Chapter 6 Reading: Bonds (Debt) -- Characteristics and Valuation, Chapter 7 Reading: Stocks (Equity)--Characteristics and Valuation, Chapter 13: Distribution of Retained Earnings: Dividends and Stock Repurchases, Chapter 8: Risk and Rate of Return, B...

Net income increases.

Ability to Pay Dividends Increases

coupon

The interest payment that a bond issuer will pay to a bondholder.

stand-alone risk

The risk of an asset when it is the only asset in an investor's portfolio.

May have a sinking fund provision

debt

The expected return on Manuel's stock portfolio is _______

(.2*.06) = .012 .012 + (.3*.14) = .054 .054 + (.35*.12) = .096 .096 + (.15*.05) = .1035 .1035 * 100 = 10.35%

The expected rate of return on Blue Llama Mining's stock over the next year is _________

(.2*.2) = ,04 .04 + (.35*.12) = .082 .082 + ((.45) x (-.16)) = .01 x 100 = 1.00%

Walter Utilities is a dividend-paying company and is expected to pay an annual dividend of $2.65 at the end of the year. Its dividend is expected to grow at a constant rate of 9.50% per year. If Walter's stock currently trades for $28.00 per share, then the expected rate of return on the stock is ________

2.65 / 28 = .09464286 .09464286 + .095 = .1896 = 18.96%

A common thumb rule is that a portfolio of ____ well-chosen securities will produce most of the benefits of diversification.

20

When a firm declares a 2-for-1 stock split, it doubles the number of shares outstanding. This causes the earnings and dividends per share to be cut in half, thereby reducing the stock price to one-half of its original value. Each shareholder will own twice as many shares, but each share will be worth only one-half as much as it was before the split.

25

stock split

Effectively a bookkeeping adjustment undertaken by a firm that increases the number of shares outstanding and immediately causes a proportional decrease in the price of the firm's stock.

Mainway Toys Co.'s dividends represent the portion of earnings left after it has made all profitable investments.

Residual Dividend

______ levels of participation in a dividend reinvestment program suggest that stockholders would be better served if the firm reduced its cash dividends.

high

Which of the following statements best describes how a change in a firm's stock price would affect a stock's capital gains yield? The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's expected future stock price. The capital gains yield on a stock that the investor already owns has an inverse relationship with the firm's expected future stock price.

The capital gains yield on a stock that the investor already owns has a direct relationship with the firm's expected future stock price.

However, sometimes borrowers avoid periodic interest payments by agreeing to borrow a given amount and repay a maturity, or face, value that is greater than the amount borrowed. Such a debt instrument is said to be issued at ________.

a discount

Usually has no voting rights

debt

Suppose each stock in the preceding portfolio has a correlation coefficient of 0.4 (ρ = 0.4) with each of the other stocks. If the weighted average of the risk (standard deviation) of the individual securities in the partially diversified portfolio of four stocks is 28%, the portfolio's standard deviation (σp) most likely is ______ 28%

less than Explanation: Because the stocks within the portfolio are not perfectly correlated (ρ < 1), the portfolio benefits from diversification. Hence, the portfolio's standard deviation must be less than the weighted average of the risk of the individual securities. The weighted average of risk of the individual securities is 28%, so the portfolio's standard deviation must be less than 28%.

The expected rate of return on Hungry Whale Electronics's stock over the next year is _______

(.2*.28) = .056 .056 + (.35 * .16) = .112 .112 + (.45*(-.2) = .022 .022 * 100 2.20%

Super's expected stock price one year from today will be ______ per share.

=2.16*(1+3.15%)^2/(7.88%-3.15%)=$48.63

Yesterday, Michelin paid a dividend of $2.25 (D0). You are considering buy Michelin stock today. Your required rate of return for their equity is 10% (r). You expect that their dividend will grow at 4% per year (g). Assume that dividends are paid annually. According to the Dividend Discount Model, what should be the price per share of Michelin?

(2.25 + (1+0.04)) / 0.1 - 0.04 = 2.34 / 0.06 = $39

Which of the following are part of the Affordable Care Act (i.e. ObamaCare)? With the exception of short-term plans, every health insurance plan in the U.S. must offer coverage for physicals, immunizations, birth control and a variety of other services. An applicant for health insurance cannot be denied due to a pre-existing condition. The Individual Mandate requires that all adults have health insurance or else they will pay a penalty. Children can stay on a parent's insurance plan until age 26. Insurance plans cannot have a lifetime maximum payout. Women can be charged more than men due to having higher average lifetime medical costs. Employers with more than 50 full-time employees must offer employees a health plan. States have the option of expanding Medicaid coverage to individuals and families earning up to 138% of the Federal Poverty level with the state contributing 10% of the additional cost and the Federal government contributing the remaining 90%

-With the exception of short-term plans, every health insurance plan in the U.S. must offer coverage for physicals, immunizations, birth control and a variety of other services. -An applicant for health insurance cannot be denied due to a pre-existing condition. -The Individual Mandate requires that all adults have health insurance or else they will pay a penalty. -Children can stay on a parent's insurance plan until age 26. -Employers with more than 50 full-time employees must offer employees a health plan. -States have the option of expanding Medicaid coverage to individuals and families earning up to 138% of the Federal Poverty level with the state contributing 10% of the additional cost and the Federal government contributing the remaining 90% -Insurance plans cannot have a lifetime maximum payout.

Assume that Savannah delays her investment for another few months, and that when she is finally ready to make her 175-share investment in Seattle Seafood, the market price of Seattle Seafood's preferred stock has changed to $174.70 per share. If she pays this price to acquire each share of Seattle Seafood's preferred stock, what rate of return will Savannah earn on her investment? Remember that the shares have a par value of $100 and a dividend rate of 5.50%. 4.10% 2.99% 3.15% 2.52%

3.15%

If Super's stock is in equilibrium, the current expected dividend yield on the stock will be _______ per share.

= required return -growth rate= 7.88%-3.15%=4.73%

The Capital Asset Pricing Model is as follows: Expected Return for Security i = risk-free rate + Beta for Security i *(Expected Return on the Market Porfolio - risk-free rate). The final term in brackets is referred to as "The Market Risk Premium". Global historical data suggests that a reasonable estimate for the Market Risk Premium is ______.

5%

If Grey Fox Aviation Company issued new bonds today, what coupon rate must the bonds have to be issued at par?

6.84%

If interest rates are expected to remain constant, what is the best estimate of the remaining life left for Grey Fox Aviation Company's bonds? 13 years 10 years 8 years 5 years

8 years

Allied Biscuit Company has generated earnings of $2,200,000. Its target capital structure consists of 60% equity and 40% debt. It plans to spend $85,000 on capital projects over the next year and expects to finance this investment in the same proportion as its capital structure. The company makes distributions in the form of dividends. Allied Biscuit's dividend payout ratio will be ________ if it follows a residual dividend policy.

97.68%

A two year bond has par value of $1000 and a 6% coupon rate that is paid semiannually. If the appropriate discount rate is 7%, what should be the price of this bond as a percentage of par value? 98.192 101.859 98.163 99.355

98.163

If Super's stock is in equilibrium, the current expected capital gains yield on Super's stock will be _____ per share.

