Fin Exam 2

The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.65, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0? Do not round intermediate calculations.

$11.72 Rationale: D0 $0.75 b 1.65 rRF 4.0% RPM 5.0% g 5.5% D1 = D0(1 + g) =$0.7913 rs = rRF + b(RPM) =12.25% P0 = D1/(rs - g) $11.72

Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's 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 stock's current value? Use the dividend values provided in the table below for your calculations. Do not round your intermediate calculations. Year Growth Rate Dividends 0 NA 0 1 NA 0 2 NA 0 3 NA $0.250 4 60% $0.400 5 30% $0.520 6 8% $0.562

$11.87

Mooradian Corporation's free cash flow during the just-ended year (t = 0) was $160 million, and its FCF is expected to grow at a constant rate of 5.0% in the future. Assume the firm has zero non-operating assets. If the weighted average cost of capital is 12.5%, what is the firm's total corporate value, in millions?

$2,240 Rationale: FCF0 $160 g 5.0% WACC 12.5% FCF1 = FCF0(1 + g) =$168.00 Total corporate value = FCF1/(WACC - g) =$2,240.00

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 10.2%, then what is the stock price?

$21.96 Rationale: Last dividend (D0) $1.00 Long-run growth rate 5.4% Required return 10.2% D1 = D0(1 + g) =$1.054 P0 = D1/(rs - g) $21.96

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 current price?

$39.47 Rationale: D1 $0.75 rS 10.5% g 8.6% P0 = D1/(rS - g) $39.47

You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF1) is expected to be $75.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's estimated intrinsic value per share of common stock? Do not round intermediate calculations.

$43.33 Rationale: FCF1 $75.00 Constant growth rate 5.0% WACC 10.0% Debt & preferred stock $200 Shares outstanding 30 Total firm value = FCF1/(WACC - g) = $1,500.00 Less: Value of debt & preferred stock-$200.00Value of equity $1,300.00 Number of shares 30 Value per share = Equity value/Shares =$43.33

Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 41% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock? Do not round intermediate calculations.

$45.43

Reddick 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 stock's expected price 3 years from today?

$58.71 Rationale: Stock price $50.00 Growth rate 5.50% Years in the future 3 P3 = P0(1 + g)3 =$58.71

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $4.00 per share. If the required return on this preferred stock is 6.5%, then at what price should the stock sell?

$61.54 Rationale: Preferred dividend $4.00 Required return 6.5% Preferred price = DP/rP =$61.54

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 6.7% on these bonds. What is the bond's price?

$987.92

Kern Corporation's 5-year bonds yield 6.60% and 5-year T-bonds yield 3.40%. The real risk-free rate is r* = 2.5%, the default risk premium for Kern's bonds is DRP = 1.90% versus zero for T-bonds, the liquidity premium on Kern's bonds is LP = 1.3%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on all 5-year bonds?

0.50%

Kelly Inc's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.70%. The real risk-free rate is r* = 2.5%, the default risk premium for Kelly's bonds is DRP = 0.40%, the liquidity premium on Kelly's bonds is LP = 2.4% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk premium (MRP) on all 5-year bonds?

0.70%

Bill Dukes has $100,000 invested in a 2-stock portfolio. $32,500 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta? Do not round your intermediate calculations. Round the final answer to 2 decimal places.

0.96

Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 3.00%. 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? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

1.15%

im Angel holds a $200,000 portfolio consisting of the following stocks: Stock Investment Beta A $50,000 1.70 B $50,000 0.80 C $50,000 1.00 D $50,000 1.20 Total $200,000 What is the portfolio's beta? Do not round your intermediate calculations.

1.175

Cheng Inc. is considering a capital budgeting project that has an expected return of 23% and a standard deviation of 30%. What is the project's coefficient of variation? Do not round your intermediate calculations. Round the final answer to 2 decimal places.

1.30

Kay Corporation's 5-year bonds yield 7.50% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?

1.80%

Suppose the real risk-free rate is 3.25%, the average future inflation rate is 4.35%, and a maturity risk premium of 0.07% per year to maturity applies to both corporate and T-bonds, i.e., MRP = 0.07%(t), where t is the number of years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 1.20% apply to A-rated corporate bonds but not to T-bonds. How much higher would the rate of return be on a 10-year A-rated corporate bond than on a 5-year Treasury bond? Here we assume that the pure expectations theory is NOT valid. Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

2.05%

If D1 = $1.50, g (which is constant) = 2.5%, and P0 = $56, then what is the stock's expected capital gains yield for the coming year?

