Finance Exam II
All else constant, a bond will sell at _____ when the coupon rate is _____ the yield to maturity.
A discount; less than
John just purchased a bond which pays $60 a year in interest. What is this $60 called?
Coupon
A corporate bond is quoted at a price of 103.16 ($1031.60) and carries a 5.20 percent coupon. The bond pays interest semiannually. What is the current yield on one of these bonds?
(0.052 x $1000)/(1.0316 x $1000) = 5.04 percent
The common stock of Auto Deliveries sells for $28.16 a share. The stock is expected to pay $1.35 per share next year when the annual dividend is distributed. The firm has established a pattern of increasing its dividends by 3 percent annually and expects to continue doing so. What is the market rate of return on this stock?
28.16 = 1.35/R-0.03 7.79 percent
Which one of the following is computed by dividing next year's annual dividend by the current stock price?
Dividend yield
Great Lakes Health Care common stock offers an expected total return of 9.2 percent. The last annual dividend was $2.10 a share. Dividends increase at a constant 2.6 percent per year. What is the dividend yield?
Dividend yield = 0.092 - 0.026 = 6.6 percent
What are the distributions to shareholders by a corporation called?
Dividends
The profitability index is most closely related to which one of the following?
Net present value
An investment has the following cash flows and a required return of 13 percent. Based on IRR, should this project be accepted? Why or why not?
No, the IRR is less than the required return by about 1.53 percent.
The length of time a firm must wait to recoup the money it has invested in a project is called the:
Payback period
Which one of the following is the electronic system used by the NYSE for directly transmitting orders to specialists?
SuperDOT
A project has a net present value of zero. Which one of the following best describes this project?
The projects cash inflows equal its cash outflows in current dollar terms.
The interest rate risk premium is the
compensation investors demand for accepting interest rate risk
The internal rate of return is defined as the
discount rate which causes the net present value of a project to equal zero.
Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. Positive net present value II. Profitability index greater than zero III. Internal rate of return greater than the required rate IV. Positive internal rate of return
I and III only
The dividend growth model: I. Assumes that dividends increase at a constant rate forever. II. Can be used to compute a stock price at any point in time. III. Can be used to value zero-growth stocks. IV. Requires the growth rate to be less than the required return.
I, II, III, and IV
The current yield is defined as the annual interest on a bond divided by which one of the following?
Market price
The secondary market is best defined by which of the following?
Market where outstanding shares of stock are resold
The specified date on which the principal amount of a bond is payable is referred to as which one of the following?
Maturity
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:
Mutually exclusive
