FIN 301 Exam 3 practice questions
Fegley, Incorporated, has an issue of preferred stock outstanding that pays a $3.80 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Required return 4.09% R = D/P0R = $3.80/$93 R = .0409, or 4.09%
Five Star Corporation will pay a dividend of $3.04 per share next year. The company pledges to increase its dividend by 3.75 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? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Stock price $41.93 P0 = D1/(R − g) P0 = $3.04/(.11 − .0375) P0 = $41.93
Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? a) The price of the bond will fall. b) The price of the bond will rise.
a) The price of the bond will fall.
A ________ is the market's measure of systematic risk. a) beta of 1 b) beta of 0 c) standard deviation of 1 d) standard deviation of 0 e) variance of 1
a) beta of 1
Altitude Group is expected to pay an annual dividend next year of $2.71 per share. Dividends are expected to increase by 4.3 percent annually. What is one share of this stock worth at a required rate of return of 13.9 percent? a) $29.44 b) $28.23 c) $32.15 d) $20.33 e) $19.50
b) $28.23 P0 = $2.71/(.139 − .043) P0 = $28.23
Walker Systems has an issue of preferred stock outstanding with a stated annual dividend of $2.60 that just sold for $23.85 per share. What is the bank's cost of preferred stock? a) 8.39% b) 10.90% c) 7.06% d) 2.51% e) 9.17%
b) 10.90% RP = $2.60/$23.85 RP = .1090, or 10.90%
When calculating a firm's weighted average cost of capital, the capital structure weights: a) are based on the book values of debt and equity. b) are based on the market values of the outstanding securities. c) depend upon the financing obtained to fund each specific project. d) remain constant over time unless new securities are issued or outstanding securities are redeemed. e) are restricted to debt and common stock.
b) are based on the market values of the outstanding securities.
Dilan owns a bond that will pay him $45 each year in interest plus $1,000 as a principal payment at maturity. The $1,000 is referred to as the: a) coupon. b) face value. c) discount. d) yield. e) dirty price.
b) face value.
Buchi owns several financial instruments: stocks issued by seven different companies, plus bonds issued by four different companies. Her investments are best described as a(n): a) index. b) portfolio. c) collection. d) grouping. e) risk-free position.
b) portfolio.
An investor who owns a well-diversified portfolio would consider ________ to be irrelevant. a) systematic risk b) unsystematic risk c) market risk d) nondiversifiable risk e) the systematic portion of a surprise
b) unsystematic risk
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. a) a premium; less than b) a premium; equal to c) a discount; less than d) a discount; higher than e) par; less than
c) a discount; less than
Bonds issued by the U.S. government: a) are considered to be free of interest rate risk. b) generally have higher coupons than comparable bonds issued by a corporation. c) are considered to be free of default risk. d) pay interest that is exempt from federal income taxes. e) are called "munis."
c) are considered to be free of default risk.
While evaluating a stock, you estimate that it will earn a return of 11 percent if economic conditions are favorable, and 3 percent if economic conditions are unfavorable. Given the probabilities of favorable versus unfavorable economic conditions, you conclude that the stock will earn 7.2 percent next year. The 7.2 percent figure is called the: a) arithmetic return. b) historical return. c) expected return. d) geometric return. e) required return.
c) expected return.
The annual dividend yield is computed by dividing _____ annual dividend by the current stock price. a) this year's b) last year's c) next year's d) the past 5-year average e) the next 5-year average
c) next year's
Municipal bonds: a) are totally risk free. b) generally have higher coupon rates than corporate bonds. c) pay interest that is free from federal taxation. d) are rarely callable. e) are free of default risk.
c) pay interest that is free from federal taxation.