= growth rate = 3.14%

Sony, a Japanese multinational firm, issued stock that trades on the FTSE exchange in London. The statement above is an example of which of the following? A Yankee stock An American Depository Receipt (ADR) A Euro stock

A Euro stock

Rating agencies—such as Standard & Poor's (S&P), Moody's Investor Service, and Fitch Ratings—assign credit ratings to bonds based on both quantitative and qualitative factors. These ratings are considered indicators of the issuer's default risk, which impacts the bond's interest rate and the issuer's cost of debt capital. Based on these ratings, bonds are classified into investment-grade bonds and junk bonds. Which of the following bonds is likely to be classified as an investment-grade bond? A bond with 10% return on capital, total debt to total capital of 85%, and 13% yield A bond with 30% return on capital, total debt to total capital of 15%, and 6% yield

A bond with 30% return on capital, total debt to total capital of 15%, and 6% yield

Parrot Transport Corp. has the right to buy back its preferred stock from its preferred stockholders; however, the company will have to pay the preferred stockholders an amount greater than the par value of the preferred stock. Which type of provision does Parrot have in its preferred stock agreement? A sinking fund provision A call provision A participating provision

A call provision

commercial paper

A discounted unsecured security issued by large and exceptionally financially sound firms and sold to other sophisticated businesses

term loan

A loan, generally obtained from a bank or insurance company, on which the borrower agrees to make a series of payments consisting of interest and principal.

Generally, investors would prefer to invest in assets that have: A high level of risk and low expected returns A low level of risk and high expected returns Grade It Now Save & Continue

A low level of risk and high expected returns

beta coefficient

A measure of the sensitivity of a security's returns to fluctuations in the return earned by the market portfolio.

A financial planner is examining the portfolios held by several of her clients. Identify which of the following portfolios is likely to have the smallest standard deviation: A portfolio containing only Chevron stock A portfolio consisting of about 30 randomly selected stocks A portfolio consisting of about 30 energy stocks

A portfolio consisting of about 30 randomly selected stocks

money market mutual fund (MMMF)

A security in which an investment company pools and manages capital from many investors in order to invest primarily in short-term financial assets that would otherwise be unavailable to the individual investors

Which of the following statements would be considered advantages of a stock repurchase? Check all that apply. The interval between stock repurchases tends to be irregular, which means that investors cannot always count on cash inflows from repurchases. A stock repurchase can be used to minimize the dilution effect associated with employees exercising their stock options. Stock repurchases are an effective way to alter the firm's capital structure. Stock repurchases are especially effective when the amount of equity in the current capital structure is significantly greater than that required by the firm's target capital structure.

A stock repurchase can be used to minimize the dilution effect associated with employees exercising their stock options. Stock repurchases are an effective way to alter the firm's capital structure. Stock repurchases are especially effective when the amount of equity in the current capital structure is significantly greater than that required by the firm's target capital structure.

callable bonds

A type of bond that allows the bond issuer to retain the privilege of redeeming it at a pre-specified price at some time prior to its normal maturity date.

Suppose a firm generates a lot of cash but has limited investment opportunities. Is this stock more likely to be a utility stock or a technology stock? In addition, is the stock more likely to have a high or low dividend yield? A technology stock that has a high dividend yield A technology stock that has a low dividend yield A utility stock that has a low dividend yield A utility stock that has a high dividend yield

A utility stock that has a high dividend yield

More profitable investment opportunities are available.

Ability to Pay Dividends Decreases

The firm increases its debt ratio.

Ability to Pay Dividends Increases

residual dividend policy

According to this policy, the firm's dividend is calculated as the difference between the firm's net income and the retained earnings needed to finance the firm's optimal capital budget.

stock repurchase

An earnings distribution activity in which a firm's net income is used to increase the treasury stock holding via purchases in the financial markets.

debenture

An example of this bond was issued by Global-Chem three years ago. It pays a 4.25% coupon and is not collateralized in the event of financial distress.

foreign debt

An example of this form of debt is issued by a German borrower, sold in the United States, and denominated in U.S. dollars.

revenue bond

An example of this type of bond is an airport construction bond in which the revenues generated via the airport's landing fees are used to service the interest payments and pay the maturity payments.

For example, assume Ethan wants to earn a return of 7.00% and is offered the opportunity to purchase a $1,000 par value bond that pays a 12.25% coupon rate (distributed semiannually) with three years remaining to maturity. The following formula can be used to compute the bond's intrinsic value: Bond A's Variable Value:

Annual Coupon Rate = 12.25% Semiannual Coupon Rate = 6.125% Bond's Semiannual Coupon Payment = 6.125% * $1,000 Bond's Semiannual Coupon Payment = $61.25

Now, consider the situation in which Ethan wants to earn a return of 10%, but the bond being considered for purchase offers a coupon rate of 7%. Again, assume that the bond pays semiannual interest payments and has three years to maturity. If you round the bond's intrinsic value to the nearest whole dollar, then its intrinsic value of _______ is _____ its par value, so that the bond is trading at ______.

Annual Required Return = 10.00% Semiannual Required Return = 5.00% Time to Maturity = 3 years Semiannual Period to Maturity = 6 Price of Bond = $61.25/1.05 + $61.25/1.05^2 + $61.25/1.05^3 + $61.25/1.05^4 + $61.25/1.05^5 + $61.25/1.05^6 + $1,000/1.05^6 Price of Bond = $61.25 * (1 - (1/1.05)^6) / 0.05 + $1,000 / 1.05^6 Price of Bond = 924 924, less than, a discount

Given this return data, the average realized return on Blue Llama Mining Inc.'s stock is .

Average realized return on BLM's stock = (12.5%+8.50%+15.00%+21.00%+6.50%)/5 = 12.7%

Portfolio managers pick stocks for their clients' portfolios based on the investment objective of the portfolio and several other factors. One key consideration is each stock's contribution to portfolio risk and its statistical relationship with the portfolio's other stocks. Based on your understanding of portfolio risk, which of the following statements are true? Check all that apply. Because of the effects of diversification, the portfolio's risk is likely to be smaller than the average of all stocks' standard deviations. Portfolio risk will decline if more stocks that are negatively correlated with other stocks are added to the portfolio. The market risk component of the total portfolio risk can be reduced by randomly adding stocks to the portfolio. The portfolio's risk is the weighted average of the individual stocks' standard deviations.

Because of the effects of diversification, the portfolio's risk is likely to be smaller than the average of all stocks' standard deviations. Portfolio risk will decline if more stocks that are negatively correlated with other stocks are added to the portfolio.

If the risk-free rate is 5.00% and the market risk premium is 7.50%, then Deborah's portfolio will exhibit a beta of _________ and a required return of __________.

