Fin 351 exam: ch 7,8 9

Westco Company issued 13-year bonds a year ago at a coupon rate of 8.5 percent. The bonds make semiannual payments and have a par value of $1,000. If the YTM on these bonds is 6.8 percent, what is the current bond price in dollars?

$1,137.94 n=24, I=3.4%, PMT=42.5, FV=1,000 PMT= .085x1000/2= 42.5

You find a zero coupon bond with a par value of $10,000 and 18 years to maturity. The yield to maturity on this bond is 5 percent. Assume semiannual compounding periods. What is the dollar price of the bond?

$4110.94 n=36, fv=10,000, I=2.5%, PV=?, PMT=0 (bc solving for PV) or PV=Face value / (1+semi-annual ytm)^Number of semi-annual period= 10,000/ (1+0.025)^36= 4110.94

Union Local School District has a bond outstanding with a coupon rate of 3.8 percent paid semiannually and 18 years to maturit. The yield to maturity on this bond is 2.7 percent, and the bond has a par value of $5,000. What is the dollar price of the bond?

$5780.01 n=36, I= 1.35%, PMT=95, FV=5000 PMT= .038x1000/2= 95

decision rule for payback period

. If payback period less than <X, then accept the project. Otherwise, reject the project.

The next dividend payment by Im, Incorporated, will be $1.40 per share. The dividends are anticipated to maintain a growth rate of 6 percent forever. If the stock currently sells for $25 per share, what is the required return?

11.60% Required Return= (dividend/ current stock)+ GR= (1.40/25)+0.06= 0.11600= 11.60%

The common stock of Salazar Insurance pays a constant annual dividend of $4.80 per share. What is one share of this stock worth at a discount rate of 13.3 percent? $40.89 $65.26 $36.09 $48.00 $57.60

36.09

Fegley, Incorporated, has an issue of preferred stock outstanding that pays a $3.95 dividend every year in perpetuity. If this issue currently sells for $94 per share, what is the required return?

4.20% required return= dividend/current price 3.95/94= 0.04202=4.20%

Five Star Corporation will pay a dividend of $2.90 per share next year. The company pledges to increase its dividend by 4 percent per year indefinitely. If you require a return of 11 percent on your investment, how much will you pay for the company's stock today?

41.43 current price= DPS/(required return- growth rate) = 2.90/(0.11-0.04)= 41.42857

McCabe Corporation is expected to pay the following dividends over the next four years: $11, $7, $6, and $3.50. Afterward, the company pledges to maintain a constant 4 percent growth rate in dividends forever. If the required return on the stock is 14 percent, what is the current share price?

42.71 1- find price at T4= price in yr 4 x (1+GR) / (RR-GR) = 3.5 x (1+.04) / (.14-.04)=36.40 2- find current price= Dividend1/ (1+RR)^1+ dividend 2/ (1+RR)^2...+ t4 price(1.14)^4.= 11/(1.14)+7/(1.14)^2+6/(1.14)^3+3.50/(1.14)^4+ 36.40/(1.14)^4= 42.70923 **hint- put ^numbers on 1.14- put in calc as fractions

Yan Yan Corporation has a $5,000 par value bond outstanding with a coupon rate of 4.6 percent paid semiannually and 21 years to maturity. The yield to maturity on this bond is 4.1 percent. What is the dollar price of the bond?

5,349.73 n=42, I= 2.05%, FV= 1,000, PMT=115 PMT= .046 x 5,000/2= 1115

Ashburn Corporation issued 15-year bonds two years ago at a coupon rate of 8.2 percent. The bonds make semiannual payments. If these bonds currently sell for 103 percent of par value, what is the YTM?

7.83% Fv=1,000, N=26, PMT=41, PV= -1030 PMT=8.2%/2= 4.1%. PMT= 0.041 x 1,000= 41 PV= 103% x 1,000= 1030 ~plug in and get 3.91%, but we need to multiply by 2 for semi annual factor.

IRR decision rule

Accept project if IRR > cost of capital ─Intuitively, think of the IRR as the return from the project. ─Then the project should be accepted if the return is greater than the required rate of return (cost of capital)

Which one of the following relationships is stated correctly? ~The coupon rate exceeds the current yield when a bond sells at a discount. ~The call price must equal the par value. ~An increase in market rates increases the market price of a bond. ~Decreasing the time to maturity increases the price of a discount bond, all else constant. ~Increasing the coupon rate decreases the current yield, all else constant.

Decreasing the time to maturity increases the price of a discount bond, all else constant.

