FIN 325 - Quiz 3

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?

$19.57 Pt = Benchmark PE ratio x EPSPt = 1.63(1.026)(11.7) = 19.57

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?

Constant growth model

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?

Coupon Rate = 6.5% Yield = Rate = 13.20% (yield to maturity) PMT = $65 Face Value = $1,000 Price = $548 Years to maturity = NPER =NPER(rate, pmt, -pv, fv) =NPER(13.2%, 65, -548, 1000) = 17.84

Which one of the following rights is never directly granted to all shareholders of a publicly held corporation?

Det the amt of the dividend to be paid per share

Which one of the following statements is correct?

Given a positive rate of inflation, the real rate must be less than the nominal rate.

Ines owns 30 shares of stock of Welch Company and wants to win a seat on the board of directors. The firm has a total of 100 shares of stock outstanding. Each share receives one vote. Presently, the company is voting to elect three new directors. Which one of the following statements must be true given this information?

If cumulative voting applies, Jen is assured one seat on the board.

You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur?

Long-term, Zero coupon

Assume the current market price of a bond exceeds its par value. Which one of these equations applies?

Yield to maturity < coupon rate When yield to maturity of a bond is more than its coupon rate, bond will be traded at price which is less than the par value. In the given question market price of bond is less than the par value, it means yield to maturity is more than the coupon rate.

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds?

Zero coupon

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect:

a decrease in all stock values.

All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.

a discount, less than

Protective covenants:

are primarily designed to protect bondholders

An example of a negative covenant that might be found in a bond indenture is a statement that the company:

cannot lease any major assets without bondholder approval.

Ana just received the semiannual payment of $35 on a bond she owns. This is called the ______ payment.

coupon Periodic payment is received against pre-defined coupon rates. The coupons are periodic payment received by bond holders. Coupons are fixed in nature.

A discount bond's coupon rate is equal to the annual interest divided by the:

face value

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:

face value.

When using the two-stage dividend growth model,:

g1 can be greater than R.

A bond's principal is repaid on the ________ date.

maturity

The annual dividend yield is computed by dividing _____ annual dividend by the current stock price.

next year's

Preferred stock may have all of the following characteristics in common with bonds with the exception of:

tax-deductible payments.

The secondary market is best defined as the market:

where outstanding shares of stock are resold.

Which one of the following rates represents the change, if any, in your purchasing power as a result of owning a bond?

Real rate

Gugenheim, Incorporated, has a bond outstanding with a coupon rate of 7.3 percent and annual payments. The yield to maturity is 8.2 percent and the bond matures in 24 years. What is the market price if the bond has a par value of $2,000?

$1,813.60 K = N Bond Price = Ʃ ((Annual Coupon)/(1+YTM)^k) + Par Value/(1+YTM)^N k=1 K=24 Bond Price = Ʃ ((7.3*2000/100)/(1+8.2/100)^k) + 2000/(1+8.2/100)^24 k=1 Bond Price = 1,813.6

A stock currently sells for $43. The dividend yield is 3.7 percent and the dividend growth rate is 5 percent. What is the amount of the dividend to be paid in one year?

$1.59 Dividend to be paid = market price of the share * dividend yield % Market price = $43 Yield % = 3.7% Dividend = $43*3.7% = $1.591 Dividend to be paid = 1.591

NU YU announced today that it will begin paying annual dividends. The first dividend will be paid next year in the amount of $.33 a share. The following dividends will be $.38, $.53, and $.83 a share annually for the following three years, respectively. After that, dividends are projected to increase by 2.6 percent per year. How much are you willing to pay today to buy one share of this stock if your desired rate of return is 9 percent?