Grill Works has 6 percent preferred stock outstanding that is currently selling for $49 per share. The market rate of return is 14 percent and the tax rate is 21 percent. What is the cost of preferred stock if its stated value is $100 per share? a) 12.77% b) 12.29% c) 12.67% d) 12.24% e) 12.54%
d) 12.24% RP = .06($100)/$49 RP = .1224, or 12.24%
A preferred stock pays an annual dividend of $7.95 and sells for $48.89 per share. What is the rate of return? a) 6.15% b) 6.84% c) 7.95% d) 16.26% e) 9.54%
d) 16.26% R = $7.95/$48.89 R = .1626, or 16.26%
Nguyen Corporation's common stock has a beta of 1.38. The risk-free rate is 1.78 percent and the expected return on the market is 14.6 percent. What is the cost of equity? a) 20.15% b) 22.51% c) 17.69% d) 19.47% e) 21.93%
d) 19.47% RE = .0178 + 1.38(.146 − .0178) RE = .1947, or 19.47%
The rate of return on the common stock of Luna Lights is expected to be 11.5 percent in a boom economy and 4.5 percent in a normal economy. The probability of a boom is 23 percent. What is the standard deviation of the returns on this common stock? a) 5.63% b) 6.11% c) 2.47% d) 2.95% e) 8.68%
d) 2.95% E(r) = .23(.115) + .77(.045) E(r) = .0611, or 6.11% σ = [23(.115 − .0611)2 + .77(.045 − .0611)2].5 σ = .00086779.5 σ = .0295, or 2.95%
Rollins, Incorporated, has a 15-year bond issue with a coupon rate of 4.5 percent that matures in 11.5 years. The bonds have a par value of $1,000 and a market price of $1,105.50. Interest is paid semiannually. What is the yield to maturity? a) 1.69% b) 1.79% c) 4.07% d) 3.38% e) 2.52%
d) 3.38% N = 23 (11.5(2)) = 23, PV = -1,105.50, PMT = 22.50 (1000 x 0.045 = 45 -> 45/2 = 22.5, FV = 1,000, CPT I/Y = 1.692% YMT = 2(1.692) = 3.38
Of the options listed below, which is the best example of a diversifiable risk? a) Interest rates increase b) Energy costs increase c) Core inflation increases d) A firm's sales decrease e) Federal income taxes increase
d) A firm's sales decrease
Which one of the following rights is never directly granted to all shareholders of a publicly held corporation? a) Electing the board of directors b) Receiving a distribution of company profits c) Voting either for or against a proposed merger or acquisition d) Determining the amount of the dividend to be paid per share e) Having first chance to purchase any new equity shares that may be offered
d) Determining the amount of the dividend to be paid per share
________ measures total risk, and ________ measures systematic risk. a) Beta; alpha b) Beta; standard deviation c) Alpha; beta d) Standard deviation; beta e) Standard deviation; variance
d) Standard deviation; beta
Which one of the following represents the capital gains yield as used in the dividend growth model? a) D1 b) D1/P0 c) P0 d) g e) g/P0
d) g
Olivares, Incorporated, bonds mature in 17 years and have a coupon rate of 5.4 percent. If the market rate of interest increases, then the: a) coupon rate will also increase. b) current yield will decrease. c) yield to maturity will be less than the coupon rate. d) market price of the bond will decrease. e) coupon payment will increase.
d) market price of the bond will decrease.
The market risk premium equals the: a) risk-free rate of return plus the inflation rate. b) risk-free rate of return plus the market rate of return. c) inflation rate minus the risk-free rate of return. d) market rate of return minus the risk-free rate of return. e) risk-free rate of return multiplied by the market beta.
d) market rate of return minus the risk-free rate of return.
The cost of preferred stock is equivalent to the: a) pretax cost of debt. b) rate of return on an annuity. c) aftertax cost of debt. d) rate of return on a perpetuity. e) cost of an irregular growth common stock.
d) rate of return on a perpetuity.
An unexpected post on social media caused the prices of 22 different companies' stocks to immediately increase by 10 to 15 percent. This occurrence is best described as an example of ________ risk. a) portfolio b) nondiversifiable c) market d) unsystematic e) expected
d) unsystematic
The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the: a) coupon rate. b) face rate. c) call rate. d) yield to maturity. e) current yield.
d) yield to maturity.
