FINA 392 - Quiz 3
The rate of return required by investors in the market for owning a bond is called the:
Yield to maturity.
The coupon rate of a bond equals:
a percentage of its face value
Which of the following is correct for a bond currently selling at a premium to par?
Its current yield is lower than its coupon rate
The value of common stock will likely decrease if:
The discount rate increases
The stock of MTY Golf World currently sells for $89.92 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12%, what will the stock sell for one year from now?
$ 95.32
J&J Manufacturing just issued a bond with a $1,000 face value and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons, and the yield to maturity is 7.5%, what will the bond sell for?
$1,050.97
Endicott Enterprises, Inc. has issued thirty-year semiannual coupon bonds with a face value of $1,000. If the annual coupon rate is 14% and the current yield to maturity is 8%, what is the firm's current price per bond?
$1,678.70
Biogenetics, Inc. plans to retain and reinvest all of their earnings for the next 30 years. Beginning in year 31, the firm will begin to pay a $30 per share dividend. The dividend will not subsequently change. Given a required return of 18%, what should the stock sell for today?
$1.16
Mullineaux Co. issued 11-year bonds one year ago at a coupon rate of 8.6 percent. The bonds make semiannual payments. If the YTM on these bonds is 7.5 percent, what is the current bond price?
$1076.43
Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell th stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?
$118.35
Suppose that sales and profits of Oly Enterprises are growing at a rate of 30% per year. At the end of four years, the growth rate will drop to a steady 6%. At the end of year 5, Oly will issue its first dividend in the amount of $3 per share. If the required return is 15%, what is the value of a share of stock? Assume dividends grow at the same rate as earnings after year 4.
$19.06
How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity, only to see market interest rates increase to 12% 1 year later? (Hint: How much would the price change from a year earlier?)
$19.48
Boomer Products, Inc. manufactures "no-inhale" cigarettes. As their target customers age and pass on, sales of the product are expected to decline. Thus, demographics suggest that earnings and dividends will decline at a rate of 5% annually forever. The firm just paid a dividend of $4; given a required rate of return is 10%, the price of the stock in 2 years will be?
$22.86
Metallica Bearings, Inc. is a young start-up company. No dividends will be paid on the stock over the next nine years, because the first needs to plow back its earnings to fuel growth. The company will pay a $7 per share dividend in 10 years and will increase the dividend by 6 percent per year, thereafter. If the required return on this stock is 14 percent, what is the current share price?
$26.91
What would you pay today for a stock that is expected to make a $2 dividend in one year if the expected dividend growth rate is 5% forever and you require a 12% return on your investment?
$28.57
Suppose you know that a company's stock currently sells for $60 per share and the required return on the stock is 14 percent. You also know that the total return on the stock is evenly divided between a capital gain yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?
$3.93
The most recent paid dividend (Div¬0¬) is $1.80, the growth rate (g) is 6%, and the required rate of return (r) is 12%. What is the stock price according to the constant growth dividend model?
$31.80
Corn, In., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $2 per share for each of the next four years, and then never pay another dividend. If you require an 11 percent return on the company's stock, how much will you pay for a share today?
$33.32
Corn, Inc., has an odd dividend policy. The company has just paid a dividend of $6 per share and has announced that it will increase the dividend by $2 per share for each of the next four years, and then never pay another dividend. If you require an 11 percent return on the company's stock, how much will you pay for a share today? Round your answer to the nearest dollar. (NOTE: do NOT include the dollar sign in your answer)
$33.5
Antiques R Us is a mature manufacturing firm. The company just paid a $9 dividend, but management expects to reduce the payout by 8 percent per year, indefinitely. If you require a 14 percent return on this stock, what will you pay for a share today?
$37.64
You want to invest in a stock that pays $6.00 annual cash dividends for the next five years. At the end of the five years, you will sell the stock for $30.00. If you want to earn 10% on this investment, what is a fair price for this stock if you buy it today?
$41.37
Sedgwick, Inc. has a 12% required rate of return. It does not expect to initiate dividends for fifteen years, at which time it will pay $2.00 per share in dividends. At that time, Sedgwick expects its dividends to grow at 7% forever. If you currently own the stock and will sell it following the first dividend, what is your estimated selling price at T15?
