Financial Management- Ch. 5-8- connect practice
A Treasury yield curve plots Treasury interest rates relative to which one of the following?
Maturity
The value of a share of stock is the present value of the expected stream of future dividends.
True
U.S. Treasury bonds have almost zero default risk but are subject to inflation risk.
True
When money is invested at compound interest, the growth rate is the interest rate.
True
You should never compare cash flows occurring at different times without first discounting them to a common date.
True
Which one of the following accurately defines a perpetuity?
Unending equal payments paid at equal time intervals.
You want to buy a new sports car for $55,000. The contract is in the form of a 60-month annuity due at an APR of 6 percent, compounded monthly. What will be your monthly payment?
$1,058.01 PVA due= $55,000= C x [(1-{1/[1+(.06/12)]^60})/(.06/12)]x[1+(.06/12)] C= $1,058.01
You invested $6,500 in an account that pays 6 percent simple interest. How much more could you have earned over a 10-year period if the interest had compounded annually?
$1,240.51 Simple interest= $6,500+ ($6,500 x .06 x 10)=$10,400 Annual compounding= $6,500 x (1.06)^10= $11,640.51 Difference= $11,640.51-10,400=$1,240.51
You want to buy a new sports car from Muscle Motors for $84,000. The contract is in the form of a 60-month annuity due at an APR of 7.55%. What will your monthly payment be?
$1,674.65 60 N; 7.55/12 I/Y; 84, 000 PV; CPT PMT
Good Guys Foods established a trust fund that provides $125,000 in scholarships each year for needy students. The trust fund earns a fixed 7.25 percent rate of return. How much money did the firm contribute to the fund assuming that only the interest income is distributed?
$1,724.138 PV= $125,000/.0725= $1,724,138
Sue plans to save $4,500, $0, and $5,500 at the end of each of the next three years, respectively. What will her investment account be worth at the end of the third year if she earns an annual rate of 4.15 percent?
$10,381.25 FV= $4,500 x 1.0415^2 + $5500= $10,381.25
Electric Utilities just issued some new preferred stock. The issue will pay a $20 annual dividend in perpetuity beginning 10 years from now. What is one share of this stock worth today if the market requires a return of 9 percent on this investment?
$102.32 P9= $20/.09= $222.22 P0= $222.22/(1+.09)^9= $102.32
The Sly Fox pays a constant dividend of $1.46 a share. The company announced today that it will continue to pay the dividend for another 2 years and then in year 3 it will pay a final liquidating dividend of $15.25 a share. What is one share of this stock worth today at a required return of 18.5%?
$11.44 P0= $1.46/(1+.185)+$1.46/(1+.185)^2+$15.25/(1+.185)^3= $11.44
Your father invested a lump sum 33 years ago at 4.25 percent interest. Today, he gave you the proceeds of that investment which totaled $51,480.79. How much did your father originally invest?
$13,035.72 Present value= $51,480.79/(1+.0425)^33= $13,035.72
The common stock of Water Town Mills pays an annual dividend of $1.84 a share. The company has promised to maintain a constant dividend even though economic times are tough. How much are you willing to pay for one share of this stock if you want to earn a 13.6 percent annual return?
$13.53 P0= $1.84/.136= $13.53
First City Bank pays 8 percent simple interest on its savings account balances, whereas Second City Bank pays 8 percent interest, compounded annually. If you made a $71,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 8 years?
$14,976.04 FV8= $71,000 x (1+0.08)^8= $131,416.04493001 F8= ($71,000 x 0.08 x 8)+ $71,000= 116,440 131,416.04493001-116,440= $14,976.04
Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying $1.55, $1.63, and $1.65 a share over the next three years, respectively. After that, the dividend will be constant at $1.70 per share per year. What is the market price of this stock if the market rate of return is 11 percent?
$15.23 P3= $1.70/.11= $15.4545 P0= $1.55/(1+.11)+$1.63/(1+.11)^2+($1.65+15.4545)/(1+.11)^3 P0= $15.23
You borrow $230,000 to buy a house. The mortgage rate is 4.5 percent and the loan period is 25 years. Payments are made monthly. If you pay the mortgage according to the loan agreement, how much total interest will you pay?
