Principles of Investments - Final (CH 8, 10, 11, 17 +)

A coupon bond that pays interest semi-annually has a par value of $1,000, matures in 7 years and has a yield to maturity of 7.5%. If the annual coupon rate is 9%, what is the approximate value of the bond today? A. $1,081. B. $1,083. C. $856. D. $1,000.

A. $1,081.

Crazy Fans Inc pays a current dividend of $1.36 with a growth rate of 2.9%. Crazy Fans shareholders require an 11.1% rate of return. The value of the stock using the dividend discount model is closest to: A. $17.07. B. $16.58. C. $16.84. D. $17.28.

A. $17.07.

LEP Tech is expected to pay its first dividend in exactly one year of $1.25 per share. The annual growth rate in dividends is expected to be 6% and LEP's shareholders require a return of 12%. The value of the stock is closest to: A. $20.83 B. $22.08 C. $23.49 D. $23.68

A. $20.83

A firm with a price-earnings ratio of 8.39 has earnings per share of $5.38. This firm will have an expected stock price closest to: A. $45.14. B. $44.16. C. $42.93. D. $43.38.

A. $45.14.

Anderson bought a bond with a modified duration of 11.20. By approximately what percentage will the bond price change assuming interest rates increase by 90 basis points? A. -10.08%. B. -11.20%. C. +11.20%. D. +10.08%.

A. -10.08%.

Linda just purchased a Louisiana general obligation bond with a yield of 3%. She is in the 24% federal bracket and 4% state bracket. If Linda lives in Louisiana, what is the equivalent yield on a corporate bond (assume she is not subject to the federal 3.8% Net Investment Income Tax)? A. 4.17%. B. 3.95%. C. 4.40%. D. 3.13%.

A. 4.17%.

A firm in the water bottling industry pays a current dividend of $2.19. Its earnings per share is $8.36 and an analysis of the financial statements shows a return on equity of 9.32%. The sustainable growth rate is closest to: A. 6.88%. B. 5.27%. C. 5.81%. D. 4.92%.

A. 6.88%.

Dr. David decides to invest $3 million in short-term fixed-income securities with an average duration of 3 years and $3 million in longer-term fixed-income securities with an average duration of 7 years. What type of strategy is Dr. David using? A. Barbell strategy. B. Bullet strategy. C. Long-short strategy. D. Intermarket spread strategy.

A. Barbell strategy.

Donna is considering purchasing a bond. She is in the 30% tax bracket. Which one should she purchase if she is only concerned about YTM? A. California 10-year bond, paying 4% semi-annually, priced at $1,131.99 B. State Street 10-year bond, paying 2% semi-annually, priced at $897.99 C. Florida general obligation 10-year bond, paying 3% semi-annually, priced at $1,071.46 D. Acme 10-year bond, paying 5% semi-annually, priced at $1,171.69

A. California 10-year bond, paying 4% semi-annually, priced at $1,131.99

Relative valuation models least likely include: A. Dividend discount model. B. Price-to-book multiple. C. Price-to-equity multiple. D. Price-to-sales multiple

A. Dividend discount model.

According to Porter's 5 competitive forces used in industry analysis, rivalry among companies in the same industry tends to increase under which of the following conditions? A. Firms in capital intensive industries characterized by high fixed costs produce high outputs when demand is low. B. A large number of substitute products are available. C. Entry barriers such as labor agreements prevent uncompetitive companies from exiting the industry. D. There are several companies of varying size, with only one or two dominant firms in the industry.

