Finance exam 2

A proxy is a document giving one party the authority to act for another party, including the power to vote shares of common stock. Proxies can be important tools relating to control of firms. a)True b)False

A

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 8.6%. What is the stock's fair value? a) $39.47 b) $7.14 c) $42.87 d) $47.76

A

Agarwal technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of tis earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay $0.25 dividend 3 years from today, then to increase its relativity rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Managements forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stocks current value? Use the dividend values provided in the table below for your calculations. Year. 0 1 2 3 4 5 Growth rate na na na na 60% 30% Dividends 0 0 0 0.25 0.40 0.52 a. 11.86 b. 11.28 c. 13.65 d. 13.30

A

Assuming the pure expectations theory is correct, which of the following statements is CORRECT? A. If 2-year Treasury bond rates exceed 1-year rates, then the market must expect interest rates to rise. B. If both 2-year and 3-year Treasury rates are 7%, then 5-year rates must also be 7%. C. If 1-year rates are 6% and 2-year rates are 7%, then the market expects 1-year rates to be 6.5% in one year. D. If 1-year Treasury bond rates exceed 2-year rates, then the market must expect interest rates to rise.

A

Based on an upward-sloping normal yield curve as shown, which of the following statements is correct? a. If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates. b. There is a positive maturity risk premium. c. Inflation must be expected to increase in the future. d. Pure expectations theory must be correct.

A

Based on your understanding of stock prices and intrinsic values, which of the following statements is true? a. A stock's market price is often based on investors' perceived risk in the company. b. The intrinsic value of a stock is based only on perceived investor returns.

A

Based on your understanding of the determinants of interest rates, if everything else remains the same, which of the following will be true? a. In theory, the yield on a bond with a longer maturity will be higher than the yield on a bond with a shorter maturity. b. The yield on U.S. Treasury securities always remains static.

A

Consider a preferred stock that pays a dividend of $100 every year, forever. If the annual discount rate is 10%, what is the price of a share of this preferred stock today? a)$1,000.00 b)$4,000.00 c)$215.47 d)$163.80

A

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $34.00, what is the stock's expected total return for the coming year? a. 8.93% b. 8.58% c. 7.41% d. 9.20%

A

If the Treasury yield curve is downward sloping, how should the yield to maturity on a 10-year Treasury bond compare to that on a 1-year T-bill? A. The yield on a 10-year bond would be less than that on a 1-year bill. B. The yield on a 10-year bond would have to be higher than that on a 1-year bill because of the maturity risk premium. C. It is impossible to tell without knowing the coupon rates of the bonds. D. The yields on the two securities would be equal.

A

Rose Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 3.50% per year. The required rate of return on the stock, rs, is 11.50%. What is the stock's expected price 5 years from now? a) $41.87 b) $52.33 c) $46.89 d) $40.61

A

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? a) Stock A's expected dividend at t = 1 is only half that of Stock B. b) Stock A has a higher dividend yield than Stock B. c) Since Stock A's growth rate is twice that of Stock B, Stock A's future dividends will always be twice as high as Stock B's. d) The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

A

Suppose Tanium, has earnings per share of $0.05. If the average P/E of comparable network service stocks is 40.20, what is the value for Tanium stock using P/E as a valuation multiple? a) $2.01 b) $3.02 c) $4.03 d) $5.04

A

Suppose that a firm is facing an upward-sloping yield curve and needs to borrow money to invest in production. Does this mean that the firm should consider borrowing only at short-term rates? A. No, the firm needs to take the volatility of short-term rates into account. B. Yes, using short-term financing will give the firm the lowest possible interest rate over the life of the project. C. No, an upward-sloping yield curve means that the firm will get a lower interest rate if it uses long-term financing.