Beta = 1750/5000 x 1 + 1000/5000 x 1.9 + 750/5000 x 1.2 + 1500/5000 x .60 = 0.930 = .35 + .38 + .18 + .18 = 1.09 Required Return on Stock L=Risk-Free Return + (Market Risk Premium x Stock L's Beta) Here, Deborah's portfolio will be treated as a security in and of itself. The market risk premium is the difference between the rate of return that investors expect from the market and the risk-free rate. Using this information, calculate as follows: Portfolio's Required Return= 5.00% + (7.50% x 1.090)=13.18%

What are the YTM and yield to call (YTC) on bonds? Grey Fox Aviation Company's bonds have a yield-to-maturity (YTM) of ________ and a yield-to-call (YTC) of _________.

Bond's Par Value = 1000 Current Market Price = 1220.35 PMT @ 9% of FV = 90 Maturity Period (N) Is 18 years Rate(Yield to maturity) = Rate(FV,PV,PMT,N) = 6.84% Price to call = 1060 years to call = 8 annual coupon rate = 9% Yield to call = 6.05%

Apple has a Beta of 1.25. Assume that the risk-free rate of interest is 3% and that you expect the stock market will return 8% over the next year. According to the Capital Asset Pricing Model (CAPM), the expected return of Apple is ____. (just plug in the number, don't include the percent sign).

Expected return = risk free rate = beta×(expected return on the market - risk free rate) Expected return = 3% + 1.25×(8%-3%) = 9.25%.

Match the following terms: -Tax-advantaged saving plan for higher education expenses. -Individual retirement savings account where dollars are contributed pre-tax but when withdrawn after age 59.5, are taxed as regular income. -Individual retirement savings account where dollars are contributed after-tax but when withdrawn after age 59.5, are tax-free. -Defined Contribution Pension Plan used by many private companies where employees make a pre-tax contribution from each paycheck and employer typically match some portion of that contribution. Withdrawals after age 59.5 are taxed as regular income. -A pension plan where the employer makes all contributions and employees get a retirement paycheck that is a formulaic function of years worked and average salary over some period during the employee's career With: A. 401-K B. Defined Benefit Plan C. 529 Plan D. Roth IRA E. Regular (or Traditional) IRA

C. 529 Plan = Tax-advantaged saving plan for higher education expenses. E. Regular (or Traditional) IRA =Individual retirement savings account where dollars are contributed pre-tax but when withdrawn after age 59.5, are taxed as regular income. D. Roth IRA = Individual retirement savings account where dollars are contributed after-tax but when withdrawn after age 59.5, are tax-free. A. 401-K = Defined Contribution Pension Plan used by many private companies where employees make a pre-tax contribution from each paycheck and employer typically match some portion of that contribution. Withdrawals after age 59.5 are taxed as regular income. B. Defined Benefit Plan = -A pension plan where the employer makes all contributions and employees get a retirement paycheck that is a formulaic function of years worked and average salary over some period during the employee's career

Which feature of a bond contract allows the issuer to redeem bonds under specified terms prior to maturity? Convertible provision Call provision Put provision Deferred call provision

Call provision

A bond where the issuer can buy the bond back from investors (i.e. force investors to surrender the security) at prices specified in the indenture prior to maturity is known as a... Puttable Bond Subordinated Bond Convertible bond Debenture Callable bond

Callable bond

What is the expected one-year capital gain yield on the bonds of Natural Gas Producers Inc.? 1.34% 1.03% 1.14% 0.91%

Capital Gain Yield = Yield to Maturity - Current Yield Capital Gain Yield = 10.0% - 8.86% Capital Gain Yield = 1.14%

The CEO of EchoStar Communications, Charlie Ergen, owned around 5% of the company's stock, but his multiple votes per share gave him around 90% of the vote. Based on this example, which of the following statements is true? -Classified shares have super-voting rights, which give more control to a certain class of investors. -Classified shares are not issued with the purpose of providing super-voting rights to a certain class of investors.

Classified shares have super-voting rights, which give more control to a certain class of investors.

If investors expect the average realized return on Blue Llama Mining Inc.'s stock from 2012 to 2016 to continue into the future, its expected coefficient of variation (CV) is expected to equal ________

Coefficient of variation = Standard deviation/Return = 5.7075%/12.7% = 0.4494

Extensive Enterprises Inc. always pays the same percentage of its annual net income as dividends.

Constant Payout Ratio

•A $10,000 investment in a 10-year T-bond that has a yield of 14.00% •A $20,000 investment in a 10-year corporate bond with an AA% rating and a yield of 18.20% Based on this information, and the knowledge that the difference in liquidity risk premiums between the two bonds is 0.40%, what is your estimate of the corporate bond's default risk premium? 5.32% 3.80% 4.18% 5.70%

Corporate Yield = Treasury Yield + Liquidity Premium + Default Premium Default Premium = 18.20% - 14% - 0.40% = 3.80%

What type of bonds are these? Municipal bonds Corporate bonds Government bonds

Corporate bonds

What is the current yield on Natural Gas Producers Inc.'s outstanding bonds? 7.09% 10.43% 8.86% 8.06%

Current Yield = Annual Coupon / Market Price Current Yield = $80 / $902.63 Current Yield = 0.0886 or 8.86% = 8.86%

Super Carpeting Inc. just paid a dividend (D0D0) of $2.16, and its dividend is expected to grow at a constant rate (g) of 3.15% per year. If the required return (rs) on Super's stock is 7.88%, then the intrinsic, or theoretical market, value of Super's shares is ________ per share.

D0 = 2.16 , g = 3.15 , ke = 7.88 D1 = D0*(1+g) = 2.16(1+.0315) = 2.2280 P0 = D1/(ke-g) P0 = 2.2280/(7.88%-3.15%) =47.10 (correct answer is 47.15)

Assume that shareholder's required rate of return (r) is 9%. Dr. Pepper is expected to pay a dividend of $2.00 per share (D1) next year. Moreover, investors expect dividends to grow at a constant rate of 4% per year (g). According to the Dividend Discount Model, what should be the current price per share of Dr. Pepper?

D1 = Dividend for next year = $2 r = required rate of return = 9% g = growth rate in dividend = 4% price of the share today = $2 /(9%-4%) =$2/5% = $40

You have taken a job as an entry-level analyst, and your boss has asked you to find the expected value of Monroe Manufacturing's stock. As you were doing your research, you found out that Monroe Manufacturing just paid a dividend (D0D0) of $3.75. The firm has experienced consistent growth of 5% for the last couple of years, and you believe that the firm will continue to grow at the same rate in the future. If investors require a return of 13% on Monroe Manufacturing's stock, what is the expected value of the company's stock? $39.38 $49.22 $54.14 $44.30

D1 = Do * (1+g) = 3.75 * (1+0.05) = 3.9375 expected value of stock = D1/(r-g) = 3.9375/(13%-5%) = .49218 = $49.22

For the same issuing firm and on the same day of issuance, which security tends to have a lower after-tax cost to the issuer, debt or preferred stock? Why is this the case? Debt, because its interest payments are not tax deductible Preferred stock, because its has priority over debt in the payment of dividends and the distribution of liquidated assets Preferred stock, because preferred stock issues are not allowed to have sinking fund provisions Debt, because its interest payments are tax deductible