2.50% Rationale: D1 $1.50 g 2.5% P0 $56.00 Capital gains yield = g =2.50%

McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)

2.62%

Taggart Inc.'s stock has a 50% chance of producing a 46% return, a 30% chance of producing a 10% return, and a 20% chance of producing a -28% return. What is the firm's expected rate of return? Do not round your intermediate calculations.

20.40%

5-year Treasury bonds yield 6.1%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year T-bonds is 0.4%. There is no liquidity premium on these bonds. What is the real risk-free rate, r*?

3.80%

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?

4.17% Rationale: D1 $1.25 g 4.7% P0 $30.00 Dividend yield = D1/P0 =4.17%

If 10-year T-bonds have a yield of 6.2%, 10-year corporate bonds yield 11.9%, the maturity risk premium on all 10-year bonds is 1.3%, and corporate bonds have a 0.4% liquidity premium versus a zero liquidity premium for T-bonds, what is the default risk premium on the corporate bond?

5.30%

Suppose the real risk-free rate is 2.50% and the future rate of inflation is expected to be constant at 2.80%. What rate of return would you expect on a 5-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

5.30%

Koy Corporation's 5-year bonds yield 11.75%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Koy's bonds?

5.85%

Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,085. What is the bond's nominal yield to call?

6.10%

Sadik Inc.'s bonds currently sell for $1,250 and have a par value of $1,000. They pay a $105 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to call (YTC)?

6.28%

Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 4.60%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

8.10%

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? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

8.80%

If D0 = $1.75, g (which is constant) = 3.6%, and P0 = $34.00, then what is the stock's expected total return for the coming year?

8.93% Rationale: D0 $1.75 g 3.6% P0 $34.00 D1 = D0(1 + g) =$1.81 Total return = rs = D1/P0 + g 8.93%

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price? - A 10-year bond with a 10% coupon. - A 10-year zero coupon bond. - An 8-year bond with a 9% coupon. - A 1-year bond with a 15% coupon. - A 3-year bond with a 10% coupon.

A 10-year zero coupon bond.

A bond trader observes the following information: The Treasury yield curve is downward sloping. Empirical data indicate that a positive maturity risk premium applies to both Treasury and corporate bonds. Empirical data also indicate that there is no liquidity premium for Treasury securities but that a positive liquidity premium is built into corporate bond yields. On the basis of this information, which of the following statements is most CORRECT? - A 10-year Treasury bond must have a higher yield than a 10-year corporate bond. - Since the Treasury yield curve is downward sloping, the corporate yield curve must also be downward sloping. - A 5-year corporate bond must have a higher yield than a 10-year Treasury bond. - The corporate yield curve must be flat. - A 10-year corporate bond must have a higher yield than a 5-year Treasury bond.

A 5-year corporate bond must have a higher yield than a 10-year Treasury bond.

Which of the following statements is CORRECT? - All else equal, bonds with longer maturities have less price risk than bonds with shorter maturities. - If a bond is selling at its par value, its current yield equals its capital gains yield. - All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons. - If a bond is selling at a premium, its current yield will be less than its capital gains yield. - If a bond is selling at a discount to par, its current yield will be greater than its yield to maturity.

All else equal, bonds with larger coupons have less price risk than bonds with smaller coupons.

You have the following data on three stocks: Stock Standard Deviation Beta A 20% 0.59 B 10% 0.61 C 12% 1.29 If you are a strict risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

B; A.

Which of the following would be most likely to lead to a higher level of interest rates in the economy? - The economy moves from a boom to a recession. - Households start saving a larger percentage of their income. - The Federal Reserve decides to try to stimulate the economy. - The level of inflation begins to decline. - Corporations step up their expansion plans and thus increase their demand for capital.

Corporations step up their expansion plans and thus increase their demand for capital.

If markets are in equilibrium, which of the following conditions will exist? - Each stock's expected return should equal its realized return as seen by the marginal investor. - Each stock's expected return should equal its required return as seen by the marginal investor. - All stocks should have the same expected return as seen by the marginal investor. - The expected and required returns on stocks and bonds should be equal. - All stocks should have the same realized return during the coming year.

Each stock's expected return should equal its required return as seen by the marginal investor.

T/F: According to the basic DCF stock valuation model, the value an investor should assign to a share of stock is dependent on the length of time he or she plans to hold the stock.

False

T/F: The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.