$11.05 Year / Cash Flows / PV@9% / Present Value 1 / $0.33 / 0.9174 / $0.30 2 / $0.38 / 0.8417 / $0.32 3 / $0.53 / 0.7722 / $0.41 4 / $0.83 / 0.7084 / $0.59 Price at Year 4 / $13.31 [0.83*1.026)/(0.09-0.026)] / 0.7084 / $9.43 Stock's Current Price = $11.05

You want to have $2 million in real dollars in an account when you retire in 35 years. The nominal return on your investment is 9.94 percent and the inflation rate is 3.2 percent. What is the real amount you must deposit each year to achieve your goal?

$16,017 Real Rate of Interest = ((1 + Nominal Rate) / (1 + Inflation Rate)) RROI = ((1 + .0994) / (1 + .032)) - 1 = .0653 Future Value = PV * [ ((1 + Real Interest Rate)^N - 1 ) / Real Interest Rate ] 2,000,000 = PV * [ ((1 + .0653)^35 - 1) / .0653 ] = 16020.544 ~ 16017

A bond with 16 years to maturity and a semiannual coupon rate of 5.86 percent has a current yield of 5.55 percent. The bond's par value is $2,000. What is the bond's price?

$2,111.71 Coupon payment = .0586 × $2,000 = $117.20 Price = $117.20/.0555 = $2,111.71

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?

$26.42 Est Current Stock Price = EPS * PE ratio 2.08 * 12.7 = 26.42

Raul wants to join the directors of World Trade but currently owns no shares in the company. He knows that no one else will help elect him. Assume there are 46,000 shares outstanding at a market price of $12.80 per share. What is the minimum amount Raul must spend to acquire a seat on the board of directors if there are three open seats and straight voting applies?

$294,412.80 Raul must own more than 50 % of the total number of outstanding shares to acquire a seat on the board of directors if there are three open seats and straight voting applies. Here the number of shares outstanding = 46000Therefore total number of shares required = (46000 /2 ) + 1 = 23000 + 1 = 23001 sharesmarket price of share = $ 12.80 Total amount = 23001 x $ 12,80 = $ 294412.8 ( The amount that Raul needs to spend to acquire a seat on board of directors)

You want a seat on the board of directors of Zeph, Incorporated. The company has 275,000 shares of stock outstanding and the stock sells for $70 per share. There are currently 4 seats up for election. If the company uses cumulative voting, how much will it cost you to guarantee that you will be elected to the board?

$3,850,070 % of stock needed = 1/(N+1) = 1/(4+1) = 0.2 # of shares to purch = (275,000*0.2) + 1 = 55,001 Cost = # of shares to purch * cost per stock = 55,001 * 70 = 3,850,070

A bond has a par value of $1,000, a current yield of 6.57 percent, and semiannual coupon payments. The bond is quoted at 96.88. What is the amount of each coupon payment?

$31.83 Bond price = $1000 * 96.88% = $968.80 Current Yield = 6.57% Current Yield = Annual coupon / current price Annual coupon / $968.80 = 0.0657 Annual coupon = $63.65 Each coupon payment is paid semi-annually. So each coupon payment = $63.55 / 2 = $31.825 or $31.83

Navarro, Incorporated, plans to issue new zero coupon bonds with a par value of $1,000 to fund a new project. The bonds will have a YTM of 5.19 percent and mature in 20 years. If we assume semiannual compounding, at what price will the bonds sell?

$358.88 We will use the BA 2 plus financial calculator to find the current price. Please press the following keys on your calculator- 2ND FV 1000 FV 0 PMT 40 N 2.595 I/Y CPT PV PV = -358.88 Answer = $358.88

Ghost Riders Company has an EPS of $1.47 that is expected to grow at 6.7 percent per year. If the PE ratio is 17.35 times, what is the projected stock price in 6 years?

$37.64 EPS for year 6 = Current EPS(1 + Growth rate)^6 = 1.47(1 + 0.067)^6 = 2.16922126 Stock price in 6 years = EPS * P/E ratio = 2.16922126 * 17.35 = 37.64

Stoneheart Group is expected to pay a dividend of $3.21 next year. The company's dividend growth rate is expected to be 3.7 percent indefinitely and investors require a return of 11.9 percent on the company's stock. What is the stock price?