Debt, because its interest payments are tax deductible

Which term is used to describe a call provision in which the issuer is prevented from calling a portion or the entire issue for several years during the early years of the bond issue? Deferred call provision Sinking fund provision Declining call provision

Deferred call provision

Consider this case: Last year, Jackson Tires reported net sales of $80,000,000 and total operating costs (including depreciation) of $52,000,000. Jackson Tires has $83,500,000 of investor-supplied capital, which has an after-tax cost of 12.5%. If Jackson Tires's tax rate is 40%, how much value did its management create or lose for the firm during the year (rounded to the nearest whole dollar)? $6,362,500 $37,562,500 $1,749,688 $39,662,500

Economic Value Added(EVA)= Net Operating Profit After Taxes (NOPAT)-Invested Capital*WACC Again: NOPAT= Earnings before Interest and Taxes(EBIT)*(1- Tax Rate) Again: EBIT= Net Sales-Operating Expenses-Depreciation As given in the question: Net Sales= $ 80,000,000 and Operating Expenses Including Depreciation= $52,000,000, putting these values into the formula for EBIT we get;EBIT= $ 80,000,000-$52,000,000 ie. $28,000,000 Putting the value of EBIT and tax rate of 40% or .4 in the formula for NOPAT we get: Again as given in the question: Invested capital = $ 83,500,000 and WACC= 12.5% or .125, using these values and the value of NOPAT in the formula for Economic Value Added we get:Economic Value Added= $16,800,000-($ 83,500,000*.125) ie. $ 6,362,500.Since EVA is positive so the company has added a value of: =$ 6,362,500.

Who is the issuer of the bonds? The New York City government Bank of New York Federal Reserve Bank of New York

The New York City government

Natural Gas Producers Inc. (NGPI) has an issue of 7-year, 8% annual coupon bonds outstanding. The bonds, which were originally issued 15 years ago, have a face value (FV) of $1,000, a yield-to-maturity (YTM) of 10%, and are noncallable. What is the current market price of NGPI's bonds? $767.24 $992.89 $902.63 $1,128.29

Face Value = $1,000 Annual Coupon Rate = 8% Annual Coupon = 8% * $1,000 Annual Coupon = $80 Time to Maturity = 7 years Annual YTM = 10.00% Market Price = $80 * PVIFA(1000%, 7) + $1,000 * PVIF(10.00%, 7) Market Price = $80 * (1 - (1/1.10)^7) / 0.10 + $1,000 * (1/1.10)^7 Market Price = 389.4735054 + 513.1581182 Market Price = $902.63

Actively managed mutual funds usually outperform passively managed mutual funds after fees are accounted for. True False

False

A closely held firm has a majority of its shareholders in high, marginal tax brackets.

Favors a Low Payout

A company recorded high retained earnings but has very little cash and other liquid assets.

Favors a Low Payout

Firm A has earnings-per-share of $3.00. Firm B has earnings-per-share of $2 and a price-per-share of $30. Using the Price/Earnings (P/E) ratio of firm B as a benchmark, what should be the price-per-share of firm A?

Firm B EPS = $2 MPS = $30 P/E ratio = MPS/EPS = $30/$2 = 15 Firm A EPS = $3 taking P/E ratio of firm B as a benchmark, MPS = EPS * P/E ratio MPS = $3 * 15 MPS = $45

The return on this type of stock primarily comes from capital gains.

Growth Stocks

Investors that rely on dividend income as a significant portion of their annual income tend to prefer this type of stock because it pays large, consistent dividends.

Income Stocks

constant payout ratio

If a firm's net income varies from year to year, this dividend policy exposes a shareholder to uncertainty regarding the amount of dividends to be received each year.

Holder-of-record date

If a shareholder owns a firm's shares on this date, he or she will receive the firm's next declared dividend.

Suppose instead of replacing Atteric Inc.'s stock with Transfer Fuels Co.'s stock, Raphael considers replacing Atteric Inc.'s stock with the equal dollar allocation to shares of Company X's stock that has a higher beta than Atteric Inc. If everything else remains constant, the required return from the portfolio would _________ .

Increase Explanation: It is important to remember that the expected return on a portfolio is the weighted average of the expected returns on the stock in the portfolio. In a portfolio, a stock's beta reflects the stock's contribution to the portfolio's riskiness. If the risk-free rate and market risk premium remain unchanged, the required returns on stock will increase if its beta increases. If Raphael replaces Atteric Inc.'s stock with a stock that has a higher beta, the portfolio's overall risk will also increase. As the portfolio's risk increases, the required return on the portfolio also increases, because investors will seek more returns for the additional risk.

Which of the following statements is true? Increasing dividends will always increase the stock price. Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources. Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth.

Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth.

ABCDE Telecom Inc. uses a policy that allows it to pay a small, consistent dividend in years when earnings are low or large capital investments are required. In some years, the firm pays an extra dividend when excess funds are available.

Low-Regular-Dividend- Plus-Extras

Suppose all stocks in Deborah's portfolio were equally weighted. The stock that would contribute the least market risk to the portfolio is _________. Further, if all of the stocks in the portfolio were equally weighted, the stock that would have the least amount of standalone risk is _________

Makissi Corp (MC) because it has the lowest beta Kulatsu Motors co (KMC) because it has the lowest standard deviation

Yakov owns a two-stock portfolio that invests in Blue Llama Mining Company (BLM) and Hungry Whale Electronics (HWE). Three-quarters of Yakov's portfolio value consists of Blue Llama Mining's shares, and the balance consists of Hungry Whale Electronics's shares. Each stock's expected return for the next year will depend on forecasted market conditions. The expected returns from the stocks in different market conditions are detailed in the following table:

Market Condition. Probability of Occurence. BLM. HWE. Strong . 20% 20% 28% Normal 35% 12% 16% Weak 45% -16% -20%

Assume that a $1,000,000 par value, semiannual coupon U.S. Treasury note with three years to maturity (YTM) has a coupon rate of 6%. The yield to maturity of the bond is 9.20%. Using this information and ignoring the other costs involved, the value of the Treasury note is ____

Maturity Value, M = 1,000,000 Periodic required return, r = 9.20% Coupon Rate (annually) = 6% Coupon or interest, C (annually) = 60,000 Number of years left to Maturity, n = 3

Bohemian Manufacturing Company is one of Free Spirit's leading competitors. Bohemian Manufacturing's market intelligence research team has learned of Free Spirit's stock split plans, and is considering paying a stock dividend in response. As a result, executives at Bohemian Manufacturing decide to pay stock dividends to its shareholders. A stock dividend is another way of keeping the stock price from going too high. Bohemian Manufacturing Company currently has 3,300,000 shares of common stock outstanding. If Bohemian Manufacturing pays a 4% stock dividend, how many new shares will the firm issue to its existing shareholders? 125,400 shares 132,000 shares 112,200 shares 138,600 shares

Multiply the current number of shares outstanding by the stock dividend to determine the number of new shares that will be issued. The calculation is: New shares issued = Pre-stock dividend shares outstanding × Number of new shares issued in stock dividend = 3,300,000 x .04 = 132,000 shares

What type of bonds are these? Treasury bonds Municipal bonds Corporate bonds

Municipal bonds

Smith & Jones Company is expected to generate $1,400,000 in net income over the next year. Smith & Jones Company's stockholders expect it to maintain its long-run dividend payout ratio of 40.00% of earnings. If Smith & Jones wants to maintain its current capital structure of 60% debt and 40% equity, the maximum capital budget it can support with this year's expected net income is ________

Net Income = 1,400,000 Long Run Dividend = 40% of 1400000 = 560,000 Total Equity (retained earnings) = 840,000 Total Capital =Equity (or retained earnings)/0.4 = 2,100,000

What would be the change in the expected value of Monroe Manufacturing's stock if investors required a return of 16% on the company's stock?