Kelley Couriers just paid its annual dividend of $5.25 per share. The stock has a market price of $58.25 and a beta of 1.2. The return on the U.S. Treasury bill is 1 percent and the market risk premium is 8.5 percent. What is the cost of equity? a) 8.8% b) 10.0% c) 10.2% d) 8.5% e) 11.2%
e) 11.2% RE = .01 + 1.2(.085) RE = .112, or 11.2%
Wayco Industrial Supply has a pretax cost of debt of 8.3 percent, a cost of equity of 14.7 percent, and a cost of preferred stock of 8.9 percent. The firm has 165,000 shares of common stock outstanding at a market price of $33 per share. There are 15,000 shares of preferred stock outstanding at a market price of $43 per share. The bond issue has a face value of $750,000 and a market quote of 101. The company's tax rate is 21 percent. What is the weighted average cost of capital? a) 12.18% b) 10.84% c) 14.32% d) 12.60% e) 13.25%
e) 13.25% E = 165,000($33) = $5,445,000 P = 15,000($43) = $645,000 D = 1.01($750,000) = $757,500 V = $5,445,000 + 645,000 + 757,500 V = $6,847,500 WACC = ($5,445,000/$6,847,500)(.147) + ($645,000/$6,847,500)(.089) + ($757,500/$6,847,500)(.083)(1 − .21) WACC = .1325, or 13.25%
McCarty Corporation recently paid an annual dividend of $2.62 on its common stock. This dividend increases at an average rate of 3.8 percent per year. The stock is currently selling for $28.12 per share. What is the market rate of return? a) 13.88% b) 14.07% c) 14.21% d) 14.37% e) 13.47%
e) 13.47% R = [$2.62(1.038)]/$28.12 + .038 R = .1347, or 13.47%
Espy Hotels has bonds outstanding that mature in 9 years, pay interest semiannually, and have a coupon rate of 5.5 percent. These bonds have a face value of $1,000 and a current market price of $989.28. What is the company's aftertax cost of debt if its tax rate is 22 percent? a) 5.61% b) 2.19% c) 4.37% d) 5.65% e) 4.41%
e) 4.41% FV = 1,000 PV = -989.28, PMT = 27.5 (1000 x 0.055)/2, N= 18 (9x2), CPT I/Y r = 5.6536% Aftertax cost of debt = 5.6536%(1 − .22) Aftertax cost of debt = 4.41%
Florida Groves has a $380,000 bond issue outstanding that is selling at 97.4 percent of face value. The firm also has 2,600 shares of preferred stock valued at $61 per share and 37,500 shares of common stock valued at $19 per share. What weight should be assigned to the common stock when computing the weighted average cost of capital? a) 55.75% b) 62.20% c) 58.75% d) 61.03% e) 57.40%
e) 57.40% D = .974($380,000) = $370,120 P = 2,600($61) = $158,600 E = 37,500($19) = $712,500 V = $370,120 + 158,600 + 712,500 V = $1,241,220WE = $712,500/$1,241,220 WE = .5740, or 57.40%
Slavin Movement has bonds on the market making annual payments, with 14 years to maturity, a par value of $1,000, and a current price of $1,108.60. At this price, the bonds yield 7.5 percent. What is the coupon rate? a) 8.93% b) 8.46% c) 9.01% d) 9.32% e) 8.78%
e) 8.78% N = 14, I/Y = 7.5, PV = -1,108.60, FV = 1000, CPT PMT = 87.79 87.79/1000 = 8.78%
What is the expected return and standard deviation for the following stock? State of EconomyProbability of State of EconomyRate of Return if State OccursBoom.08−.02Normal.73.098Recession.19.138 a) 9.936%; 4.47% b) 9.936%; 3.76% c) 9.616%; 4.47% d) 7.202%; 3.76% e) 9.616%; 3.76%
e) 9.616%; 3.76% E(R) = .08(−.02) + .73(.098) + .19(.138) E(R)= .09616, or 9.616% σ = [.08(−.02 − .09616)2 + .73(.098 − .09616)2 + .19(.138 − .09616)2].5 σ = .0376, or 3.76%
You own a portfolio that has $1,720 invested in Stock A and $3,470 invested in Stock B. The expected returns on these stocks are 13.7 percent and 8.0 percent, respectively. What is the expected return on the portfolio? a) 9.20% b) 10.23% c) 12.18% d) 7.13% e) 9.89%
e) 9.89% E(Rp) = [$1,720/($1,720 + 3,470)](.137) + [$3,470/($1,720 + 3,470)](.08) E(Rp) = .0989, or 9.89%
Chavez & Hwang just issued 15-year, 6.4 percent, unsecured bonds at par. These bonds fit the definition of which one of the following terms? a) Note b) Discounted c) Zero coupon d) Callable e) Debenture
e) Debenture