A. Firms in capital intensive industries characterized by high fixed costs produce high outputs when demand is low.

Two years ago Clyde paid $144,000 for 4,000 shares PLT stock. The market value of PLT has been fluctuating wildly and is expected to continue to do so for the next several months. Earlier this year Clyde sold another stock for a gain and he would like to sell the PLT shares in December to take a loss that can offset the those gains, and then purchase the PLT shares back sometime in January. of the following will yield the greatest amount of tax savings for Clyde this year? A. Sell at $125,000 on December 10th and buy them back on January 18th B. Sell at $135,000 on December 10th and buy them back on January 18th C. Sell at $130,000 on December 10th and buy them back on January 9th D. Sell at $125,000 on December 10th and buy them back on January 9th

A. Sell at $125,000 on December 10th and buy them back on January 18th (greater loss, and therefore a greater tax savings)

ZAGG investments owns 285,000 shares of CRC, a defensive stock. After examining the stock's cash flows, its executive leadership, and its likelihood of becoming a takeover target, a research analyst estimates the intrinsic value for this firm to be $35.00. The current market price on the NASDAQ exchange is $59.23. The analyst is most likely to recommend: A. Selling the shares that are already owned. B. Shorting the shares. C. Buying the shares due to the pending economic decline. D. Buying the shares due to its intrinsic value.

A. Selling the shares that are already owned.

Deke is considering purchasing a 4-year bond that is pricing such that its YTM is 3%.Which of the following is correct if this bond has a 3.6% coupon, paid semi-annually? A. The current yield is between 3% and 3.6% B. The current yield < 3% C. The current yield = 3.3% D. The current yield > 3.6%

A. The current yield is between 3% and 3.6%

The Anderson bond is 5% coupon bond with semi-annual coupon payments that matures in 10 years. If the YTM for this bond is 4%, what is the value of the bond? A. $1,081.11 B. $1,081.76 C. $1,125.03 D. $1,124.35

B. $1,081.76

Cisco Tech is a growth company that has been paying a dividend of $1.00 per share for the last ten years and has recently paid the same $1 for the current year. Cisco has just created "new tech" that should revolutionize artificial intelligence and therefore has decided to pay higher dividends two years from today. That dividend will be $3.00, followed by a $6.00 dividend the next year, and a $9.00 dividend the following year. It is expected that the following dividend payments will increase by 9% annually. What is the value of Cisco if the required rate of return equals 14%? A. $112.92 B. $128.73 C. $114.46 D. $93.90

B. $128.73

Jackson Inc. has EPS of $5.625 with a retention ratio of 60%. The annual growth rate in dividends is expected to be 6% and Jackson's shareholders require a return of 11%. The stock price is closest to: A. $45.00. B. $47.70. C. $67.50. D. $71.55.

B. $47.70.

The preferred stock for CRYSTAL pays an annual dividend of $8.42 while the firm's preferred shareholders require an 13.5% return. The value of this firm is closest to: A. $62.41. B. $62.37. C. $62.39. D. $62.35.

B. $62.37.

Edgar Corp (EC) is a growth company that has never paid a dividend. The EC board of directors has decided to pay its first dividend one year from today. The first dividend will be $2.00 per share. Because of the growth expectations for the company, it is expected that the following two dividend payments will increase by 40% each year. Beyond that, the EC dividend is expected to grow at 6% annually. What is the value of EC if the required rate of return equals 11%? A. $58.59. B. $67.71. C. $61.68. D. $61.00.

B. $67.71.

FLASH Delivery has EPS of $6.00 per share and has a payout ratio of 40%. Its dividend is expected to grow at a rate of 5.25%. If FLASH stock is trading at $22.86, then the shareholder's required return is closest to: A. 16.9%. B. 16.3%. C. 14.2%. D. 15.7%.

B. 16.3%.

Jack is considering purchasing a 6-year bond that is selling for $1,150. The bond can be called in 3 years at 104. What is the YTC for this bond if it has a 9% coupon, paid semi-annually? A. 4.79%. B. 4.82%. C. 4.63%. D. 5.99%.

B. 4.82%.

Carla is considering purchasing a 35-year bond that is selling for $500. What is the YTM for this bond if it has a 2% coupon, paid semi-annually? A. 5.09%. B. 5.06%. C. 5.00%. D. 5.03%.

B. 5.06%.

James is considering purchasing an 11-year bond that is selling for $1,250. What is the current yield for this bond if it has a 6.5% coupon, paid semi-annually? A. 4.3%. B. 5.2%. C. 3.7%. D. 6.5%.

