Total C. Dividend D. Capital gains E. earnings

D. Capital gains

The h in the Fisher equation represents the: A. Current yield B. Real return C. Coupon rate D. Inflation rate E. Nominal return

D. Inflation rate

If inflation is expected to steadily increase in the future, the term structure of interest rates will most likely be: A. Downward sloping B. Inverted C. Double humped D. Normal E. Flat

D. Normal

Two equally risky bonds are priced to yield a total return (YTM) of 8%. One bond has an annual coupon of 6%, matures in 10 years and is currently priced at $865.80. The other bond has an annual coupon of 10%, matures in 10 years and is currently priced at $1,134.20. Based on this information (and as discussed in class), which bond would you prefer to invest in? A. You would prefer the first bond because it has a lower price. B. You would prefer the second bond because it has a higher coupon payment. C. You don't like bonds and would not buy either one. D. You should be indifferent between the bonds since they are both priced to yield 8%. E. You cannot decide because we did not talk about this in class.

D. You should be indifferent between the bonds since they are both priced to yield 8%.

As discussed in class, an "inverted" yield curve implies __________ according to the pure expectations theory? A. higher interest rates in the future B. short term rates are lower than long term rates C. an increase in expected inflation D. in all likelihood we are going into a recession E. investors expect inflation to be constant

D. in all likelihood we are going into a recession

If inflation is expected to steadily decrease in the future, the yield curve will most likely be: A. upward sloping. B. flat. C. normal. D. inverted. E. double-humped.

D. inverted

The yield curve

D. is a graphical depiction of term structure of interest rates usually depicted for U.S. Treasuries in order to hold risk constant across m

Assume that you are considering purchasing one of two bonds. Both bonds have 15 years until maturity and are BOTH priced to provide an YTM of 7%. Bond A has a coupon rate of 9% and Bond B has a coupon rate of 5% (coupons are paid annually). Bond A's price is $1,182.16 and Bond B's price is $817.48. Which bond should you prefer as discussed in class? A. you should buy Bond B since you can buy more bonds given the cheaper price. B. you should buy Bond A since it has the higher coupon rate. C. You should not buy either bond because bonds are bad investments. D. you should be indifferent between the two bonds since they are both priced to yield 7%. E. cannot determine without more information.

D. you should be indifferent between the two bonds since they are both priced to yield 7%.

The inflation premium: A. Decreases the real return. B. Is inversely related to time to maturity. C. Remains constant over time. D. Rewards investors for accepting interest rate risk. E. Compensates investors for expected price increases.

E. Compensates investors for expected price increases.

The relationship between market rates and the price risk impact is: A. Uncorrelated B. Indeterminate C. Direct D. Positive E. Inverse

E. Inverse

Which one of the following securities has the highest priority in bankruptcy? A. Common stock B. Preferred stock C. Subordinate debt D. Junior debt E. Senior debt

E. Senior debt

The constant growth stock valuation model is also referred to as A. the Free Cash Flow Model. B. the Earnings Multiple Model. C. the Preferred Stock Valuation Model. D. the Net Present Value Model. E. the Gordon Model.

E. the Gordon Model.

corporate bond has a coupon rate of 6% and a current price of $855. If the bond has 15 years to maturity and pays coupons semiannually, what is the bond's YTM? Assume the bond has a $1,000 par value. A. 6% B. 3% C. 4.75% D. 8.25% E. 7.64%

KEY: semiannual n =15 x 2 I% = ?? PV = -855 PMT = 1000 x 0.06 /2 FV = 1000 I% =3.82 x 2 = 7.64

BioChip's common stock is valued using the Gordon Model. The firm just paid a dividend of $2.75. Dividends are expected to grow at 3% forever. If you require an 11% return on BioChip's stock, what is the maximum current price you would pay? A. $20.23 B. $34.38 C. $25.76 D. $36.47 E. $35.41

P0 = D(1+g)/ R- g 2.75(1.03)/.11-.03 = 35.406

AlphaStrike Company has common stock with a current price of $27.50. The firm just paid its annual dividend of $3.25. If investors expect dividends to grow at a constant rate of 4% forever, what is the expected return on its common stock? A. 15.82% B. 16.78% C. 16.29% D. 14.27% E. 13.66%

R= D0(1+g)/P0 + g 3.25/27.50 +0.04

A $1,000 par value bond matures in seven years, has an annual coupon rate of 7.50%, and has a yield to maturity of 6.23%. What is the current market price of the bond? A. $1,070.32 B. $947.21 C. $959.58 D. $1,041.49 E. $962.40

A. $1,070.32 Solve for PV N = 7 I% = 6.23 PV =?? PMT = 75 ( i guess get rid of decimal point?) FV = 1000 PV = 1070.32

You are considering purchasing a new home. You will need to borrow $275,000 to purchase the home. A mortgage company offers you a 30-year fixed rate mortgage at 6% APR (0.5% month). If you borrow the money from this mortgage company, your monthly mortgage payment will be closest to: A. $1,649 B. $660 C. $2,536 D. $1,499 E. $1,390

A. $1,649 Solve PMT N = 12 x 30 I% = 6 /12 PV = -275,000 PMT = ?? FV = 0 PMT = 1648.76

Venus, Inc. has an issue of preferred stock outstanding that pays a $9.00 dividend every year, in perpetuity. If the required return is 7.70%, what is the current intrinsic value of this stock? A. $116.88 B. $150.35 C. $135.23 D. $69.30 E. Cannot solve without knowing the growth rate

A. $116.88 P = D/R 9/7.70 = 1.1688

The Egg House just borrowed $260,000 to build a new restaurant. The loan terms call for equal annual payments at the end of each year. The loan is for 15 years at an APR of 8 percent. How much of the SECOND annual payment (just the second payment) will go to paying interest? Assume the annual payment is $30,376. A. $20,034 B. $40,834 C. $20,800 D. $40,800 E. Cannot solve without knowing the future value of the loan.

A. $20,034 N = 15 I% = 8 PV = 260,000 PMT = -30,376 FV = 0 THEN {INT (2,2) =20033.92

MagnaChip, Inc. IS EXPECTED TO PAY a dividend of $2.50 per share next year on its common stock. Dividends are expected to grow at a constant rate of 4% forever. If you require a return of 12.50%, how much are you willing to pay for MagnaChip's stock today? A. $29.41 B. $27.65 C. $30.59 D. $15.15 E. $33.75

A. $29.41 KEY: expected to pay so take div as is Po = D1/r-g 2.50/.1250-.04

Using the information in the previous question, what is the current intrinsic value of the stock assuming that the price in four years is $25? A. $41.64 B. $37.85 C. $36.25 D. $44.35 E. $39.48

A. $41.64 25 + 1.80 NPV(14,0,{5,12,18,26.80})

Von Bora Corporation has preferred stock outstanding. The stock pays a fixed dividend of $7.00 per share annually. Dividends are expected to remain constant at $7.00 forever. If investors require a 12% return, what is the current value of the firm's preferred stock? A. $58.33 B. $1.71 C. $27.50 D. $70.00 E. $84.00

A. $58.33 7/.12 = 58.33

A corporate bond has 20 years until maturity. It pays a 5% coupon semiannually. If investors require a YTM of 7.50%, what is the bond's current market price? Assume a par value of $1,000. A. $743.11 B. $1,256.89 C. $370.28 D. $1,075.65 E. $425.55

A. $743.11 KEY: SEMIANNUAL n= 20 x 20 I%= 7.50/2 PV =?? PMT = 1000 x 0.05 / 2 FV = 1000 PV = 743.11

The common stock of Ford Motor Company currently sells for $15.63 per share. Ford is expected to pay a dividend of $1.25 per share in one year. If you believe Ford's dividend's will grow at a constant rate of 5.50% forever, what expected return to you anticipate if you purchase the stock at its current market price? A. 13.50% B. 5.50% C. 13.94% D. 5.58% E. Cannot solve for expected return without know the CAPM inputs

A. 13.50% R= D1/Po + g 1.25/15.36 + 0.055 = .1363

Assume you purchase a bond from Texas Republic and it has 8 years remaining until maturity and that you will not sell it prior to maturity. Further, when you purchased the bond, it was priced at $875.80 The bond has an annual coupon rate of 4%. What is the bond's yield to maturity? A. 6% B. 2% C. 4% D. 9% E. 8%

A. 6% Solve for I% n = 8 I% = ?? PV = -875.8 PMT = 1,000 x 0.04 FV = 1,000 (always assume 1000) I% = 6.00

Currently, investors demand a real return of 3.50%. They also expect inflation to be 4.50%. Based on this information, what is the nominal risk-free return according to the Fisher equation? A. 8.00% B. 3.75% C. 1.08% D. 9.25% E. 8.16%

A. 8.00% (1.035)(1.045) -1 = .0815

Assume investors demand a real return of 3.00% and expect inflation to be 6.00%. What is the nominal risk-free rate according to the Fisher equation? A. 9.18% B. 1.0918% C. 9% D. 3.00% E. 18.00%

A. 9.18% R =(1+0.03)(1+0.06)-1 =0.0918

All else constant, which of the following would lead to a decrease in the current intrinsic value of a firm's common stock? A. The assumed growth rate decreases. B. The assumed growth rate increases. C. You plan to hold it for 3 years rather than 5 years. D. The required return demanded by investors decreases. E. The company just announced an amazing new product.

A. The assumed growth rate decreases.

As discussed in class, a "normal" yield curve implies __________ according to the pure expectations theory? A. higher interest rates in the future B. lower interest rates in the future C. a decrease in expected inflation D. in all likelihood we are going into a recession E. investors expect inflation to be constant

A. higher interest rates in the future