The profitability index is most closely related to which one of the following? Multiple Choice Payback Discounted payback Average accounting return Net present value Modified internal rate of return

Net present value

Which one of the following statements is correct? Stocks can only be assigned one dividend growth rate. Preferred stocks generally have variable growth rates. Dividend growth rates must be either zero or positive. All stocks can be valued using the dividend discount models. Stocks can have negative growth rates.

Stocks can have negative growth rates.

Assume the current market price of a bond exceeds its par value. Which one of these equations applies? Market value < Face value Yield to maturity = Current yield Market value = Face value Current yield > Coupon rate Yield to maturity < Coupon rate

Yield to maturity < Coupon rate

A bond that has only one payment, which occurs at maturity, defines which one of these types of bonds? Debenture Callable Floating-rate Junk Zero coupon

Zero coupon

Treasury bills are currently paying 6 percent and the inflation rate is 3.3 percent. a. What is the approximate real rate of interest? b.What is the exact real rate?

a.) 2.70% b.)2.61%

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: Multiple Choice net present value period. internal return period. payback period. discounted profitability period. discounted payback period.

discounted payback period.

A forward PE is based on: the last four quarterly dividend payments. the last dividend payment multiplied by 2. historical earnings. estimated future earnings. industry averages.

estimated future earnings.

Which one of the following represents the capital gains yield as used in the dividend growth model? D1 D1/P0 P0 g g/P0

g

Net present value decision rule

if the NPV is positive, accept the project ─A positive NPV means that the project is expected to add value to the firm and will therefore increase the wealth of the owners. ─Since our goal is to increase owner wealth, NPV is a direct measure of how well this project will meet our goal.

Red, Incorporated, Yellow Corporation, and Blue Company each will pay a dividend of $3.10 next year. The growth rate in dividends for all three companies is 4 percent. The required return for each company's stock is 7 percent, 10 percent, and 13 percent, respectively. What is the stock price for each company?

red: 103.33 yellow: 51.67 blue; 34.44 current price= DPS/(required return- growth rate) R: 3.10/(.07-.04)= 103.3333 Y: 3.10/(.10-.04)= 51.66667 B: 3.10/(.13-.04)= 34.44444

If a project has a net present value equal to zero, then: Multiple Choice ~the total of the cash inflows must equal the initial cost of the project. ~the project earns a return exactly equal to the discount rate. ~a decrease in the project's initial cost will cause the project to have a negative NPV. ~any delay in receiving the projected cash inflows will cause the project to have a positive NPV. ~the project's PI must also be equal to zero.

the project earns a return exactly equal to the discount rate.

An investment project has annual cash inflows of $4,400, $3,900, $5,100, and $4,300, for the next four years, respectively. The discount rate is 14 percent. a. What is the discounted payback period for these cash flows if the initial cost is $5,700? b.What is the discounted payback period for these cash flows if the initial cost is $7,800? c.What is the discounted payback period for these cash flows if the initial cost is $10,800?

)a) 1.61 b)2.27 c)3.20 a) Value today of Year 1 cash flow = $4,400 / 1.14 = $3,859.65 Value today of Year 2 cash flow = $3,900 / 1.142= $3,000.92 Value today of Year 3 cash flow = $5,100 / 1.143= $3,442.35 Value today of Year 4 cash flow = $4,300 / 1.144= $2,545.95 Discounted payback = 1 + ($5,700 - $3,859.65) / $3,000.92 b) Discounted payback = 2 + ($7,800- $3,859.65- $3,000.92) / $3,442.35 c) Discounted payback = 3 + ($10,800-$3,859.65- $3,000.92-$3,442.35) / $2,545.95

Caccamise Company is expected to maintain a constant 6.2 percent growth rate in its dividends indefinitely. If the company has a dividend yield of 8 percent, what is the required return on the company's stock?

14.20% In percent form, add. : .08+0.062=.14200= 14.20%

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: YearCash Flow 0−$ 27,000 1-11,000' 2-14,000 3-10,000 If the required return is 16 percent, what is the IRR for this project? Should the firm accept the project? Yes No

14.38% no IRR(-27000,{11000, 14000,10000})

The Michner Corporation is trying to choose between the following two mutually exclusive design projects: YearCash Flow (I)Cash Flow (II) 0−$ 58,000−$ 18,600 1-25,900- 10,000 2-25,900-10,000 3-25,900-10,000 a-1. If the required return is 10 percent, what is the profitability index for both projects? a-2. If the company applies the profitability index decision rule, which project should the firm accept? Project Project Il b-1. What is the NPV for both projects?

