Corporate Finance Exam 2

Find the EAR if the APR is 18.2% with monthly compounding. A. 19.8% B. 36.4% C. 18.2% D. 1.5% E. 19.2%

A. 19.8%

The newspaper reported last week that Tisch Enterprises earned $34.05 million this year. The report also stated that the firm's return on equity is 15 percent. The firm retains 85 percent of its earnings. What is the firm's earnings growth rate? A. 12.75% B. 22.25% C. 32.95% D. 18.05% E. 6.75%

A. 12.75%

A 10-year, $600 annuity pays its first payment at Date 3. If you compute the present value of this annuity, the computed value will be as of Date A. 2 B. 3 C. 1 D. 5 E. 4

A. 2

A stock that pays a constant annual dividend will have a market price that: A. decreases when the market rate of return increases. B. always remains constant. C. decreases over time. D. increases over time. E. increases when the market rate of return increases.

A. decreases when the market rate of return increases.

Alto stock pays an annual dividend of $1.10 a share and has done so for the past 6 years. No changes in the dividend amount are expected. The relevant market rate of return is 7.8 percent. Given this, one share of this stock: A. is valued as a perpetuity. B. is valued as a nonconstant growth stock. C. is valued as a differential growth stock. D. has a current market value of $1.10. E. is basically worthless as it offers no growth potential.

A. is valued as a perpetuity.

The selection of an appropriate discount rate for a particular project is primarily dependent upon the project's: A. level of risk B. expected dollar return C. time to closure D. starting date E. initial cost

A. level of risk

Bond ratings: A. consider interest rate risk. B. are provided solely by Moody's. C. only assess the possibility of default. D. of C indicate an average level of risk. E. of B or higher are considered investment-grade ratings.

C. only assess the possibility of default.

Treasury bills are currently paying 7 percent and the inflation rate is 2.7 percent. What is the approximate real rate of interest? A. 4% B. 7% C. 2.70% D. 4.30% E. 4.15%

D. 4.30%

Assume a stated rate of interest of 8 percent. Which form of compounding will produce the highest effective rate of interest? A. semiannual B. daily C. monthly D. continuous E. annual

D. continuous

An interest rate expressed as if it were compounded once per year is called the A. stated annual rate. B. periodic interest rate. C. daily interest rate. D. effective annual rate. E. compound interest rate.

D. effective annual rate.

A bond with both a face value and a market value of $1,000 is called a _____ bond.: A. zero coupon B. discount C. floating rate D. par value E. premium

D. par value

Cuban Corporation will pay a dividend of $3.22 per share next year. The company pledges to increase its dividend by 6 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company's stock today? A. $66.70 B. $87.40 C. $32.20 D. $49.80 E. $64.40

E. $64.40

The next dividend payment by Grenier, Inc., will be $1.68 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. The stock currently sells for $32 per share. What is the dividend yield? A. 11.25% B. 6% C. 32% D. 25% E. 5.25%

E. 5.25%

Which one of these definitions is correct?: A. Negative covenant: a "thou shalt" agreement B. Premium bond: bond that sells for less than face value C. Unfunded debt: long-term corporate debt D. Dirty price: market price, excluding accrued interest E. Call provision: issuer's right to repurchase a bond prior to maturity

E. Call provision: issuer's right to repurchase a bond prior to maturity

Annuities with payments occurring at the end of each time period are called _____, whereas annuities with payments occurring at the beginning of each time period are called _____. A. straight annuities; deferred annuities B. ordinary annuities; early annuities C. deferred annuities; straight annuities D. annuities due; ordinary annuities E. ordinary annuities; annuities due

E. ordinary annuities; annuities due

An upward sloping yield curve indicates: A. long-term rates are higher than medium-term rates. B. lower quality bonds have higher yields. C. short-term rates will rise sharply in the near future. D. an inverse relationship between bond prices and yields. E. interest rates are declining.

A. long-term rates are higher than medium-term rates.

The underlying assumption of the dividend growth model is that a stock is worth: A. the present value of the future income provided by that stock. B. an amount computed as the last annual dividend divided by the required rate of return. C. the same amount to every investor. D. the same amount as any other stock that paid the same dividend this year. E. an amount computed as the next annual dividend divided by the market rate of return.

