FIN221 Quiz3

The risk-free rate, rRF, is 6%. The overall stock market has an expected return of 12%. Hazlett, Inc. has a beta of 1.2. What is the required return of Hazlett, Inc. stock?

13.2

A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is rs = 11%, and the expected constant growth rate is 5%. What is the current stock price?

16.67

A stock is expected to have a dividend per share of $0.60 at the end of the year (D1 = 0.60). The dividend is expected to grow at a constant rate of 7% per year, and the stock has a required return of 12%. What is the expected price of the stock five years from today? (That is, what is ?)

16.83

Two firms (A and B) have $1,000 par value bond issues outstanding that have the same maturity (20 years) and risk. Firm A's bond has an 8% annual coupon rate, while Firm B's bond has an 8% semiannual coupon rate. If the nominal required rate of return, rd, is 12%, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds?

17.53

Oakdale Furniture Inc. has a beta coefficient of 0.7 and a required rate of return of 15%. The market risk premium is currently 5%. If the inflation premium increases by 2%, and Oakdale acquires new assets that increase its beta by 50%, what will be Oakdale's new required return?

18.75

The Corrigan Company just paid a dividend of $1 per share, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price?

26.25

Three $1,000 face value bonds that mature in 10 years have the same level of risk, hence their YTMs are equal. Bond A has an 8% annual coupon, Bond B has a 10% annual coupon, and Bond C has a 12% annual coupon. Bond B sells at par. Assuming interest rates remain constant for the next 10 years, which of the following statements is CORRECT?

Bond A sells at a discount (its price is less than par), and its price is expected to increase over the next year.

Bond A has a 9% annual coupon, while Bond B has a 7% annual coupon. Both bonds have the same maturity, a face value of $1,000, and an 8% yield to maturity. Which of the following statements is CORRECT?

Bond A's current yield is greater than Bond B's current yield.

A 15-year, $1,000 face value bond with a 10% semiannual coupon has a nominal yield to maturity of 7.5%. The bond, which may be called after five years, has a nominal yield to call of 5.54%. What is the bond's call price?

$1,040

A 12-year bond, $1,000 face value bond pays an 8% annual coupon and a yield to maturity of 7%.What is the price of the bond today?

$1,079.43

The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds?

$935.82

You are holding a stock that has a beta of 2.0 and is currently in equilibrium. The required return on the stock is 15%, and the return on an average stock is 10%. What would be the percentage change in the return on the stock, if the return on an average stock increased by 30% while the risk-free rate remained unchanged?

+40

Kennedy Gas Works has 10-year, $1,000 face value bonds that pay a 10% quarterly coupon. The bonds may be called in five years. The bonds have a nominal yield to maturity of 8% and a yield to call of 7.5%. What is the bonds' call price?

1,048.34

A bond that matures in 12 years has a 9% semiannual coupon and a face value of $1,000. The bond has a nominal yield to maturity of 8%. What is the price of the bond today?

1,076.23

You hold a diversified portfolio consisting of a $10,000 investment in each of 20 different common stocks (that is, your total investment is $200,000). The portfolio beta is equal to 1.2. You have decided to sell one of your stocks that has a beta equal to 0.7 for $10,000. You plan to use the proceeds to purchase another stock that has a beta equal to 1.4. What will be the beta of the new portfolio?

1.235

Stock Z has had the following returns over the past five years:YearReturn199810%1999122000272001-15200230What is the company's coefficient of variation (CV)?

1.25

Given the following information, determine which beta coefficient for Stock A is consistent with equilibrium:

1.26

Portfolio P has 30% invested in Stock X and 70% in Stock Y. The risk-free rate is 6% and the market risk premium is 5%. Portfolio P has a required return of 12% and Stock X has a beta of 0.75. What is Stock Y's beta?

1.39

Below are the stock returns for the past five years for Agnew Industries: Year Stock Return 2002 22% 2001 33 2000 1 1999 -12 1998 10 What was the stock's coefficient of variation during this 5-year period? (Use the population standard deviation to calculate the coefficient of variation.)