$42.80
Cannons Corporation will pay a $4.00 per share dividend next year. The company pledges to increase its dividend by 4 percent per year, indefinitely. If you require a 13 percent return on your investment, how much will you pay for the company's stock today?
$44.44
Kiessling Corp. pays a constant $9 dividend on its stock. The company will maintain this dividend for the next eight years and will then cease paying dividends forever. If the required return on this stock is 11 percent, what is the current share price?
$46.32
As a financial analyst, yolare estimating the value of a stock, ABC. You expect the stock do not pay any dividend for the next five years and then start to pay $10 dividend per year for the next 20 years. After that, the stock is expected to stop paying dividends forever and the company's assets will be worth nothing. If the required rate of return of the stock is 10%, What is Your best estimate of the value of the stock today
$52.86
The last dividend paid by the Brim Company was $3.50. Brim's dividend growth rate is expected to be a constant 20% for two years, after which dividends are expected to grow at a rate of 5% forever. Brim's required rate of return on common stock is 13% At what price should Brim shares sell for currently?
$59.47
Kwak Motors, Inc. pays a $1.77 preferred dividend every quarter and will maintain this policy forever. What price should you pay for one share of preferred stock if you want an annual return of 9.25% on your investment?
$76.54
Five years ago Thompson Tarps, Inc. issued twenty-five-year 10% annual coupon bonds with a $1,000 face value. Since then, interest rates in general have risen, and the yield to maturity on the Thompson Tarps bonds is now 12%. Given this information, what is the price today for a Thompson Tarps bond?
$850.61
Randy Harris is contemplating whether to add a bond to his portfolio. It is a semiannual, 6.5% bond with 7 ears to maturity. He is concerned about the change in value due to interest rate fluctuations and would like to know the bond's value given Various scenarios. At a yield to maturity of 7.5% or 5.0%, the bond's fair value is closest to:
$946.30 at 7.5% or $1087.68 at 5%
The stock of MTY Golf World currently sells for $89.92 per share. The firm has a constant dividend growth rate of 6% and just paid a dividend of $5.09. If the required rate of return is 12% what will the stock sell for one year from now?
$95.32
If dividends on a common stock are expected to grow at a constant rate forever, and if you are told the most recent dividend paid, the dividend growth rate, and the appropriate discount rate today, you can calculate ______________. I.)the price of the stock today; II.)the dividend that is expected to be paid ten years from now; III.)the expected stock price five years from now
. I, II, and III
If the dividend yield is 5% based on the current price of $25, what will the year 4 dividend be if dividends grow at a constant 6%? (round to the nearest cent)
1.49
Assume that stock ABC will pay a dividend of $1.25 next year (or Year 1), which will then grow at a constant rate of 6 percent every year after that. The stock is currently selling at $31.25. Given the information What is the required rate Of return on the stock?
10%
A coupon bond pays coupon annually, has a par value of $1,000, matures in 4 years, has a coupon rate of 10%, and a yield to maturity of 12%. The current yield on this bond is
10.65
The current quarterly dividend on the common shares of your company is $0.30, the risk-adjusted annual discount rate is 16% and the management of the firm believes that the dividends will increase by 1.2% per quarter. What is the current share price of the company?
10.84
Interest rates have fallen over the seven years since a $1,000 par, 10-year bond was issued with a coupon of 7%. What is the present value of this bond if the required rate of return is currently 4.5%? (For simplicity, assume annual coupons)
1068.72
Assume that a corporate bond has a par value of $1.000 and 15 years until it matures. Also assume that investors require an annual rate of return of 12% (compounded semi-annually), that coupon interest is paid semi-annually, and that the current price for this bond is $931.18. What is the annual coupon rate on this bond?
11%
Shocking Co. is expected to maintain a constant 7 percent growth rate in its dividends, indefinitely. If the company has a dividend yield of 4.2 percent, what is the required return on the power company's stock?