$39.15 g = grwoth P0 = stock price Ke = Required return D1 = D0*(1+g) = 3.21 Stock Price = P0 = D1/(Ke-g) = 3.21/(0.119 - 0.037) = 39.15

Stana, Incorporated, has preferred stock outstanding that sells for $103.10 per share. If the required return is 4.14 percent, what is the annual dividend?

$4.27 To find the annual dividend, multiply the par value by the dividend rate. For example, if the preferred shares have a value of $103.10 and a dividend return rate of 4.14 percent, multiply $103.10 by .0414 to find that the preferred share pays a $4.27 annual dividend. Annual Dividend = 103.10 * 4.14% = $4.268 rounded to $4.27

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?

$4.85%

Michael's, Incorporated, just paid $2.30 to its shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 5 percent. If you require a rate of return of 9.2 percent, how much are you willing to pay today to purchase one share of the company's stock?

$57.50 The amount that an investor would be willing to pay to purchase one share of M's stock should be computed using the following formula: K = (D1/S) + g Where, K = required rate of return = 0.092 D1 = Next expected dividend = 2.30 x (1 + 0.05) g = growth rate = 0.05 S = Price to be paid for the share (To be calculated) K = (D1/S) + g or, K - g = D1/S or, 0.092 - 0.05 = [ 2.30 x (1 + .05) ] / S or, S = 2.415 / 0.042 = 57.50

You want a seat on the board of directors of Red Cow, Incorporated. The company has 310,000 shares of stock outstanding and the stock sells for $55 per share. There are currently 3 seats up for election. The company uses straight voting. How much will it cost you to guarantee that you will be elected to the board?

$8,525,055 Cost = Share price*((shares outstanding/2)+1) Cost =55*((310000/2)+1) =8525055

Wine and Roses, Incorporated, offers a bond with a coupon of 6.0 percent with semiannual payments and a yield to maturity of 6.91 percent. The bonds mature in 12 years. What is the market price of a $1,000 face value bond?

$926.56 FV = 1000 Coupon rate = 0.06 Frequency coupon = 2 Coupon, PMT = (1000*.06)/2 = 30 TTM, RATE = 0.0691 Yrs to Maturity = 12 Period, NPER = 12*2 = 24 Value of bond, PV: =-PV(rate, nper, pmt, [fv], [type]) =-PV(.0691/2, 24, 30, 1000, 0) = $926.59

Kindzi Company has preferred stock outstanding that is expected to pay an annual dividend of $3.41 every year in perpetuity. If the required return is 3.64 percent, what is the current stock price?

$93.68 Current Price of the share paying constant dividend = Expected dividend/required rate of return Current Price of the Share = 3.41/3.64% = 93.68

The average time for a trade on the NYSE Arca is best defined as less than:

1 sec

A stock just paid a dividend of $5.53 and is expected to maintain a constant dividend growth rate of 4.4 percent indefinitely. If the current stock price is $81, what is the required return on the stock?

11.53% Required return=(D1/Current price)+Growth rate =[(5.53*1.044)/81]+0.044 =11.53%(Approx).

The yield to maturity on a bond is the interest rate you earn on your investment if interest rates do not change. If you actually sell the bond before it matures, your realized return is known as the holding period yield. Suppose that today you buy a coupon bond with 9 percent annual interest for $1,000. The bond has 12 years to maturity. Three years from now, the yield to maturity has declined to 7 percent and you decide to sell. What is your holding period yield?

12.83%

The Lo Sun Corporation offers a 6.0 percent bond with a current market price of $809.50. The yield to maturity is 8.24 percent. The face value is $1,000. Interest is paid semiannually. How many years until this bond matures?