A

The four most fundamental factors that affect the cost of money are (1) production opportunities, (2) time preferences for consumption, (3) risk, and (4) inflation. A. True B. False

A

The pure expectations theory, or the expectations hypothesis, asserts that long-term interest rates can be used to estimate future short-term interest rates. Based on the pure expectations theory, is the following statement true or false? A certificate of deposit (CD) for two years will have the same yield as a CD for one year followed by an investment in another one-year CD after one year. a. True b. False

A

Which of the following statements is CORRECT? a) The constant growth model takes into consideration the capital gains investors expect to earn on a stock. b) Two firms with the same expected dividend and growth rate must also have the same stock price. c) It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. d) The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

A

Which of the following statements is correct? a) If the Federal Reserve wants to stimulate the economy, they will buy short-term securities increasing the money supply. b) If the Federal Reserve wants to stimulate the economy, they will sell short-term securities increasing the money supply. c) If the Federal Reserve wants to stimulate the economy, they will buy short-term securities reducing the money supply. d) If the Federal Reserve wants to stimulate the economy, they will sell short-term securities reducing the money supply.

A

Which of the following statements is true about the constant growth model? a. The constant growth model can be used if a stock's expected constant growth rate is less than its required return. b. The constant growth model can be used if a stock's expected constant growth rate is more than its required return.

A

Suppose your considering buying shares in MIT, Inc. MIT's next yearly dividend is expected to be $1.50 per share, and all subsequent dividends are expected to shrink by 10% per year for the foreseeable future. If the appropriate rate of return on this stock is 8%, what should it be selling for? a)$8.33 b)$11.56 c)$28.45 d)$75.00 In Question 17 above, if MIT's shares were selling for $10.00 per share, what should you do as an investor? a)Sell your MIT shares, as they are overvalued. b)Buy MIT shares, as they are undervalued. c)Do nothing, as MIT shares are fairly priced. d)Cannot be determined with the given information.

A A Since the stock is selling for a price higher than the intrinsic value, the stock is overvalued.

Which of the following statements is correct? A. If the Federal Reserve wants to stimulate the economy, they will buy short term securities increasing the money supply. B. If the Federal Reserve wants to stimulate the economy, they will sell short-term securities increasing the money supply. C. If the Federal Reserve wants to stimulate the economy, they will buy short-term securities reducing the money supply. D. If the Federal Reserve wants to stimulate the economy, they will sell short-term securities reducing the money supply.

A If the Fed wants to stimulate the economy, it will want to increase the money supply. When the Fed buys short-term securities from investors, they pump money back into the economy

Which of the following statements is CORRECT? a. the constant growth model takes into consideration the capital gains investors expect to earn on a stock b. two firms with the same expected dividend and growth rate must also have the same stock price c. it is appropriate to use the constant growth model to estimate a stocks value even if its growth rate is never expected to become constant d. the price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate

A Statement a is true, because the expected growth rate is also the expected capital gains yield. All the other statements are false.

Cyclic, Inc., pays dividends of $1, $2, $1 and $2 at the end of the first, second, third, and fourth quarters of each year on their preferred stock. If the first quarter for this firm just started, and if the required rate of return on their preferred stock is 13% per year, compounded quarterly, what price should their preferred stock sell for today? a)$45.91 b)$75.69 c)$87.69 d)$90.60

A The periodic rate for a quarter is = 13%/4 =3.25% The effective rate for two quarters is = (1+0.0325)^2-1 =6.605625% Value of stock = 2/0.06605625 + (1/0.06605625)(1+0.0325) =$45.91

Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: a. When the Fed increases the money supply, short-term interest rates tend to decline. b. If the Fed injects a huge amount of money into the markets, inflation is expected to decline, and long-term interest rates are expected to rise. c.During the credit crisis of 2008, investors around the world were fearful about the collapse of real estate markets, shaky stock markets, and illiquidity of several securities in the United States and several other nations. The demand for US Treasury bonds increased, which led to a rise in their price and a decline in their yields. d. When the economy is weakening, the Fed is likely to decrease short-term interest rates.