B. 5.2%.

Sam has a $3million fixed-income portfolio that consists of Bond A, Bond B, Bond C, and Bond D. The bonds have durations of 2, 3, 8, and 10, respectively. If Sam has 20% invested in Bond A, 30% in Bond B, and 25% invested in each of the other two bonds, what is the duration for the portfolio? Assume that the correlation between the bonds is 0.5. A. 5.75. B. 5.80. C. 6.20. D. 5.50.

B. 5.80.

Dirk is considering purchasing a 6-year bond that is selling for $1,150. What is the YTM for this bond if it has a 9% coupon, paid semi-annually? A. 5.95%. B. 5.99%. C. 5.91%. D. 5.87%.

B. 5.99%.

Holly bought a 7-year bond, with a 3% coupon paid semi annually. It was priced to yield 3% when she bought it. What is the effective duration assuming a 100-basis point change in interest rates? A. 6.0561. B. 6.2775. C. 5.7598. D. 5.9827.

B. 6.2775.

Three years ago, an investor bought 200 shares of IBM stock at $100 per share and 200 shares of GE stock at $30 per share. On December 15 of last year, the investor sold 100 shares of IBM at $75 per share and 100 shares of GE at $35 per share. On January 10, the investor bought 100 Shares of IBM at $77 per share and 100 shares of GE at $32 per share. What are the income tax consequences the investor must report from these transactions? A. No capital gain or loss B. A long-term capital gain of $500. C. A net long-term capital loss of $2,000. D. A long-term capital loss of $2,500.

B. A long-term capital gain of $500

In Porter's 5 competitive forces used in industry analysis which of the following is NOT a barrier to entry affecting the threat of new entrants? A.Government regulation. B. Availability of substitute products. C. Economies of scale in exiting companies. D. High required investment.

B. Availability of substitute products.

After examining a tech firm's cash flows, its executive leadership, and its likelihood of becoming a takeover target, a research analyst estimates the intrinsic value for this firm to be $64.50. The current market price on the NASDAQ exchange is $61.10. The analyst is most likely to recommend: B. Buying the shares. C. Selling the shares that are already owned. D. Increasing allocation in the tech sector.

B. Buying the shares.

Which of the following statements regarding technical and fundamental analysis is true? A. Technical analysis requires an evaluation of macroeconomic conditions. B. In fundamental analysis, future cash flows are projected by analyzing a firm's financial statements. C. Technical analysis values securities based on expected future cash flows. D. Fundamental analysis is based on supply and demand.

B. In fundamental analysis, future cash flows are projected by analyzing a firm's financial statements.

Free cash flow to equity in the current year will most likely increase when a firm: A. Increases its investment in net working capital. B. Issues bonds. C. Experiences a decline in net income. D. Has substantial capital expenditures.

B. Issues bonds.

According to technical analysis, which of the following determines market values? A. The present value of the expected future cash flows. B. Supply and demand. C. The company's competitive position within the industry. D. The book value.

B. Supply and demand.

Which of the following statements is correct? A. A company that is a going concern cannot be valued using discounted cash flows. B. The PE ratio is an earnings valuation model. C. Relative measures of valuation are generally superior to cash flow models. D. A company that is not a going concern can generally be valued using discounted cash flows.

B. The PE ratio is an earnings valuation model.

Donna is considering purchasing a 3-year bond that is selling for $1,000. Which of the following is correct if this bond has a 4% coupon, paid semi-annually? A. The YTM > current yield. B. The YTM equals the coupon rate and current yield. C. The current yield > YTM. D. The coupon rate > current yield.

B. The YTM equals the coupon rate and current yield.

A firm's price-to-earnings ratio will increase when: A. The retention ratio increases. B. The payout ratio increases. C. The growth rate in dividends decreases. D. The required return increases.

B. The payout ratio increases.

The preferred stock for Iron Heights pays an annual dividend of $6.00 while the firm's preferred shareholders require an 9.6% return. The value of this stock is closest to: A. $64.50. B. $61.50. C. $62.50. D. $63.50.