P0 = 3.75 x (1+.05) / (0.16 - .05) = -13.42

A three year bond has par value of $1000, coupon rate of 6% which is paid semiannually, and a price of $985. What is its yield to maturity? (remember to annualize your answer). 6.61% 6.56% 6.92% 6.75% 6.86%

PV =985 Par Value =1000 Coupon =6%*1000/2 =30 Number of Periods =3*2 =6 YTM using Excel formula =2*RATE(6,30,-985,1000) =6.56%

Assume that a $2,000,000 par value, semiannual coupon U.S. Treasury note with four years to maturity (YTM) has a coupon rate of 4%. The yield to maturity of the bond is 7.20%. Using this information and ignoring the other costs involved, the value of the Treasury note is _____

Par value FV = $2,000,000 YTM = 7.20%, so rate =7.20%/2 = 3.6% = 0.036 Coupon PMT = (4%/2) * $2,000,000 = $40,000 Maturity = 4 years so n per = 2*4 = 8 Now using excel function for present value of the bond =PV(rate,nper,pmt,fv) = PV(.036,8,40000,2000000) = -$1,780,948.58 So, value of treasury note = $1,780,948.58

The expected rate of return on Yakov's portfolio over the next year is ________

Portfolio return = (Return of Asset A*Weight of Asset A) + (Return of Asset B*Weight of Asset B) 1.00*(3/4) + 2.20(1/4) = = .75 + .55 = 1.30%

You invest $100,000 in 40 stocks, 20 bonds, and a certificate of deposit (CD). What kind of risk will you primarily be exposed to? Stand-alone risk Portfolio risk

Portfolio risk

This protects common stockholders from the management team of a firm issuing a large number of additional shares and purchasing these shares themselves in an attempt to gain greater control over the company.

Preemptive Right

Dividends are taxed in the year they are received, while capital gains are taxed when the stock is sold.

Prefer Fewer Dividends

An investor is on a fixed income and depends upon returns from investment.

Prefer More Dividends

The value of a dividend received today is known, but the value of a capital gain received in the future is uncertain.

Prefer More Dividends

Suppose the market risk premium is currently 6%. If investors were to become more risk-averse, the market risk premium might increase to 8%. What effect would you expect this to have on the prices of most financial assets? Prices would increase. Prices would be unaffected. Prices would decrease.

Prices would decrease. Explanation : The value of a financial asset is the present value of all the cash flows that the asset is expected to produce in the future. Remember that the present value of a cash flow received in year n is PV(CFn) = CF^n/(1+r)^n, where r is the required return on the asset. If the market risk premium goes up, so does the required return. If you are discounting cash flows with a higher required return, the present values will be smaller. That means the value of financial assets will decline.

Common stockholders have the right to elect a firm's board of directors, who in turn appoint the officers who manage the company. Most common stockholders transfer their right to vote to a second party through this instrument.

Proxy

Spentworth Industries Inc.'s investors like the firm's dividend policy because the firm pays the same dividend every year no matter how the firm performs.

Stable, Predictable Dividend

Companies sometimes employ stock splits to bring down the price of its shares so that the stock is more attractive to potential investors. Tasty Tuna Corporation currently has 30,000 shares of common stock outstanding. Its management believes that its current stock price of $100 per share is too high. The company is planning to conduct a 2-for-1 stock split. When a firm declares a 2-for-1 stock split, it doubles the number of shares outstanding. This causes the earnings and dividends per share to be cut in half, thereby reducing the stock price to one-half of its original value. Each shareholder will own twice as many shares, but each share will be worth only one-half as much as it was before the split. If Tasty Tuna Corporation declares a 2-for-1 stock split, the price of the company's stock after the split—assuming that the total value of the firm's stock remains the same before and after the split—should be __________ per share.

Stock Split: post-split stock price = $100 per share / 2 new shares per old share = $50.00

Savory Seafood Inc. is one of Tasty Tuna's leading competitors. Savory Seafood's market intelligence research team has learned of Tasty Tuna's stock split plans, and is considering paying a stock dividend to its own shareholders. As a result, executives at Savory Seafood decide to offer stock dividends to its shareholders. Savory Seafood Inc. currently has 3,300,000 shares of common stock outstanding. If Savory Seafood pays a 5% stock dividend, how many total shares of common stock will be outstanding after the stock dividend? 3,465,000 shares 4,331,250 shares 3,291,750 shares 3,811,500 shares

Stock dividends reward existing shareholders with new shares of stock. The magnitude of the stock dividend indicates how many new shares the investor will receive. Multiply the current number of shares outstanding by the stock dividend to determine the number of new shares that will be issued. The calculation is: New shares issued = Pre-stock dividend shares outstanding × Number of new shares issued in stock dividend = 3,300,000 shares × 5% = 165,000 shares Add the number of newly issued shares to the number of shares outstanding before the stock dividend to find the total number of shares outstanding after the stock dividend: Post-split Total shares outstanding = Pre-stock dividend shares outstanding + Stock dividend shares issued = 3,300,000 shares + 165,000 shares = 3,465,000 shares

Which of the following statements would be considered advantages of a stock repurchase? Check all that apply. Stock repurchases allow a firm to distribute earnings to investors without changing the amount of the regular cash dividend. The market generally perceives a stock repurchase as a sign that management believes that the firm's stock is undervalued. The interval between stock repurchases tends to be irregular, which means that investors cannot always count on cash inflows from repurchases.

Stock repurchases allow a firm to distribute earnings to investors without changing the amount of the regular cash dividend. The market generally perceives a stock repurchase as a sign that management believes that the firm's stock is undervalued.

Market Risk

That portion of an investment's risk calculated as the difference between its total risk and its firm-specific risk.

Equilibrium

The condition in which the expected return on a security equals its required return, and there is no pressure on its price to change.

Which of the following statements is true about bonds? The interest payments from municipal bonds are exempt from state and federal taxes. The interest payments from corporate bonds are not exempt from state and federal taxes.

The interest payments from municipal bonds are exempt from state and federal taxes.

If Erik is risk averse, which investment will he prefer? The investor will choose option 1. The investor will choose option 2. The investor will choose option 3. The investor will be indifferent toward these options.

