Finance Exam 2

Ativan Corporation's outstanding bonds have a $1,000 par value, a 4% annual coupon, 10 years to maturity, and a 6%YTM. IF the coupon is paid semiannually, what is the bond's price? A. $851.23 B. $1162.22 C. $1163.51 D. $852.80

A. $851.23

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT? A. If the yield to maturity remains at 8%, then the bond's price will decline over the next year. B. The bond's coupon rate is less than 8%. C. If the yield to maturity increases, then the bond's price will increase. D. If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year.

A. If the yield to maturity remains at 8%, then the bond's price will decline over the next year.

According to the non constant (supernormal) growth model discussed in the textbook, the discount rate used to find present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period. A. True B. False

A. True

If the required rate of return on a bond (rd) is greater than its coupon interest and will remain above that rate, then the market value of the bond will always be below its par value until the bond matures, at which time its market value will equal its par value. A. True B. False

A. True

In the corporate bond market, more bonds do not trade than trade on an average day. A. True B. False

A. True

The market value of any real or financial asset, including stocks and bonds, may be estimated by determining future cash flows and then discounting them back to the present. A. True B. False

A. True

There is an inverse relationship between bond's quality ratings their required rates of return. Thus, the required return is lowest for AAA-rated bonds, and required returns increase as the ratings get lower. A. True B. False

A. True

A bond has a $1,000 par value, 8 years to maturity, and 6% annual coupon (paid annually) and sells for $975. What's its yield to maturity (YTM)? A. 3.20% B. 6.41% C. 2.58% D. none of the above

B. 6.41%

A bond that had a 20-year original maturity with 1 year left to maturity ahs more risk than a 10-year original bond with 1 year left to maturity. (Assume that the bonds have equal default risk and equal coupon rates, and they cannot be called.) A. True B. False

B. False

A call provision gives bondholders (aka bond investors) the right to demand, or "call for" repayment of a bond. A. True B. False

B. False

In the last three decades, the amount of stock issuance far exceeds that of bond issuance. A. True B. False

B. False

Preferred stock is a hybrid--sort of a cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guranteed like interest on a bond. A. True B. False

B. False

A stock is expected to pay a year-end dividend of $1.50, i.e. D1=$1.50. The dividend is espected to decline at a rate of 5% a year forever (g=5%). If the company is in equilibrium and its expected and required return is 5%, which of the following statements is CORRECT? A. The company's current stock price is $10. B. The company's dividend yield is expected to be 10%. C. The constant growth model cannot be used because growth rate is negative. D. The company's expected capital gains yield is 5%.

B. The company's dividend yield is expected to be 10%.

A stock is expected to pay a dividend of $0.75 at the end of the year (that is, D1=$0.75). The required rate of return is rs=10.5%, and the expected constant growth rate is g=6.4%. What is the stock's current price? A. $19.46 B. $20.21 C. $18.29 D. $17.39 E. none of the above

C. $18.29

What will be the required rate of return on a perpetual perferred stock with a stated dividend of $6 every year, and a current price of $50? A. 6% B. 8.33% C. 12% D. None of the above

C. 12%

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their normal yield to maturity is 8.04%, and they pay interest semiannually, and they sell at a price of $975. What is the bond's annual coupon interest rate? A. $39.03 B. $78.06 C. 3.90% D. 7.81% E. none of the above

D. 7.81%

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the greatest price risk? A. A 5-year bond with a 9% coupon. B. A 7-year bond with a 9% coupon. C. A 10-year bond with a 9% coupon. D. A 50-year bond with a 9% coupon. E. none of the above.

D. A 50-year bond with a 9% coupon.

Which of the following is CORRECT? A. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par. B. All esle equal, if a bond's yield to maturity falls, its price will fall. C. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par. D. All else equal, if a bond's yield to maturity increases, its price will fall.

D. All else equal, if a bond's yield to maturity increases, its price will fall.

Which of the following statements is INCORRECT? A. If a stock has a required rate of return rs=12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividnend yield is 7%. B. The stock valuation model, P0=D1/(rs-g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. C. In theory, the current price of a stock is the present value of all expected future dividends, discounted at the required rate of return. D. The constant growth model cannot be used for a negative growth stock, where the dividend is expected to decline at a constant rate over time.

D. The constant growth model cannot be used for a negative growth stock, where the dividend is expected to decline at a constant rate over time.

The expected return on Natter Corporation's stock is 14%. The stock's divivends is expected grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT? A. The stock's dividend yield is 7%. B. The stock's dividend yield is 8%. C. The current dividend per share is $4.00. D. The stock price is expected to be $54 a share one year from now. E. The stock price is expected to be $57 a share one year from now.

D. The stock price is expected to be $54 a share one year from now.