FIN 301 EXAM FINAL (#3)

super normal dividend growth P0

(determine dividend cash flows and the projected stock price when dividend growth stabilizes, then use CF on calculator to solve)

compute weighted av cost of capital

#1 Number of outstanding bonds × selling price per bond + number of preferred stock × market price per share + number of common stock × par value per share #2 Total value of preferred stock ÷ total market value × 100

Constant Dividend Growth Required Return

(Dividend1 / Price0) + Dividend Growth %

coupon

*constant & paid The stated interest payment made on a bond.

Yield to maturity < Coupon rate

Assume the current market price of a bond exceeds its par value. Which one of these equations applies? Market value < Face value Yield to maturity = Current yield Market value = Face value Current yield > Coupon rate Yield to maturity < Coupon rate

Stock with a beta of 1.24 (mayvbe)

Based on the capital asset pricing model (CAPM), which of the following should earn the highest risk premium? Diversified portfolio with returns similar to the overall market Stock with a beta of 1.24 Stock with a beta of .63 U.S. Treasury bill Portfolio with a beta of 1.12

are considered to be free of default risk

Bonds issued by the U.S. government: are considered to be free of interest rate risk. generally have higher coupons than comparable bonds issued by a corporation. are considered to be free of default risk. pay interest that is exempt from federal income taxes. are called "munis."

26.42 (2,08*12.7)

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? $27.42 $27.09 $26.08 $26.42 $28.13

4.41%

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? 5.61% 2.19% 4.37% 5.65% (subtract 1-.22) at end and then multiply by 2 since its semmiannual!!

market risk premium

Expected Return in the Market - Risk Free Rate

stock value

Expected dividend ÷ (Required return - Growth rate)

57.40%

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? 55.75% 62.20% 58.75% 61.03% 57.40% *key word COMMON STOCK

$13.75

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? $13.75 $15.36 $10.23 $13.20 $9.82 (write as .042, .164, etc)

10.90%

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? 8.39% 10.90% 7.06% 2.51% 9.17%

Expected return (ER)

(Probability1 x Return1) + (Probability2 x Return2) + (Probability3 x Return3)

Variance

(Probability1)(Return1 - ER)2 + (Probability2)(Return2 - ER)2 + (Probability3)(Return3 - ER)2

weighted average cost of capital (WACC)

(WeightEquity x Cost of Equity) + (WeightDebt x After-Tax Cost of Debt)

zero growth or constant dividend stock value

Dividend / Required Return

constant dividend growth value

Dividend1 / (Required Return % - Dividend Growth %)

Equity RR constant dividend

Dividend1 / Price0) + Dividend Growth %

19.47%

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? 20.15% 22.51% 17.69% 19.47% 21.93%

Beta

Of the options listed below, which is the best measure of systematic risk? The weighted average standard deviation Beta The geometric average The standard deviation The arithmetic average

market price of the bond will decrease.

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: coupon rate will also increase. current yield will decrease. yield to maturity will be less than the coupon rate. market price of the bond will decrease. coupon payment will increase.

willing to pay and rate of return

P0 = D0 * (1+g) / (r - g) D0 * (1+g) is the dividend next year or D1 r is the required rate of return g is the growth rate in dividends

Bond Periods to Maturity

Par (FV), Coupon Payment (PMT), Market Price (-PV), Yield to Maturity (I/Y) then Compute (CPT) N

Bond Market Price

Par (FV), Coupon Payment (PMT), Periods (N), Yield to Maturity (I/Y) then Compute (CPT) PV

$197.29 (best guess)

Sai purchased a car today at a price of $8,500. He paid $600 down in cash and financed the balance for 48 months at 5.4 percent per year compounded monthly. What is the amount of each monthly loan payment? $1,997.27 $183.37 $463.75 $197.29 $187.39

4.92% (ans x 2)

The 30-year, 5.5 percent bonds issued by Modern Kitchens pay interest semiannually, mature in four years, and have a $1,000 face value. Currently, the bonds sell for $1,020.66. What is the yield to maturity? 4.92% 4.41% 2.46% 2.68% 5.39%

59.54%

The Downtowner has 168,000 shares of common stock outstanding valued at $53 per share along with 13,000 bonds selling for $1,008 each. What weight should be given to the debt when the company computes its weighted average cost of capital? 46.67% 65.05% 51.79% 59.54% 48.27% (what weight should be given to debt??)**

coupon rate

The annual coupon divided by the face value of a bond. every year annual _____ ____/face value

yield to maturity

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: coupon rate. face rate. call rate. yield to maturity. current yield.

rate of return on a perpetuity.

