Finance 300 Exam 2

Treasury yield curve plots the interest rates relative to which one of the following? a. market rates b. coupon rate c. the risk-free rate d. time to maturity e. inflation

time to maturity

A firm has a current EPS of $2.54 and a benchmark price-earnings (PE) ratio of 16.4. Earnings are expected to grow 3.8 percent annually. What is the expected stock price in one year based on the PE ratio? a. $41.66 b. $42.89 c. $43.24 d. $46.08 e. $48.09

$43.24 P1 = $2.54 × (1 + .038) × 16.4 = $43.24

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent return on this investment, which of the following is closest to the price you are willing to pay for the bond? a. $619 b. $674 c. $761 d. $828 e. $902

$828

Amon Amarth Co. offers 10-year, 8 percent coupon bonds with semiannual payments and a yield to maturity of 8.24 percent. What is the market price of a $1,000 face value bond? a. $990.32 b. $983.86 c. $1,108.16 d. $1,521.75 e. $591.04

$983.86 Bond value = [(.08 × $1,000)/2] × ({1 - 1/[1 + (.0824/2)]^10 × ^2}/(.0824/2)) + {$1,000/[1 + (.0824/2)]10 × 2} = $983.86

The outstanding bonds of Dark Tranquility, Inc. provide an annual real rate of return of 2.9 percent. Given the current rate of inflation is 1.8 percent, what is the nominal rate of return on these bonds? a. 1.05 percent b. 1.10 percent c. 4.75 percent d. 5.22 Percent e. 14.75 Percent

4.75% 1 + R = (1 + 0.029) × (1 + 0.018) R = 4.75%

Wilton's Market just announced its next annual dividend will be $1.50 a share. It expects the dividends to grow by 1.8 percent annually forever. How much will one share of this stock be worth five years from now if the required return is 15.5 percent? a. $11.76 b. $11.97 c. $14.14 d. $12.19 e. $13.79

P5 = ($1.50 × 1.018^5)/ (0.155 - 0.018) = $11.97

Emst & Frank stock is listed on NASDAQ. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? a. Private. b. Auction. c. Tertiary. d. Secondary. e. Primary.

Primary

A bond that is payable to whomever has physical possession of the bond is said to be in ___: a. New-issue condition. b. Registered form. c. Bearer form. d. Debenture status. e. Collateral status.

bearer form

An agent who arranges a transaction between a buyer and a seller of equity securities is called a ____? a. broker. b. floor trader. c. capitalist. d. principal. e. dealer.

broker

You cannot attend the shareholder's meeting for Company X, so you authorize another shareholder to vote on your behalf. What is the granting of this authority called? a. altering b. cumulative voting c. straight voting d. indenture agreement e. proxy voting

proxy voting

A bond with a coupon rate of 7% makes semiannual coupon payments on January 15 and July 15 of each year. The quoted price for the bond on January 30 (i.e., 15 days after the last coupon payment) was $1,001.875. What is the invoice price of the bond? (Assume the current coupon period has 182 days.)? a. $1,001.88 b. $1,004.76 c. $1,019.38 d. $1,033.99 e. $1,036.88

$1,004.76 = ($1000*7%/2) × (15/182) = $2.8846 Invoice price = quoted price + accrued interest = 1,001.8750 +2.8846 = 1,004.7596 = $1,004.76

Sew 'N More just paid an annual dividend of $1.42 a share. The firm plans to pay annual dividends of $1.45, $1.50, and $1.53 over the next 3 years, respectively. After that time, the dividends will be held constant at $1.60 per share forever. What is this stock worth today at a discount rate of 9 percent? a. $17.08 b. $16.30 c. $16.67 d. $16.79 e. $17.50

$17.50 1.60 / .09 = $17.78 1.45 / (1 + .09) + 1.50 / (1 + .09)2 + (1.53 + 17.78) / (1 + .09)^3 = $17.50

A share of common stock has just paid a dividend of $3.00. If the expected long-run growth rate for this stock is 5 percent, and if investors require an 11 percent return, what is the price of the stock? a. $50.00 b. $50.50 c. $52.50 d. $53.00 e. $63.00