$153,524 PVA= $230,000= C x [(1-{1/[1+(.045/12)^(25*12)})/(.045/12)] C= $1,278.41 Total Interest = (1,278.41 x 25 x 12)- $230,000= $153,524 ***mortgage calculator
What is the future value of $1,400 a year for 35 years at 6 percent interest? Assume annual compounding.
$156,009 FVA= $1,400 x {[(1+.06)^35 -1]/.06}= $156,009
You need some money today and the only friend you have that has any is your miserly friend. He agrees to loan you the money you need, if you make payments of $30 a month for the next six months. In keeping with his reputation, he requires that the first payment be paid today. He also charges you 2 percent interest per month. How much money are you borrowing?
$171.40 PVA due= $30 x ({1-[1/(1+.02)^6]}/.02) x (1+.02) = $171.40
Global Tek is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 3.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 15.5 percent?
$2.49 P4= [$.20 x (1+.15)^4 x (1+.035)]/(.155-.035)= $3.017 P0= {[$.20 x (1+.15)]/(.155-.15)}x {1-[(1+.15)/(1+.155)]^4}+$3.017/(1+.155)^4= $2.49
GEO Inc. has paid annual dividends of $.41, $.47, and $.52 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively flat. Given the lack of future growth, you will only buy this stock if you can earn at least a rate of return of 16 percent. What is the maximum amount you are willing to pay for one share of this stock today?
$3.25 P0= $.52/.16= $3.25
New Products pays no dividend at the present time. Starting in Year 3, the firm will pay a $.25 dividend per share for two years. After that, the company plans on paying a constant $.75 a share annual dividend indefinitely. How much should you pay per share to purchase this stock today at a required return of 13.8 percent?
$3.56 P4=$.75/.138= $5.4348 P0= $.25/(1+.138)^3 + ($.25+5.4348)/(1+.138)^4= $3.56
Synovec Co. is growing quickly. Dividends are expected to grow at a rate of 24% for the next 3 years. With the growth rate falling off to a constant 5% thereafter. If the required return is 14%, and the company just paid a dividend of $1.75 what is the current share price?
$32.50 P3= [(1.75)(1.24)^3(1.05)/(.14-.05)= $38.93 P0= [(1.75)(1.24)/1.14] + [(1.75)(1.24)^2/(1.14)^2] + [(1.75)(1.24)^3/(1.14)^3] + [38.93/1.14^3] P0= 32.50
Your local toy store just announced that it will pay a $4 dividend next year, $3 the following year, and then a final liquidating dividend of $46 a share in year 3. At a discount rate of 14 percent, what should one share sell for today?
$36.87 P0= $4/(1+.14)+ $3/(1+.14)^2 +$46/(1+.14)^3= $36.87
Whistle Stop pays a constant annual $8 dividend on its stock. The company will maintain this dividend for the next 8 years and will then cease paying dividends forever. What is the current price per share if the required return on this stock is 12.6 percent?
$38.92 P0= $8 x ({1-[1/(1+.126)^8]}/.126= $38.92
E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $24 in perpetuity, beginning 13 years from now. If the market requires a return of 3.8 percent on this investment, how much does a share of preferred stock cost today?
$403.70 P12= $24/.038= $631.58 P0= $631.58/(1.038)^12= $403.70
Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $187,000, $220,000, and $245,000 over the next three years, respectively. After that time, they feel the business will be worthless. Southern Tours has determined that a 13.5 percent rate of return is applicable to this potential acquisition. What is Southern Tours willing to pay today to acquire Holiday Vacations?
$503,098 PV= ($187,000/1.135)+($220,000/1.135^2)+ ($245,000/1.135^3)= $503,098
Burnett Corp. pays a constant $8.60 dividend on its stock. The company will maintain this dividend for the next 11 years and will then cease paying dividends forever. If the required rate of return on this stock is 11%, what is the current share price?
$53.38 P0= $8.60 (PVIFA11%,11)= 53.38
A stock pays a constant annual dividend and sells for $56.07 a share. If the market rate of return on this stock is 12.2 percent, what is the amount of the next annual dividend?
$6.84 D1= .122 x $56.07= $6.84
You just borrowed $195,000 to buy a house. The mortgage rate is 3.75%. The loan is to be repaid in equal monthly payments over 15 years. The first payment is due one month from now. What is the total amount of interest payments for the 15 year mortgage loan?
