FIN 3123 Financial Management Stocks and Bonds

Bedeker, Inc., has an issue of preferred stock outstanding that pays a $5.35 dividend every year in perpetuity. If this issue currently sells for $93 per share, what is the required return?

Required Return= 5.75%

What is the present value of $1,400 a year at a discount rate of 8 percent if the first payment is received 7 years from now and you receive a total of 25 annual payments?

$9,417.69

While not true of common stock, preferred shares (check all that apply):

Are often associated with a sinking fund set-up by the company, Typically don't get voting rights, Have a pre-specified dividend yield usually based on par value

You purchase a bond with an invoice price of $1,030. The bond has a coupon rate of 7.8 percent, and there are four months to the next semiannual coupon date. Assume a par value of $1,000. What is the clean price of the bond?

Clean price= 1,017.00

Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next nine years because the firm needs to plow back its earnings to fuel growth. The company will pay a dividend of $12 per share 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 14 percent, what is the current share price?

Current share price= $41.00

A sinking fund is managed by a trustee for which one of the following purposes?

Early bond redemption

A six-year, $1,000 face value bond issued by Taylor Tools pays interest semiannually on February 1 and August 1. Assume today is October 1. What will be the difference, if any, between this bond's clean and dirty prices today?

Five months' interest

Which one of the following risks would a floating-rate bond tend to have less of as compared to a fixed-rate coupon bond?

Interest rate risk

Nan and Neal are twins. Nan invests $5,000 at 7 percent at age 25. Neal invests $5,000 at 7 percent at age 30. Both investments compound interest annually. Both twins retire at age 60 and neither adds nor withdraws funds prior to retirement. Which statement is correct?

Nan will have more money than Neal at any age.

You are comparing two investment options that each pay 6 percent interest, compounded annually. Both options will provide you with $12,000 of income. Option A pays $2,000 the first year followed by two annual payments of $5,000 each. Option B pays three annual payments of $4,000 each. Which one of the following statements is correct given these two investment options? Assume a positive discount rate. (No calculations needed.)

Option B has a higher present value at Time 0.

Which one of the following is an electronic system used by the NYSE for directly transmitting orders to designated market makers?

Pillar system

Five years ago Two Towers Inc. issued bonds that pay a 7 percent coupon. At issue these bonds were rated BBB, but today they are rated AAA. Which of the following is most likely based on this information?

The bonds carry a smaller default premium than when issued.

You have found the following stock quote for RJW Enterprises, Inc., in the financial pages of today's newspaper. 52 week: Hi= 48.61, Lo=29.56 Stock (Div)= RJW 1.4 YLD (%)=3.6 PE=19 Vol 100s= 10 Close ?? Net chg.= -.41 a.What was the closing price for this stock that appeared in yesterday's paper? b.If the company currently has 18 million shares of stock outstanding, what was net income for the most recent four quarters?

a) 39.3 b) 36,842,105.26

Both Bond Sam and Bond Dave have 10 percent coupons, make semiannual payments, and are priced at par value. Bond Sam has six years to maturity, whereas Bond Dave has 19 years to maturity. a) If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave? b.If rates were to suddenly fall by 2 percent instead, what would be the percentage change in the price of Bond Sam and Bond Dave?

a) Bond sam=-8.38, Bond Dave= -14.85% b)Bond sam=9.39% Bond Dave=19.37% (PSam= $50(PVIFA6.0%,12)+ $1,000(PVIF6.0%,12)= $916.16PDave= $50(PVIFA6.0%,38)+ $1,000(PVIF6.0%,38)= $851.54 The percentage change in price is calculated as: Percentage change in price = (New price - Original price)/Original price ΔPSam% = ($916.16 - 1,000)/$1,000 = -.0838, or -8.38%ΔPDave% = ($851.54 - 1,000)/$1,000 = -.1485, or -14.85% If the YTM suddenly falls to 8 percent: PSam= $50(PVIFA4.0%,12)+ $1,000(PVIF4.0%,12)= $1,093.85PDave= $50(PVIFA4.0%,38)+ $1,000(PVIF4.0%,38)= $1,193.68 ΔPSam% = ($1,093.85 - 1,000)/$1,000 = .0939, or 9.39%ΔPDave% = ($1,193.68 - 1,000)/$1,000 = .1937, or 19.37%)

An agent who arranges a transaction between a buyer and a seller of equity securities is called a:

broker

Rosita paid a total of $1,189, including accrued interest, to purchase a bond that has 7 of its initial 20 years left until maturity. This price is referred to as the:

dirty price.

Your grandmother has promised to give you $10,000 when you graduate from college. If you speed up your graduation by one year and graduate two years from now rather than the expected three years, the present value of this gift will:

increase.

Interest rates that include an inflation premium are referred to as:

nominal rates

The items included in an indenture that limit certain actions of the issuer in order to protect a bondholder's interests are referred to as the:

protective covenants.

The difference between the price that a dealer is willing to pay and the price at which he or she will sell is called the:

spread.

After successfully completing your corporate finance class, you feel the next challenge ahead is to serve on the board of directors of Schenkel Enterprises. Unfortunately, you will be the only person voting for you. The company has 415,000 shares outstanding, and the stock currently sells for $48, If there are four seats in the current election, how much will it cost you to buy a seat?

total cost= $3,974048

One year ago, you invested $1,750. Today it is worth $1,815.48. What rate of interest did you earn?

