Finance Exam 2 MC

A decrease in which of the following will increase the current value of a stock according to the dividend growth model?

Discount rate

What are the distributions of either cash or stock to shareholders by a corporation called?

Dividends

Gehle Corporation pays a constant annual dividend of $.63 per share. The stock is priced at $5.38 per share. If your required rate of return is 11 percent per year, should you buy the stock? Why or why not?

Yes; The stock has a present value of $5.73 per share. P0 = $.63/.11P0 = $5.73

Interest rates that include an inflation premium are referred to as:

nominal rates.

The stream of customer orders coming in to the NYSE trading floor is called the:

order flow.

The pure time value of money is known as the:

term structure of interest rates.

If you sell a bond with a coupon of 6 percent to a dealer when the market rate is 7 percent, which one of the following prices will you receive?

Bid price

A bond that can be paid off early at the issuer's discretion is referred to as being which type of bond?

Callable

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

Capital gains yield

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

Comparable real rate

Real rates are defined as nominal rates that have been adjusted for which of the following?

Inflation

Habibi Gourmet made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.54 per share. Secondly, all dividends after that will decrease by 1.16 percent annually. What is the value of this stock at a discount rate of 9 percent?

P0 = $1.54/[.09 − (−.0116)] P0 = $15.16

Nasafi Lumber paid an annual dividend of $1.37 per share yesterday. Today, the company announced that future dividends will be increasing by 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?

P0 = [$1.37(1.03)]/(.146 − .03) P0 = $12.16

Reyes 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 premium bond that pays $60 in interest annually matures in seven years. The bond was originally issued three years ago at par. Which one of the following statements is accurate in respect to this bond today?

The yield to maturity is less than the coupon rate.

Protective covenants:

are primarily designed to protect bondholders.

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

broker.

Farm Machinery stock currently sells for $54.80 per share. The market required return is 14.2 percent while the company maintains a constant 3 percent growth rate in dividends. What was the most recent annual dividend per share paid on this stock?

$5.96 $54.80 = [D0(1.03)]/(.142 − .03) D0 = $5.96