Question 1

A share of preferred stock pays a quarterly dividend of $2.50.If the price of this preferred stock is currently $50,what is the simple annual rate of return?

Accepted Answer

A)  12% 
B)  18% 
C)  20% 
D)  23% 
E)  28% 
A)  12% 
B)  18% 
C)  20% 
D)  23% 
E)  28%

Question 2

The current price of a 10-year,$1,000 par value bond is $1,158.91.Interest on this bond is paid every six months,and the simple annual yield is 14 percent.Given these facts,what is the annual coupon rate on this bond?

Accepted Answer

A)  10% 
B)  12% 
C)  14% 
D)  17% 
E)  21% 
A)  10% 
B)  12% 
C)  14% 
D)  17% 
E)  21%

Question 3

Your company paid a dividend of $2.00 last year.The growth rate is expected to be 4 percent for 1 year,5 percent the next year,then 6 percent for the following year,and then the growth rate is expected to be a constant 7 percent thereafter.The required rate of return on equity (rs)is 10 percent.What is the current price of the common stock?

Accepted Answer

A)  $53.45 
B)  $60.98 
C)  $64.49 
D)  $67.47 
E)  $69.21 
A)  $53.45 
B)  $60.98 
C)  $64.49 
D)  $67.47 
E)  $69.21

Question 4

A $1,000 par value bond sells for $1,216.It matures in 20 years,has a 14 percent coupon,pays interest semiannually,and can be called in 5 years at a price of $1,100.What is the bond's YTM?

Accepted Answer

A)  6.05% 
B)  10.00% 
C)  10.06% 
D)  11.26% 
E)  11.06% 
A)  6.05% 
B)  10.00% 
C)  10.06% 
D)  11.26% 
E)  11.06%

Question 5

Eastern Auto Parts' last dividend was D0 = $0.50,and the company expects to experience no growth for the next 2 years.However,Eastern will grow at an annual rate of 5 percent in the third and fourth years,and,beginning with the fifth year,it should attain a 10 percent growth rate which it should sustain thereafter.Eastern has a required rate of return of 12 percent.What should be the present price per share of Eastern common stock?

Accepted Answer

A)  $19.26 
B)  $31.87 
C)  $30.30 
D)  $20.83 
E)  $19.95 
A)  $19.26 
B)  $31.87 
C)  $30.30 
D)  $20.83 
E)  $19.95

Question 6

A 15-year zero coupon bond has a yield to maturity of 8 percent and a maturity value of $1,000.What is the amount of tax that an investor in the 30 percent tax bracket would pay during the first year of owning the bond?

Accepted Answer

A)  $7.57 
B)  $10.41 
C)  $15.89 
D)  $20.44 
E)  $25.22 
A)  $7.57 
B)  $10.41 
C)  $15.89 
D)  $20.44 
E)  $25.22

Question 7

The last dividend on Spirex Corporation's common stock was $4.00,and the expected growth rate is 10 percent.If you require a rate of return of 20 percent,what is the highest price you should be willing to pay for this stock?

Accepted Answer

A)  $44.00 
B)  $38.50 
C)  $40.00 
D)  $45.69 
E)  $50.00 
A)  $44.00 
B)  $38.50 
C)  $40.00 
D)  $45.69 
E)  $50.00

Question 8

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,other things equal and held constant.

Accepted Answer

A) True 
 B)False

Question 9

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years.If your simple annual required rate of return is 12 percent with quarterly compounding,how much should you be willing to pay for this bond?

Accepted Answer

A)  $941.36 
B)  $1,051.25 
C)  $1,115.57 
D)  $1,391.00 
E)  $825.49 
A)  $941.36 
B)  $1,051.25 
C)  $1,115.57 
D)  $1,391.00 
E)  $825.49

Question 10

The Florida Boosters Association has decided to build new bleachers for the football field.Total costs are estimated to be $1 million,and financing will be through a bond issue of the same amount.The bond will have a maturity of 20 years,a coupon rate of 8 percent,and has annual payments.In addition,the Association must set up a reserve to pay off the loan by making 20 equal annual payments into an account which pays 8 percent,annual compounding.The interest-accumulated amount in the reserve will be used to retire the entire issue at its maturity 20 years hence.The Association plans to meet the payment requirements by selling season tickets at $10 net profit per ticket.How many tickets must be sold each year to service the debt,i.e. ,to meet the interest and principal repayment requirements?

