Test #2

Chapter 9 #6: Lee Hong Imports paid a $1.00 per share annual dividend last week. Dividends are expected to increase by 5% annually. What is one share of this stock worth to you today if the appropriate discount rate is 14%?

$11.67

Chapter 9 #4: Healthy Foods just paid its annual dividend of $1.45 a share. The firm recently announced that all future dividends will be increased by 2.8 percent annually. What is one share of this stock worth to you if you require a 14 percent rate of return?

$13.31

Chapter 9 #8: Nofal Corporation will pay a $4.45 per share dividend next year. The company pledges to increase its dividend by 6 percent per year, indefinitely. Required: If you require a return of 9 percent on your investment, how much will you pay for the company's stock today?

$148.33 (on excel)

Chapter 9 #5: How much are you willing to pay for one share of stock if the company just paid an $.80 annual dividend, the dividends increase by 4% annually and you require an 8% rate of return?

$20.80

Chapter 4 #13 You borrow $149,000 to buy a house. The mortgage rate is 7.5% and the loan period is 30 years. Payments are made monthly. If you pay for the house according to the loan agreement, how much total interest will you pay?

$226,059

Chapter 4 #12: If a student borrows $20,000 to start a business as a 5 year, 10% loan, assume annual payments, the decrease in principal in year 1 is

$3,275.95

Chapter 9 #16: Metallica Bearings, Inc., is a young start-up company. No dividends will be paid on the stock over the next ten years, because the firm needs to plow back its earnings to fuel growth. The company will then pay a dividend of $14.75 per share 11 years from today and will increase the dividend by 5.25 percent per year thereafter. Required: If the required return on this stock is 13.25 percent, what is the current share price? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

$53.13 (on excel)

Chapter 9 #11: Antiques R Us is a mature manufacturing firm. The company just paid a dividend of $8.40, but management expects to reduce the payout by 3 percent per year, indefinitely. If you require a return of 12 percent on this stock, what will you pay for a share today? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16))

$54.32 (on excel)

Chapter 9 #12: 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 $10 per share dividend in 10 years and will increase the dividend by 5 percent per year thereafter. If the required return on this stock is 11.5 percent, what is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

$57.76 (on excel)

Chapter 9 #13 Lohn Corporation is expected to pay the following dividends over the next four years: $14, $10, $9, and $3.50. Afterwards, the company pledges to maintain a constant 6 percent growth rate in dividends forever. If the required return on the stock is 10 percent, what is the current share price? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

$93.49 (on excel)

Chapter 9 #14: Yang Corp. is growing quickly. Dividends are expected to grow at a rate of 32 percent for the next three years, with the growth rate falling off to a constant 7.2 percent thereafter. Required: If the required return is 14 percent and the company just paid a $3.35 dividend, what is the current share price? (Hint: Calculate the first four dividends.) (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

$95.56 (on excel)

Chapter 8 #2: Treasury bills are currently paying 5 percent and the inflation rate is 3.20 percent. What is the approximate real rate of interest?

1.80%

Chapter 9 #9: White Wedding Corporation will pay a $3.26 per share dividend next year. The company pledges to increase its dividend by 6.5 percent per year, indefinitely. If you require a return of 15 percent on your investment, how much will you pay for the company's stock today?

38.35 (on excel)

Chapter 9 #10Ayden, Inc., has an issue of preferred stock outstanding that pays a $3.75 dividend every year, in perpetuity. This issue currently sells for $92 per share. What is the required return?

4.08% (on excel)

Which one of the following bonds is the least sensitive to changes in market interest rates?

8 percent annual coupon, 4 year

The lowest rating a bond can receive from Moody's and still be classified as an investment-quality bond is: A)BB B)BBB. C)B.

B)BBB.

Chapter 8 #6: Lycan, Inc., has 7.2 percent coupon bonds on the market that have 10 years left to maturity. The bonds make annual payments. Required: If the YTM on these bonds is 9.2 percent, what is the current bond price?

Current bond price : $872.77

Chapter 8 #10: 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, 10 years to maturity, and a coupon rate of 6.4 percent paid annually. If the yield to maturity is 7.5 percent, what is the current price of the bond?

Current price : 924.50

Chapter 8 #3 Bond P is a premium bond with a 9 percent coupon. Bond D is a 4 percent coupon bond currently selling at a discount. Both bonds make annual payments, have a YTM of 6 percent, and have eight years to maturity. a) What is the current yield for Bond P and Bond D? b) If interest rates remain unchanged, what is the expected capital gains yield over the next year for Bond P and Bond D?

Current yield: bond P - 7.59% bond d - 4.57% Capital gains yield: Bond p - -1.59% Bond d - 1.43%

Chapter 8 #7 Bond P is a premium bond with a coupon rate of 9.9 percent. Bond D is a discount bond with a coupon rate of 5.9 percent. Both bonds make annual payments, have a YTM of 7.9 percent, and have fourteen years to maturity. Requirement 1: What is the current yield for bond P? Requirement 2: What is the current yield for bond D? Requirement 3: If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond P? Requirement 4: If interest rates remain unchanged, what is the expected capital gains yield over the next year for bond D?

