FINANCE MANAGEMENT Exam II

One year ago, you purchased 100 shares of a stock .This morning you sold those shares and realized a total return of 8.2 percent. Given this information, you know for sure the:

sum of the dividend yield and capital gains yield is 8.2 percent refer to 10.1

The dividend yield is defined as:

next year's expected cash dividend divided by the current market price per share. refer to section 7.1

If the financial markets are semi-strong form efficient, then:

only individuals with private information have a marketplace advantage. refer to 10.6

You are buying a bond at a clean price of $1,140. The bond has a face value of $1,000, an 8 percent coupon, and pays interest semiannually. The next coupon payment is 1 month from now. What is the dirty price of this bond?

$1173.33

Plastics, Inc. will pay an annual dividend of $1.85 next year. The company just announced that future dividends will be increasing by 2.25 percent annually. How much are you willing to pay for one share of this stock if you require a 16 percent return?

$13.45 P0= $1.85/(0.16 - 0.0225) = $13.45

Auto Transmissions is expected to pay annual dividends of $1.90 and $2.10 over the next two years, respectively. After that, the company expects to pay a constant dividend of $2.30 a share. What is the value of this stock at a required return of 15 percent?

$14.83 P2 = ($2.30/0.15) = $15.33 P0 = [$1.90/1.15] + [($2.10 + $15.33)/1.15^2] = $14.83

Jones Footwear pays a constant annual dividend. Last year, the dividend yield was 2.8 percent when the stock was selling for $26 a share. What is the current price of the stock if the current dividend yield is 3.1 percent?

$23.48 D = 0.028 × $26 = $0.728 P0 = $0.728/0.031 = $23.48

River Rock, Inc. just paid an annual dividend of $2.80. The company has increased its dividend by 2.5 percent a year for the past ten years and expects to continue doing so. What will a share of this stock be worth six years from now if the required return is 16 percent? Group of answer choices

$24.65 P6 = ($2.80 * 1.025^7)/(0.16 - 0.025) = $24.65

Atlas Home Supply has paid a constant annual dividend of $2.40 a share for the past 15 years. Yesterday, the firm announced the dividend will increase next year by 10 percent and will stay at the level through year three, after which time the dividends will increase by 2 percent annually. The required return on this stock is 12 percent. What is the current value per share?

$25.51 P3 = ($2.40 × 1.10 × 1.02)/(0.12− 0.02) = $26.928 P0 = {($2.40 × 1.10)/1.12} + {($2.40 × 1.1)/1.12^2} + {[($2.40 × 1.1) + $26.928]/1.12^3} = $25.51

Granger Corp. stock currently sells for $48.29 per share. The market requires a 13 percent return on the firm's stock. If the company maintains a constant 5.5 percent growth rate in dividends, what was the most recent annual dividend per share paid on the stock?

$3.43 0.13 = {[D0 × (1 + 0.055)]/$48.29} + 0.055; D0 = $3.43

A 6 percent bond has a yield to maturity of 6.5 percent. The bond matures in 7 years, has a face value of $1,000, and pays semiannual interest payments. What is the amount of each semiannual coupon payment?

$30.00 coupon payment = ($1000 * 0.06)/2 = $30

One year ago, you purchased 400 shares of stock for $12 a share. The stock pays $0.22 a share in dividends each year. Today, you sold your shares for $28.30 a share. What is your total dollar return on this investment?

$6,608 Total dollar return = 400 × ($28.30 − $12 + $0.22) = $6,608

Business Services, Inc. is expected to pay its first annual dividend of $0.80 per share three years from now. Starting in year six, the company is expected to start increasing the dividend by 2 percent per year. What is the value of this stock today at a required return of 12 percent?

$6.16 P5 = ($0.80 × 1.02)/(0.12 − 0.02) = $8.16 P0 = [$0.80/1.12^3] + [$0.80/1.12^4] + [($0.80 + $8.16)/1.12^5] = $6.16

Today, you are buying a $1,000 face value bond at an invoice price of $987. The bond has a 6 percent coupon and pays interest semiannually. There are 2 months until the next coupon date. What is the clean price of this bond?

$967

Donuts Delite just paid an annual dividend of $1.10 a share. The firm expects to increase this dividend by 8 percent per year the following 3 years and then decrease the dividend growth to 2 percent annually thereafter. Which one of the following is the correct computation of the dividend for year 7?

($1.10) (1.08)^3 (1.02)^4 refer to section 7.1

One year ago, Neal purchased 3,600 shares of Franklin stock for $101,124. Today, he sold those shares for $26.60 a share. What is the total return on this investment if the dividend yield is 1.7 percent?