The cost of preferred stock is equivalent to the: pretax cost of debt. rate of return on an annuity. aftertax cost of debt. rate of return on a perpetuity. cost of an irregular growth common stock.

5.40%

Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 per share, and 42,000 shares of common stock valued at $44 per share. What weight should be assigned to the preferred stock when computing the weighted average cost of capital? 6.08% 5.40% 6.67% 5.00% 5.75%

risk-free rate

To calculate the expected risk premium on a stock, one must subtract the ________ from the stock's expected return. expected market rate of return risk-free rate inflation rate standard deviation variance

the returns currently required by both debtholders and stockholders.

To determine a firm's cost of capital, one must include: only the return required by the firm's current shareholders. only the current market rate of return on equity shares. the weighted costs of all future funding sources. the returns currently required by both debtholders and stockholders. the company's original debt-equity ratio.

Dividend payments that increase by 10 percent per year for five years followed by dividends that increase by 3 percent annually thereafter

Which one of the following sets of dividend payments best meets the definition of two-stage growth as it applies to the two-stage dividend growth model? No dividends for five years, then increasing dividends forever $1 per share annual dividend for two years, then $1.25 annual dividends forever Decreasing dividends for six years followed by one final liquidating dividend payment Dividends payments that increase by 2, 3, and 4 percent respectively for three years followed by a constant dividend thereafter

$304.65

You estimate that you will owe $28,200 in student loans by the time you graduate. If you want to have this debt paid in full within 10 years, how much must you pay each month if the interest rate is 5.4 percent per year compounded monthly? $2,890.27 $1,525.57 $310.28 $3,723.31 $304.65 remember interesst / monthly

come back

You just obtained a loan of $17,200 with monthly payments for three years at 5.5 percent interest compounded monthly. What is the amount of each payment? $1,107.10 $467.43 $519.37 $1,995.70 $439.96

5.59% (.14*.12+0.065*.65)

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? 6.22% 5.59% −2.24% 0.35% 5.67%

beta of portfolio

(WeightStock1 x BetaStock1) + (WeightStock2 x BetaStock2) + (WeightStock3 x BetaStock3)

beta of 1

A ________ is the market's measure of systematic risk.

Maturity date

A bond's principal is repaid on the ________ date. coupon yield maturity dirty clean

Bond Yield to Maturity

Periods (N), Par (FV), Coupon Payment (PMT), Market Price (-PV), then Compute (CPT) I/Y

Pre-tax debt RR(bond yield to maturity)

Periods (N), Par (FV), Coupon Payment (PMT), Market Price (-PV), then Compute (CPT) I/Y

after-tax debt RR

Periods (N), Par (FV), Coupon Payment (PMT), Market Price (-PV), then Compute (CPT) I/Y, once you have I/Y, multiply it times 1-tax rate

find Bond Coupon Rate

Periods (N), Par (FV), Market Price (-PV), Yield to Maturity (I/Y) then Compute (CPT) PMT

preferred stock

Preferred Stock Dividend (D) / Preferred Stock Price (P

NPV calculation

Press CF then enter initial Cash Flow C00 ENTER, Down Arrow, enter Cash Flow C01 ENTER, Down Arrow, enter frequency of cash flow FO1 ENTER, Down Arrow, (repeat as needed based on number of cash flows) press NPV, enter the discount rate (I), ENTER, Down Arrow, then Compute (CPT)

future dividend D1

Price0 ( Required Return% - Dividend Growth%)

Current dividend D0

Price0 ( Required Return% - Dividend Growth%) / ( 1 + Dividend Growth%)

17.84 years

Rao Investments has 6.5 percent coupon bonds outstanding with a current market price of $548. The yield to maturity is 13.2 percent and the face value is $1,000. Interest is paid annually. How many years is it until these bonds mature? 17.84 years 14.19 years 17.41 years 16.16 years 18.32 years

calculating equity (CAPM/SML)

Risk Free Rate + Beta(Expected return in the market - Risk Free Rate)

standard deviation

Square Root of the Variance

difference bt debt and equity

1. debt is not an ownership interest in firm(no voting power) 2. payment of interest (debt) is tax deductible dividends are not 3. unpaid debt is liability for firm

yield to maturity formula

= C + (fv - pv) /t ÷ (fv + pv)/2 C=coupon rate FV=face value PV=price value T=time to maturity

5.19%

Ahmad Couture has bonds outstanding with a face value of $1,000, 11 years to maturity, and a coupon rate of 6 percent paid semiannually. What is the company's pretax cost of debt if the bonds currently sell for $1,067.12? 2.60% 5.34% 2.67% 5.19% 4.60%

a discount; less than

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity. a premium; less than a premium; equal to a discount; less than a discount; higher than par; less than

$28.23

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? $29.44 $28.23 $32.15 $20.33 $19.50

coupon payment

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment. coupon face value discount call premium yield

Bond Coupon Rate

Annual Bond Coupon/Par Value

expected dividend

Annual dividend × (1 + Growth rate)

Bond Current Yield

Bond Coupon / Market Price of Bond

(i think) standard deviation to decrease.