A. TRUE B. FALSE C. TRUE D. TRUE

A stock is expected to pay a dividend of $1.25 at the end of the next quarter. The expected dividend growth rate is 4% per quarter and the appropriate rate of return on this stock is 7% per quarter. How much is the intrinsic value of this stock? a)$17.86 b)$41.67 c)$161.60 d)$43.33

B

Francis Inc.'s stock has a required rate of return of 10.25% and it sells for $80.00 per share. The dividend is expected to grow at a constant rate of 6.00% per year. What is the expected year-end dividend, D1? a)$4.25 b)$3.40 c)$3.57 d)$3.23

B

Horizon value can be defined as a) the present value of all future dividends. b) all the future dividends beyond the explicit forecast period, discounted back to the horizon date. c) the present value of the terminal value. d) the future value of all future dividends.

B

LOHI Corporation pays its preferred stockholders a dividend of $0.50 every quarter. If the preferred stockholders require a rate of return of 10% compounded quarterly, what price does a preferred stock of LOHI corporation sell for today? a)$5.00 b)$20.00 c)$200.00 d)$80.00

B

One of the four most fundamental factors that affect the cost of money is the expected rate of inflation. If inflation is expected to be relatively high, then interest rates will tend to be relatively low, other things held constant. A. True B. False

B

Redrick enterprises' stock currently sells for $50.00 per share. The dividend is projected to increase at a constant rate of 5.50% per year. The required rate of return on the stock, Rs, is 9.00%. What is the stocks expected price 3 years from today? a. $71.04 b. $58.71 c. $68.69 d. $61.65

B

A 5-year corporate bond has a yield of 12%, while a 5-year Treasury bond has a yield of 7.5%. The maturity risk premium on both bonds is 1.5%. The corporate bond also has a default risk premium of 0.75%. How much is the liquidity risk premium on the corporate bond? A. 0.75% B. 2.25% C. 3.75% D. 4.5%

C Difference in yields = 12%-7.5% = 4.5% Liquidity risk premium = 4.5% - 0.75% = 3.75%

Stocks X and Y have the following data. Assuming the stock market is efficient, and dividends are expected to grow at a constant rate, which of the following statements is CORRECT? X Y Price $25. $25 Expected dividend yield. 5%. 3% Required return 12%. 10% A. Stock Y pays a higher dividend per share than stock X B. stock X pays a higher dividend per share than stock Y C. One year from now, stock X should have the higher price D. Stock Y has a lower expected growth rate than stock X

B

Stocks X and Y have the following data. If dividends are expected to grow at a constant rate, which of the following statements is CORRECT? a) Stock Y pays a higher dividend per share than Stock X. b) Stock X pays a higher dividend per share than Stock Y. c) One year from now, Stock X should have the higher price. d) Stock Y has a lower expected growth rate than stock X.

B

Suppose that you estimate that LOHI Corporate, will skip it next three annual dividends, but then resume paying a dividend, with the first dividend paid to be equal to $1.00. If all subsequent dividends will grow at a constant rate of 6% per year and the required rate of return on LOHI is 14% per year, what should be its price? a) $6.35 b) $8.44 c) $10.37 d) $12.50

B

Suppose the real risk-free rate is 4.20%, the average expected future inflation rate is 4.20%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity, hence the pure expectations theory is NOT valid. What rate of return would you expect on a 4-year Treasury security? A. 8.54% B. 8.80% C. 8.01% D. 7.92%

B

Suppose you are trying to value a company using the price to earnings (P/E) ratio. If the value of the benchmark P/E ratio is less than the P/E ratio of the company you are trying to value, which of the following statements is correct? a) The company is fairly priced. b) The company is overvalued. c) The company is undervalued. d) None of the above.

B

The constant growth valuation formula has dividends in the numerator. Dividends are divided by the difference between the required return and dividend growth rate as follows: Which of the following statements is true? a. Increasing dividends will always decrease the stock price, because the firm is depleting internal funding resources. b. Increasing dividends may not always increase the stock price, because less earnings may be invested back into the firm and that impedes growth. c. Increasing dividends will always increase the stock price.