The investor will choose option 1. Explanation: Although the three investment alternatives have the same expected return, they exhibit different levels of risk (as measured by their standard deviation). Remember, a risk-averse investor requires additional expected return for assuming additional risk. Options 2 and 3 have more risk but do not provide a higher expected return in exchange for the additional risk. Therefore, as a risk-averse investor, Erik will prefer option 1, which has no risk at all and provides a guaranteed $1,100 payoff in one year.

Yield to Call (YTC)

The name given to the return earned by an investor who purchases a bond for its market price, holds it until it is called on its first call date, and receives all interest payments and the call price between the date of purchase and the call date.

current yield

The portion of a bondholder's return attributable to the bond's interest payment, calculated by dividing the bond's interest payment by its market value.

Risk premium

The portion of an asset's total expected return required by investors as compensation for assuming the additional risks associated with the security, the issuer, and the marketplace.

Risk

The potential for variability in the possible outcomes associated with an investment.

A bond's yield to maturity (YTM) is the percentage return that it is expected to generate if the bond is assumed to be held until it matures. Calculating a bond's YTM requires you to make several assumptions. Which of the following is one of these assumptions? The bond is callable. The probability of default is zero.

The probability of default is zero.

Which of the following conditions must hold true for the constant growth valuation formula to be useful and give meaningful results? The required rate of return, rsrs, must be greater than the long-run growth rate. The company's growth rate needs to change as the company matures. The company's stock cannot be a zero growth stock. Grade It Now Save & Continue

The required rate of return, rs, must be greater than the long-run growth rate.

ABC Telecomm Inc. is expected to generate $1,400,000 in net income over the next year. ABC Telecomm Inc. has forecasted a capital budget of $87,000, and it wishes to maintain its current capital structure of 70% debt and 30% equity. If ABC Telecomm follows a strict residual dividend policy and makes distributions to its shareholders in the form of dividends, its expected dividend payout ratio for this year will be _________

The residual dividend policy says that a firm should pay out (as dividends) the earnings left over after its required investment. You can calculate this value using the following formulas: Dividends = Net income − Retained earnings needed to finance new investments = Net income−(Target equity ratio×Total Capital Budget) Dividends = 1,400,000 - (0.3 x 87,000) = 1,373,900 The residual dividend policy model predicts that ABC Telecomm should pay a dividend of $1,373,900 at the end of the year. The last terms being multiplied by each other represent the money from equity needed to fund this year's capital budget. The dividend payout ratio is the expected dividend divided by forecasted net income, calculated as follows: Dividend payout ratio = Dividends / net income = 1,373,900 / 1,400,000 = 0.9814 = 98.14%

Yield to Maturity (YTM)

The return earned by a bondholder who purchases a bond today at its market price, assuming that the bond will be held until maturity and that all coupons and the maturity payment will be received in accordance with the indenture.

investment-grade bond

The term applied to bonds that are judged by their rating agency as being likely to pay their interest and maturity obligations.

optimal dividend policy

This dividend policy maximizes the price of a firm's common stock.

dividend reinvestment plans

This program automatically uses a shareholder's dividends to acquire additional shares of a firm's outstanding or newly issued stock.

coefficient of variation

This statistical measure, which is calculated by dividing the standard deviation of an investment's returns by its mean, or expected return, represents a security's risk per unit of return.

Dividend Irrelevance Theory

This theory contends that a firm's dividend policy will not impact either the value of the firm or its cost of capital.

information content hypothesis

This theory of dividend policy management contends that management uses its dividend payments to send signals regarding the firm's future earnings forecasts.

stock dividend

This type of earnings distribution takes the form of the payment of additional shares of the paying firm, rather than the payment of cash.

Repurchase Agreement

Tiger Telecommunications Company needs to borrow $1 million overnight and is willing to secure the loan with a portfolio of securities that the borrower will repurchase tomorrow at a higher price. This is an example of a:

There are a number of reasons why a firm might want to repurchase its own stock. Read the statement and then answer the corresponding question about the company's motivation for the stock repurchase: Merry Melon Fruit Company is a high-tech company that recently repurchased a number of shares so that it will be able to meet obligations to employees without having to issue any new shares. What is the company's motivation for the stock repurchase? To adjust the firm's capital structure To distribute excess funds to stockholders To protect against a takeover attempt To acquire shares needed for employee options or compensation

To acquire shares needed for employee options or compensation

Parrot Transport Corp.'s board of directors has decided to repurchase some of its stock on the open market because it wants to increase the company's debt-to-equity ratio. What is the company's motivation for the stock repurchase? To acquire shares needed for employee options or compensation To distribute excess funds to stockholders To protect against a takeover attempt To adjust the firm's capital structure

To adjust the firm's capital structure

Treasury Securities that have a year or less until maturity are known as ... Treasury Bills TIPS Treasury Notes Treasury Bonds

Treasury Bills

Which of the following types of bonds has the least default risk? Corporate bonds Municipal bonds Treasury bonds

Treasury bonds

Which of the following statements is true about bonds? Treasury bonds are assumed to have no default risk. Treasury bonds are riskless securities.

Treasury bonds are assumed to have no default risk.

Stock repurchases where a company uses surplus cash to buy back shares from investors at the market price are an alternative method of companies returning cash to shareholders. True False

True

Based on your understanding of the beta coefficient, indicate whether each statement in the following table is true or false: Over time, a stock with a beta of 1.0 produces a return that goes up and down with a 1:1 relationship with the return on the market. A stock that is more volatile than the market will have a beta of less than 1.0. Beta measures the volatility in stock movements relative to the market.

True False True Explanation: A diversified portfolio will have its unsystematic risk minimized. The remaining risk is the market risk, which cannot be diversified. Each stock's contribution to market risk is termed systematic risk. The beta coefficient is a statistical measure of the stock's relation with the market—that is, the extent to which a stock rises and falls with the changes in the market. Analysts generally use historical data to calculate the beta and use it as an estimate of the stock's volatility relative to the market. An average stock is said to have a beta of 1.0, which means that on average it moves in the same direction and with the same magnitude as movements in the market. This means that the stock has a positive correlation with the market. If a stock has a beta of more than 1.0, it means that the stock's positive and negative returns are of greater magnitude than average market returns. Investors should expect a higher rate of return from stocks with higher betas.

What is the proper name of a bond issued by the United States Treasury?

U.S. Treasury Bond

When are issuers more likely to call an outstanding bond issue? When interest rates are higher than they were when the bonds were issued When interest rates are lower than they were when the bonds were issued

When interest rates are lower than they were when the bonds were issued

Which of the following statements is true about bonds? When interest rates increase, prices of U.S. Treasuries decline. When interest rates increase, prices of U.S. Treasuries increase.

When interest rates increase, prices of U.S. Treasuries decline.

Given your computation and conclusions, which of the following statements is true? When the coupon rate is less than Ethan's required return, the bond should trade at a premium. When the coupon rate is less than Ethan's required return, the bond should trade at a discount. When the coupon rate is greater than Ethan's required return, the bond's intrinsic value will be less than its par value. A bond should trade at a par when the coupon rate is greater than Ethan's required return.

When the coupon rate is less than Ethan's required return, the bond should trade at a discount.