$52.50 (Use DGM and remember to calculate D1 = D0 * (1+g) )

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? a. 12.26 years b. 12.53 years c. 18.49 years d. 24.37 years e. 25.05 years

12.53 years

The preferred stock of Into Eternity pays an annual dividend of $6.50 and sells for $42.19 a share. What is the dividend yield? a. 2.74% b. 6.49% c. 6.50% d. 14.17% e. 15.41%

15.41% Preferred stock evaluation is simple perpetuity: $6.50/$42.19 = .1541, or 15.41%

An investor with a 25 percent marginal tax rate is choosing to invest in either a corporate bond with a before-tax annual yield of 7.3% or a municipal bond. What must be the annual rate of return that the municipal bond offers to make the investor indifferent between the two securities? a. 5.48% b. 5.84% c. 6.08% d. 7.30% e. 9.73%

5.48% 073 × (1 - .25) = .0548, or 5.48%

The current dividend yield on Clayton's Metals common stock is 3.2 percent. The company just paid a $1.48 annual dividend and announced plans to pay $1.54 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on this stock? a. 7.25% b. 7.82% c. 8.08% d. 8.39% e. 8.75%

7.25% (Calculate the growth rate (i.e., the percentage change in dividends): g = (1.54 - 1.48)/1.48 = 0.04054 This is the capital gain yield. R = div yield + cap gain yield = 0.032 + 0.04054 = 0.0725

Kirchner Corporation bonds mature in 6 years and have a yield to maturity of 8.5 percent. The par value of the bonds is $1,000. The bonds have a 10 percent coupon rate and pay interest on a semi-annual basis. What are the current yield and capital gains yield on the bonds for this year? (Assume that interest rates do not change over the course of the year)? a. Current yield = 9.35%, capital gains yield = -0.85% b. Current yield = 9.35%, capital gains yield = 0.65% c. Current yield = 8.50%, capital gains yield = 1.50% d. Current yield = 10.00%, capital gains yield = 0.00% e. None of the answers above is correct.

Current yield = 9.35%, capital gains yield = -0.85% The current yield (CY) = $100/$1,069.3780 = 9.35% CY + CG = YTM, solve for CG: 9.35% + CG = 8.5%, CG = -0.85%

Which one of the following represents the capital gains yield as used in the dividend growth model? a. D1 b. D1/P0 c. P0 d. g e. g/P0

g

A sinking fund is managed by a trustee for which one of the following purposes? a. Paying bond interest payments b. Converting bonds into equity securities c. Paying preferred dividends d. Early bond redemption e. Reducing bond coupon rates

Early bond redemption

A person on the floor of the NYSE who executes buy and sell orders on behalf of customers is called a(n): a. Floor broker. b. Floor trader. c. Dealer. d. Specialist. e. Executor.

Floor Broker

The Zuffa Company has a semi-annual coupon bond outstanding. A decrease in the market interest rate will have which one of the following effects on this bond, all else equal? a. increase the coupon rate b. decrease the coupon rate c. increase the market price d. decrease the market price e. no effect on market price

Increase the market price

Which one of the following risk premiums compensates for the inability to easily resell a bond prior to maturity? a. Default risk b. Taxability c. Liquidity d. Inflation e. Interest rate risk

Liquidity

A securities market primarily composed of dealers who buy and sell for their own inventories is referred to which type of market? a. Auction. b. Private. c. Over-the-counter. d. Regional. e. Insider.

Over-the-counter

Which of the following statement is most FALSE? a. Market expectations of interest rates affect shape of the yield curve. b. Because interest rates tend to fall in response to an economic slowdown, an inverted yield curve is often interpreted as a negative forecast for economic growth. c. Bond markets are primarily over-the-counter transactions. d. Inverted yield curves tend to precede recessions. e. The yield curve tends to be sharply decreasing as the economy comes out of a recession and interest rates are expected to rise.

The yield curve tends to be sharply decreasing as the economy comes out of a recession and interest rates are expected to rise.