A-1= 1= 1.111 2=1.337 A-2= 2 B.a= 6410.467 b= 6268.520 1 ****KNOW- profitability index= NPV + initial investment/initial investment

Kara, Incorporated, imposes a payback cutoff of three years for its international investment projects. YearCash Flow (A)Cash Flow (B) 0−63,000−73,000 1-24,500-16,500 2-31,000-19,500 3-22,500-29,000 4-9,500-233,000 What is the payback period for both projects? Which project should the company accept? Project A Project B

A.2.33 B.3.03 project A 1. find cumulative probabilities 0) -63000 -63000 1) 24500 -38500 2) 31000 -7500 3) 22500 15000 4) 9500 24500 2. use cum prob from year before cutoff year, which is 3, so use 2 of 7500 4. plug into "P=# of years before recovery( last year before recovery/ CF in payback year) (yr without negative cum prob) so, 2 x (7500/22500)= 2.33 and 0- ($73,000)- ($73,000) 1- $16,500- ($56,500) 2- $19,500 - ($37,000) 3-$29,000- ($8,000) 4 - $233,000- $225,000 PP= 3 x (8000/233000)= 3.03

Which one of the following applies to a premium bond? Yield to maturity > Current yield > Coupon rate Coupon rate = Current yield = Yield to maturity Coupon rate > Yield to maturity > Current yield Coupon rate < Yield to maturity < Current yield Coupon rate > Current yield > Yield to maturity

Coupon rate > Current yield > Yield to maturity

Which one of these statements related to preferred stock is correct? ~Preferred shareholders normally receive one vote per share of stock owned. ~Preferred shareholders determine the outcome of any election that involves a proxy fight. ~Preferred shareholders are considered to be the residual owners of a corporation. ~Preferred stock normally has a stated liquidating value of $1,000 per share. ~Cumulative preferred shares are more valuable than comparable noncumulative shares.

Cumulative preferred shares are more valuable than comparable noncumulative shares.

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 Taxability Liquidity Inflation Interest rate risk

Default risk

Which one of the following applies to the dividend growth model? ~An individual stock has the same value to every investor. ~Even if the dividend amount and growth rate remain constant, the value of a stock can vary. ~Zero-growth stocks have no market value. ~Stocks that pay the same annual dividend will have equal market values. ~The dividend growth rate is inversely related to a stock's market price.

Even if the dividend amount and growth rate remain constant, the value of a stock can vary.

Which one of the following will decrease the net present value of a project? Multiple Choice ~Increasing the value of each of the project's discounted cash inflows ~Moving each cash inflow forward one time period, such as from Year 3 to Year 2 ~Decreasing the required discount rate ~Increasing the project's initial cost at Time 0 ~Increasing the amount of the final cash inflow

Increasing the project's initial cost at Time 0

An investment costs $239,000 and has projected cash flows of $123,900, $78,400, and −$22,300 for Years 1 to 3, respectively. The required rate of return is 15.5 percent. Based solely on the internal rate of return rule, should you accept the project? Why or why not? Multiple Choice Yes; The IRR exceeds the required return. Yes; The IRR is less than the required return. No; The IRR is less than the required return. No; The IRR exceeds the required return. You should not apply the IRR rule in this case.

No; The IRR is less than the required return.

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule? Multiple Choice Project X only Project Z only Both X and Z Neither X nor Z Either, but not both projects

Project X only

Bond J has a coupon rate of 3 percent and Bond K has a coupon rate of 9 percent. Both bonds have 17 years to maturity, make semiannual payments, and have a YTM of 6 percent. a. If interest rates suddenly rise by 2 percent, what is the percentage price change of these bonds? b.What if rates suddenly fall by 2 percent instead?

a.) J: -20.98% k: -17.08% b.) J: 28.47% k: 22.44%

Williams Software has 12 percent coupon bonds on the market with 16 years to maturity. The bonds make semiannual payments and currently sell for 108.8 percent of par. a. What is the current yield on the bonds? b.What is the YTM? c.What is the effective annual yield?

a. 11.03% b. 10.84% c. 11.13% a. annual coupon payment/price ACP= .12x 1,000= 120 price= 1.088 x 1,000= 1088 120/ 1088= 11.03% b. YTM= ?, N=32, FV=1,000, PV=1088, PMT=60 PV=1.088 x 1,000= 1088 PMT= .12 x 1,000/2 I=5.42%, x 2= 10.84% C. EAR= (apr/m+1)^m-1

The Dahlia Flower Company has earnings of $2.10 per share. The benchmark PE for the company is 10. a. What stock price would you consider appropriate? b. What if the benchmark PE were 13?