$60,255.08 https://www.mortgagecalculator.org
You hope to buy your dream car four years from now. Today, that car costs $54,500. You expect the price to increase by an average of 3.1 percent per year over the next four years. How much will your dream car cost by the time you are ready to buy it?
$61,578.79 Future value= $54,500 x (1+.031)^4= $61,578.79
You just acquired a 30-year mortgage in the amount of $179,500 at 4.75 percent interest, compounded monthly. Payments will be equal over the life of the loan with the first payment due one month after the date of the loan. How much of the first payment will be interest?
$710.52 Interest (month 1)= $179,500 x (.0475/12)= $710.52
Your broker is offering 1.2 percent compounded daily on its money market account. If you deposit $7,500 today, how much will you have in your account 15 years from now?
$8,979.10 FV= $7,500 x [1+(.012/365)]^(15*365)= $8,979.10
You want to purchase some shares of JJ Farms stock but need a 14.5 percent rate of return to compensate for the perceived risk. What is the maximum you are willing to spend per share to buy this stock if the company pays a constant $1.25 annual dividend per share?
$8.62 P0= $1.25/.145= $8.62
You just won the grand prize in a national writing contest! As your prize, you will receive $1,000 a month for 10 years. If you can earn 7 percent on your money, what is this prize worth to you today?
$86,126.35 PVA= $1,000 x [(1-{1/[1+(.07/12)]^(10*12)})/ (.07/12)] = $86,126.35
Roadside Markets has a 6.75 percent coupon bond outstanding that matures in 10.5 years. The bond pays interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?
$967.24 Bond price= $33.75 x [(1-{1/[1+(.072/2)]^(10.5*2)})/ (.072/2)] + $1000/[1+(.072/2)]^(10.5*2) Bond price= $967.24
Yan Yan Corp. has a $5,000 par value bond outstanding with a coupon rate of 4.8 percent paid semiannually and 10 years to maturity. The yield to maturity of the bond is 4.3 percent. What is the price of the bond? $5000
(27 x 2) N; -5000 PV; 4.8/2 I/Y; -120 PMT; CPT FV= 5000
Although appealing to more refined tastes, art as a collectible has not always performed so profitably. During 2003, an auction house sold a sculpture at auction for a price of $10,381,500. Unfortunately for the previous owner, he had purchased it in 1998 at a price of $12,517,500. What was his annual rate of return on this sculpture? (A negative answer should be indicated by a minus sign.)
-3.6729 per year PV= 12,517,500 FV= 10,381,500 N= 5 compute I/Y
The break-even tax rate between a taxable corporate bond yielding 7 percent and a comparable nontaxable municipal bond yielding 5 percent can be expressed as:
.05/(1-t*)= .07
A preferred stock pays an annual dividend of $6.75 and sells for $58.60 a share. What is the rate of return on this security?
11.52 percent R= $6.75/$58.60= 11.52 percent
You are planning to make monthly deposits of $420 into a retirement account that pays 8% interest compounded monthly. If your first deposit will be made in one month from now, how large will your retirement account be in 25 years?
25 x 12 N; 8/12 I/Y; 420 PMT; CPT FV = 399,431.11
Which one of the following bonds is the least sensitive to interest rate risk?
3-year; 6 percent coupon
The next dividend payment by HG Enterprises will be $2.35 per share. The dividends are anticipated to maintain a 2.5 percent growth rate forever. The stock currently sells for $54.60 per share. What is the dividend yield?
4.30 percent Dividend yield= $2.35/$54.60= .0430 or 4.30 percent
A Japanese company has a bond outstanding that sells for 90% of its yen 100,000 par value. The bond has a coupon rate of 4.9% paid annually and matures in 20 years. What is the yield to maturity of this bond?
5.75 percent 20 N; 90,000 PV; -4,900 PMT; -100,000 FV; CPT I/Y = 5.75 percent
A Treasury bond is quoted at a price of 101.6533 with a current yield of 6.276 percent. What is the coupon rate on a $10,000 bond?
6.38 percent Price= 1.016533 x $10,000 = $10,165.33 Annual Int. = .06276 x $10,165.33 = $637.98 Coupon rate= $637.98/$10,000 = 6.38 percent
The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $1,032. What is the yield to maturity?