1.46

Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return?

10.50

If D1 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock's expected total return for the coming year?

11.0

You must estimate the intrinsic value of Gallovits Technologies' stock. Gallovits's end-of-year free cash flow (FCF) is expected to be $25 million, and it is expected to grow at a constant rate of 8.5% a year thereafter. The company's WACC is 11%. Gallovits has $200 million of long-term debt plus preferred stock, and there are 30 million shares of common stock outstanding. What is Gallovits' estimated intrinsic value per share of common stock?

26.67

You own 100 bonds that have 8 years remaining to maturity, an annual coupon payment of $80, and a par value of $1,000. Unfortunately, the issuer is on the brink of bankruptcy. The creditors, including yourself, have agreed to postpone the next 4 interest payments (otherwise, the next interest payment would have been due in 1 year). The remaining interest payments, for Years 5 through 8, will be made as scheduled. The postponed payments will accrue interest at an annual rate of 6%, and they will then be paid as a lump sum at maturity (8 years from now). The required rate of return on these bonds, considering their substantial risk, is now 28%. What is the present value of each bond?

266.88

Miller Inc. is considering a capital budgeting project that has an expected return of 10% and a standard deviation of 30%. What is the project's coefficient of variation?

3.0

Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). Their nominal required yield to maturity is 10%, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate?

4

You just purchased a $1,000 par value, 9-year, 7% semiannual coupon bond. The bond sells for $920. What is the nominal yield to maturity?

4.13

An analyst has put together the following spreadsheet to estimate the intrinsic value of the stock of Rangan Company (in millions of dollars): t=1t=2t=3Sales $3,000 $3,600 $4,500NOPAT 500600750Net investment in operating capital* 300400500 •Net investment in operating capital = Capital expenditures + Changes in net operating capital - Depreciation.After Year 3 (t = 3), assume that the company's free cash flow will grow at a constant rate of 7% a year and the company's WACC equals 11%. The market value of the company's debt and preferred stock is $700 million. The company has 100 million outstanding shares of common stock.Using the free cash flow model, what is the intrinsic value of the company's stock today?

47.15

If D0 = $2.00, g (which is constant) = 6%, and P0 = $40, what is the stock's expected dividend yield for the coming year?

5.3

The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5% for 2 years, after which dividends are expected to grow at a rate of 10% forever. Klein's required return (rs) is 12%. What is the current price of Klein's common stock?

50.16

You have been given the following projections for Cali Corporation for the coming year.• Sales = 10,000 units.• Sales price per unit = $10.• Variable cost per unit = $5.• Fixed costs = $10,000.• Bonds outstanding = $15,000.• rd on outstanding bonds = 8%.• Tax rate = 40%.• Shares of common stock outstanding = 10,000 shares.• Beta = 1.4.• rRF = 5%.• RPM = 4%.• Dividend payout ratio = 60%.• Growth rate = 8%.Calculate the current price per share for Cali Corporation.

53.72

Due to numerous lawsuits, a major chemical manufacturer has recently experienced a market reevaluation. The firm has 15-year, 8% semiannual coupon bonds. The required nominal rate on this debt has now risen to 16%. What is the current value of this bond?

550

Dawson Energy is expected to pay an end-of-year dividend, D1, of $2.00 per share, which is expected to grow at a constant rate over time. The stock has a required return of 14% and a dividend yield, D1/P0, of 5%. What is the expected price of the stock five years from today?

61.54

Gettysburg Grocers' stock is expected to pay a year-end dividend, D1, of $2.00 per share. The dividend is expected to grow at a constant rate of 5%, and the stock has a required return of 9%. What is the expected price of the stock five years from today?

63.81

Ken Williams Ventures' recently issued bonds that mature in 15 years. They have a par value of $1,000 and an annual coupon of 6%. If the current market interest rate is 8%, at what price should the bonds sell?

828.81

Holmgren Hotels' stock has a required return of 11%. The stock currently does not pay a dividend but it expects to begin paying a dividend of $1.00 per share starting five years from today (D5 = $1.00). Once established the dividend is expected to grow by 25% per year for two years, after which time it is expected to grow at a constant rate of 10% per year. What should be Holmgren's stock price today?