11.2%
I Braxton Ltd issued a 30-year 10% coupon bond ten years ago. Braxton bonds have a maturity (face) value of $1,000 and make semiannual interest payments. If investors require an 8% nominal annual return (i.e., yield to maturity) on bonds with the same risk rating as Braxton, at what price should the bonds be selling for currently!
1197.93
Suppose that you have just purchased a share of stock for $40. The most recent dividend was $2 and dividends are expected to grow at a rate of 7% indefinitely. What must your required return be on the stock?
12.35%
Massey Co. has 12 percent coupon bonds making annual payments with YTM of 9 percent. The current yield on these bonds is 9.80 percent. How many years do these bonds have left until they mature?
12.96 or approx. 13 years
What is the required return for a stock that has a 6% constant-growth rate, a price of $25, an expected dividend of $2 next year, and a P/E ratio of 10?
14% (don't use "%")
Dizzy Corp. bonds, with a coupon rate of 12% paid semiannually, have 3 years remaining to maturity, and are currently priced at $939.97 per bond. What is the yield to maturity? (assume the bonds have a par value of $1,000)
14.54
How much does the $1,000 to be received upon a bond's maturity in 30 years add to the bond's price if the appropriate discount rate is 6%, compounded semi-annually?
169.73
You bought a 30-year bond many years ago. The bond has a par value of $1,000 and coupon rate of 12% paid semi-annually. The current price of the bond is $1,137.99 and the yield to maturity is 10%. How many years ago did you buy the bond?
18 years (30-12)
Mack Industries just paid a dividend of $1.00 per share (DIV0= $1.00). Analysts expect the company's dividend to arow 20 percent this year and 15 percent next year. After two years the dividend is expected to grow at a constant rate of 5 percent. The required rate of return on the company's stock is 12 percent. What should be the company's current stock price? (choose the closest answer)
18.67
Suppose you purchase a zero coupon bond with par value of $1,000, maturing in 25 years, for $180. If the yield to maturity on the bond remains unchanged, what will the price of the bond be 5 years from now?
253.64
Assume that at the end of the next year, Company A will pay a $2.00 dividend per share, an increase from the current dividend of $1.50 per share After that, the dividend is expected to increase at a constant rate of 5%. If an investor requires a 12% return on the stock, what is the value of the stock?
28.57
ABC common stock is expected to have extraordinary growth of 20% per year for 2 years, at which time the growth rate will settle into a constant 6%. If the discount rate is 15% and the most recent dividend was $2.50, what should be the approximate current share price? (round to the nearest cent)
37.39
Assume that a share of stock, priced at $52.5 per share, just paid a dividend of $2. The dividend is expected to grow at a long-run constant rate. The required rate of return is 4% higher than the dividend growth rate (or R - g = 4%) Given this information, determine the dividend yield of the stock.
4%
Sedgwick, Inc. has a 12% required rate of return. It does not expect to initiate dividends for fifteen years, at which time it will pay $2.00 per share in dividends. At that time, Sedgwick expects its dividends to grow at 7% forever. If you currently own the stock and will sell it following the first dividend, what is your estimated selling price at T15?
42.80
How much should you pay for a share of stock that offers a constant-growth rate of 10%, requires a 16% rate of return and is expected to sell for $50 one year from now? (round to the nearest cent).
45.45
Trudeau lechnologies common stock currently trades at $40 per share. The stock is expected to pay a year-end dividend, DIV1, of $2 per share. The stock's dividend is expected to grow at a constant rate g, and it's required rate of return is 9 percent. What is the expected price of the stock five years from today (that is, P5)? Round to the nearest cent
48.67
The Jones Company has decided to undertake a large project. Consequently, there is a need for additional funds. The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share. If the required return on this stock is currently 10 percent. what should be the stocks market value
50
You are interested in a corporate bond with the current market price of $973.36 and yield to maturity of 7%. The bond carries a coupon rate of 6%, paid semi-annually. If you buy the bond today, how many semi-annual coupon payments will you receive until the final maturity?
6
Albright Motors is expected to pay a year-end dividend of $3.00 a share (DIV1 = $3.00). The stock currently sells for $30 a share. The required (and expected) rate of return on the stock is 16 percent. If the dividend is expected to grow at a constant rate, g, what is g?