Which of the following statements regarding the aftertax cost of debt is accurate? a) It varies inversely with changes in market interest rates. b) It will generally exceed the cost of equity if the relevant tax rate is zero. c) It will generally equal the cost of preferred stock if the tax rate is zero. d) It is unaffected by changes in the market rate of interest. e) It is highly dependent upon a company's tax rate.
e) It is highly dependent upon a company's tax rate.
Which of the following statements best describes the principle of diversification? a) Concentrating an investment in two or three stocks will eliminate all of the unsystematic risk. b) Concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. c) Spreading an investment across multiple diverse companies will not lower the total risk. d) Spreading an investment across many diverse assets will eliminate all of the systematic risk. e) Spreading an investment across many diverse assets will eliminate some of the total risk.
e) Spreading an investment across many diverse assets will eliminate some of the total risk.
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) Alternative voting b) Cumulative voting c) Straight voting d) Indenture voting e) Voting by proxy
e) Voting by proxy
Assume the current market price of a bond exceeds its par value. Which one of these equations applies? a) Market value < Face value b) Yield to maturity = Current yield c) Market value = Face value d) Current yield > Coupon rate e) Yield to maturity < Coupon rate
e) Yield to maturity < Coupon rate
The items in an indenture that limit actions of the issuer in order to protect a bondholder's interests are referred to as the: a) trustee relationships. b) bylaws. c) legal bounds. d) trust deed. e) protective covenants.
e) protective covenants.
When determining a firm's weighted average cost of capital, the item with the least amount of impact is the: a) company's beta. b) coupon rate of the company's outstanding bonds. c) growth rate of the company's dividends. d) company's marginal tax rate. e) standard deviation of the company's common stock.
e) standard deviation of the company's common stock.
If a poorly-diversified portfolio becomes well diversified, we would expect the portfolio's: a) beta to increase. b) beta to decrease. c) rate of return to increase. d) standard deviation to increase. e) standard deviation to decrease.
e) standard deviation to decrease.
Nikita Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $962. At this price, the bonds yield 5.1 percent. What must the coupon rate be on the bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
4.51% n = 8, I/Y = 5.1 PV = - 962, FV = 1000, CPT PMT = 45.1 45.1/100 = 4.51
Draiman Corporation has bonds on the market with 14.5 years to maturity, a YTM of 5.3 percent, a par value of $1,000, and a current price of $987. The bonds make semiannual payments. What must the coupon rate be on these bonds? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
5.17% N = 14.5, I/Y = 5.3%/2, PV = 987, FV = 1,000, CPT PMT = 25.85 25.85(2)/1000 = 5.17%
The next dividend payment by Im, Incorporated, will be $1.87 per share. The dividends are anticipated to maintain a growth rate of 4.3 percent forever. If the stock currently sells for $37 per share, what is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) required return
9.35 R = (D1/P0) + g R = ($1.87/$37) + .043 R = .0935, or 9.35%
Hailey Corporation pays a constant $9.45 dividend on its stock. The company will maintain this dividend for the next 13 years and will then cease paying dividends forever. If the required return on this stock is 10.7 percent, what is the current share price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Current share price $64. 76 P0 = $9.45(PVIFA10.7%,13) P0 = $64.76
Red, Incorporated, Yellow Corporation, and Blue Company each will pay a dividend of $4.15 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company's stock is 8 percent, 11 percent, and 14 percent, respectively. What is the stock price for each company? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) Red, Incorporated ? Yellow Corporation ? Blue Company ?