If a poorly-diversified portfolio becomes well diversified, we would expect the portfolio's: beta to increase. beta to decrease. rate of return to increase. standard deviation to increase. standard deviation to decrease.

2.76%

Lichtenfeld has a bond issue outstanding that matures in 19 years. The bonds pay interest semiannually. The bonds have a face value of $1,000 and are currently priced at $995.28. The bonds carry a coupon rate of 3.5 percent. What is the aftertax cost of debt if the total tax rate is 22 percent? 2.76% 3.53% 1.38% 2.75% 3.28%

6.68%

Montez Supply is expected to pay an annual dividend of $.95 per share next year. The market price of the stock is $43.50 and the growth rate is 4.5 percent. What is the cost of equity? 2.28% 6.68% 8.69% 6.78% 2.18%

$21,629.93

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? 9.89% 10.43% 11.02% 11.38% 12.17%

pay interest that is free from federal taxation.

Municipal bonds: are totally risk free. generally have higher coupon rates than corporate bonds. pay interest that is free from federal taxation. are rarely callable. are free of default risk.

35.60 (annual/discount)

Murchison preferred stock pays an annual dividend of $4.45. What is the current price of this stock at a discount rate of 12.5 percent? $40.05 $60.08 $35.60 $44.50 $53.40

12.16

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? $11.81 $13.53 $9.67 $12.16 $9.38 (just type 3 in calculator as 3 NOT .03)

6.40%

Nazarian's has bonds on the market with 13 years to maturity, a YTM of 7.6 percent, and a current price of $901.98. The bonds make semiannual payments and have a face value of $1,000. What is the coupon rate? 6.40% 6.33% 6.60% 6.67% 6.50% at the end you multiply rate by 2!!!

Stock Price

P/E Ratio x Earning per Share

par value

The principal amount of a bond that is repaid at the end of the term. Also called Face value. (FV)

2.95%

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? 5.63% 6.11% 2.47% 2.95% 8.68%

Yield to Maturity (YTM)

The rate required in the market on a bond.

maturity data

The specified date on which the principal amount of a bond is paid. I/Y

idk

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? .9% 8.5% 6.5% 6.7% 5.0%

893.41

Werden Drilling offers 5.5 percent coupon bonds with semiannual payments and a yield to maturity of 7 percent. The bonds mature in 10 years. What is the market price per bond if the face value is $1,000? $893.41 $894.65 $937.63 $671.36 $1,114.20 *semiannual divide coupon, YTM, and multiply maturity by 2

Constant growth model

What is the model called that determines the market value of a stock based on its next annual dividend, the dividend growth rate, and the applicable discount rate? Maximal growth model Constant growth model Capital pricing model Realized earnings model Realized growth model

are based on the market values of the outstanding securities.

When calculating a firm's weighted average cost of capital, the capital structure weights: are based on the book values of debt and equity. are based on the market values of the outstanding securities. depend upon the financing obtained to fund each specific project. remain constant over time unless new securities are issued or outstanding securities are redeemed. are restricted to debt and common stock.

It can be effectively eliminated by portfolio diversification.

Which of the following statements regarding unsystematic risk is accurate? It can be effectively eliminated by portfolio diversification. It is compensated for by the risk premium. It is measured by beta. It is measured by standard deviation. It is related to the overall economy.

expected return.

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: arithmetic return. historical return. expected return. geometric return. required return.

1.1064

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? 1.163 1.092 1.127 1.178 1.106

total

______ risk is measured using the standard deviation. Total Nondiversifiable Unsystematic Systematic Economic

bond

fixed income investment in which an investor loans money to an entity -Used by companies, municipalities, states and sovereign governments to raise money -Owners of bonds are debtholders, or creditors, of the issuer.

long term debt securities

maturities of more than year -unfunded debt

short term debt securities

maturities of one year or less

bond value

present value of coupons + present value of face amount

debtor/borrower

the corporation borrowing the money

creditor/lender

the person or firm making the loan