FIN 315 Exam 3

Nu-Tek has preferred stock outstanding that pays a cumulative $1.50 dividend per quarter. This company has not paid any of its dividends for the past two quarters. How much must be paid as a dividend for each share of preferred stock if the company plans to pay a dividend to its common shareholders this upcoming quarter? a. $4.50 b. $0 c. $1.50 d. $3.00 e. $6.00

a. $4.50 Required preferred dividend = 3($1.50) Required preferred dividend = $4.50

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond? a. Callable b. Par value c. Senior d. Subordinated e. Unsecured

a. Callable

All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity. a. a discount; less than b. par; less than c. a premium; equal to d. a discount; higher than e. a premium; less than

a. a discount; less than

A newly issued bond has a coupon rate of 7 percent and semiannual interest payments. The bonds are currently priced at par. The effective annual rate provided by these bonds must be: a. greater than 7 percent. b. less than 3.5 percent. c. greater than 3.5 percent but less than 7 percent. d. 7 percent. e. 3.5 percent.

a. greater than 7 percent.

The current yield is defined as the annual interest on a bond divided by the: a. market price. b. coupon rate. c. call price. d. par value. e. face value.

a. market price.

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: a. priced the same as a $1 perpetuity. b. worth $1 a share in the current market. c. basically worthless as it offers no growth potential. d. equal in value to the present value of $1 paid one year from today. e. valued at an assumed growth rate of 1 percent.

a. priced the same as a $1 perpetuity.

Global Logistics just announced it is increasing its annual dividend to $1.68 next year and will increase that dividend by 1.85 percent annually thereafter. How much will one share of this stock be worth ten years from now if the required rate of return is 12.8 percent? a. $18.26 b. $18.43 c. $18.77 d. $19.12 e. $18.09

b. $18.43 P10 = [$1.68(1.018510)]/(.128 − .0185) P10 = $18.43

Jensen Shipping currently has an EPS of $2.31, a benchmark PE of 13.5, and an earnings growth rate of 2.3 percent. What is the target share price 4 years from now? a. $29.42 b. $34.15 c. $31.15 d. $27.32 e. $38.47

b. $34.15 P4 = $2.31(1.0234)(13.5) P4 = $34.15

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? a. 24.37 years b. 12.53 years c. 18.49 years d. 12.26 years e. 25.05 years

b. 12.53 years $1,023.46 = $35({1 − [1/(1 + .0672/2)2t]}/(.0672/2)) + $1,000/(1 + .0672/2)2t For Calculator Enter: 6.72/2=I/Y −$1,023.46=PV $35=PMT $1,000=FV CPT; N= 25.052 THEN, 25.052/2= 12.53

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity? a. 6.97 percent b. 7.22 percent c. 6.88 percent d. 6.92 percent e. 7.43 percent

b. 7.22 percent $987 = $35[(1 − {1/[1 + (r/2)](8)(2)})/(r/2)] + $1,000/[1 + (r/2)](8)(2) For Calculator Enter: 16=N -$987=PV $35=PMT $1,000=FV CPT, I/Y= 3.608 THEN, 2(3.608)= 7.22%

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment? a. Yield b. Coupon c. Face value d. Discount e. Call premium

b. Coupon

A decrease in which of the following will increase the current value of a stock according to the dividend growth model? a. Dividend amount b. Discount rate c. Number of future dividends, provided the total number of dividends is less than infinite d. Dividend growth rate e. Both the discount rate and the dividend growth rate

b. Discount rate

A $1,000 par value corporate bond that pays $60 annually in interest was issued last year. Which one of these would apply to this bond today if the current price of the bond is $996.20? a. The bond is currently selling at a premium. b. The current yield exceeds the coupon rate. c. The current yield exceeds the yield to maturity. d. The coupon rate has increased to 7 percent. e. The bond is selling at par value.

b. The current yield exceeds the coupon rate.

You cannot attend the shareholder's meeting for Alpha United so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? a. Straight voting b. Voting by proxy c. Cumulative voting d. Alternative voting e. Indenture voting

b. Voting by proxy

Which one of the following represents the capital gains yield as used in the dividend growth model? a. D1 b. g c. g/P0 d. D1/P0 e. P0

b. g

When using the two-stage dividend growth model: a. g1 cannot be negative. b. g1 can be greater than R. c. Pt = Dt/R. d. R must be less than g1 but greater than g2. e. g1 must be greater than g2.

b. g1 can be greater than R.

GEO Inc. has paid annual dividends of $.41, $.47, and $.53 a share over the past three years, respectively. The company expects to now maintain a constant dividend. At a discount rate of 14.4 percent, what is the current value per share? a. $3.09 b. $2.43 c. $3.68 d. $2.85 e. $3.18

c. $3.68 P0 = $.53/.144 P0 = $3.68

The current dividend yield on CJ's common stock is 1.89 percent. The company just paid an annual dividend of $1.56 and announced plans to pay $1.70 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock? a. 13.39 percent b. 12.75 percent c. 10.86 percent d. 9.08 percent e. 15.82 percent

c. 10.86 percent R = .0189 + [($1.70 − 1.56)/$1.56] R = .1086, or 10.86%

Gee-Gee common stock returned a nifty 21.6 percent rate of return last year. The dividend amount was $.25 a share which equated to a dividend yield of 1.01 percent. What was the rate of price appreciation for the year? a. 21.52 percent b. 21.38 percent c. 20.59 percent d. 23.60 percent e. 22.87 percent

c. 20.59 percent g = .216 − 0.0101 g = .2059, or 20.59%

Currently, a firm has a benchmark PE of 11.7 and an EPS of $3.20. Earnings are expected to grow 3.2 percent annually. What is the implicit rate of return? a. 2.89 percent b. 4.08 percent c. 3.20 percent d. 3.67 percent e. 4.23 percent

c. 3.20 percent P0 = $3.20(11.7) P0 = $37.44 P1 = $3.20(1.032)(11.7) P1 = $38.638 R = ($38.638 − 37.44)/$37.44 R = .0320, or 3.20%