-3.60 % Purchase price = $101,124/3,600 shares = $28.09 a share Total return = [($26.60 - $28.09)/$28.09] + 0.017 = -3.60 percent

Over the past five years, a stock returned 8.3 percent, -32.5 percent, -2.2 percent, 46.9 percent and 11.8 percent. What is the variance of these returns?

0.081504 Average return = (0.083 −0.325 - 0.022 + 0.469 + 0.118)/5 = .0646 σ2 = [(0.083 - 0.0646)^2 + (-0.325 - .0646)^2 + (-0.022 - 0.0646)^2 + (0.469 - 0.0646)^2 + (0.118 - 0.0646)^2]/(5 - 1) = 0.081504

LKP, Inc., stock has an expected return of 14.47 percent. The risk-free rate is 3.8 percent and the market risk premium is 8.6 percent. What is the stock's beta?

1.24 E(r) = 0.1447 = 0.038 + β(0.086); β = 1.24

A stock has an expected return of 14.3 percent, the risk-free rate is 3.2 percent, and the market risk premium is 8.1 percent. What must the beta of this stock be? Group of answer choices

1.37 E(r) = 0.143 = 0.032 + β(0.081); β = 1.37 EOC #: 11.14

You would like to create a portfolio that is equally invested in a risk-free asset and two stocks. One stock has a beta of 1.14. What does the beta of the second stock have to be if you want the portfolio to be equally as risky as the overall market?

1.86 1/3(0) + 1/3(1.14) + 1/3(x) = 1.0; x = 1.86

You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.04 and the total portfolio is equally as risky as the market, what must the beta be for the other stock in your portfolio?

1.96 βP = 1 = (1/3)(0) + (1/3)(1.04) + (1/3)(x); x = 1.96 EOC #: 11.12

The required return on Mountain Meadow stock is 14 percent and the dividend growth rate is 3.5 percent. The stock is currently selling for $11.80 a share. What is the dividend yield?

10.50 percent dividend yield = 0.14 -0.035 = 10.5 percent

The stock of Billingsley United has a beta of 0.92. The market risk premium is 8.4 percent and the risk-free rate is 3.2 percent. What is the expected return on this stock?

10.93 % Er = 0.032 + 0.92(0.084) = 10.93 percent

You own a portfolio that has $1,900 invested in Stock A and $2,700 invested in Stock B. If the expected returns on these stocks are 9 percent and 15 percent, respectively, what is the expected return on the portfolio?

12.52 percent E(r) = [1,900/($1,900 + $2,700)][0.09] + [$2,700/($1,900 + $2,700)][0.15] = 12.52 percent EOC #: 11.2

Over the past six years, a stock had annual returns of 14 percent, -3 percent, 8 percent, 21 percent, -16 percent, and 4 percent, respectively. What is the standard deviation of these returns?

13.05 percent Average return = (0.14 - 0.03 + 0.08 + 0.21 - 0.16 + 0.04)/6 = 0.046667 σ2 = [(0.14 - 0.046667)^2 + (-0.03 - 0.046667)^2 + (0.08 - 0.046667)^2 + (0.21 - 00.046667)^2 + (-0.16 - 0.046667)^2 + (0.04 - 0.046667)^2]/(6 - 1) = 0.017027 σ = √0.017027 = 13.05 percent

You own a stock that has an expected return of 16.48 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.65 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?

13.30 percent E(r) = 0.1648 = 0.0365 + 1.33(rm - 0.0365); rm = 13.30 percent

Home Grown Grains stock returned 28.7 percent, 2.6 percent, 13.1 percent, and 11.8 percent over the past four years, respectively. What is the arithmetic average return for this period?

14.05 % Arithmetic average = (0.287 + 0.026 + 0.131 + 0.118)/4 = 14.05 percent

A stock has produced returns of 11 percent, 18 percent, -6 percent, -13 percent, and 21 percent for the past five years, respectively. What is the standard deviation of these returns?

14.99% Average return = (0.11 + 0.18 - 0.06 - 0.13 + 0.21)/5 = 0.062 σ2 = [(0.11 - 0.062)^2 + (0.18 - 0.062)^2 + (-0.06 - 0.062)^2 + (-0.13 - 00.062)^2 + (0.21 - 0.062)^2 ]/(5 - 1) = 0.02247 σ = √0.02247 = 14.99 percent

Worth While Entertainment has common stock with a beta of 1.46. The market risk premium is 9.1 percent and the risk-free rate is 4.6 percent. What is the expected return on this stock?

17.89% E(r) = 0.046 + 1.46(0.091) = 17.89 percent

Suppose a stock had an initial price of $74 per share, paid a dividend of $0.80 per share during the year, and had an ending share price of $76. What was the capital gains yield?