6.00%
Benson Biometrics, Inc. has outstanding $1,000 face value 8% coupon bonds that make semiannual payments and have fourteen years remaining to maturity. If the current price for these bonds is $1,118.74, what is the annualized yield to maturity?
6.68%
Clapper Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM? Round your answer to the nearest hundredth point.
6.69
Clapper Corp. issued 12-year bonds 2 years ago at a coupon rate of 7.8 percent. The bonds make semiannual payments. If these bonds currently sell for 108 percent of par value, what is the YTM?
6.69%
On January 1, 2002, HomeSafe Cab Co. will issue new bonds to finance its expansion plans. Currently outstanding 8%, January 1, 2017 HomeSafe bonds are selling for $1,091.96. If interest is paid semiannually for both bonds, what must the coupon rate of the new bonds be in order for the issue to sell at par?
7.00% — Given the two bonds are issued by the same company and have the same risk, they YTM of the new bond should be same as the existing bond, or 7%. Further, to issue the new bond at par value, its coupon rate must be set to equal its YTM. Thus, the coupon rate of the new bond must be 7%.
Barely Heroes Corporation has bonds on the market with 14.5 years to maturity, YTM of 9 percent, and a current price of $850. The bonds make semiannual payments. What must the coupon rate be on Barely Heroes' bonds?
7.13%
The market price of a bond is $1,236.94, it has 14 years to maturity, a $1,000 face value, and pays an annual coupon of $100 in semiannual installments. What is the yield to maturity?
7.27%
Roxie Inc has just paid a dividend of S4.00. Its stock is now selling for $65 per share, and the required rate of return on a stock like Roxie Inc. is 14%. Assuming Roxie is a constant growth stock, determine the implied growth rate for Roxie's dividends.
7.4% (don't use "%")
A bond with a 7% coupon with an original maturity of 20 years was issued 4 years ago. If the bond is currently selling for $940, what is its yield to maturity? (The bond pays coupons annually)
7.66%
ABC Corporation's common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is expected to pay a dividend of $2.89 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock?
8.7%
Bond.
Aa1
How much would an investor lose if she purchased a 30-year zero-coupon bond with a $1,000 par value and 10% yield to maturity, only to see market interest rates increase to 12% 1 year later? (Hint. How much would the price change from a year earlier?
About $19.48
The price and yield to maturity on a bond have
An inverse relationship
The restrictive covenants of a bond indenture are intended to protect the interest of
Bondholders
You believe that the required return on Dynegy stock is 16% and that the expected dividend growth rate is 12%, which is expected to remain constant for the foreseeable future. Is the stock currently overvalued, undervalued, or fairly priced?
Cannot tell without more information
Preferred stocks are different from common stocks in that
Common stockholders have voting rights while preferred stockholders do not
Which of the following is fixed (e.g., cannot change) for the life of a given bond?
Coupon Rate
Dividend models suggest that ______________ determine the value of a financial asset to which the owner is entitled while holding the asset.
Future cash flows
Which of the following statements is true? I.)The dividend growth model only holds if, at some point in time, the dividend growth rate exceeds the stock's required return; II.)An increase in the dividend growth rate will increase a stock's market value, all else the same; III.)An increase in the required return on a stock will increase its market value, all else the same.
II only - An increase in the dividend growth rate will increase a stock's market value, all else the same
Which of the following statements is true?
If a stock's dividend is expected to grow at a constant rate, then the growth rate of its price (price appreciation or capital gain) is exactly the same as the growth rate of its dividends
A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is false?
Interest rates must be lower now than they were five weeks ago.
A bond sold five weeks ago for $1,100. The bond is worth $1,150 in today's market. Assuming no changes in risk, which of the following is true?
Interest rates must be lower now than they were five weeks ago.
Which of the following statements about IPO is false?
Investors trade a company's stocks among themselves during an IPO
Which of the following statements regarding dividend yields is true?
It is analogous to the current yield for a bond.
Consider a 10%, 10-year bond sold to yield 8%. One year passes and interest rates remained unchanged at 8%. What will have happened to the bond's price during this period? Assume the bond pays coupons semi-annually
It will decrease
Which of the following is correct for a bond currently selling at a premium to par?