3.74 percent

You find a zero coupon bond with a par value of $10,000 and 24 years to maturity. The yield to maturity on this bond is 4.6 percent. Assume semiannual compounding periods. What is the price of the bond?

3357.14

Do-Well bonds have a face value of $1,000 and are currently quoted at 86.725. The bonds have coupon rate of 6.5 percent. What is the current yield on these bonds?

7.49 percent

Union Local School District has a bond outstanding with a coupon rate of 3.5 percent paid semiannually and 18 years to maturity. The yield to maturity on this bond is 3.7 percent, and the bond has a par value of $10,000. What is the price of the bond?

9738.86

Jallouk Corporation has two different bonds currently outstanding. Bond M has a face value of $80,000 and matures in 20 years. The bond makes no payments for the first six years, then pays $2,900 every six months over the subsequent eight years, and finally pays $3,200 every six months over the last six years. Bond N also has a face value of $80,000 and a maturity of 20 years; it makes no coupon payments over the life of the bond. The required return on both these bonds is 12 percent compounded semiannually. What is the current price of Bond M and Bond N?

Bond M= $27590.93 Bond N= $7777.78

You are trying to compare the present values of two separate streams of cash flows that have equivalent risks. One stream is expressed in nominal values and the other stream is expressed in real values. You decide to discount the nominal cash flows using a nominal annual rate of 8 percent. What rate should you use to discount the real cash flows?

Comparable real rate

Gabriele Enterprises has bonds on the market making annual payments, with eight years to maturity, a par value of $1,000, and selling for $976. At this price, the bonds yield 7.3 percent. What must the coupon rate be on the bonds?

Coupon rate=6.89%

A company has four open seats on its board of directors. There are seven candidates vying for these four positions. There will be a single election to determine the winners. As the owner of 100 shares of stock, you will receive one vote per share for each open seat. You decide to cast all 400 of your votes for a single candidate. What is this type of voting called?

Cumulative

Maurer, Inc., has an odd dividend policy. The company has just paid a dividend of $5 per share and has announced that it will increase the dividend by $6 per share for each of the next five years, and then never pay another dividend. If you require a return of 12 percent on the company's stock, how much will you pay for a share today?

Current share price=$78.03

Today, June 15, you want to buy a bond with a quoted price of 98.64. The bond pays interest on January 1 and July 1. Which one of the following prices represents your total cost of purchasing this bond today?

Dirty price

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 6.2 percent paid annually. If the yield to maturity is 7.3 percent, what is the current price of the bond?

Price: 886.13

Ernst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets?

Primary

The next dividend payment by Savitz, Inc., will be $2.08 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. If the stock currently sells for $42 per share, what is the required return?

Required Return= 10.95%

Grateful Eight Co. is expected to maintain a constant 3.6 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 5.4 percent, what is the required return on the company's stock?

Required Return= 9.00%

E-Eyes.com just issued some new preferred stock. The issue will pay an annual dividend of $12 in perpetuity, beginning 17 years from now. If the market requires a return of 4.2 percent on this investment, how much does a share of preferred stock cost today?

Stock price= $147.93

Which one of these statements related to growing annuities and perpetuities is correct?

The present value of a growing perpetuity will decrease if the discount rate is increased.

Which one of the following statements correctly defines a time value of money relationship?

Time and present value are inversely related, all else held constant

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?

Voting by proxy

Treasury bills are currently paying 6 percent and the inflation rate is 3.4 percent. a. What is the approximate real rate of interest? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b.What is the exact real rate? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

a) approximate real rate=2.60% b)exact real rate= 2.51%

Locate the Treasury issue in Figure 7.4 maturing in February 2044. Assume a par value of $10,000. a.What is its coupon rate? b.What is its bid price in dollars? c.What was the previous day's asked price in dollars?

a) coupon rate= 3.625% b) bid price=$11,272.66 c)previous day's price= 11,210.94

The Jackson-Timberlake Wardrobe Co. just paid a dividend of $1.25 per share on its stock. The dividends are expected to grow at a constant rate of 5 percent per year indefinitely. Investors require a return of 12 percent on the company's stock. a.What is the current stock price? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)b.What will the stock price be in 3 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)c.What will the stock price be in 8 years? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

a) current price= $18.75 b) stock price in 3 years= $21.75 c) stock price in 8 years= $21.75

Suppose your company needs to raise $51 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 4.2 percent, and you're evaluating two issue alternatives: A semiannual coupon bond with a coupon rate of 4.2 percent and a zero coupon bond. Your company's tax rate is 22 percent. Both bonds will have a par value of $2,000. a-1.How many of the coupon bonds would you need to issue to raise the $51 million? a-2.How many of the zeroes would you need to issue? b-1.In 25 years, what will your company's repayment be if you issue the coupon bonds? b-2.What if you issue the zeroes? c.Calculate the aftertax cash flows for the first year for each bond.

a-1= 25500 a-2= 72081.85 B-1=52,071,000 B-2=144,163,298 c= coupon bonds: outflow $1,670,760 zero coupon bonds: Inflow $476,057

The interest earned on both the initial principal and the interest reinvested from prior periods is called:

compound interest.

Sam just opened a savings account paying 3.5 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this, Sam:

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

Which one of the following premiums is compensation for the possibility that a bond issuer may not pay a bond's interest or principal payments as expected?

default risk