6.48 percent $1,032= $35x[(1-{1/[1+(r/2)]^(8*2)})/(r+2)]+ $1,000/[1+(r/2)]^(8*2) To solve for r, use trial and error, a financial calculator, or a computer. Financial calc: 16 N; 3.2405 i/y; -1032 PV; 35 PMT; 1000 FV YTM= 2 x 3.2405%= 6.48%
The Uptowner will pay an annual dividend of $1.98 a share next year with future dividends increasing by 2.8 percent annually. What is the market rate of return if the stock is currently selling for $49.10 a share?
6.83 percent R= $1.98/$49.10+.028= .0683 or 6.83 percent
One year ago, you invested $1,800. Today it is worth $1,924.62. What rate of interest did you earn?
6.92 $1,924.62= $1800 x(1+r)^1 r= 6.92 Financial Calc. PV= 1,800; FV= 1,924.62; N= 1; calc. IY
The common stock of Dayton Repair sells for $43.19 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividend by 2.15 percent annually and expects to continue doing so. What is the market rate of return on this stock?
7.43 percent R= $2.28/$43.19+.0215= .0743 or 7.43 percent
Sixty years ago, your mother invested $4,500. Today, that investment is worth $430,065.11. What is the average annual rate of return she earned on this investment?
7.90 $430,065.11= $4500 x (1+r)^60 r= 7.90 Financial calc PV= -4500; FV= 430,065.11; N=60 calc I/Y
Which one of the following will produce the lowest present value interest factor?
8 percent interest for 10 years.
Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have a 7 percent coupon rate. What is the current yield on these bonds?
8.07 percent Current yield= (.07 x $1,000)/(.86725 x $1,000)= .0807 or 8.07%
Suppose the real rate is 3.6% and the inflation rate is 5.2%. What rate would you expect to see on a Treasury bill?
8.99 percent Fisher Equation R= (1+.036)(1+.052)-1 R= .0899 or 8.99 percent
Some time ago, Tracie purchased 11 acres of land costing $77,900. Today, that land is valued at $54,800. How long has she owned this land if the price of the land has been decreasing by 3.5 percent per year?
9.87 years $54,800= $77,900 x [1+ (-.035)]^t t=9.87 years
The taxability risk premium compensates bondholders for which one of the following?
A bond's unfavorable tax status
Which one of the following statements related to annuities and perpetuity is correct?
A perpetuity composed of $100 monthly payments is worth more than an annuity of $100 monthly payments; given equal discount rates.
The interest rate that is most commonly quoted by a lender is referred to as which one of the following?
Annual percentage rate
You are comparing two annuities that offer quarterly payments of $2,500 for five years and pay .75 percent interest per month. You will purchase one of these today with a single lump sum payment. Annuity A will pay you monthly, starting today, while annuity B will pay monthly, starting one month from today. Which one of the following statements is correct concerning these two annuities?
Annuity B has a smaller present value than annuity A
Andy deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Barb also deposited $3,000 this morning into an account that pays 5 percent interest, compounded annually. Andy will withdraw his interest earnings and spend it as soon as possible. Barb will reinvest her interest earnings into her account. Given this, which one of the following statements is true?
Barb will earn more interest in the second year than Andy.
If you sell a 6 percent bond to a dealer when the market rate is 7 percent, which one of the following prices will you receive?
Bid price
Which one of the following is the rate at which a stock's price is expected to appreciate?
Capital gains yield
Christina invested $3,000 five years ago and earns 2 percent interest on her investment. By leaving her interest earnings in her account, she increases the amount of interest she earns each year. The way she is handling her interest income is referred to as which one of the following?
Compounding
Which one of the following applies to a premium bond?
Coupon rate>current yield>yield to maturity
Which of these will increase the present value of an amount to be received sometime in the future?
Decrease in the interest rate.
Terry is calculating the present value of a bonus he will receive next year. The process he is using is called:
Discounting
Which one of the following is computed by dividing next year's annual dividend by the current stock price?
Dividend yield
According to the Rule of 72, you can do which of the following?
Double your money in 5 years at 14.4 percent interest. Rule of 72= 72/5= 14.4 percent interest 72/int rate= number of years to double
An ordinary annuity is best defined by which one of the following?