2.70% Capital gains yield = ($76 - $74)/$74 = 2.70 percent EOC #: 10.1

A stock has a beta of 1.68, the expected return on the market is 14.72, and the risk-free rate is 4.65. What must the expected return on this stock be? Group of answer choices

21.57% E(r) = 0.0465 + 1.68(0.1472 - 0.0465) = 21.57 percent EOC: 11.13

AB Builders, Inc. has 12-year bonds outstanding with a face value of $1,000 and a market price of $974. The bonds pay interest annually and have a yield to maturity of 4.03 percent. What is the coupon rate?

3.75 percent

A stock has a market price of $46.10 and pays a $2.40 annual dividend. What is the dividend yield?

5.21 percent dividend yield = $2.40/$46.10 = 5.21 percent

Pluto, Inc., has an issue of preferred stock outstanding that pays a $4.50 dividend every year, in perpetuity. If this issue currently sells for $82.30 per share, what is the required return?

5.47 percent required return = $4.50/$82.30 = 5.47 percent

Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current price is quoted at 101. What is the yield to maturity?

5.77 percent

You purchased 1,300 shares of LKL stock 5 years ago and have earned annual returns of 7.1 percent, 11.2 percent, 3.6 percent, -4.7 percent and 11.8 percent. What is your arithmetic average return?

5.80 % Arithmetic average = (0.071 + 0.112 + 0.036 - 0.047 + 0.118)/5 = 5.80 percent

Hardware and Moore has an expected return of 12.9 percent and a beta of 1.21. The expected return on the market is 11.7 percent. What is the risk-free rate?

5.99% E(r) = 0.129 = rf + 1.21(0.117 - rf); rf = 5.99 percent

Kelly decided to accept the risk and purchased a high growth stock. Her returns for the past five years are 48 percent, 39 percent, -56 percent, 61 percent, and -24 percent. What is the standard deviation of these returns?

50.83 % Average return = (0.48 + 0.39 - 0.56 + 0.61 - 0.24)/5 = 0.136 σ2 = [(0.48 - 0.136)^2 + (0.39 - 0.136)^2 + (-0.56 - 0.136)^2 + (0.61 - 00.136)^2 + (-0.24 - 0.136)^2 ]/(5 - 1) = 0.258330 σ = √0.258330 = 50.83 percent

A stock has yielded returns of 6 percent, 11 percent, 14 percent, and -2 percent over the past 4 years, respectively. What is the standard deviation of these returns?

6.99 % Average return = (0.06 + 0.11 + 0.14 - 0.02)/4 = 0.0725 σ2 = [(0.06 - 0.0725)^2 + (0.11 - 0.0725)^2 + (0.14 - 0.0725)^2 + (-0.02 - 00.0725)^2 ]/(4 - 1) = 0.004892 σ = √0.004892 = 6.99 percent

A bond has a $1,000 face value, a market price of $1,036, and pays interest payments of $70 every year. What is the coupon rate?

7.00 percent coupon rate = $70/$1000 = 7%

A stock has returns for five years of 23 percent, -17 percent, 8 percent, 22 percent, and 3 percent. The stock has an average return of ______ percent and a standard deviation of _____ percent.

7.80; 16.36 Average return = (0.23 - 0.17 + 0.08 + 0.22 + 0.03)/5 = 0.078 σ2 = [(0.23 - 0.078)^2 + (-0.17 - 0.078)^2 + (0.08 - 0.078)^2 + (0.22 - 00.078)^2 + (0.03 - 00.078)^2]/(5 - 1) = 0.026770 σ = √0.026770 = 16.36 percent EOC #: 10.7

The $1,000 face value bonds of Jasper International have a 7.5 percent coupon and pay interest annually. Currently, the bonds are quoted at 98.27 and mature in 3.5 years. What is the yield to maturity?

8.09 percent

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 required return?

9.21 percent required return = ($1.80/$48.50) + 0.055 = 9.21 %

The common stock of Tasty Treats is valued at $10.80 a share. The company increases its dividend by 8 percent annually and expects its next dividend to be $0.20 per share. What is the total rate of return on this stock?

9.85 percent R = ($0.20/$10.80) + 0.08 = 9.85 percent

The Toy Box pays an annual dividend of $2.40 per share and sells for $46.60 a share based on a market rate of return of 15 percent. What is the capital gains yield?

9.85 percent capital gains yield = 0.15 - ($2.40/$46.60) = 9.85 percent

An efficient capital market is best defined as a market in which security prices reflect which one of the following?

Available information refer to 10.6

Which of the following terms can be used to describe unsystematic risk? I. asset-specific risk II. diversifiable risk III. market risk IV. unique risk

I, II, and IV only refer to 11.4

Kate owns a stock with a market price of $31 per share. This stock pays a constant annual dividend of $0.60 per share. If the price of the stock suddenly increases to $36 a share, you would expect the: I. dividend yield to increase. II. dividend yield to decrease. III. capital gains yield to increase. IV. capital gains yield to decrease.