Requirement 1: 8.49% Requirement 2: 7.07% Requirement 3: -.59% Requirement 4: .83%

capital gains yield

The rate at which a stock's price is expected to appreciate (or depreciate)

Chapter 9 #7: The next dividend payment by Wyatt, Inc., will be $2.65 per share. The dividends are anticipated to maintain a growth rate of 6.50 percent, forever. Assume the stock currently sells for $48.90 per share. a)What is the dividend yield? b)What is the expected capital gains yield?

a)5.42 b)6.50 (work on excel)

Chapter 8 #12: Microhard has issued a bond with the following characteristics:Par: $1,000Time to maturity: 9 yearsCoupon rate: 12 percentSemiannual payments Calculate the price of this bond if the YTM is a. 12% b. 14% c.10%

a. 1000 b. 899.41 c. 1116.9

Chapter 4 #20: Wesson Metals has an outstanding loan that calls for equal annual payments of $9,768.46 over the life of the loan. The original loan amount was $50,000 at an APR of 8.5 percent. How much of the second loan payment is interest? a)$3,525.61 b)$3,780.93 c)$4,250.00 d)$5,409.16 e)$5,987.53

b)$3,780.93

Chapter 8 #9: Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest annually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the current yield? a)5.39 percent b)5.43 percent c)5.50 percent d)5.61 percent e)5.77 percent

b)5.43 percent

The 6 percent coupon bonds of Precision Engineering are selling for 98 percent of par value. The bonds mature in eight years and pay interest semiannually. These bonds have current yield of _____ percent, a yield to maturity of _____ percent, and an effective annual yield (EAR) of _____ percent. a)6.12; 6.32; 6.36 b)6.12; 6.32; 6.42 c)6.12; 6.36; 6.42 d)6.23; 6.32; 6.36 e)6.23; 6.36; 6.42

b)6.12; 6.32; 6.42

Changes in interest rates affect bond prices. Which one of the following compensates bond investors for this risk? a)Taxability risk premium b)Default risk premium c)Interest rate risk premium d)Real rate of return e)Bond premium

c)Interest rate risk premium

assume that you are using the dividend growth model to value stocks. If you expect the market rate to return to increase across the board on all equity securities, then you should also expect the: a)market values of all stocks to increase, all else constant. b)market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate. c)market values of all stocks to decrease, all else constant. d)stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price. e)dividend growth rates to increase to offset this change.

c)market values of all stocks to decrease, all else constant.

Chapter 8 #8: A $1,000 face value bond currently has a yield to maturity of 6.69 percent. The bond matures in three years and pays interest annually. The coupon rate is 7 percent. What is the current price of this bond? a)$948.01 b)$949.60 c)$1,005.26 d)$1,008.18 e)$1,010.13

d)$1,008.18

Which one of the following has the highest effective annual rate? a)6 percent compounded annually b)6 percent compounded semiannually c)6 percent compounded quarterly d)6 percent compounded monthly e)All the other answers have the same effective annual rate.

d)6 percent compounded monthly

Which one of the following bonds is the least sensitive to changes in market interest rates? a)Zero coupon, 10 year b)6 percent annual coupon, 10 year c)Zero coupon, 4 year d)8 percent annual coupon, 4 year e)6 percent annual coupon, 4 year

d)8 percent annual coupon, 4 year

Which of the following combinations is ensured to decrease the interest rate sensitivity of a bond? a)Increase in both the time to maturity and the coupon rate b)Increase in the time to maturity and a decrease in the coupon rate c)Decrease in both the time to maturity and the coupon rate d)Decrease in the time to maturity and an increase in the coupon rate e)Decrease in the time to maturity and an increase in the face value

d)Decrease in the time to maturity and an increase in the coupon rate

Chapter 4 #19: Julie is borrowing $12,800 to purchase a car. The loan terms are 36 months at 7.5 percent interest. How much interest will she pay on this loan if she pays the loan as agreed? Round your answer to the nearest whole dollar. a)$1,338 b)$1,414 c)$1,459 d)$1,506 e)$1,534

e)$1,534

Which one of the following represents additional compensation provided to bondholders to offset the possibility that the bond issuer might not pay the interest and/or principal payments as expected? a)Interest rate risk premium b)Inflation premium c)Liquidity premium d)Taxability premium e)Default risk premium

e)Default risk premium

All else constant, a bond will sell at _____ when the yield to maturity is _____ the coupon rate. a)a premium; higher than b)a premium; equal to c)at par; higher than d)at par; less than e)a discount; higher than

e)a discount; higher than

A credit card has an annual percentage rate of 12.9 percent and charges interest monthly. The effective annual rate on this account: a)will be less than 12.9 percent b)can either be less than or equal to 12.9 percent c)is 12.9 percent d)can either be greater than or equal to 12.9 percent e)will be greater than 12.9 percent.

e)will be greater than 12.9 percent.

Dividend Yield

the dividend per share divided by the current stock price