B

The real risk-free rate is 3.05%, inflation is expected to be 5.95% this year, and the maturity risk premium is zero. What is the equilibrium rate of return on a 1-year Treasury bond? A. 8.37% B. 9.00% C. 8.82% D. 10.80%

B

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT? a. the two stocks must have the same dividend per share b. if one stock has a higher dividend yield, then it must also have a lower dividend growth rate c. if one stock has a higher dividend yield, then it must also have a higher dividend growth rate d. the two stock must have the same dividend growth rate

B

Which of the following statements will always hold true? a. The constant growth valuation formula is not appropriate to use for zero growth stocks. b. The constant growth valuation formula is not appropriate to use unless the company's growth rate is expected to remain constant in the future. c. It will never be appropriate for a rapidly growing start-up company that pays no dividends at present, but is expected to pay dividends at some point in the future, to use the constant growth valuation formula.

B

Which tend to be more volatile, short- or long-term interest rates? a. Long-term interest rates b. Short-term interest rates

B

You can estimate the value of a company's stock using models such as the corporate valuation model and the dividend discount model. Which of the following companies would you choose to evaluate if you were using the corporate valuation model to estimate the value of the company's stock? a. A company that has a stable distribution policy. b. A company that is not expected to distribute any earnings to its stockholders for the next few years.

B

You read in The Wall Street Journal that 30-day T-bills are currently yielding 5.8%. Your brother-in-law, a broker at Safe and Sound Securities, has given you the following estimates of current interest rate premiums: • Inflation premium = 3.25% • Liquidity premium = 0.6% • Maturity risk premium = 1.85% • Default risk premium = 2.15% On the basis of these data, what is the real risk-free rate of return? A. 9.05% B. 2.55% C. 13.65% D. 5.8%

B

A stock just paid a quarterly dividend of $1.25. The future dividends of this stock are expected to increase at a rate of 1% per quarter. The appropriate rate of return on this stock is 8%, compounded quarterly (𝑟4=8%). How much is the intrinsic value of this stock? a)$15.63 b)$41.67 c)$125.00 d)$126.25

D

Answer Questions 12-14 using the information below. In the year that just ended, Diamond Corp. had an earnings per share (EPS) of $3.00. Analysts expect that the earnings will grow by 30% this year, 20% in the 2nd year, and by 10% in the third year. The management of Diamond Corp. plans to retain 70% of their earnings during the first three years. After the third year they plan to maintain a constant retention rate of 40%. Analysts forecast that the return on new equity investment for Diamond Corp. after the third year would be 10%. The required rate of return on Stanley Corp's stock is 12%. 12. What are the values of the expected dividends for Diamond Corp. during the first three years? a) D1=$3.90, D2=$4.68 and D3=$5.148. b) D1=$1.17, D2=$1.404 and D3=$1.5444. c) D1=$2.73, D2=$3.276 and D3=$3.6036. d) D1=$2.34, D2=$2.808 and D3=$3.0888. 13. How much is the horizon value (at the horizon date)? a) $66.924 b) $26.7696 c) $53.5392 d) $40.1544 14. What is the intrinsic value of the stock? a) $58.51 b) $26.67 c) $31.84 d) $33.55

B D C

Stock X has the following data. Assuming the stock market is efficient, and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1 $3.00 Current Price, P0. $50.00 Expected constant growth rate 6.0% A. the stocks required return is 10% B. the stocks expected dividend yield and growth rate are equal C. the stocks expected dividend yield is 5% D. the stocks expected capital gains yield is 5%

B Dividend yield = D1/P0 = 3/50 =6%

The corporate bond yield spread captures the difference in yields between a treasury security and corporate bond caused by ____________ A. maturity risk and default risk. B. default risk and liquidity risk. C. inflation risk and interest rate risk. D. liquidity risk and maturity risk.