84.80

A stock is expected to pay a $0.45 dividend at the end of the year (D1 = 0.45). The dividend is expected to grow at a constant rate of 4% a year, and the stock's required rate of return is 11%. What is the expected price of the stock 10 years from today?

9.52

Which of the following statements is CORRECT?

A security's beta measures its non-diversifiable, or market, risk relative to that of an average stock.

Which of the following statements is NOT CORRECT?

All else equal, long-term bonds have more reinvestment rate risk than short-term bonds.

Which of the following statements is CORRECT?

An increase in expected inflation could be expected to increase the required return on a riskless asset and on an average stock by the same amount, other things held constant.

You observe the following information regarding Company X and Company Y:* Company X has a higher expected return than Company Y.* Company X has a lower standard deviation of returns than Company Y.* Company X has a higher beta than Company Y.Given this information, which of the following statements is CORRECT?

Company X has a lower coefficient of variation than Company Y.

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0, and the market risk premium, rM - rRF, is positive. Which of the following statements is correct?

If Stock A's required return is 11%, the market risk premium is 5%.

Stock X has a beta of 0.6, while Stock Y has a beta of 1.4. Which of the following statements is CORRECT?

If the market risk premium decreases (but expected inflation is unchanged), the required return on both stocks will decrease but the decrease will be greater for Stock Y.

Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds?

Market interest rates decline sharply.

An investor is considering buying one of two 10-year, $1,000 face value bonds: Bond A has a 7% annual coupon, while Bond B has a 9% annual coupon. Both bonds have a yield to maturity of 8%, which is expected to remain constant for the next 10 years. Which of the following statements is CORRECT?

One year from now, Bond A's price will be higher than it is today.

Stocks A and B each have an expected return of 12%, a beta of 1.2, and a standard deviation of 25%. The returns on the two stocks have a correlation of 0.6. Portfolio P has 50% of its money in Stock A and 50% in Stock B. Which of the following statements is correct?

Portfolio P has a standard deviation that is less than 25%.

Stock A and Stock B both have an expected return of 10% and a standard deviation of returns of 25%. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P is a portfolio with 50% invested in Stock A and 50% invested in Stock B. Which of the following statements is CORRECT?

Portfolio P has more market risk than Stock A but less market risk than Stock B.

Which of the following statements is CORRECT?

Preferred stock is normally expected to provide steadier, more reliable income to investors than the same firm's common stock, and as a result, the expected after-tax yield on preferred is lower than the after-tax expected return on the common stock.

Stock X has a required return of 12% and a dividend yield of 5%, and its dividend is expected to grow at a constant rate forever. Stock Y has a required return of 10%, a dividend yield of 3%, and its dividend is expected to grow at a constant rate forever. Both stocks currently sell for $25 per share. Which of the following statements is CORRECT?

Stock X pays a higher dividend per share than Stock Y.

A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?

The bond's yield to maturity is greater than its coupon rate.

Which of the following statements is CORRECT?

The constant growth model takes into consideration the capital gains earned on a stock.

In general, which of the following will tend to occur as you add randomly selected stocks to your portfolio, which currently consists of just 3 stocks?

The diversifiable risk of your portfolio will likely decline, but the market risk will probably remain the same.

Which of the following statements is CORRECT?

The dividend yield on a constant growth stock must be equal to its expected total return less its expected capital gains yield.

Stock A has a beta of 0.8 and Stock B has a beta of 1.2. 50% of Portfolio P is invested in Stock A and 50% is invested in Stock B. If the market risk premium (rM - rRF) were to increase but the risk-free rate (rRF) remained constant, which of the following would occur?

The required return will increase for both stocks but the increase will be greater for Stock B than for Stock A.

Which of the following statements is CORRECT?

The slope of the security market line is equal to the market risk premium, (rM - rRF).

If a stock's expected return exceeds its required return, this suggests that

The stock is probably a good buy.