Equal payments paid at the end of regular intervals over a stated time period.
Converting an annuity to an annuity due decreases the present value.
False
Discounting refers to the growth process that turns $1 today into a greater value several periods in the future.
False
In estimating the market value of a bond, the coupon rate should be used as the discount rate.
False
The dividend discount model should not be used to value stocks in which the dividend does not grow.
False
The future value of an annuity table provides a "shortcut" for calculating the future value of a steady stream of payments, denoted as A. The same value can be calculated directly from the following equation: FVa= A[1/(1+i)]^1+A[1/(1+i)]^2+...A[1/(1+i)]^n
False
The farther into the future any given amount is received, the larger its present value.
False Time amplifies the growth of money. Consequently, to achieve a certain future value, more time means that you can start with less.
First National Bank charges 13.3% compounded monthly on its business loans. First United Bank charges 13.6 % compounded semi-annually. Calculate the EAR for First National Bank and First United Bank.
First National EAR: (1+(0.133/12))^12 -1= 14.14% First United EAR: (1+(0.136/2))^2 -1= 14.06%
Phillippe invested $1,000 ten years ago and expected to have $1,800 today. He has not added or withdrawn any money from this account since his initial investment. All interest was reinvested in the account. As it turns out, he only has $1,680 in his account today. Which one of the following must be true?
He earned a lower rate than he expected.
You want to have $1 million in your savings account when you retire. You plan on investing a single lump sum today to fund this goal. You are planning on investing in an account which will pay 7.5 percent annual interest. Which of the following will reduce the amount that you must deposit today if you are to have your desired $1 million on the day you retire? I. Invest in a different account paying a higher rate of interest. II. Invest in a different account paying a lower rate of interest. III. Retire later. IV. Retire sooner.
I. Invest in a different account paying a higher rate of interest. III. Retire later Answer: I and III only
Art invested $100 two years ago at 8 percent interest. The first year, he earned $8 interest on his $100 investment. He reinvested the $8. The second year, he earned $8.64 interest on his $108 investment. The extra $.64 he earned in interest the second year is referred to as:
Interest on interest
Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity?
Liquidity
DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:
Market price of the bond will decrease
You are considering five loan offers. The only significant difference between them is their interest rates. Given the following information, which offer should you accept? (Assume a 365-day year.) Offer A: 6.75 percent APR with daily compounding Offer B: 6.8 percent APR with monthly compounding Offer C: 7 percent APR with annual compounding Offer D: 6.825 percent APR with quarterly compounding Offer E: 6.85 percent APR with semi-annual compounding
Offer E **charges lower interest rate Offer E: EAR= [1+(.0685/2)]^2 -1 = .0697 or 6.97%
You are comparing two investment options that each pay 6 percent interest, compounding annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate.
Option B has a higher present value at time zero.
What is the relationship between present value and future value interest factors?
The factors are reciprocals of each other.
A loan where the borrower receives money today and repays a single lump sum on a future date is called a(n) ________ loan.
Pure discount
The Fisher effect is defined as the relationship between which of the following variables?
Real rates, inflation rates, and nominal rates
Renee invested $2,000 six years ago at 4.5 percent interest. She spends her earnings as soon as she earns any interest so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?
Simple interest
Which one of the following statements is correct?
Stocks can have negative growth rates.
Which one of the following statements concerning interest rates is correct?
The effective annual rate equals the annual percentage rate when interest is compounded annually.
This afternoon, you deposited $1,000 into a retirement savings account. The account will compound interest at 6% annually. You will not withdraw any principal or interest until you retire in 40 years. Which one of the following statements is correct?
The present value of this investment is equal to $1,000.
Which one of the following statements is false concerning the term structure of interest rates?
The term structure of interest rates and the time to maturity are always directly related.
A premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?
The yield-to-maturity is less than the coupon rate.
As long as the interest rate is positive, the future value will always be larger than the present value given any period of time.
True
Asked yields can be guaranteed only to investors who buy a bond and hold it until maturity.
True
Compound interest pays interest for each time period on the original investment plus the accumulated interest.
True
Compounding refers to the growth process that turns $1 today into a greater value several periods in the future.