B The corporate yield spread is the difference between the yields on a treasury security and a corporate bond which have the same time to maturity. Therefore, the difference between in the two yields is equal to the default risk premium and liquidity risk premium (which is only included in the corporate bond.)

According to the pure expectations theory, the yield curve could never be downward sloping. A. True B. False

B The pure expectations theory states that the shape of the current yield curve can be explained by future expectations about interest rates. If investors expect that future interest rate will be lower than they are today, then the yield curve will be downward sloping.

A 10-year corporate bond has a yield of 12.05%, while a 10-year Treasury bond has a yield of 7.5%. The maturity risk premium on both bonds is 1.5%. The corporate bond also has a default risk premium of 0.75%. How much is the liquidity risk premium on the corporate bond? a)2.30% b)2.25% c)3.80% d)4.55%

C

A stock is expected to pay a year-end dividend of $2.00. The dividend is expected to decline at a rate of 5% a year forever. If the company is in equilibrium and its expected and required rate of return is 15%, how much is the expected price of the stock five years from now? a)$7.35 b)$8.15 c)$7.74 d)$9.50.

C

Consider a preferred stock that pays a dividend of $10 every six months, forever. If the discount rate compounded semiannually is 10% (𝑟2=10%), what is the price of a share of this preferred stock today? a)$1000.00 b)$4,000.00 c)$200.00 d)$97.56

C

Consider a stock that promises to pay a dividend of $10 per year. However, this dividend payment will begin only five years from now. If the appropriate discount rate is 8% per year, what is the intrinsic value of this stock, today? a)$125.00 b)$100.00 c)$91.88 d)$85.07

C

If D1 = $1.25, g (which is constant) = 4.7%, and P0 = $30.00, then what is the stock's expected dividend yield for the coming year? a. 4.13% b. 3.17% c. 4.17% d. 3.25%

C

Nachman Industries just paid a dividend of D0 = $2.50. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value? a)$102.82 b)$73.08 c)$84.98 d)$65.43

C

Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the US Treasury yield curve can take. Check all that apply. a. Downward-sloping yield curve b. Inverted yield curve c. Upward-sloping yield curve

C

Suppose the yield on a 10-year T-bond is currently 5.25% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 3.20%. Suppose further that the MRP on a 10-year T-bond is 0.90%, that no MRP is required on a TIPS, and that no liquidity premium is required on any T-bond. Given this information, what is the expected rate of inflation over the next 10 years? a) 0.94% b) 1.08% c) 1.15% d) 0.95%

C

Suppose you're considering buying a stock that is expected to pay a dividend of $1.00 per quarter, forever. If the appropriate rate of return on this stock is 12%, compounded quarterly, what should it sell for? a)$8.33 b)$133.33 c)$33.33 d)$4.00

C

Which of the following statements accurately describes the relationship between earnings and dividends when all other factors are held constant? a. Growth in earnings requires growth in dividends. b. Long-run earnings growth occurs primarily because firms pay dividends to reward their shareholders for investing in the company. c. Retaining a higher percentage of earnings will result in a higher growth rate.

C

Which of the following statements is CORRECT, other things held constant? A. If companies have fewer good investment opportunities, interest rates are likely to increase. B. If individuals increase their savings rate, interest rates are likely to increase. C. If expected inflation increases, interest rates are likely to increase. D. Interest rates on all debt securities tend to rise during recessions because recessions increase the possibility of bankruptcy, hence the riskiness of all debt securities.

C

Which of the following statements is CORRECT? a) Classified stock (dual class shares) are issued only by family owned firms. b) Class A shares have only one vote per share. c) Some firms have only a single class of common stock. d) Class B shares cannot be publicly traded.

C

Which of the following statements is CORRECT? a) A five-year bond has a higher maturity risk premium than a 10-year bond. b) The inflation premium is the sum of the expected annual inflation over the lifetime of a security. c) Better the credit rating a company receives, lower would be the default risk premium investors would require on the interest they charge on that company. d) The real risk-free rate compensates investors for the expected inflation.