False

T/F: The realized return on a stock portfolio is the weighted average of the expected returns on the stocks in the portfolio.

False

T/F: The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.

False

T/F: The tighter the probability distribution of its expected future returns, the greater the risk of a given investment as measured by its standard deviation.

False

The risk-free rate is 6%; Stock A has a beta of 1.0; Stock B has a beta of 2.0; and the market risk premium, rM - rRF, is positive. Which of the following statements is CORRECT? - If the risk-free rate increases but the market risk premium stays unchanged, Stock B's required return will increase by more than Stock A's. - If the risk-free rate remains constant but the market risk premium increases, Stock A's required return will increase by more than Stock B's. - If Stock B's required return is 11%, then the market risk premium is 5%. - If Stock A's required return is 11%, then the market risk premium is 5%. - Stock B's required rate of return is twice that of Stock A.

If Stock A's required return is 11%, then the market risk premium is 5%.

Assume that a noncallable 10-year T-bond has a 12% annual coupon, while a 15-year noncallable T-bond has an 8% annual coupon. Assume also that the yield curve is flat, and all Treasury securities have a 10% yield to maturity. Which of the following statements is CORRECT? - If the yield to maturity on both bonds remains at 10% over the next year, the price of the 10-year bond would increase, but the price of the 15-year bond would fall. - The 10-year bond would sell at a premium, while the 15-year bond would sell at par. - If interest rates decline, the prices of both bonds would increase, but the 15-year bond would have a larger percentage increase in price. - If interest rates decline, the prices of both bonds would increase, but the 10-year bond would have a larger percentage increase in price. - The 10-year bond would sell at a discount, while the 15-year bond would sell at a premium.

If interest rates decline, the prices of both bonds would increase, but the 15-year bond would have a larger percentage increase in price.

Short Corp just issued bonds that will mature in 10 years, and Long Corp issued bonds that will mature in 20 years. Both bonds promise to pay a semiannual coupon, they are not callable or corvertible, and they are equally liquid. Further assume that the Treasury yield curve is based only on the pure expectations theory. Under these conditions, which of the following statements is CORRECT? - If Long's and Short's bonds have the same default risk, their yields must under all conditions be equal. - If the Treasury yield curve is downward sloping, Long's bonds must under all conditions have the lower yield. - If the yield curve for Treasury securities is flat, Short's bond must under all conditions have the same yield as Long's bonds. - If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds. - If the yield curve for Treasury securities is upward sloping, Long's bonds must under all conditions have a higher yield than Short's bonds.

If the Treasury yield curve is upward sloping and Short has less default risk than Long, then Short's bonds must under all conditions have a lower yield than Long's bonds.

Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant? - The expectations theory cannot hold if inflation is decreasing. - If the pure expectations theory holds, the corporate yield curve must be downward sloping. - If inflation is expected to decline, there can be no maturity risk premium. - If the pure expectations theory holds, the Treasury yield curve must be downward sloping. - If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.

If the pure expectations theory holds, the Treasury yield curve must be downward sloping.

A 10-year bond pays an annual coupon, its YTM is 8%, and it currently trades at a premium. Which of the following statements is CORRECT? - The bond's coupon rate is less than 8%. - If the yield to maturity remains at 8%, then the bond's price will remain constant over the next year. - If the yield to maturity remains at 8%, then the bond's price will decline over the next year. - If the yield to maturity increases, then the bond's price will increase. - The bond's current yield is less than 8%.

If the yield to maturity remains at 8%, then the bond's price will decline over the next year.

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct. - In equilibrium, the expected return on Stock A will be greater than that on B. - Stock A would be a more desirable addition to a portfolio then Stock B. - Stock B would be a more desirable addition to a portfolio than A. - When held in isolation, Stock A has more risk than Stock B. - In equilibrium, the expected return on Stock B will be greater than that on Stock A.

In equilibrium, the expected return on Stock A will be greater than that on B.

Which of the following events would make it more likely that a company would call its outstanding callable bonds? - Market interest rates decline sharply. - Market interest rates rise sharply. - The company's bonds are downgraded. - Inflation increases significantly. - The company's financial situation deteriorates significantly.

Market interest rates decline sharply.

Assume that the current corporate bond yield curve is upward sloping. Under this condition, then we could be sure that - Long-term bonds are a better buy than short-term bonds. - Maturity risk premiums could help to explain the yield curve's upward slope. - The economy is not in a recession. - Inflation is expected to decline in the future. - Long-term interest rates are more volatile than short-term rates.