14.94 years 809.50 = 30PVIFA(4.12,nper) + 1000PVIF(4.12,nper) nper = 29.88 No of Year = 29.88/2 = 14.94 Year or 15 year approx

A bond has a yield to maturity of 3.89 percent. If the inflation rate is 1.48 percent, what is the real rate of return on the bond?

2.3% ((1 + YTM) / (1 + inflation rate)) - 1 = ((1 + 0.0389) / (1 + 0.0148)) - 1 = 0.237

Footsteps Company has a bond outstanding with a coupon rate of 5.6 percent and annual payments. The bond currently sells for $996.38, matures in 20 years, and has a par value of $1,000. What is the YTM of the bond?

5.63% Face Value = $1,000Current Price = $996.38 Annual Coupon Rate = 5.60% Annual Coupon = 5.60%*$1,000 = $56 Time to Maturity = 20 years Let Annual YTM be i% $996.38 = $56 * PVIFA(i%, 20) + $1,000 * PVIF(i%, 20) Using financial calculator: N = 20PV = -996.38PMT = 56FV = 1000 I = 5.63% Annual YTM = 5.63%

Broke Benjamin Company has a bond outstanding that makes semiannual payments with a coupon rate of 5.7 percent. The bond sells for $961.87 and matures in 21 years. The par value is $1,000. What is the YTM of the bond?

6.02% Coupon Rate = 5.70% Yrs to Maturity = 21 NPER = 42 (yrs to maturity * 2) PMT = 28.5 (face value * coupon rate) / 2 Face Value = $1,000 Price = PV = $961.87 Rate = 3.01% =RATE(nper, pmt, -pv, fv) =RATE(42, 28.5, -96.87, 1000) Yielde to maturity = Rate*2 = (3.01%*2) = 6.02% Pre tax

A bond with a coupon rate of 5.43 percent and semiannual coupon payments matures in 18 years. The YTM is 6.55 percent. What is the effective annual yield?

6.66% Effective annual yield = (1 + YTM/n)n - 1 Effective annual yield = (1 + 0.0655/2)2 - 1 Effective annual yield = (1 + 0.03275)2 - 1 Effective annual yield = 1.0666 - 1 Effective annual yield = 0.066 or 6.66%

You want a seat on the board of directors of Four Keys, Incorporated. The company has 265,000 shares of stock outstanding and the stock sells for $64 per share. There are currently 3 seats up for election. The company uses straight voting. How many shares do you need to guarantee that you will be elected to the board?

66,251 shares Shares Needed = Total shares * Percent of stock needs + 1 265,000 * (1/(1+3)) + 1 = 66,251

Jensen Shipping has 38,400 shares outstanding and uses cumulative voting. The firm grants one vote for each share of common stock. What is the minimum number of votes required to obtain a seat on the board of directors if there are three open seats?

9,601 1/(N+1) (1/(3+1)) * 38400 + 41 = 9601

Read Corporation currently pays an annual dividend of $1.46 per share and plans on increasing that amount by 2.75 percent annually. Cho, Incorporated, currently pays an annual dividend of $1.42 per share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Cho has a higher ________ than the stock of Read.

capital gains yield Ace-Pak currently pays an annual dividend of $1.46 a share and plans on increasing that amount by 2.75 percent annually. Northern Culture currently pays an annual dividend of $1.42 a share and plans on increasing its dividend by 3.1 percent annually. Given this information, you know for certain that the stock of Northern Culture has a higher Current price and Capital gain yield than the stock of Ace-Pak. Note: 1) Growth rate represents the capital gain yield and required rate of return less capital gain yield reresents dividend yield. So, let us assume the required rate of return is 10%, then Dividend yield of Ace-pak will be 7.25% (10%- 2.75%) and current price will be $20.14 ($1.46 / 7.25%) and the dividend yield of Northern Culture will be 6.90% (10%-3.1%) and current price will be $20.58 ($1.42/6.90%). 2) Price of stock = Dividend / (Required rate of return - Growth rate).