Which of the following statements is true about the constant growth model? When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to an increased value of the stock. When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock.

When using a constant growth model to analyze a stock, if an increase in the required rate of return occurs while the growth rate remains the same, this will lead to a decreased value of the stock.

____________ dividend reinvestment program invests the dividends in newly issued stock. This type of plan raises new capital for the firm.

a new stock

The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called ______

an Indenture

When the bond's coupon rate is less than the bondholder's required return, the bond's intrinsic value will be less than its par value, and the bond will trade ______.

at a discount

Dividend distribution decisions are complicated and involve the understanding of critical strategic factors that affect the policy and value of a firm. Thus, the management of any firm has to consider the constraints on dividend payments, the availability and cost of alternative sources of capital, and other external factors when they create and implement their distribution policy. Based on your understanding of the constraints on dividend payments, identify the type of constraint this condition represents. Assume that all other factors are held constant. The __________ often stipulates that no dividends can be paid unless the current ratio, times-interest-earned ratio, and other safety ratios exceed stated minimums.

bond indenture

A bond's ______ gives the issuer the right to call, or redeem, a bond at specific times and under specific conditions.

call provision

Usually has no specified maturity date

common stock

A bond's ______ allows the bondholder or preferred stockholder to voluntarily convert their bond or preferred shares, respectively, into a specified number or value of common shares.

convertibility provision

On the _______ date, the dividend to be paid is recorded as a ________, and retained earnings are ________ by the same amount. If the company lists a stockholder as an owner on the _________, the stockholder receives the dividend for that period.

declaration, current liability, decreased, holder-of-record date

You heard that rating agencies have upgraded a bond's rating. The yield on the bond is likely to ________, and the bond's price will ________.

decrease, increase

A bond issuer is said to be in ________ if it does not pay the interest or the principal in accordance with the terms of the indenture agreement or if it violates one or more of the issue's restrictive covenants.

default

Are the bonds of Natural Gas Producers Inc. selling at a discount, at par, or at a premium? Premium Par Discount

discount bc lower than face value

The T-note described is currently selling at a ______. Assuming that interest rates remain constant over the life of the note, its price should be expected to ________ as the T-note approaches maturity. When valuing a semiannual coupon bond, the time period (N) in the present value formula is assumed to have a value of __________ periods.

discount, increase, 6-month

Edinburgh Exports pays an annual dividend rate of 11.80% on its preferred stock that currently returns 15.81% and has a par value of $100.00 per share. What is the value of Edinburgh's preferred stock? $74.64 per share $89.57 per share $100.00 per share $111.95 per share

dividend (ignore the %)/current return (as a decimal not %) = 11.80/.1581 = 74.64

Having the ability to accelerate or delay projects makes it _______ for a firm to adhere to a stable dividend policy.

easier

A stock is in equilibrium if its expected return __________ its required return. In general, assume that markets and stocks are in equilibrium (or fairly valued), but sometimes investors have different opinions about a stock's prospects and may think that a stock is out of equilibrium (either undervalued or overvalued). Based on the analyst's expected return estimates, Stock A is _________, Stock B is ___________, and Stock C is in equilibrium and fairly valued.

equals undervalued undervalued Explanation: Stock A's expected return is 7.5%. Use the CAPM to find its required return as follows: rA= 4.0% + 0.5 (5.0%) =4.0% + 2.5% =6.5%. Here is one way to think about the issue: Investors in the market require a return of 6.5% for holding Stock A, but this analyst believes that the stock actually will return 7.5%. By the analyst's estimate, it sounds as if the stock is quite a bargain. You require only a 6.5% return, but you expect to get a 7.5% return instead; it sounds as if the stock is undervalued. You can see this on the graph, because at a beta of 0.5, the expected return (7.5%) is greater than the required return (shown by the SML). In fact, any asset that is plotted on this graph above the SML is thought to be undervalued, whereas assets below the SML are thought to be overvalued. An asset lying directly on the SML is said to be in equilibrium. Stock B's required return is 9.0%; that is, (rB)rB = 4.0% + 1.0(5.0%) = 4.0% + 5.0% = 9.0%. Stock C's required return is 12.4%; that is, rC= 4.0% + 2.0(5.0%) = 4.0% + 10.0% = 14.0%. Compare the stocks' required returns with their expected returns. Stock C is fairly valued, because its expected return is equal to its required return. Stocks A and B are undervalued, because their required returns are less than their expected returns. These conclusions are verified by the graph. Stock C lies on the SML, whereas Stocks A and B lie above it.

When the bond's coupon rate is greater to the bondholder's required return, the bond's intrinsic value will ________ its par value, and the bond will trade at a premium.

exceed

A bond's ________ is generally $1,000 and represents the amount borrowed from the bond's first purchaser.

face or maturity value

Shorter-term bond prices are more sensitive to changes in interest rates than are longer-term bond prices. True False

false

True or False: Just like term loans, bond issues do not have to be registered with the Securities and Exchange Commission (SEC).

false

True or False: The interest rate on a term loan must be fixed over the life of the loan, whereas the interest rate on a bond issue can vary over the life of the issue.

false

A firm has an established credit line for access to external sources of funding.

favors a high payout

If the coupon interest rate remains constant from the time of issue until the bond matures, then the bond is called a ______ bond.

fixed-rate

Manuel is an amateur investor who holds a small portfolio consisting of only four stocks. The stock holdings in his portfolio are shown in the following table: Stock % of Portfolio Expected Return Standard Deviation Artemis Inc 20% 6% 23% Babish & Co 30% 14% 27% Cornell Industries 35% 12% 30% Danforth Motors 15% 5% 32%

following 2 ?s

Suppose an investor, Erik, is offered the investment opportunities described in the table below. Each investment costs $1,000 today and provides a payoff, also described below, one year from now. Option Payoff One Year from Now 1 100% chance of receiving $1,100 2 50% chance of receiving $1,000 ; 50% chance of receiving $1,200 3 50% chance of receiving $200 ; 50% chance of receiving $2,000

following 2 ?s

Deborah holds a $5,000 portfolio that consists of four stocks. Her investment in each stock, as well as each stock's beta, is listed in the following table: Stock Investmt . Beta . Standrd Dev. Perpetualcold Refrigeration Co. (PRC) $1750 . 1.00 . 18.00% Kulatsu Motors Co. (KMC) . $1000 1.90 . 12.00% Water and Power Co. (WPC) $750 . 1.20 . 20.00% Makissi Corp. (MC) $1500 0.60 28.50%

following 2?s

Grey Fox Aviation Company has 9% annual coupon bonds that are callable and have 18 years left until maturity. The bonds have a par value of $1,000, and their current market price is $1220.35. However, Grey Fox Aviation Company may call the bonds in eight years at a call price of $1,060.

following 3 ?S

Five years of realized returns for Blue Llama Mining Inc. (Blue Llama) are given in the following table: 2012 2013 2014 2015 2016 Stock return 12.5% 8.50% . 15.00% . 21.00% . 6.50% Also note that: 1.While Blue Llama was started 40 years ago, its common stock has been publicly traded for the past 25 years.2.The returns on Blue Llama's equity are calculated as arithmetic returns.

