FIN 325 Exam 2

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?

Voting by proxy

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:

priced the same as a $1 perpetuity

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.

You own a bond that pays $64 in interest annually. The face value is $1,000 and the current market price is $1,021.61. The bond matures in 11 years. What is the yield to maturity?

use calculator: N:11; PV: -$1021.61; PMT: $64; FV: $1000; CPT I/Y: 6.12

The bond market requires a return of 9.8 percent on the 5-year bonds issued by JW Industries. The 9.8 percent is referred to as the:

yield to maturity.

Roadside Markets has 8.45 percent coupon bonds outstanding that mature in 10.5 years. The bonds pay interest semiannually. What is the market price per bond if the face value is $1,000 and the yield to maturity is 7.2 percent?

Bond price = $42.25({1 − [1/(1 + .072/2)(10.5)(2)]}/(.072/2)) + $1,000/(1 + .072/2)(10.5)(2) Bond price = $1,091.00 Calculator: N=21, I/Y=8.45/2 , PMT=42.25, FV=1000 CPT PV = $1,091.00

Which one of following is the rate at which a stock's price is expected to appreciate?

Capital gains yield

Allison just received the semiannual payment of $35 on a bond she owns. Which term refers to this payment?

Coupon

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?

Debenture

Which one of the following applies to the dividend growth model?

Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000?

Explanation: Bond price = $28.25({1 − [1/(1 + .0694/2)(7)(2)]}/(.0694/2)) + $1,000/(1 + .0694/2)(7)(2) =$929.42 Calculator: N=14, I/Y=6.94/2 , PMT=28.25, FV=1000 CPT PV = $929.42

A 13-year, 6 percent coupon bond pays interest semiannually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?

Explanation: Bond price = $30({1 − [1/(1 + .055/2)(13)(2)]}/(.055/2)) + $1,000/(1 + .055/2)(13)(2) Bond price = $1,046.01 Bond price = $30({1 − [1/(1 + .057/2)(13)(2)]}/(.057/2)) + $1,000/(1 +.057/2)(13)(2) Bond price = $1,027.28 % change in price = ($1,027.28 − 1,046.01)/$1,046.01 % change in price = −.0179, or −1.79%

Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725 percent of par value $1000. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?

Explanation: Current yield = [.065 ($1,000)]/[.86725 ($1,000)] Current yield = .0749, or 7.49%

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?

Explanation: Dividend yield = .1456 − .021 Dividend yield = .1246, or 12.46%

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?

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

Future Motors is expected to pay an annual dividend next year of $3.10 a share. Dividends are expected to increase by 1.85 percent annually. What is one share of this stock worth at a required rate of return of 15 percent?

Explanation: P0 = $3.10/(.15 − .0185) P0 = $23.57

How much are you willing to pay for one share of LBM stock if the company just paid an annual dividend of $2.24, the dividends increase by 2.3 percent annually, and you require a return of 14.8 percent?

Explanation: P0 = [$2.24(1.023)]/(.148 − .023) P0 = $18.33

Arcs and Triangles paid an annual dividend of $1.47 a share last month. The company is planning on paying $1.52, $1.58, and $1.60 a share over the next three years, respectively. After that, the dividend will be constant at $1.65 per share per year. What is the market price of this stock if the market rate of return is 12 percent?

Explanation: P3 = $1.65/.12 P3 = $13.75 P0 = $1.52/1.12 + $1.58/1.122 + ($1.60 + 13.75)/1.123 P0 = $13.54

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent?

Explanation: P3 = $1.90/.146 P3= $13.01 P0 = $1.48/1.146 + $1.60/1.1462 + ($1.75 + 13.01)/1.1463 P0 = $12.32

AC Electric just paid its annual dividend of $2.42. The firm plans to increase its dividend by 2.5 percent for the next 3 years and then maintain a constant 2 percent rate of dividend growth. The required return is 12.5 percent. What is the current value per share of this stock?

Explanation: P3 = [$2.42(1.0253)(1.02)]/(.125 − .02) P3 = $25.32 P0 = [$2.42(1.025)/(.125 − .025)][1 − (1.025/1.125)3] + $25.32/1.1253 P0 = $23.82

Global Tek plans on increasing its annual dividend by 15 percent a year for the next four years and then decreasing the growth rate to 2.5 percent per year. The company just paid its annual dividend in the amount of $.20 per share. What is the current value of one share of this stock if the required rate of return is 17.4 percent?