Red, Incorporated $103.75 Yellow Corporation $59.29 Blue Company $41.50 Pt = Dt × (1 + g)/(R − g) Red stock price = $4.15/(.08 − .04) = $103.75 Yellow stock price = $4.15/(.11 − .04) = $59.29 Blue stock price = $4.15/(.14 − .04) = $41.50
Caccamise Company is expected to maintain a constant 3.4 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.3 percent, what is the required return on the company's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Required Return 8.70% R = Dividend yield + Capital gains yield R = .053 + .034R = .0870, or 8.70%
How much are you willing to pay for one share of Govender stock if the company just paid an annual dividend of $1.61, the dividends increase by 4.2 percent annually, and you require a return of 16.4 percent? a) $13.75 b) $15.36 c) $10.23 d) $13.20 e) $9.82
a) $13.75 P0 = [$1.61(1.042)]/(.164 − .042) P0 = $13.75
A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6 percent annually. What is the target stock price in one year? a) $19.57 b) $22.89 c) $19.07 d) $20.14 e) $21.08
a) $19.57 P1 = $1.63(1.026)(11.7) P1 = $19.57
Castillo Corporation common stock is currently priced at $39.75 per share. The company just paid $4.35 per share as its annual dividend. The dividends have been increasing by 7.5 percent annually and are expected to continue doing the same. What is the cost of equity? a) 19.26% b) 8.25% c) 18.44% d) 10.92% e) 11.74%
a) 19.26% RE = [$4.35(1.075)]/$39.75 + .075 RE = .1926, or 19.26%
Decline, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 105.2 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the aftertax cost of debt if the tax rate is 21 percent? a) 4.30% b) 4.92% c) 4.17% d) 5.43% e) 5.58%
a) 4.30% FV = 1,000 PV = -1052 (1000x 1.052), PMT = 30 (1000 x 0.06)/2, N= 26 (13 x2), CPT I/Y r = 5.437% RD Aftertax = 5.437%(1 − .21) RD Aftertax = 4.30%
Which of the following statements regarding unsystematic risk is accurate? a) It can be effectively eliminated by portfolio diversification. b) It is compensated for by the risk premium. c) It is measured by beta. d) It is measured by standard deviation. e) It is related to the overall economy.
a) It can be effectively eliminated by portfolio diversification.
Which of the following statements regarding a firm's pretax cost of debt is accurate? a) It is based on the current yield to maturity of the company's outstanding bonds. b) It is equal to the coupon rate on the latest bonds issued by the company. c) It is equivalent to the average current yield on all of a company's outstanding bonds. d) It is based on the original yield to maturity on the latest bonds issued by a company. e)It must be estimated as it cannot be directly observed in the market.
a) It is based on the current yield to maturity of the company's outstanding bonds.