True
In determining the future value of an ordinary annuity, the final payment is not compounded at all.
True
In determining the interest factor (IF) for the present value of $1, one could use the reciprocal of that IF for the future value of $1 at the same rate and time period.
True
In paying off a mortgage loan, the amount of the periodic payment that goes toward the reduction of principal increases over the life of the mortgage
True
Preferred stock would be valued the same as a common stock with a zero dividend growth rate.
True
The appropriate discount rate for valuation of bonds is called the yield to maturity.
True
The dividend discount model indicates that the value of a stock is the present value of the dividends it will pay over the investor's horizon, plus the present value of the expected stock price at the end of that horizon.
True
The dividend discount model states that today's stock price equals the present value of all expected future dividends.
True
The more frequent the compounding, the higher the future value, other things equal.
True
The price of a bond is equal to the present value of all future interest payments added to the present value of the principal.
True
The valuation of a financial asset is based on the concept of determining the present value of future cash flows.
True
Which of the following statements is correct, assuming all else is constant?
When the discount rate decreases, the PV increases.
The bond market requires a return of 9.8 percent on the five-year bonds issued by JW Industries. The 9.8 percent is referred to as which of the following?
Yield to maturity
You have some property for sale and have received two offers. The first offer is for $89,500 today in cash. The second offer is the payment of $35,000 today and an additional guaranteed $70,000 two years from today. If the applicable discount rate is 11.5 percent, which offer should you accept and why?
You should accept the second offer because it has the larger net present value. Offer A: PV= $89,500 Offer B: PV= $35,000+(70,000/1.115^2)= $91,305.17
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
a discount, less than
The next dividend payment by Savitz, Inc. will be $1.48 per share. The dividends are anticipated to maintain a growth rate of 5% forever. The stock currently sells for $27 per share. a. What is the dividend yield? b. What is the expected capital gains yield
a. $1.48/$27= .0548 or 5.48 percent b. capital gains yield = 5 percent
Investment X offers to pay you $5,800 per year for 9 years, whereas Investment Y offers to pay you $8,600 per year for 5 years. Calculate the present value for Investment X and Y if the discount rate is 5 percent. If the discount rate is 15%, what is the Present Value of the cash flows?
a. Inv. X= 5800[PMT];5[I/Y]; 9[N]; CPT PV= -41225.37 Inv. Y= 8600 [PMT]; 5[i/y]; 5[N] CPT PV= -37,233.50 b. Inv. X = 5800 PMT; 15 I/Y; 9 N; CPT PV= -27,675.19 Inv. Y= 8600 PMT; 15 I/Y; 5 N; CPT PV= -28,828.53
The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.40 per share of its stock. The dividends are expected to grow at a constant rate of 5% per year, indefinitely. Investors require a return of 12% on the company's stock. a. What is the current stock price? b. What will the stock price be in 3 years? c. What will the stock price be in 10 years?
a. $21.00 P0=[ 1.40(1.05)]/(.12-.05)= $21.00 b. $24.31 P3= [1.40(1.05)^4]/(.12-.05)= $24.31 OR $21.00(1+.05)^3= $24.31 c. $32.58 Pg= [1.40(1.05)^10]/(.12-.05)= $32.58 OR $21.00(1+.05)^9= $32.58
Suppose the following bond quotes for IOU Corporation appear in the financial pages of today's newspaper. Assume the bond has a face value of $2,000 and the current date is April 19, 2018. Company Ticker: IOU Coupon: 5.5 Maturity: 4/19/2034 Last Price: $108.89 Last Yield: ? Est. Vol (000s): 1,841 a. What is the yield to maturity of the bond? b. What is the current yield?
a. 4.70 percent 32 (16x2) N; -2,177.80 PV; 55 (110/2) PMT; 2000 FV; CPT IY= 2.352 YTM= 2 x 2.352= 4.70 percent b. 5.05% 110/2177.80= 0.0505 or 5.05 percent
The interest rate risk premium is the:
compensation investors demand for accepting interest rate risk
Which one of the following represents the capital gains yield as used in the dividend growth model?
g
A zero coupon bond:
has more interest rate risk than a comparable coupon bond
The yields on a corporate bond differ from those on a comparable Treasury security primarily because of:
taxes and default risk