C

You have the following information regarding three stocks. If you were trying to estimate the intrinsic value of these stocks, for which stocks would you be able to apply the constant dividend growth model? a) Stock A only. b) Stock B only. c) Stock A and C. d) Stock C and B.

C

A 5-year Treasury Inflation Protected Security (TIPS) has a yield of 5%, while a 5-year Treasury bond has a yield of 7.5%. The maturity risk premium is 0% for the TIPS and 0.50% for the Treasury bond. There is no liquidity premium on either bond. What is the expected average rate of inflation over the next five years? A. 0.50% B. 2.50% C. 2.00% D. 0.00%

C Difference in yields = 7.5%-5% = 2.5% Inflation risk premium = 2.5% - 0. 5% = 2.00%

Answer Question 24 and 25 using the following information. You are given the following information regarding the U.S. Treasury yields. 24.If the pure expectations theory holds, what is the expected 1-year rate, 1 year from now? a)6.01% b)5.27% c)5.57% d)11.03% 25.If the pure expectations theory holds, what is the expected 5-year rate, 5 years from now? a)5.86% b)5.76% c)5.75% d)5.84%

C A

Johnson Co.'s price-to-earnings (P/E) ratio is 20. The price-to-earnings (P/E) ratio of its three closest competitors are 23, 25 and 24. If you assume that the market has correctly priced Johnson Co's competitors and that these competitors have a similar risk profile to that of Johnson Co., what can you say about the valuation of Johnson Co.'s share price? a)It is fairly priced. b)It is overvalued. c)It is undervalued. d)Cannot be determined with the given information.

C Benchmark Price-to-earnings ratio = (23+25+24)/3 = 24 as 24>20, it is undervalued

Tableware Co.'s current earning per share is $1.50. The price-to-earnings (P/E) ratio of its four closest competitors are:15.00,15.14,14.90,15.05. Based on the price-to-earnings ratio, what should the intrinsic value of Tableware's stock be? a)$15.0225 b)$15.025 c)$22.53 d)Cannot be determined with the given information.

C Benchmark Price-to-earnings ratio=(15.00+15.14+14.90+15.05)/4=15.0225 Price estimate=Benchmark P/E ratio* Target firm's EPS = 15.0225*1.5=$22.53

Which of the following describe the reason(s) why maximization of intrinsic stock value benefits society? Check all that apply. a. Successful companies can avoid raising external funds in the financial markets. b. Most investors prefer companies that can raise prices beyond reasonable levels. c. Stock price maximization requires efficient, low-cost businesses. d. Successful companies higher more employees.

C & D

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, then which of the following statements is CORRECT? a) The company's dividend yield 5 years from now is expected to be 10%. b) The constant growth model cannot be used because the growth rate is negative. c) The company's expected capital gains yield is 5%. d) The company's expected stock price at the beginning of next year is $9.50.

D

An analyst evaluating securities has obtained the following information. The real rate of interest is 2% and is expected to remain constant for the next 3 years. Inflation is expected to 4% and is expected to remain constant for the next 3 years. The maturity risk premium is estimated to be 0.1*(t-1) % , where t = number of years to maturity. The liquidity premium on relevant 3-year securities is 0.25% and the default risk premium on relevant 3-year securities is 0.6%. The yield on a 3-year Treasury bond (𝑟𝑇3) and a 3-year corporate bond(𝑟𝐶3) is, A. 5% and 5.7%, respectively. B. 5.7% and 6.55%, respectively. C. 4% and 5.7%, respectively. D. 6.2% and 7.05%, respectively.

D

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT? a)All common stocks fall into one of three classes: A, B, and C. b)All common stocks, regardless of class, must have the same voting rights. c)All firms have several classes of common stock. d)Some class or classes of common stock are entitled to more votes per share than other classes.

D

Companies can issue different classes of common stock. Which of the following statements concerning stock classes is CORRECT? a) All common stocks fall into one of three classes: A, B, and C. b) All common stocks, regardless of class, must have the same voting rights. c) All firms have several classes of common stock. d) Some class or classes of common stock are entitled to more votes per share than other classes.

