Finance Exam #2

What is a growing annuity?

finite number of growing cash flows

What is annuity?

finite series of equal payments that occur at regular intervals

What should the price of a five-year bond be if it has a coupon of 6.5 percent paid annually. Thecurrent market rate for bonds of similar risk is 5.75 percent.

$1031.81

A firm has an expected dividend next year of $1.20 per share, an expected zero growth rate ofdividends, and a required return of 10 percent. What value would be placed on this investment?

$12.00

announced that future dividends will be increasing by 3 percent annually. If you require a return of14.6 percent, how much are you willing to pay to purchase one share of this stock today?

$12.16

A firm has a current EPS of $1.63 and a benchmark PE of 11.7. Earnings are expected to grow 2.6percent annually. What should the stock price be today? In 1 year?

$19.07; $19.57

A firm is planning on paying its first dividend of $2 in three years. After that dividends are expectedto grow at 6% per year indefinitely. The stock's required return is 14%. What is the value of a share today?

$19.24

You have been offered the opportunity to invest in a new apartment building for 10 years. Theexpected cash flows you will receive in exchange for your investment are $3,000 in each of years1-4, $4000 in years 5 and 6, and $2,000 in years 7 -10. You think that the appropriate discount rateis 7%. What is the most you should be willing to invest today?

$20,193.03

XYZ paid a $2.60 dividend last year on EPS of $5.25. The firm's return on equity (ROE) is 7.5%.The required return on stocks of similar risk is 14%. What is the intrinsic value of XYZ stocktoday?

$25.88

John Smith has signed a contract that will pay him $80,000 at the end of each year for the next 6years, plus an additional $100,000 at the end of year 6. If 8% is the appropriate discount rate, whatis the present value of this contract?

$432,847.34

What is the method of comparable

equity valuation relies on similar companies and their operating performance.

Dividends-R-Us, Corp. is paying a dividend of $3 a share today. It is expected that the companywill continue its policy of increasing its dividend 8% a year every year. If you require a 14% rateof return to invest in this company, what is the maximum amount you would be willing to pay fora share of the company's stock?

$54.00

What is the most you'd be willing to spend for the expectation of receiving $10,000 8 years fromnow if your required return is 8%?

$5402.69

What is the value of a share of preferred stock with a $5.40 dividend if investments of similar riskare providing a 7.9% return?

$68.35

Highland Corp., a U.S. company, has a five-year bond whose yield to maturity is 6.5 percent. Thebond has no coupon payments. What is the price of this zero-coupon bond?

$729.88

Tina's Medical Equipment Company is expected to pay a $2.25 common stock dividend next year.The company's policy is to allow its dividend to grow at 5 percent per year indefinitely. What isthe value of the stock if the required rate of return is 8 percent?

$75.00

Your friend Barbara has a bond that she would like to sell to you. The bond matures in 10 years,has a face value of $1,000 and a coupon interest rate of 6% (paid annually). If you know that theyield to maturity on similar bonds is 8%, what is the maximum price you would be willing to payfor the bond?

$865.80

Werden Drilling offers 5.5 percent coupon bonds with semiannual payments and a yield to maturityof 7 percent. The bonds mature in 10 years. What is the market price per bond if the face value is$1,000?

$893.41

You want to purchase some shares of Ojomo Corporation stock but need a rate of return of 14.5percent to compensate for the perceived risk. What is the maximum you are willing to pay per sharefor this stock if the company pays a constant annual dividend of $1.35 per share?

$9.31

Bigbie Corp. issued a twenty five-year bond six years ago with a coupon of 8 percent. The bondpays interest semiannually. If the yield -to maturity on this bond is 9 percent, what is the price ofthe bond?

$909.75

What is the YTM on a bond?

-YTM on a bond is its rate of return if held through its maturity date, based on its current price, coupon payments, face value, and maturity date

Rockwell Industries has a three-year bond outstanding that pays a 7.25 percent coupon and iscurrently priced at $913.88. What is the yield-to-maturity of this bond? Assume annual couponpayments.

10.76%

XYZ Corp's common stock can be purchased today for $32.25. It is expected to pay $4.25 individends next year. You can sell the stock for $38.50 right after receiving the dividend next year.What is the expected return if you purchase the stock today? (Choose the nearest number)

33%

If inflation is 3%, and nominal rates are 8%. What is the real rate of return?

4.85%

The 30-year, 5.5 percent bonds issued by Modern Kitchens pay interest semiannually, mature infour years, and have a $1,000 face value. Currently, the bonds sell for $1,020.66. What is the yieldto maturity?