The next dividend payment by Im, Incorporated, will be $1.87 per share. The dividends are anticipated to maintain a growth rate of 4.3 percent forever. The stock currently sells for $37 per share. a.What is the dividend yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b.What is the expected capital gains yield? (Enter your answer as a percent rounded to 1 decimal place, e.g., 32.1.)
a. 5.05% b. 4.3% The dividend yield is the dividend next year divided by the current price, so the dividend yield is: Dividend yield = D1/P0 Dividend yield = $1.87/$37Dividend yield = .0505, or 5.05% The capital gains yield, or percentage increase in the stock price, is the same as the dividend growth rate, so: Capital gains yield = 4.3%
Dausin Design offers bonds with a coupon rate of 9 percent per year, paid semiannually. The yield to maturity is 3.5 percent and the maturity date is 10 years from today. What is the market price of this bond if the face value is $1,000? a) $1,457.41 b) $1,460.70 c) $1,250.28 d) $1,589.22 e) $1,142.12
b) $1,460.70 N = 20 (10x2), I/Y = 1.75 (3.5/2), PMT = 45 (90/2), FV = 1,000, CPT PV
MentonCo 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) 12.26 years b) 12.53 years c) 18.49 years d) 24.37 years e) 25.05 years
b) 12.53 years I/Y = 3.36 (6.72/2), PV = -1.023.46, PMT = 35, FV = 1,000, CPT N = 25.05 25.05/2 = 12.53
The common stock of Hall & Byrd is expected to lose 5 percent in a recession, earn 7 percent in a normal economy, and earn 9 percent in a booming economy. The probability of a boom is 15 percent while the probability of a recession is 22 percent. What is the expected rate of return on this stock? a) 6.86% b) 4.66% c) −6.55% d) −3.50% e) 3.67%
b) 4.66% E(r) = .22(−.05) + .63(.07) + .15(.09) E(r) = .0466, or 4.66%
Jiminy's Cricket Farm issued a 20-year, 7 percent, semiannual bond four years ago. The bond currently sells for 108 percent of its face value. What is the aftertax cost of debt if the company's combined tax rate is 23 percent? a) 4.96% b) 4.78% c) 4.15% d) 4.12% e) 3.86%
b) 4.78% FV = 1,000 PV = -1080 (1000x 1.08), PMT = 35 (1000 x 0.07)/2, N= 32 (20-4 x2), CPT I/Y r = 6.204% RD Aftertax = 6.204%(1 − .23) RD Aftertax = 4.78%
A corporate bond is quoted at a price of 98.96 and has a coupon rate of 4.8 percent, paid semiannually. What is the current yield? a) 4.24% b) 4.85% c) 5.36% d) 5.62% e) 4.66%
b) 4.85% current yield = 0.048/0.9896
You recently purchased a stock that is expected to earn 12 percent in a booming economy, 6.5 percent in a normal economy, and lose 1.5 percent in a recessionary economy. The probability of a booming economy is 14 percent while the probability of a normal economy is 65 percent. What is your expected rate of return on this stock? a) 6.22% b) 5.59% c) −2.24% d) 0.35% e) 5.67%
b) 5.59% E(r) = .14(.12) + .65(.065) + .21(−.015) E(r) = .0559, or 5.59%
The common stock of Shepard Auto sells for $47.92 per 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? a)4.84% b) 6.41% c) 9.92% d) 6.14% e) 7.28%
b) 6.41% R = $2.28/$47.92 + .0165 R = .0641, or 6.41%
The stock of Yakir Development has a beta of 1.31. The risk-free rate of return is 1.5 percent and the market rate of return is 8 percent. What is the risk premium on this stock? a) .9% b) 8.5% c) 6.5% d) 6.7% e) 5.0%
b) 8.5% Risk premium = 1.31(.08 − .015) Risk premium = .085, or 8.5%
The common stock of Salazar Insurance pays a constant annual dividend of $4.80 per share. What is one share of this stock worth at a discount rate of 13.3 percent? a) $40.89 b) $65.26 c) $36.09 d) $48.00 e) $57.60
c) $36.09 P0 = $4.80/.133 P0 = $36.09
A preferred stock sells for $63.60 per share and provides a return of 8.40 percent. What is the amount of the dividend per share? a) $5.45 b) $5.25 c) $5.34 d) $5.43 e) $5.28