D

Expo corporation pays its preferred stock a dividend of $2, every other quarter. The next dividend is due two quarters from now. If the required rate of return of its preferred stockholders is 20%, compounded quarterly, what should be the price of its preferred stock today? a) $2.00 b) $0.10 c) $40.00 d) $19.51

D

If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $52, then what is the stock's expected dividend yield for the coming year? A. 3.36% B. 3.81% C. 4.61% D. 4.48%

D

Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $57.50 per share. What is its effective annual(not nominal) rate of return? a)6.78% b)7.28% c)8.14% d)7.14%

D

Sorenson Corp.'s expected year-end dividend is D1=$1.90, its required return is rs=11.00%, its dividend yield is 6.00%,and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years ,i.e., what is 𝑃7?Do not round intermediate calculations. a)$50.35 b)$47.68 c)$38.77 d)$44.56

D

Suppose the real risk-free rate is 3.00%, the average expected future inflation rate is 6.60%, and a maturity risk premium of 0.10% per year to maturity applies, i.e., MRP = 0.10%(t), where t is the number of years to maturity. What rate of return would you expect on a 5-year Treasury security? a)8.83% b)7.47% c)9.70% d)10.10%

D

Suppose you are evaluating a stock that just paid a quarterly dividend of $1.25, you expect future dividends on this stock to increase at a rate of 4% per quarter, and you think the appropriate rate of return on this stock is 28%, compounded quarterly. How much would it be worth? a) $17.86 b) $21.44 c) $41.67 d) $43.33

D

The preemptive right is important to shareholders because it_____________________. a)allows managers to buy additional shares below the current market price. b)will result in higher dividends per share. c)is included in every corporate charter. d)protects the current shareholders against a dilution of their ownership interests.

D

Which of the following statements is INCORRECT? a)The yield curve is a graphical representation of the term structure of interest rate. b)According to the pure expectations theory, an upward sloping yield curve would indicate that investors expect future interest rates to increase. c)According to the pure expectations theory, the yield curve could never be downward sloping. d)If inflation is expected to increase in the future and the maturity risk premium is greater than zero, the Treasury bond yield curve must be upward sloping.

D

This is the premium added as a compensation for the risk that an investor will not get paid in full.

Default risk premium

This premium is added when a security lacks marketability, because it cannot be bought and sold quickly without losing value.

Liquidity risk premium

The yield on 1-year Treasury security is 5%, 2-year securities yield 5.2%, 3-year securities yield 5.3%, and 4-year securities yield 5.5%. There is no maturity risk premium. Using the pure expectations theory, forecast the yields on the following securities: I. a 1-year security, 1 year from now II. a 1-year security, 2 years from now III. a 2-year security, 1 year from now IV. a 3-year security, 1 year from now

Maturity period yield 1 5.0% 2 5.2% 3 5.3% 4 5.5% 1 yr, 1 yr from now [(1+0.052)^2 / (1.05)]-1 = 5.4 1 yr, 2 yrs from now [(1.053)^3/(1.052)^2]-1 = 5.5 2 yr, 1 yr from now [(√1.053^3)/(√1.05)]-1 = 5.45 3 yr, 1 yr from now [3√(1.055^3)/(1.05)]-1 = 5.67 I = 5.4% II =5.5% III = 5.45% IV = 5.67%

True or False: In some cases, individuals who start a business have special voting rights that help them exercise more control over the firm. They own a special class of stock called founders' shares.

T

This is the premium added to the real risk-free rate to compensate for a decrease in purchasing power over time.

inflation premium

This is the premium that reflects the risk associated with changes in interest rates for a long-term security.

maturity risk premium

It is calculated by adding the inflation premium to r*.

nominal risk free rate

It changes over time, depending on the expected rate of return on productive assets exchanged among market participants and people's time preferences for consumption.

real risk free rate