Accepted Answer

A)  5,372 
B)  10,186 
C)  15,000 
D)  20,459 
E)  25,000 
A)  5,372 
B)  10,186 
C)  15,000 
D)  20,459 
E)  25,000

Question 11

The common stock valuation model,as shown below,gives no consideration to expected capital gains.

Accepted Answer

A) True 
 B)False

Question 12

Marie Snell recently inherited some bonds (face value $100,000)from her father,and soon thereafter she became engaged to Sam Spade,a University of Florida marketing graduate.Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo.The 2 percent annual coupon bonds mature on January 1,2030,and it is now January 1,2010.Interest on these bonds is paid annually on December 31 of each year,and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent.If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually,what would be the largest equal annual amounts she could withdraw for two years,beginning today (i.e. ,two payments,the first payment today and the second payment one year from today)?

Accepted Answer

A)  $13,255 
B)  $29,708 
C)  $12,654 
D)  $25,305 
E)  $14,580 
A)  $13,255 
B)  $29,708 
C)  $12,654 
D)  $25,305 
E)  $14,580

Question 13

Trickle Corporation's 12 percent coupon rate,semiannual payment,$1,000 par value bonds mature in 25 years.The bonds currently sell for $1,230.51 in the market,and the yield curve is flat.Assuming that the yield curve is expected to remain flat,what is Trickle's most likely before-tax cost of debt if it issues new bonds today?

Accepted Answer

A)  4.78% 
B)  6.46% 
C)  7.70% 
D)  9.56% 
E)  12.92% 
A)  4.78% 
B)  6.46% 
C)  7.70% 
D)  9.56% 
E)  12.92%

Question 14

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

Accepted Answer

A)  Increase. 
B)  Decrease. 
C)  Fluctuate. 
D)  Remain constant. 
E)  Possibly increase,possibly decrease,or possibly remain unchanged. 
A)  Increase. 
B)  Decrease. 
C)  Fluctuate. 
D)  Remain constant. 
E)  Possibly increase,possibly decrease,or possibly remain unchanged.

Question 15

Your client has been offered a 5-year,$1,000 par value bond with a 10 percent coupon.Interest on this bond is paid quarterly.If your client is to earn a simple rate of return of 12 percent,compounded quarterly,how much should she pay for the bond?

Accepted Answer

A)  $800 
B)  $926 
C)  $1,025 
D)  $1,216 
E)  $981 
A)  $800 
B)  $926 
C)  $1,025 
D)  $1,216 
E)  $981

Question 16

U.S.Delay Corporation,a subsidiary of the Postal Service,must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities.The 1,000 par value quarterly payment bonds would sell at $795.54,have a 10 percent annual coupon rate,and mature in ten years.At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate as the quarterly payment bonds?

Accepted Answer

A)  $274.50 
B)  $271.99 
C)  $198.89 
D)  $257.52 
E)  $254.84 
A)  $274.50 
B)  $271.99 
C)  $198.89 
D)  $257.52 
E)  $254.84

Question 17

The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.

Accepted Answer

A) True 
 B)False

Question 18

A bond is more likely to be called when market interest rates decline.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following statements is correct?

Accepted Answer

A)  Other things held constant,a callable bond would have a lower required rate of return than a noncallable bond. 
B)  Other things held constant,a corporation would rather issue noncallable bonds than callable bonds. 
C)  Reinvestment rate risk is worse from a typical investor's standpoint than interest rate price risk. 
D)  If a 10-year,$1,000 par,zero coupon bond were issued at a price which gave investors a 10 percent rate of return,and if interest rates then dropped to the point where rd = YTM = 5%,we could be sure that the bond would sell at a premium over its $1,000 par value. 
E)  If a 10-year,$1,000 par,zero coupon bond were issued at a price which gave investors a 10 percent rate of return,and if interest rates then dropped to the point where rd = YTM = 5%,we could be sure that the bond would sell at a discount below its $1,000 par value. 
A)  Other things held constant,a callable bond would have a lower required rate of return than a noncallable bond. 
B)  Other things held constant,a corporation would rather issue noncallable bonds than callable bonds. 
C)  Reinvestment rate risk is worse from a typical investor's standpoint than interest rate price risk. 
D)  If a 10-year,$1,000 par,zero coupon bond were issued at a price which gave investors a 10 percent rate of return,and if interest rates then dropped to the point where rd = YTM = 5%,we could be sure that the bond would sell at a premium over its $1,000 par value. 
E)  If a 10-year,$1,000 par,zero coupon bond were issued at a price which gave investors a 10 percent rate of return,and if interest rates then dropped to the point where rd = YTM = 5%,we could be sure that the bond would sell at a discount below its $1,000 par value.