II only refer to section 7.1

New Labs just announced that it has received a patent for a product that will eliminate all flu viruses. This news is totally unexpected and viewed as a major medical advancement. Which one of the following reactions to this announcement indicates the market for New Labs stock is efficient?

The price of New Labs stock increases rapidly to a higher price and then remains at that price. refer to 10.6

The variance is the average squared difference between which of the following?

actual return and average return refer to 10.4

Dividends are best defined as:

cash or stock payments to shareholders refer to section 7.2

Which one of the following is the quoted price of a bond?

clean price refer to section 6.5

Which one of the following is the price that an investor pays to purchase an outstanding bond?

dirty price refer to section 6.5

Which one of the following terms best refers to the practice of investing in a variety of diverse assets as a means of reducing risk?

diversification refer to 11.5

Which one of the following is the hypothesis that securities markets are efficient?

efficient markets hypothesis refer to 10.6

Aardvark, Inc. pays a constant annual dividend. At the end of trading on Wednesday, the price of its stock was $28. At the end of trading on the following day, the stock price was $27. As a result of the decline in the stock's price, the dividend yield _____ while the capital gains yield _____.

increased; remained constant refer to section 7.1

When a bond's yield to maturity is less than the bond's coupon rate, the bond:

is selling at a premium refer to section 6.1

The systematic risk principle states that the expected return on a risky asset depends only on which one of the following?

market risk refer to 11.6

Stock A comprises 28 percent of Susan's portfolio. Which one of the following terms applies to the 28 percent?

portfolio weight refer to 11.2

Investors require a 4 percent return on risk-free investments. On a particular risky investment, investors require an excess return of 7 percent in addition to the risk-free rate of 4 percent. What is this excess return called?

risk premium refer to 10.3

Which one of the following describes systematic risk?

risk that affects a large number of assets refer to 11.4

Which one of the following is the positive square root of the variance?

standard deviation refer to 10.4

The standard deviation measures the _____ of a security's returns over time.

volatility refer to 10.4

Which one of the following terms refers to a bond's rate of return that is required by the market place?

yield to maturity refer to section 6.1

Which one of the following is the computation of the risk premium for an individual security? E(r) is the expected return on the security, rf is the risk-free rate, β is the security's beta, and E(r)M is the expected rate of return on the market.

β[E(r)M - rf] Refer to 11.1

Keller Metals common stock is selling for $36 a share and has a dividend yield of 3.2 percent. What is the dividend amount?

$1.15 dividend = 0.032 * $36 = $1.15

Delfino's expects to pay an annual dividend of $1.50 per share next year. What is the anticipated dividend for year 5 if the firm increases its dividend by 2 percent annually?

$1.50 * (1.02)^4 refer to section 7.1

A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond matures in 3 years and pays interest annually. The coupon rate is 7 percent. What is the current price of this bond?

$1008.18

Berkeley, Inc. just paid an annual dividend of $2.60 per share on its stock. The dividends are expected to grow at a constant rate of 4.5 percent per year, indefinitely. If investors require an 11 percent return on this stock, what will the price be in 12 years? Group of answer choices

$70.89 P12 = ($2.60 × 1.045^13)/(0.11 - 0.045) = $70.89

The Pancake House pays a constant annual dividend of $1.25 per share. How much are you willing to pay for one share if you require a 15 percent rate of return?

$8.33 P = $1.25/0.15 = $8.33

A 5.5 percent $1,000 bond matures in 7 years, pays interest semiannually, and has a yield to maturity of 6.23 percent. What is the current market price of the bond?

$959.09

When you refer to a bond's coupon, you are referring to which one of the following?

Annual interest payment Refer to section 6.1

Which one of the following measures the amount of systematic risk present in a particular risky asset relative to that in an average risky asset?

Beta refer to 11.6

The price of a stock at year 4 can be expressed as:

D5/(R-g) refer to section 7.1

What is the principal amount of a bond that is repaid at the end of the loan term called?

Face value refer to section 6.1

A stock has a beta of 1.56 and an expected return of 17.3 percent. A risk-free asset currently earns 5.1 percent. If a portfolio of the two assets has a beta of 1.06, what are the portfolio weights?

Stock weight = 0.68; risk-free weight = 0.32 βP = 1.06 = x(1.56) + (1 - x)(0); x = 0.68 Stock weight is 0.68 and the risk-free weight is 0.32. EOC #: 11.17

The rate of return on which one of the following is used as the risk-free rate?

U.S. Treasury Bill refer to 10.3