It's current yield is lower than its coupon rate
Which of the following is a major credit rating agency in the US?
Moody's
Given no change in required returns, preferred stock prices will:
None of the above
Stocks A and B have the same required rate of return and the same expected year-end dividend (D1). Stock A's dividend is expected to grow at a constant rate of 10 percent per year, while Stock B's dividend is expected to grow at a constant rate of 5 percent per year. Which of the following statements is most correct?
None of the statements above is correct.
Which of the following bonds would be considered to be of investment grade?
None of these are correct
Super Growth Co. is growing quickly. Dividends are expected to grow at a 32 percent rate for the next three years, with the growth rate falling off to a constant 7 percent thereafter. If the required return is 15 percent and the company just paid a $2.25 dividend, what is the current share price?
P0= $54.46
A newly-issued 15 year, $1,000 face value 6 75% semi annual coupon bond is priced at $1075. Which of the following choices describes the bond and the relationship of the bond's market yield to the coupon?
Premium bond, required market yield is less than 6.75%
Restrictions on asset sales and borrowing in bond indenture are often known as?
Protective Covenants
Lifehouse Software has 10 percent coupon bonds on the market with 7 years to maturity. The bonds make semiannual payments and currently sell for 104 percent of par. What is the current yield on Lifehouse's bonds? The YTM?
R= 9.212%; Current Yield= 9.615%
Which of the following is a major company in rating bonds?
S&P
Stocks are different from bonds because____
Stocks, unlike bonds, represent ownership
The value of common stock will likely decrease if.
The discount rate increases
An indenture is:
The contract between the bond issuing corporation and bondholders
Which of the following statements regarding bond pricing is true?
The lower the yield to maturity, the more valuable the bond is
Value of a common stock does not directly depend on:
The maturity date of common stock
If two constant growth stocks have the same required rate or return and the same price, which of the following statements is most correct?
The stock with the higher dividend yield will have a lower dividend growth rate
The Canadian government decided to issue a consol (a bond with a never-ending interest payment and no maturity date). The bond will pay $50 in interest each year (at the end of the year), but it will never return the principal. The current discount rate for Canadian government bonds is 6.5%. What should this consol bond sell for in the market? What if the interest rate should fall to 4.5%? Rise to 8.5%? Why does the price go up when interest rates fall? Why does the price go down when interest rates rise?
at 6.5%, $50 / 0.065 = $769.23; at 4.5%, $50 / 0.045 = $1,111.11; at 8.5%, $50 / 0.085 = $588.24; The price rises when interest rates fall because the present value of each future interest payment is worth more in present value due to the lower discount rate. The price falls when interest rates rise because the present value of each future interest payment is worth less in present value due to the higher discount rate.
A year ago a company issued a bond with a face value of $1,000 with an 8% coupon. Now the prevailing market yield is 10%. What happens to the bond? The:
bond is traded at a market price of less than $1.000.
In terms of valuation, preferred stocks are most similar to
common stocks with no growth in dividends
You are attempting to value a stock in a mature industry that is steadily shrinking in size. Of the stock valuation models studied, the most appropriate is the?
constant growth model
The ________ is the annual coupon payment divided by the current price of the bond, and is not always an accurate indicator.
current yield
As illustrated using the dividend growth model, the total return on a share of common stock is comprised of a _____________.
dividend yield and a capital gains yield
For a discount bond, the current yield is __ the coupon rate, and the coupon rate is _____ the yield to maturity:
greater than; less than
A bond with an annual coupon of $100 originally sold at par for $1,000. The current market interest rate on this bond is 9%. Assuming no change in risk, this bond will sell at a ___ and present the seller (who bought the bond at initial issuance) of the bond today with a capital ___.
premium; gain
The ________ is the market of first sale in which companies first sell their authorized shares to the public.
primary market
As the rating of a bond increases (for example, from A, to AA, to AAA), it generally means that:
the default risk decreases and the required rate of return decreases.
A bond that makes no coupon payments (and thus is initially priced at a deep discount to par value) is called a:
zero coupon