A. the present value of the future income provided by that stock.

First City Bank pays 6 percent simple interest on its savings account balances, whereas Second City Bank pays 6 percent interest compounded annually. If you made a $60,000 deposit in each bank, how much more money would you earn from your Second City Bank account at the end of 10 years? A. $96,000 B. $11,450.86 C. $3,600 D. $36,000 E. $107,450.86

B. $11,450.86

An investor purchasing a British consol is entitled to receive annual payments from the British government forever. What is the price of a consol that pays $210 annually if the next payment occurs one year from today? The market interest rate is 5.2 percent. A. $4,000,000.00 B. $4,038.46 C. $4,500.35 D. $2,100,000.00 E. $2,100.00

B. $4,038.46

Compute the future value of $2,000 compounded annually for 20 years at 7 percent. A. $20,000.00 B. $7,739.37 C. $14,744.00 D. $2,000.00 E. $40,000.00

B. $7,739.37

The next dividend payment by Grenier, Inc., will be $1.76 per share. The dividends are anticipated to maintain a growth rate of 7 percent forever. If the stock currently sells for $34 per share, what is the required return? A. 20.19% B. 12.18% C. 38.36% D. 50% E. 24.36%

B. 12.18%

Lydic Corporation has bonds on the market with 16.5 years to maturity, a YTM of 6.3 percent, a par value of $1,000, and a current price of $1,036. The bonds make semiannual payments.What must the coupon rate be on these bonds? A. 3.36% B. 6.65% C. 66% D. 33.6% E. 13.4%

B. 6.65%

Skolits Corp. issued 10-year bonds 2 years ago at a coupon rate of 7.5 percent. The bonds make semiannual payments. If these bonds currently sell for 105 percent of par value, what is the YTM? A. 4% B. 6.68% C. 3.34% D. 2.17% E. 2.70%

B. 6.68%

Which one of these represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends? A. Inflation rate B. Capital gains yield C. Interest yield D. Dividend yield E. Real rate of return

B. Capital gains yield

The free cash flow model, as compared to other models, tends to be most helpful when valuing a share of stock in a: A. firm that pays a fixed annual dividend. B. non-dividend-paying firm that has external financing needs. C. firm that pays dividends that increase at a constant rate of growth. D. firm having similar growth opportunities as other firms. E. firm that plans to lower its dividend growth rate in the near future.

B. non-dividend-paying firm that has external financing needs.

Wise University expects to receive $100 next year from a new donor. They also expect this amount to increase by 3 percent annually and to continue forever. Which formula will correctly compute the current value of this donation at a discount rate of 13 percent? A. ($100 × 1.03) / (0.13 - 0.03) B. ($100 × 1.03) / 0.13 C. $100 / (0.13 - 0.03) D. $100 + ($100 × 1.03) / (0.13 - 0.03) E. $100 / 0.13 + 0.03

C. $100 / (0.13 - 0.03)

You purchase a bond with an invoice price of $1,024. The bond has a coupon rate of 6.6 percent, and there are four months to the next semiannual coupon date. The bond has a par value of $1,000.What is the clean price of the bond? A. $1000 B. $1024 C. $1013 D. $1035 E. $1010

C. $1013

The Herjavec Co. just paid a dividend of $2.10 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. Investors require a return of 14 percent on the company's stock.What is the current stock price? A. $49.00 B. $50.00 C. $24.50 D. $48.00 E. $28.36

C. $24.50

What is the dollar price of a zero coupon bond with 7 years to maturity, semiannual compounding, and a par value of $1,000, if the YTM is 5%? A. $505.73 B. $1414.73 C. $707.73 D. $1000 E. $787.23

C. $707.73

The _____ premium is that portion of a nominal interest rate or bond yield that represents compensation for the possibility of nonpayment by the bond issuer.: A. taxability B. liquidity C. default risk D. inflation E. interest rate risk

C. default risk