following 3 ?s

In the table, identify which factors, in general, tend to favor high or low payout ratios.

following 3 terms

Several factors affect a firm's ability to pay a dividend. Three such factors are described in the table: profitability (an increase in net income), investment opportunities, and capital structure (an increase in the debt ratio). Use the table to indicate how a firm's ability to pay a dividend is affected by the factors described. (Hint: Consider each factor in isolation, with everything else held the same.)

following 3 terms

Calculate expected returns for the individual stocks in Yakov's portfolio as well as the expected rate of return of the entire portfolio over the three possible market conditions next year.

following 3?s

In July 2009, Walmart sold 100 billion yen of five-year samurai bonds. Lead managers in the deal were Mizuho Securities, BNP Paribas, and Mitsubishi UFJ Securities.

following 4 ?s

New York City issued a general obligation bond for a canal in 1812. It was the first formal debt instrument with a fixed repayment schedule issued by a city.

following 4 questions

In general, firms' dividend practices fit into the categories listed in the following table (constant payout ratio, low-regular-dividend-plus-extras, residual dividend policy, and stable, predictable dividend policies). Identify the category that each practice corresponds to in the table.

following 4 terms

In some cases, individuals who start a business have special voting rights that help them exercise more control over the firm. They own a special class of stock called ______ shares.

founders'

What is the proper name of a corporate bond that pays interest to its bondholders only if the issuer earns sufficient income to allow the payment of the bond's interest payments?

income bond

Suppose that there is high unemployment, which causes interest rates to fall, which in turn pulls the preferred stock's yield to 9.49%. The value of the preferred stock will _______

increase

The contract that describes the terms of a borrowing arrangement between a firm that sells a bond issue and the investors who purchase the bonds is called the ________.

indenture

The entity that promises to make the interest and maturity payments for a bond issue is called the _______

issuer

Walter's dividend is expected to grow at a constant growth rate of 9.50% per year. What do you expect to happen to Walter's expected dividend yield in the future? It will stay the same. It will decrease. It will increase.

it will stay the same

Modigliani and Miller also pointed out that many institutional investors do not pay taxes and can buy and sell stocks with very low transaction costs. For these investors, dividend policy is _____ relevant than it is for an individual investor.

less

Savannah has to postpone her purchase of Seattle Seafood's preferred shares for just over four months. By the time she is ready to invest, the return on alternative investments of comparable risk has increased. She should expect the cost of her investment in Seattle Seafood's preferred shares to be ________ expensive.

less

If management is concerned with keeping control of the company, it will be likely to retain _______ earnings than it otherwise would to avoid diluting control by issuing new stock to raise capital.

more

Your brother, Andrew, called yesterday to ask your advice about investing in bonds to fund your nephew's future college education. Andrew said that he was interested in investing in only very safe and secure investments. Assuming that he restricts his investments to blue-chip corporations of equal credit risk, which form of bond should you recommend?

mortgage bond

A bond's _______ refers to its face value and the amount of money that the issuing entity borrows and promises to repay on the maturity date.

par value

Savannah is considering the purchase of 175 shares of the preferred stock of Seattle Seafood Company. The stock carries a par value of $100 per share and an annual dividend rate of 5.50%. Alternative investments of comparable risk are generating yields of 4.25%. Given this information, the per-share value of Seattle Seafood's preferred stock should be: $97.06 $161.76 $129.41 $116.47

per share value of Seattle Seafood's preferred stock should be: 5.5/4.25% = 129.41

Raphael calculated the portfolio's beta as 0.885 and the portfolio's expected return as 8.87%. Raphael thinks it will be a good idea to reallocate the funds in his client's portfolio. He recommends replacing Atteric Inc.'s shares with the same amount in additional shares of Transfer Fuels Co. The risk-free rate is 4.00%, and the market risk premium is 5.50%. According to Raphael's recommendation, assuming that the market is in equilibrium, the portfolio's required return will change by __________

rP=rRF+(rM−rRF)(βP) rP=rRF+(RPM)(bP) rRF+RPMbP=4.00%+(5.50%×0.68) =7.74%

The formula for the valuation of a share of preferred stock is P0=D/rsP0=D/rs. In this equation, the variable rs represents the

required rate of return on investment

The preceding data series represents ____________ of Blue Llama's historical returns. Based on this conclusion, the standard deviation of Blue Llama's historical returns is __________.

sample, Standard deviation of BLM's historical returns = sqrt[((12.50-12.7)^2+(8.50-12.7)^2+(15-12.7)^2+(21.00-12.7)^2+(6.5-12.7)^2)/4] = sqrt[255.388/4] = 5.7075%

A bond contract feature that requires the issuer to retire a specified portion of the bond issue each year is called a _______

sinking fund provision

A stock's contribution to the market risk of a well-diversified portfolio is called ___________ risk. According to the Capital Asset Pricing Model (CAPM), this risk can be measured by a metric called the beta coefficient, which calculates the degree to which a stock moves with the movements in the market.

systematic

Modigliani and Miller argued that each shareholder can construct his or her own dividend policy. This statement is: True False

true

With Social Security, your payout in retirement is a function of your highest 35 years of salary (and SS taxes paid). Thus, higher income people get a bigger payout than lower income people. True False

true

Your first late payment fee on a credit card is capped at $25 (courtesy of the Credit Card Act of 2009). Late payments after that will often have higher fees. True False

true

Suppose, based on the earnings consensus of stock analysts, Raphael expects a return of 7.76% from the portfolio with the new weights. Does he think that the revised portfolio, based on the changes he recommended, is undervalued, overvalued, or fairly valued? Overvalued Undervalued Fairly Valued

undervalued Explanation: As an analyst, Raphael will need to compare the portfolio's required and expected returns to answer this question. Based upon the market risk, the portfolio has a required rate of 7.74%. This means that, according to his estimates, investors would require a return of 7.74% for investing in the portfolio. However, other analysts estimate that investors expect a return of 7.76%, which means that investors expect to get a higher rate of return than existing investors require. Thus, based on all calculations and data, Raphael would think that the stock is undervalued.

Who is the issuer of the bonds? BNP Paribas Mitsubishi UFJ Securities Walmart

walmart

Remember, a bond's coupon rate partially determines the interest-based return that a bond _______ pay, and a bondholder's required return reflects the return that a bondholder ________ to receive from a given investment.

will, would like

Suppose instead of replacing Atteric Inc.'s stock with Baque Co.'s stock, Darnell considers replacing Atteric Inc.'s stock with the equal dollar allocation to shares of Company X's stock that has a higher beta than Atteric Inc. If everything else remains constant, the portfolio's beta ______ , and the required return from the portfolio _____ .

would increase, would increase

If the price of the bond is initially discounted and offers no coupon payments, the bond is called a ________ bond.

zero-coupon

Your broker, Savannah, called earlier with an offer to invest in a corporate bond that sells at a significant discount from its face value and does not pay an annual or semiannual interest payment. This is an example of what type of bond?

zero-coupon bond