4.92%

Lampson bonds have a face value of $1,000 and are currently quoted at 867.25. The bonds havecoupon rate of 6.5 percent. What is the current yield on these bonds?

7.49%

A coupon bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years,and is selling today for $915.48. The yield to maturity on this bond is approximately __________

8%

You own a stock that had returns of 10.5 percent, −8.30 percent, 12.90 percent, and 18.15 percentover the past four years. What was the arithmetic average return for this stock? What is the standarddeviation?

8.31%; 11.53%

What is a premium bond?

A bond that sells above its par value. When going rate of interest is below the coupon rate

What is a growing perpetuity?

A growing stream of cash flows that lasts forever

What is a bond?

A long-term debt instrument in which a borrower agrees to make payments of principal and interest, on specific dates, to the holders of the bond.

What is the difference between real and nominal rates?

A nominal rate equals the real interest rate plus a projected rate of inflation. A real rate reflects the true cost of funds to the borrower and the real yield to the lender or to an investor

How can agency costs be mitigated?

Aligning managers' interests with shareholders' interests

Examples of financial institutions

Banks, Credit unions, utilities, government lenders

What is the difference between bond issuers and bond purchasers

Bond Issuers are the entities that raise and borrow money from the people who purchase the bonds (Bondholders)

What is a discount bond?

Discount bonds are bonds that sell for less than the face value

What is discounting?

Discounting is the process of determining the value today of an amount to be received in the future.

Difference between equity and debt capital

Equity reflects ownership and debt capital reflects an obligation

How are municipal bonds different from US treasury bonds?

Federal tax-exempt, more risky

What is the payout ratio?

Fraction of earnings paid out as dividends

What is the yield curve?

In finance, the yield curve is the relation between the interest rate (or cost of borrowing) and the maturity of the debt for a given borrower in a given currency. For example, the current U.S. dollar interest rates paid on U.S. Treasury securities for various maturities are closely watched by many traders.

When the yield to maturity is greater than the coupon rate, the market price of the bond is _______________ the face the face or par value. The bond is said to be trading at a ____________.

Less than; discount

What are the 2 major stock exchanges?

New York Stock Exchange and Nasdaq.

What is credit spread?

The difference between interest rates on loans to households and businesses and interest rates on completely safe assets such as U.S. Treasury bonds.

what is a retention ratio?

The retention ratio is the percentage of net income available to common stockholders that is added to retained earnings.

What does standard deviation measure?

Total Risk

What is an underwriter?

Typically an investment bank with knowledge in the IPO process that gives advice, promotes and facilitated the sale of new shares

What is a agency cost?

Value lost from agency problems or from the cost of mitigating agency problems

What is a secondary market

Where lenders buy & sell loans from one another

What is the agency problem with equity ownership?

a conflict when the agents entrusted with the responsibility of looking after the interests of the principals choose to use the power or authority for their benefits and in corporate finance

What is the structure of interest rates?

a good measure of future economic growth expectations

What is a dealer?

a more imprecise term than distributor that can mean the same as distributor, retailer, wholesaler, and so forth

What is an issuer?

a person or company that supplies or distributes something.

What is a broker?

a person who is paid to buy and sell for someone else

what is capital gain

a profit from the sale of property or of an investment.

What is the dividend discount model?

a quantitative method used for predicting the price of a company's stock based on the theory

what is a dividend yield

a stock's expected cash dividend divided by its current price

What is a perpetuity?

an infinite series of equal payments

What is common stock?

shares entitling their holder to dividends that vary in amount and may even be missed, depending on the fortunes of the company.

What is preferred stock?

stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends.

Examples of financial assets

stocks and bonds

What is face value?

the amount the bond issuer must pay back at the time of maturity

What are the limitations of the dividend discount model?

the difficulty of accurate projections, the fact that it does not factor in buybacks, and its fundamental assumption of income only from dividends.

What is the yield to maturity?

the interest rate that equates the present value of cash flow payments received from a debt instrument with its value today

What is a capital market?

the market in which longer-term debt and equity instruments are traded

What is a primary market

the market in which new securities are originally sold to investors

what is the current yield?

the measure of the proceeds the bondholder receives for making a loan

What is return?

the money an investor receives above and beyond the sum of money initially invested

What is term structure?

the relationship between time to maturity and yields, all else equal

What is a coupon?

the stated interest payment made on a bond

What is maturity?

the time at which payment to a bondholder is due

What is a money market?

the trade in short-term loans between banks and other financial institutions.