Quiz 3

Dividends that are expected to be paid far into the future have:

lower impact on current stock price due to discounting

Which of the following is correct for a bond prices at $1,100 that has 10 years remaining until maturity, and a 10% coupon rate, with semiannual payments?

payment of interest equals $50

Which of the following statements about the call provision of a bond is most accurate? A call provision

stipulates whether and under what circumstances the issuer can redeem or repay the bond prior to maturity

Assume that you plan to buy a share of XYZ stock today and hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16%, how much should you be willing to pay for this stock today?

$118.35

Braxton Lts issued a 30-year 10% coupons bond ten years ago. Braxton bonds have a maturity (face) value of $1000 and make semiannual interest payments. If investors require an 8% nominal annual return (i.e. yield to maturity) on bonds with the same risk rating as Brxton, at what price should the bonds be selling for currently?

$1197.93

Mack industries just paid a dividend of $1000 per share. Analysts expect the companies dividend to grow 20% this year and 25% next year. After two years the dividend is expected to grow at a constant rate of 5%. The required rate of return on the companies stock is 12%. What should be the companies current stock price?

$18.67

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

$28.57

A firm expects to pay a dividend over each of the next 4 years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8% per year, and if you require a 14% rate of return, then how much would you be willing to pay for this stock?

$43.97

As a financial analyst, you are estimating the value of a stock, ABC. You expect the stock do not pay any dividend for the next five years, and then start to pay $10 dividend per year for the next 20 years. After that, the stock is expected to stop paying dividend forever and the company's assets will be worth nothing. If the required rate of return of the stock is 10%, what is your best estimate of the value of the stock today?

$52.86

Kwak Motors Inc. pays a $1.77 preferred dividend every quarter and will maintain this policy forever. What price should you pay for one share of preferred stock if you want an annual return of 9.25% on your investment?

$76.54 (HW3 Q31)

Stocks are different from bonds because

stocks, unlike bonds, represent residual ownership

Interest rates have fallen over the seven years since a $1000 par, 10 year bond was issued with a coupon of 7%. What is the present value of this bond if the required rate of return is currently 4.5%? (For simplicity, assume annual coupon payments)

1068.72

Assume that a corporate bond has a par value of $1000 and 15 years until it matures. Also assume that investors require an annual rate of return of 12% (compounded semi-annually), that coupon interest is paid semi-annually, and that the current price for this bond is $931.18. What is the annual coupon rate on this bond?

11.0%

You have just been offered a $1,000 par value for $847.88. The coupon rate is 8%, payable annually, and annual interest rates on new issues of the same degree of risk or 10%. You want to know how many more interest payments you will receive, but the parties selling the bond cannot remember. Determine how many interest payments remain.

15 years

You have just been offered a $1000 per value bond for $847.88. The coupon rate is 8%, payable annually and annual interest rates on new issues of the same degree of risk are 10%. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Determine how many interest payments remain.

15 years

You bought a 30-year bond many years ago. The bond has a par value of $1000 and a coupons rate of 12%, paid semi-annually. The current price of the bond is $1137.99 and the yield to maturity is 10%. How many years ago did you buy the bond?

18 years

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 Round your answer to the nearest dollar. (NOTE: do NOT include the dollar sign in your answer)

33.5

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

37.5 = 37.63

Assume that a stock is expected to pay a $3.50 dividend next year which is then expected to grow at a constant annual rate. The stock is currently selling at $43.75 and investors require a 12% rate of return for the stock. What is the expected growth rate of the dividend?

4%

Cannons Corporation will pay $4.00 per share dividend next year. The company pledges to increase its dividend by 4% per year, indefinitely. If you require a 13% return on your investment, how much will you pay for the company's stock today? Round your answer to the nearest dollar (NOTE: do not include the dollar sign in your answer)

44.5

You are invested in a corporate bond with the current market price of $974.36 and yield to maturity of 7%. The bond carries a coupon rate of 6%, paid semi-annually. If you buy the bond today, how many semi-annual coupon payments will you receive until the final maturity?

6%

What is the value of a preferred stock that is expected to pay $5.00 annual dividend forever if similar risk securities are now yielding 8%?

62.50 (price preferred stock= dividend/r= 5/.08 = 62.50)

The market price of a bond is $1236.94, it has 14 years to mature, a $1000 face value, and pays an annual coupon of $100 in semiannual installments. What is the yield to maturity?

7.27%

The following data pertains to a common stock: It will pay no dividends for dividends for two years The dividend 3 years from now is expected to be $1 Dividends are expected to grow at a 7% rate from that point onward If an investor requires a 17% return on this stock, what will they be willing to pay now?

7.31

Roxie Inc. has just paid a dividend of $4.00. Its stock is now selling for $65 per share, and the required rate of return on a stock like Roxie Inc. is 14%. Assuming Roxie is a constant growth stock, determine the implied growth rate for Roxie's dividends.

7.4%

A bond with a 7% coupon with an original maturity of 20 years was issued 4 years ago. If the bond is currently selling for $940, what is its yield to maturity? (The bond pays coupons annually)

7.66%

What is the current yield of a bond with a 6% coupon, 4 years until maturity, and a price of $750?

8%

Which of the following bonds would be considered to be of investment grade?

A Baa-rated bound

Which of the following is a function of the secondary market?

All of the above

Which of the following statements about the constant growth dividend model is FALSE?

For the constant growth dividend model to work the growth rate must exceed the required rate of return on equity

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, III (the price of the stock today; the dividend that is expected to be paid in 10 years; the expected stock price 5 years from now)

A bond sold 5 weeks ago for $1100. The bond is worth $1150 in today's market. Assuming no changes in risk, which of the following is true?

Interest rates must be lower now than they were 5 weeks ago.

Which of the following statements is false about junk bonds?

Junk bonds must be bad investment and should be avoided

Which of the following statements about the call provision of a bond is most accurate?

Stipulates whether and under what circumstances the issuer can redeem or repay the bond prior to maturity

The current yield on a bond is equal to:

The annual coupon payment divided by the current market price

Periodic receipts of interest by bondholders are known as:

The coupon rates

Which of the following statements is correct for a 10% coupon bond that has a current yield of 7%?

The bonds yield to maturity is less than 10%

Which of the following statements regarding bond pricing is true?

The lower the yield to maturity, the more valuable the bond is

Value of a common stock does not directly depend on

The maturity date of common stock

If two constant growth stocks have the same required rate of return and the same price, which of the following statements is most correct?

The stock with the higher dividend yield will have a lower dividend growth rate