c) $5.34 D = .0840($63.60) D = $5.34
Levrier Lighting has 5.75 percent coupon bonds outstanding that mature in 10 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 8.32 percent? a) $830.01 b) $896.60 c) $827.81 d) $663.44 e) $1,193.40
c) $827.81 N = 20 (10x2), I/Y = 4.16 (8.32/2), PMT = 28.75 (57.5/2 = 28.75), FV = 1,000, CPT PV
You want to purchase some shares of Ojomo Corporation stock but need a rate of return of 14.5 percent to compensate for the perceived risk. What is the maximum you are willing to pay per share for this stock if the company pays a constant annual dividend of $1.35 per share? a) $10.66 b) $18.55 c) $9.31 d) $13.50 e) $16.20
c) $9.31 P0 = $1.35/.145P0 = $9.31
Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the aftertax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent? a) 9.89% b) 10.43% c) 11.02% d) 11.38% e) 12.17%
c) 11.02% WACC = .46(.158) + .05(.083) + .49(.068) WACC = .1102, or 11.02%
The stock of Rullo Rigs has a beta of 1.34. The risk-free rate of return is 1.9 percent, the inflation rate is 2.2 percent, and the market risk premium is 6.9 percent. What is the expected rate of return on this stock? a) 2.8% b) 8.8% c) 11.1% d) 9.4% e) 8.6%
c) 11.1% E(r) = .019 + 1.34(.069) E(r) = .111, or 11.1%
The risk-free rate of return is 3.5 percent, the inflation rate is 2.9 percent, and the market risk premium is 7.5 percent. What is the expected rate of return on a stock with a beta of 1.43? a) 4.6% b) 11% c) 14.2% d) 13.1% e) 8.7%
c) 14.2% E(r) = .035 + 1.43(.075) E(r) = .142, or 14.2%
The Dry Well has 6.85 percent preferred stock outstanding with a market value per share of $79, a stated value of $100 per share, and a book value per share of $29. What is the cost of preferred stock? a) 8.50% b) 8.88% c) 8.67% d) 9.29% e) 9.00%
c) 8.67% RP = .0685($100)/$79 RP = .0867, or 8.67%
What are the distributions of either cash or stock to shareholders by a corporation called? a) Coupon payments b) Retained earnings c) Dividends d) Capital payments e) Diluted profits
c) Dividends
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? a) The face value of the bond today is greater than it was when the bond was issued. b) The bond is worth less today than when it was issued. c) The yield to maturity is less than the coupon rate. d) The coupon rate is less than the current yield. e) The yield to maturity equals the current yield.
c) The yield to maturity is less than the coupon rate.
Syed Development issued 20-year bonds one year ago at a coupon rate of 10.2 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM is 8.2 percent, what is the current bond price? a) $985.55 b) $991.90 c) $1,142.16 d) $1,190.93 e) $1,098.00
d) $1,190.93 N= 38 (19x2), I/y = 4.1 (8.2/2), PMT = 51, FV = 1000, CPT PV
Currently, a firm has an EPS of $2.08 and a benchmark PE of 12.7. Earnings are expected to grow by 3.8 percent annually. What is the estimated current stock price? a) $27.42 b) $27.09 c) $26.08 d) $26.42 e) $28.13
d) $26.42 P0 = $2.08(12.7) P0 = $26.42
Your portfolio is comprised of 22 percent of Stock X, 32 percent of Stock Y, and 46 percent of Stock Z. Stock X has a beta of 1.04, Stock Y has a beta of .96, and Stock Z has a beta of 1.24. What is the beta of your portfolio? a) 1.163 b) 1.092 c) 1.127 d) 1.178 e) 1.106
e) 1.106 βPortfolio = .22(1.04) + .32(.96) + .46(1.24) βPortfolio = 1.106
To determine a firm's cost of capital, one must include: a) only the return required by the firm's current shareholders. b) only the current market rate of return on equity shares. c) the weighted costs of all future funding sources. d) the returns currently required by both debtholders and stockholders e) the company's original debt-equity ratio.
the returns currently required by both debtholders and stockholders