C. $62.50.

The Gecko bond is a 10% coupon bond with semi-annual coupon payments that matures in 20 years. If the YTM for this bond is 4%, what is the value of the bond? A. $1,742.80. B. $1,815.42. C. $1,820.66. D. $1,893.49.

C. $1,820.66.

BCOOL pays a current dividend of $0.75 per share. The annual growth rate in dividends is expected to be 5% and BCOOL's shareholders require a return of 12.5%. The value of the stock is closest to: A. $9.50 B. $11.00 C. $10.50 D. $10.00

C. $10.50

Compute the free cash flow to equity for a firm with the following conditions (each account is reported on a per share basis): NI = $9.25, Depreciation = $1.52, Proceeds from a Bond Issue = $3.00, Total Debt Repayments = $0.45, Change in Net Working Capital = -$1.00 A. $15.22 B. $12.32 C. $14.32 D. $13.22

C. $14.32

Higgins purchased 2,000 shares of Dunlap, Inc. stock for $28 per share three years ago and paid a $50 brokerage commission on the transaction. This year he sold the shares for $37 per share and paid a $50 brokerage commission on the transaction. What is the amount of his taxable gain or loss? A. $0. B. $18,000. C. $17,900. D. $74,000.

C. $17,900

The Ignite bond is a 20-year zero-coupon bond. If the YTM for this bond is 6%, what is the value of the bond? Assume semiannual compounding. A. $302.15. B. $293.10. C. $306.56. D. $311.80.

C. $306.56.

The Kraft bond is a 17-year zero-coupon bond. If the YTM for this bond is 3%, what is the value of the bond? Assume semiannual compounding. A. $623.17. B. $605.02. C. $602.77. D. $620.86.

C. $602.77.

A coupon bond that pays interest annually of $100 has a par value of $1,000, matures in 5 years, and is selling today for $894.50. What is the yield to maturity on this bond? A. 9.00%. B. 12.00%. C. 13.00%. D. 7.00%.

C. 13.00%.

Brandy is considering purchasing an 8-year bond that is selling for $700. What is the current yield for this bond if it has a 6% coupon, paid semi-annually? A. 11.92%. B. 9.32%. C. 8.57%. D. 10.17%.

C. 8.57%.

Which of the following statements is correct about duration? A. Duration can exceed the maturity for a bond, if the bond has a call feature. B. The duration of a bond increases as the coupon rate increases. C. Effective duration can accommodate bonds with embedded options. D. Modified duration measures the change in the value of a bond equally as well when interest rates increase as when interest rates decrease.

C. Effective duration can accommodate bonds with embedded options.

Byron decides to invest $3 million in fixed-income securities by buying $300,000 worth of bonds with 10 different maturities, ranging from 1-year, 2-years, all the way up to 10-years. What type of strategy is Byron using? A. Bullet strategy B. Intermarket spread strategy C. Ladder strategy D. Barbell strategy

C. Ladder strategy

Which of the following is not portfolio income? A. Interest. B. Dividends. C. Limited partnership Income. D. Capital gains.

C. Limited partnership Income.

Which of the following is not correct regarding the constant growth dividend discount model? A. The model is based on the dividend one year from the valuation period. B. The model can be rearranged to determine the payout ratio. C. The model requires that the required return be greater than or equal to the growth rate of the dividend. D. The model is highly sensitive to small differences in the required rate of return or the dividend growth rate.

C. The model requires that the required return be greater than or equal to the growth rate of the dividend.

Jackson owns a twenty-year zero-coupon bond priced at $551. If interest rates increase by 50 basis points, how much will the bond price change? A. The price will decrease more than 10%. B. The price will increase less than 5%. C. The price will decrease between 5% and 10%. D. The price will decrease less than 5%

C. The price will decrease between 5% and 10%.

Drake is considering purchasing a 15-year bond that is selling for $1,123. Which of the following is correct if this bond has a 2.5% coupon, paid semi-annually? A. The current yield < coupon rate. B. The YTM < coupon rate. C. The current yield > YTM. D. All of these.

D. All of these.

The Echo bond is a 6% coupon bond with semi-annual coupon payments that matures in 15 years. If the YTM for this bond is 4%, what is the value of the bond? A. $1,271.26. B. $1,272.92. C. $1,222.37. D. $1,223.96.