Question 20

You are considering the purchase of a common stock that just paid a dividend of $2.00.You expect this stock to have a growth rate of 30 percent for the next 3 years,then to have a long-run normal growth rate of 10 percent thereafter.If you require a 15 percent rate of return,how much should you be willing to pay for this stock?

Accepted Answer

A)  $71.26 
B)  $97.50 
C)  $82.46 
D)  $79.15 
E)  $62.68 
A)  $71.26 
B)  $97.50 
C)  $82.46 
D)  $79.15 
E)  $62.68

A share of preferred stock pays a quarterly dividend of $2.50.If the price of this preferred stock is currently $50,what is the simple annual rate of return?

The current price of a 10-year,$1,000 par value bond is $1,158.91.Interest on this bond is paid every six months,and the simple annual yield is 14 percent.Given these facts,what is the annual coupon rate on this bond?

A $1,000 par value bond sells for $1,216.It matures in 20 years,has a 14 percent coupon,pays interest semiannually,and can be called in 5 years at a price of $1,100.What is the bond's YTM?

A 15-year zero coupon bond has a yield to maturity of 8 percent and a maturity value of $1,000.What is the amount of tax that an investor in the 30 percent tax bracket would pay during the first year of owning the bond?

The last dividend on Spirex Corporation's common stock was $4.00,and the expected growth rate is 10 percent.If you require a rate of return of 20 percent,what is the highest price you should be willing to pay for this stock?

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,other things equal and held constant.

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years.If your simple annual required rate of return is 12 percent with quarterly compounding,how much should you be willing to pay for this bond?

The common stock valuation model,as shown below,gives no consideration to expected capital gains.

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

Your client has been offered a 5-year,$1,000 par value bond with a 10 percent coupon.Interest on this bond is paid quarterly.If your client is to earn a simple rate of return of 12 percent,compounded quarterly,how much should she pay for the bond?

The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.

A bond is more likely to be called when market interest rates decline.

Which of the following statements is correct?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

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Exam 10: Valuation Concepts

A share of preferred stock pays a quarterly dividend of $2.50.If the price of this preferred stock is currently $50,what is the simple annual rate of return?

The current price of a 10-year,$1,000 par value bond is $1,158.91.Interest on this bond is paid every six months,and the simple annual yield is 14 percent.Given these facts,what is the annual coupon rate on this bond?

A $1,000 par value bond sells for $1,216.It matures in 20 years,has a 14 percent coupon,pays interest semiannually,and can be called in 5 years at a price of $1,100.What is the bond's YTM?

A 15-year zero coupon bond has a yield to maturity of 8 percent and a maturity value of $1,000.What is the amount of tax that an investor in the 30 percent tax bracket would pay during the first year of owning the bond?

The last dividend on Spirex Corporation's common stock was $4.00,and the expected growth rate is 10 percent.If you require a rate of return of 20 percent,what is the highest price you should be willing to pay for this stock?

The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds,other things equal and held constant.

A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years.If your simple annual required rate of return is 12 percent with quarterly compounding,how much should you be willing to pay for this bond?

The common stock valuation model,as shown below,gives no consideration to expected capital gains.

An increase in a firm's expected growth rate would normally cause the firm's required rate of return to

Your client has been offered a 5-year,$1,000 par value bond with a 10 percent coupon.Interest on this bond is paid quarterly.If your client is to earn a simple rate of return of 12 percent,compounded quarterly,how much should she pay for the bond?

The constant growth model used for evaluating the price of a share of common stock can also be used to find the price of perpetual preferred stock or any other perpetuity.

A bond is more likely to be called when market interest rates decline.

Which of the following statements is correct?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Risk and Rates of Return

The Cost of Capital

Capital Budgeting

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters