finance quiz 3

As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a _____________.

dividend yield and a capital gains yield

The stock of MTY Golf World currently sells for $89.92 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now?

$ 95.32

J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what will the bond sell for?

$1,050.97

1. Mullineaux Co. issued 11-year bonds one year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.5 percent, what is the current bond price?

$1,076.43

Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years, the growth rate will drop to a steady 6%. At the end of year 5, Oly will issue its first dividend in the amount of $3 per share. If the required return is 15%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4.

$19.06

What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% forever and you require a 12% return on your investment?

$28.57

3. Barely Heroes Corporation has bonds on the market with 14.5 years to maturity, YTM of 9 percent, and a current price of $850. The bonds make semiannual payments. What must the coupon rate be on Barely Heroes' bonds?

$35.64

9. Your broker faxed to you the following information about two semiannual coupon bonds that you are considering as a potential investment. Unfortunately, your fax machine is blurring some of the items, and all you can read from the fax on the two different bonds is the following:

1138.96

Suppose that you have just purchased a share of stock for $40. The most recent dividend was $2 and dividends are expected to grow at a rate of 7% indefinitely. What must your required return be on the stock?

12.35%

5. Massey Co. has 12 percent coupon bonds making annual payments with YTM of 9 percent. The current yield on these bonds is 9.80 percent. How many years do these bonds have left until they mature?

12.96 or 13 years

7. Addison Company will issue a zero-coupon bond this coming month. The bond's projected yield is 7%. If the par value is $1,000, what is the bond's price using a semiannual convention if a. The maturity is 20, 30, 50, 100 years?

252.57, 126.93, 32.06, 1.03

2. Clapper Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?

3.345%

23. Super Growth Co. is growing quickly. Dividends are expected to grow at a 32 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 15 percent and the company just paid a $2.25 dividend, what is the current share price?

69.21, 54.46

On January 1, 2002, HomeSafe Cab Co. will issue new bonds to finance its expansion plans. Currently outstanding 8%, January 1, 2017 HomeSafe bonds are selling for $1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?

7.00%

The market price of a bond is $1,236.94, it has 14 years to maturity, a $1,000 face value, and pays an annual coupon of $100 in semiannual installments. What is the yield to maturity?

7.27%

ABC Corporation's common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is expected to pay a dividend of $2.89 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock?

8.7%

Given no change in required returns, preferred stock prices will:

None of the above

Stocks A and B have the same required rate of return and the same expected year end dividend (D1) Stock A's dividend is expected to grout a constant rate of 10 percent per year, while stock b's dividendd is expected to grow at a constant rate of 5 percent per year. Which of the following statements is most correct?

None of the statements above is correct

21. Metallica Bearings, Inc. is a young start-up company. No dividends will be paid on the stock over the next nine years, because the first needs to plow back its earnings to fuel growth. The company will pay a $7 per share dividend in 10 years and will increase the dividend by 6 percent per year, thereafter. If the required return on this stock is 14 percent, what is the current share price?

P9 = D10 / (R - g) = $7.00 / (.14 - .06) = $87.50; P0 = $87.50 / 1.149 = $26.91

Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 5% annually forever. The firm just paid a dividend of $4; given a required rate of return is 10%, the price of the stock in 2 years will be:

$22.86

6. Moore Company is about to issue a bond with semiannual coupon payments, a coupon rate of 8%, and a par value of $1,000. The yield to maturity for this bond is 10%.a. What is the bond price if it matures in five, ten, fifteen, or twenty years? b. What do you notice about the bond price in relationship to the bond's maturity?

922.78, 875.38, 846.28, 828.41 The longer the maturity of a bond selling at a discount, all else held constant, the lower the price of the bond!

The highest S&P bond rating category considered to be junk quality grade is:

BB+

4. Lifehouse Software has 10 percent coupon bonds on the market with 7 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on Lifehouse's bonds? The YTM?

Current yield-9.615 YTM-9.212 I/Y-4.606

19. Suppose you know that a company's stock currently sells for $60 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between a capital gain yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?

Dividend yield = 1/2(.14) = .07 = capital gains yield D1 = .07($60) = $4.20; D0(1 + g) = D1, hence, D0 = $4.20 / (1.07) = $3.93

If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ______________.

I, II, and II

22. Corn, In., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $2 per share for each of the next four years, and then never pay another dividend. If you require an 11 percent return on the company's stock, how much will you pay for a share today?

P0 = $8 / (1.11) + $10 / (1.11)2 + $12 / (1.11)3 + $14 / (1.11)4 = $33.32

24. Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require a 14 percent return on this stock, what will you pay for a share today?

P0 = D0 (1 + g) / (R - g) = $9.00 (0.92) / (.14 + .08) = $37.64

17. Cannons Corporation will pay a $4.00 per share dividend next year. The company pledges to increase its dividend by 4 percent per year, indefinitely. If you require a 13 percent return on your investment, how much will you pay for the company's stock today?

P0 = D1 / (R - g) = $4.00 / (.13 - .04) = $44.44

20. Kiessling Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share price?

P0=9/(1+11%) + 9/(1+11%)2+9/(1+11%)3+....+9/(1+11%)8 = 46.32

18. Shocking Co. is expected to maintain a constant 7 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.2 percent, what is the required return on the power company's stock?

R = dividend yield + capital gains yield = .042 + .07 = 11.2%

A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false?

The coupon payment of the bond must have decreased.

The rate of return required by investors in the market for owning a bond is called the:

Yield to maturity.

12. Benson Biometrics, Inc. has outstanding $1,000 face value 8% coupon bonds that make semiannual payments and have fourteen years remaining to maturity. If the current price for these bonds is $1,118.74, what is the annualized yield to maturity?

a. 6.68%

8. The Canadian government decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay $50 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is 6.5%. What should this consol bond sell for in the market? What if the interest rate should fall to 4.5%? Rise to 8.5%? Why does the price go up when interest rates fall? Why does the price go down when interest rates rise?

at 6.5%, $50 / 0.065 = $769.23 at 4.5%, $50 / 0.045 = $1,111.11 at 8.5%, $50 / 0.085 = $588.24 The price rises when interest rates fall because the present value of each future interest payment is worth more in present value due to the lower discount rate. The price falls when interest rates rise because the present value of each future interest payment is worth less in present value due to the higher discount rate.

10. Five years ago Thompson Tarps, Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value. Since then, interest rates in general have risen, and the yield to maturity on the Thompson Tarps bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?

b. $850.61

15. A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is true?

b. Interest rates must be lower now than they were five weeks ago.

25. Which of the following statements regarding dividend yields is true?

c. It is analogous to the current yield for a bond.

13. The rate of return required by investors in the market for owning a bond is called the:

c. Yield to maturity

16. For a discount bond, the current yield is __ the coupon rate, and the coupon rate is _____ the yield to maturity.

c. greater than; less than

The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.

current yield

11. Endicott Enterprises, Inc. has issued thirty-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 8%, what is the firm's current price per bond?

d. $1,678.70

14. A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a bond

d. zero coupon

Which of the following is not true

if a stock has a required rate of return R=12% and its dividend grows at a constant rate of 5% this implies that the stocks dividend yield is 5%

A bond with an annual coupon of $100 originally sold at par for $1,000. The current market interest rate on this bond is 9%. Assuming no change in risk, this bond will sell at a and present the seller (who bought the bond at initial issuance) of the bond today with a capital

premium; gain

The ________ is the market of first sale in which companies first sell their authorized shares to the public.

primary market

Stocks are different from bonds because ________.

stocks, unlike bonds, represent residual ownership

As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that

the default risk decreases and the required rate of return decreases.