D. $1,223.96.

Three years ago, George purchased 1,000 shares of ABC, Inc. for $10 per share. He signed an agreement with the company that allowed the company to use his dividend payments to purchase additional shares for him. Over the last 5 years, George received a total of $1,200 in dividend payments, which purchased an additional 100 shares of stock. If George sells all of his shares for $24,000, what is his taxable gain? A. $24,000. B. $0. C. $14,000. D. $12,800.

D. $12,800.

Patch Software is expected to pay its first dividend in exactly one year of $0.25 per share. The growth rate in dividends is expected to be 4.5% and Patch's shareholders require 13.8%. The stock value is closest to: A. $3.11. B. $2.42. C. $2.84. D. $2.69.

D. $2.69.

Laramie bought a 20-year zero-coupon bond for $672.93. Using the formula for modified duration, approximately what percentage will the bond price change assuming interest rates increase by 120 basis points? A. +23.53%. B. +24.00%. C. -24.00%. D. -23.53%.

D. -23.53%.

ACE has EPS of $10.00 per share and has a retention ratio of 80%. Its dividend is expected to grow at a rate of 9%. If ACE stock is trading at $54.50, then the shareholder's required return is closest to: A. 9%. B. 4%. C. 11%. D. 13%.

D. 13%.

What is the duration of a 10-year bond with a coupon rate of 6%, paid annually, and a yield to maturity of 11%? A. 6.89. B. 8.11. C. 10.00. D. 7.32.

D. 7.32

Parker is considering purchasing a 5-year bond that is selling for $1,079. Which of the following is correct if this bond has a 5% coupon, paid semi-annually? A. The coupon rate > current yield. B. The YTM < coupon rate. C. The current yield > YTM. D. All of these.

D. All of these

Which of the following statements correctly identifies when income is subject to tax? A. Recognition occurs when an asset has been sold or exchanged. B. Realization occurs when the gain on an asset is reflected on the taxpayer's return. C. As a general rule, realized gains are not recognized unless a provision in the IRC requires recognition. D. Capital gains must be realized before they can be recognized on a tax return.

D. Capital gains must be realized before they can be recognized on a tax return.

If interest rates______, then the_______of the bond will_______. A. Increase, par value, decrease. B. Increase, price, increase. C. Decrease, price, decrease. D. Decrease, price, increase.

D. Decrease, price, increase.

Which is most accurate regarding a firm's common stock dividend policy? A. Dividends are an expense appearing on the firm's income statement. B. Dividends are paid until the maturity date of the outstanding equity. C. Dividend payments represent a legal obligation to the shareholders. D. Dividend payments are discretionary and can fluctuate over time.

D. Dividend payments are discretionary and can fluctuate over time.

On September 20 of Year 1, Jorge purchased 1,000 shares of LMF, Inc. common stock for $25,000. He sold the shares for $35,000 on September 20 of Year 2. Which of the following statements correctly identifies the tax consequences of this transaction? A. Jorge will not be required to recognize the gain on the transaction. B. Jorge will recognize a $10,000 ordinary gain on the sale. C. Jorge will recognize a $10,000 long-term capital gain on the sale. D. Jorge will recognize a $10,000 short-term capital gain on the sale.

D. Jorge will recognize a $10,000 short-term capital gain on the sale.

Lisa, who lives in Georgia, is in the32% federal tax bracket and 5% state income tax bracket. Which of the following bonds that she is considering purchasing has the highest after-tax yield (assume she is not subject to the federal 3.8% Net Investment Income Tax)? A. California Municipal bond paying 2.4%. B. Treasury bond paying 3.3%. C. Corporate bond paying 3.7%. D. Louisiana Municipal bond paying 2.6%.

D. Louisiana Municipal bond paying 2.6%.

Which of the following stages of the industry life cycle is characterized by increased competition and deceleration of profitability? A. Market maturity. B. Pioneering development. C. Market decline. D. Mature growth.

D. Mature growth.