Maturity risk premiums could help to explain the yield curve's upward slope.

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 B Price $25 $25 Expected growth (constant) 10% 5% Required return 15% 15% - 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. - Currently the two stocks have the same price, but over time Stock B's price will pass that of A. - Stock A's expected dividend at t = 1 is only half that of Stock B. - The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist. - Stock A has a higher dividend yield than Stock B.

Stock A's expected dividend at t = 1 is only half that of Stock B.

For a portfolio of 40 randomly selected stocks, which of the following is most likely to be true? - The beta of the portfolio is larger than the weighted average of the betas of the individual stocks. - The riskiness of the portfolio is greater than the riskiness of each of the stocks if each was held in isolation. - The riskiness of the portfolio is the same as the riskiness of each stock if it was held in isolation. - The beta of the portfolio is equal to the weighted average of the betas of the individual stocks. - The beta of the portfolio is less than the weighted average of the betas of the individual stocks.

The beta of the portfolio is equal to the weighted average of the betas of the individual stocks.

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 Expected constant growth rate 6.0% - The stock's expected dividend yield is 5%. - The stock's expected capital gains yield is 5%. - The stock's expected dividend yield and growth rate are equal. - The stock's expected price 10 years from now is $100.00. - The stock's required return is 10%.

The stock's expected dividend yield and growth rate are equal.

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

The yield on a 10-year bond would be less than that on a 1-year bill.

T/F: A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%.

True

T/F: According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

True

T/F: For a stock to be in equilibrium, two conditions are necessary: (1) The stock's market price must equal its intrinsic value as seen by the marginal investor, and (2) the expected return as seen by the marginal investor must equal his or her required return.

True

T/F: If investors are risk averse and hold only one stock, we can conclude that the required rate of return on a stock whose standard deviation is 0.21 will be greater than the required return on a stock whose standard deviation is 0.10. However, if stocks are held in portfolios, it is possible that the required return could be higher on the stock with the lower standard deviation.

True

T/F: If the pure expectations theory is correct, a downward sloping yield curve indicates that interest rates are expected to decline in the future.

True

T/F: Junk bonds are high-risk, high-yield debt instruments. They are often used to finance leveraged buyouts and mergers, and to provide financing to companies of questionable financial strength.

True

T/F: 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.

True

T/F: The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

True

T/F: The risk that interest rates will increase, and that increase will lead to a decline in the prices of outstanding bonds, is called "interest rate risk," or "price risk."

True

T/F: Bad managerial judgments or unforeseen negative events that happen to a firm are defined as "company-specific," or "unsystematic," events, and their effects on investment risk can in theory be diversified away.

True

T/F: If a stock's expected return as seen by the marginal investor exceeds his or her required return, then the investor will buy the stock until its price has risen enough to bring the expected return down to equal the required return.

True

Which of the following statements is CORRECT? - You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline. - You hold two bonds. One is a 10-year, zero coupon, bond and the other is a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from the current level, the zero coupon bond will experience the smaller percentage decline. - The shorter the time to maturity, the greater the change in the value of a bond in response to a given change in interest rates, other things held constant. - The longer the time to maturity, the smaller the change in the value of a bond in response to a given change in interest rates. - The time to maturity does not affect the change in the value of a bond in response to a given change in interest rates.

You hold two bonds, a 10-year, zero coupon, issue and a 10-year bond that pays a 6% annual coupon. The same market rate, 6%, applies to both bonds. If the market rate rises from its current level, the zero coupon bond will experience the larger percentage decline.

You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B? Years Market Stock A Stock B 1 0.03 0.16 0.05 2 -0.05 0.20 0.05 3 0.01 0.18 0.05 4 -0.10 0.25 0.05 5 0.06 0.14 0.05 - bA = 0; bB = -1. - bA > 0; bB = 1. - bA < -1; bB = 1. - bA > +1; bB = 0. - bA < 0; bB = 0.

bA < 0; bB = 0.

For a stock to be in equilibrium—that is, for there to be no long-term pressure for its price to change—the - expected return must be equal to both the required future return and the past realized return. - expected future return must be less than the most recent past realized return. - required return must equal the realized return in all periods. - past realized return must be equal to the expected return during the same period. - expected future return must be equal to the required return.

expected future return must be equal to the required return.

Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If you require an 9.5% nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

$1,000.00

Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 5.30%, based on semiannual compounding. What is the bond's price?

$1,200.05