a. 21.00 b. 27.30 a= 2.10 x 10- 21 b= 2.10 x 13= 27.30

A firm evaluates all of its projects by applying the NPV decision rule. A project under consideration has the following cash flows: YearCash Flow 0−$ 27,900 1- 11,900 2-14,900 3-10,900 a.) What is the NPV for the project if the required return is 10 percent? At a required return of 10 percent, should the firm accept this project? Yes No b.) What is the NPV for the project if the required return is 26 percent? At a required return of 26 percent, should the firm accept this project? Yes No

a. 34.21.56 yes B.-3621.34 no NPV(10,-27900,L2)

Bonds issued by the U.S. government: ~are considered to be free of interest rate risk. ~generally have higher coupons than comparable bonds issued by a corporation. ~are considered to be free of default risk. ~pay interest that is exempt from federal income taxes. ~are called "munis."

are considered to be free of default risk.

Mutually exclusive projects are best defined as competing projects that: Multiple Choice would need to commence on the same day. have the same initial start-up costs. both require the total use of the same limited resource. both have negative cash outflows at time zero. have the same life span.

both require the total use of the same limited resource.

he RLX Company just paid a dividend of $1.85 per share on its stock. The dividends are expected to grow at a constant rate of 4 percent per year indefinitely. Investors require a return of 12 percent on the company's stock. a.What is the current stock price? b.What will the stock price be in 3 years? c.What will the stock price be in 14 years?

current: 24.05 3: 27.05 14: 41.65 current: p= Dividend x (1+GR) / (RR-GR) = 1.85 x (1+.04) / (.12-.04)= 24.05 3: first: find expected dividend for yr 3, second: find price yr 3 expected dividend= dividend x (1+GR)^1+yr finding= 1.85 x (1+.04)^1+3= 2.16424 price yr 3= dividend / (RR-GR)= 2.16424 / (.12-.04)= 27.053 14: dividend price: 1.85 x (1+.04)^14+1= 3.33175 price in yr 14= 3.33175 / (.12-.04)= 41.64688

Supernormal growth is a growth rate that: is both positive and follows a year or more of negative growth. exceeds a firm's previous year's rate of growth. is generally constant for an infinite period of time. is unsustainable over the long term. applies to a single, abnormal year.

is unsustainable over the long term.

The current yield is defined as the annual interest on a bond divided by the: coupon rate. face value. market price. call price. par value.

market price.

Municipal bonds: are totally risk free. generally have higher coupon rates than corporate bonds. pay interest that is free from federal taxation. are rarely callable. are free of default risk.

pay interest that is free from federal taxation.

The length of time a firm must wait to recoup the money it has invested in a project is called the: Multiple Choice internal return period. payback period. profitability period. discounted cash period. valuation period.

payback period.

National Trucking has paid an annual dividend of $1 per share on its common stock for the past 15 years and is expected to continue paying a dollar per share long into the future. Given this, one share of the firm's stock is: ~basically worthless as it offers no growth potential. ~equal in value to the present value of $1 paid one year from today. ~priced the same as a $1 perpetuity. ~valued at an assumed growth rate of 1 percent. ~worth $1 per share in the current market.

priced the same as a $1 perpetuity.

The present value of an investment's future cash flows divided by the initial cost of the investment is called the: Multiple Choice net present value. internal rate of return. average accounting return. profitability index. profile period.

profitability index.

Interest rates that include an inflation premium are referred to as: annual percentage rates. stripped rates. effective annual rates. real rates. nominal rates.

real rates.

A project has a net present value of zero. Given this information: Multiple Choice the project has a zero percent rate of return. the project requires no initial cash investment. the project has no cash flows. the summation of all of the project's cash flows is zero. the project's cash inflows equal its cash outflows in current dollar terms.

the project's cash inflows equal its cash outflows in current dollar terms.

The bond market requires a return of 6.2 percent on the 15-year bonds issued by Mingwei Manufacturing. The 6.2 percent is referred to as the: coupon rate. face rate. call rate. yield to maturity. current yield.

yield to maturity

profitability index rule

~Accept project if Profitability Index > 1 ~A profitability index of 1.1 implies that for every $1 of investment, we create an additional $0.10 in value ─Note that whenever the NPV>0, PI>1

Answer this question based on the dividend growth model. If you expect the market rate of return to increase across the board on all equity securities, then you should also expect: ~an increase in all stock values. ~all stock values to remain constant. ~a decrease in all stock values. ~dividend-paying stocks to maintain a constant price while non-dividend paying stocks decrease in value. ~dividend-paying stocks to increase in price while non-dividend paying stocks remain constant in value.

~a decrease in all stock values.