Jason's Paints just issued 20-year, 7.25 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? a. Discounted b. Note c. Debenture d. Zero-coupon e. Callable

c. Debenture

A discount bond's coupon rate is equal to the annual interest divided by the: a. clean price. b. current price. c. face value. d. call price. e. dirty price.

c. face value.

Supernormal growth is a growth rate that: a. applies to a single, abnormal year. b. is generally constant for an infinite period of time. c. is unsustainable over the long term. d. is both positive and follows a year or more of negative growth. e. exceeds a firm's previous year's rate of growth.

c. is unsustainable over the long term.

The dividend growth model: a. only values stocks at Time 0. b. can be used to value both dividend-paying and non-dividend-paying stocks. c. requires the growth rate to be less than the required return. d. cannot be used to value constant dividend stocks. e. assumes dividends increase at a decreasing rate.

c. requires the growth rate to be less than the required return.

The common stock of Water Town Mills pays a constant annual dividend of $2.25 a share. What is one share of this stock worth at a discount rate of 16.2 percent? a. $14.01 b. $13.79 c. $13.28 d. $13.89 e. $14.56

d. $13.89 P0 = $2.25/.162 P0 = $13.89

Dee's made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.58 a share. Secondly, all dividends after that will decrease by 1.15 percent annually. What is the value of this stock at a discount rate of 15.5 percent? a. $9.82 b. $10.10 c. $11.01 d. $9.49 e. $10.51

d. $9.49 P0 = $1.58/[.155 − (−.0115)] P0 = $9.49

You own one share of a cumulative preferred stock that pays quarterly dividends. The firm has recently suffered some financial setbacks and has failed to pay the last two dividends. However, new funding has been arranged and the firm intends to restore all dividends, both common and preferred, this quarter. As a preferred shareholder, you should expect to receive the equivalent of ________ quarter(s) of dividends when the next dividend is paid. a. 0 b. 1 c. 2 d. 3 e. either 1, 2, or 3

d. 3

Which one of these equations applies to a bond that currently has a market price that exceeds par value? a. Market value < Face value b. Yield to maturity = Current yield c. Current yield > Coupon rate d. Yield to maturity < Coupon rate e. Market value = Face value

d. Yield to maturity < Coupon rate

Three Corners Markets paid an annual dividend of $1.42 a share last month. Today, the company announced that future dividends will be increasing by 1.3 percent annually. If you require a return of 14.6 percent, how much are you willing to pay to purchase one share of this stock today? a. $9.68 b. $10.68 c. $11.23 d. $11.57 e. $10.82

e. $10.82 P0 = [$1.42(1.013)]/(.146 − .013) P0 = $10.82

Home Services common stock offers an expected total return of 14.56 percent. The last annual dividend was $2.27 a share. Dividends increase at a constant 2.1 percent per year. What is the dividend yield? a. 16.48 percent b. 16.66 percent c. 13.35 percent d. 14.20 percent e. 12.46 percent

e. 12.46 percent Dividend yield = .1456 − .021 Dividend yield = .1246, or 12.46%

The yield to maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a coupon bond with 9 percent annual interest for $1,000. The bond has 12 years to maturity. Three years from now, the yield to maturity has declined to 7 percent and you decide to sell. What is your holding period yield? a. 8.84 percent b. 9.49 percent c. 13.01 percent d. 10.96 percent e. 12.83 percent

e. 12.83 percent The yield to maturity at the time of purchase must be 9 percent, which is the coupon rate, because the bond was purchased at par value. Bond price Year 3 = $90{[1 − (1/1.079)]/.07} + $1,000/1.079 Bond price Year 3 = $1,130.30 $1,000 = $90({1 − [1/(1 + r)3]}/r) + $1,130.30/(1 + r)3 For Calculator Enter: 3=N $-1,000=PV $90=PMT $1,130.30= FV CPT; I/Y

Bert owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. What is the $1,000 called? a. Yield b. Dirty price c. Coupon d. Discount e. Face value

e. Face value

Which one of the following statements is correct? a. Dividend growth rates must be either zero or positive. b. Preferred stocks generally have variable growth rates. c. All stocks can be valued using the dividend discount models. d. Stocks can only be assigned one dividend growth rate. e. Stocks can have negative growth rates.

e. Stocks can have negative growth rates.

As a bond's time to maturity increases, the bond's sensitivity to interest rate risk: a. decreases at a decreasing rate. b. increases at a constant rate. c. increases at an increasing rate. d. decreases at an increasing rate. e. increases at a decreasing rate.

e. increases at a decreasing rate.

A bond's principal is repaid on the ________ date. a. clean b. coupon c. yield d. dirty e. maturity

e. maturity