Explanation: P4 = [$.20(1.154)(1.025)]/(.174 − .025) P4= $2.40635 P0 = [$.20(1.15)/(.174 − .15)][1 − (1.15/1.174)4] + $2.40635/1.1744 P0= $2.03

The common stock of Dayton Repair sells for $47.92 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock?

Explanation: R = $2.28/$47.92 + .0165 R = .0641, or 6.41%

The outstanding bonds of Winter Tires Inc. provide a real rate of return of 3.6 percent. If the current rate of inflation is 2.68 percent, what is the actual nominal rate of return on these bonds?

Explanation: R = (1.036)(1.0268) − 1 R = .0638, or 6.38%

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?

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

You purchased an investment that will pay you $8,000, in real dollars, a year for the next three years. Each payment will be received at the end of the period with the first payment occurring one year from today. The nominal discount rate is 8.46 percent and the inflation rate is 3.1 percent. What is the present value of these payments in real dollars?

Explanation: You need to discount real dollars with the real interest rate. r = 1.0846/1.031 − 1 r = .0520, or 5.20% PV = $8,000{[1 − (1/1.0523)]/.052} PV = $21,705

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?

Explanation: g = .216 − 0.0101 g = .2059, or 20.59%

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?

Face value

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?

I/Y: 6.72/2; PV: -$1023.46; PMT: $35; FV: $1000; CPT N: 25.02 Number of years = 25.052/2 Number of years = 12.53

New Homes has a bond issue with a coupon rate of 5.5 percent that matures in 8.5 years. The bonds have a par value of $1,000 and a market price of $1,022. Interest is paid semiannually. What is the yield to maturity?

N: 17; PV: -$1022; PMT: $27.50; FV: $1000; CPT I/Y: 2.588 YTM = 2(2.588%) YTM = 5.18%

You are reviewing a new project and have estimated the following cash flows: Year Cash flow 0 -165,000 1 63,120 2 70,800 3 91,080 • Your required return for assets of this risk level is 12%. • Based on NPV rule, do you accept the project?

PV=63120/(1.12)^1 + 70800/(1.12)^2 + 91080/(1.12)^3 = 177,627.4 NPV= 177,627.4 - 165,000 = 12,627.4 >0; accept project

Hardy Lumber has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most apt to be granted to the preferred shareholders?

Right to share in company profits prior to other shareholders

Which one of the following statements is correct?

Stocks can have negative growth rates.

Round Dot Inns is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct?

The bonds will sell at a premium if the market rate is 5.5 percent.

A project has a net present value of zero. Which one of the following best describes this project?

The project's cash inflows equal its cash outflows in current dollar terms.

Winston Co. has a dividend yield of 5.4 percent and a total return for the year of 4.8 percent. Which one of the following must be true?

The stock has a negative capital gains yield.

A project will produce cash inflows of $5,400 a year for 3 years with a final cash inflow of $2,400 in Year 5. The project's initial cost is $13,400. What is the net present value if the required rate of return is 14.2 percent?

Write down cash flows for each year: CF0 = -13,400, CF1 = 5,400, CF2 = 5,400, CF3 = 5,400, CF5 = 2,400 • Compute PV first • PV= $5,400([1 − (1/1.1423)]/.142) + $2,400/(1.142)5 = 13,730.47 • Compute NPV NPV = PV - Initial cost = 13,730.47 - 13,400 = 330.47

Which one of these equations applies to a bond that currently has a market price that exceeds par value?

Yield to maturity < Coupon rate

All else constant, a bond will sell at ________ when the coupon rate is ________ the yield to maturity.

a discount; less than

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

dirty price.

A discount bond's coupon rate is equal to the annual interest divided by the:

face value.

Which one of the following represents the capital gains yield as used in the dividend growth model?

g

The Fisher effect primarily emphasizes the effects of ________ on an investor's rate of return.

inflation

DLQ Inc. bonds mature in 12 years and have a coupon rate of 6 percent. If the market rate of interest increases, then the:

market price of the bond will decrease.

A bond's principal is repaid on the ________ date.

maturity

The annual dividend yield is computed by dividing ________ annual dividend by the current stock price.

next year's