Question 1

All else constant,a coupon bond that is selling at a premium,must have:

Accepted Answer

A)  a coupon rate that is equal to the yield to maturity. 
B)  a market price that is less than par value. 
C)  semi-annual interest payments. 
D)  a yield to maturity that is less than the coupon rate. 
A)  a coupon rate that is equal to the yield to maturity. 
B)  a market price that is less than par value. 
C)  semi-annual interest payments. 
D)  a yield to maturity that is less than the coupon rate.

Question 2

LCP,a newly formed medical group,is currently paying dividends of $.50.These dividends are expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter.What is the value of the stock if the appropriate discount rate is 12%?

Accepted Answer

A)  $8.08. 
B)  $11.17. 
C)  $14.22. 
D)  $17.32. 
E)  $30.90. 
A)  $8.08. 
B)  $11.17. 
C)  $14.22. 
D)  $17.32. 
E)  $30.90.

Question 3

A forward rate prevailing from period three through to period four can be:

Accepted Answer

A)  readily observed in the market place. 
B)  extracted from high coupon bonds. 
C)  extracted from spot rates with 2 and 3 year maturities. 
D)  extracted from spot rates with 3 and 4 years to maturity. 
A)  readily observed in the market place. 
B)  extracted from high coupon bonds. 
C)  extracted from spot rates with 2 and 3 year maturities. 
D)  extracted from spot rates with 3 and 4 years to maturity.

Question 4

The No-zip Snap Company had net earnings of $127,000 this past year.Dividends were paid of $38,100 on the company's equity of $1,587,500.If No-Zip has 100,000 shares outstanding with a current market price of $11 5/8 per share,what is the required rate of return?

Accepted Answer

A)  9% 
B)  6% 
C)  4.2% 
D)  14% 
A)  9% 
B)  6% 
C)  4.2% 
D)  14%

Question 5

In the above problem,the yield to maturity of the 2 year bond is:

Accepted Answer

A)  21%. 
B)  18%. 
C)  12%. 
D)  11%. 
A)  21%. 
B)  18%. 
C)  12%. 
D)  11%.

Question 6

Mortgage Instruments Inc.is expected to pay dividends of $1.03 next year.The company just paid dividends of $1.This growth rate is expected to continue.How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%?

Accepted Answer

A)  $20. 
B)  $21. 
C)  $34. 
D)  $52. 
A)  $20. 
B)  $21. 
C)  $34. 
D)  $52.

Question 7

Explain why some bond investors are subject to liquidity risk and/or default risk.How does each of these risks affect the yield of a bond?

Accepted Answer

Liquidity problems exist in thinly trade

Question 8

Given the opportunity to invest in one of the three bonds listed below,which would you purchase? Assume an interest rate of 7%.

Accepted Answer

@#IMG-DLM& PV of Bond A = $971.96 < Pric

Question 9

A 12-year,5% coupon bond pays interest annually.The bond has a face value of $1,000.What is the percentage change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

Accepted Answer

A)  11.11% decrease 
B)  12.38% decrease 
C)  12.38% increase 
D)  14.13% decrease 
E)  14.13% increase 
A)  11.11% decrease 
B)  12.38% decrease 
C)  12.38% increase 
D)  14.13% decrease 
E)  14.13% increase

Question 10

If the quoted dividend yield in the paper was 2.2% and the dividend was listed as $0.72 what price is used in the calculation of dividend yield?

Accepted Answer

A)  the day open of $32.15. 
B)  the day low of $32. 
C)  the day close of $32.73. 
D)  the day high of $33.50. 
A)  the day open of $32.15. 
B)  the day low of $32. 
C)  the day close of $32.73. 
D)  the day high of $33.50.

Question 11

Which of the following amounts is closest to what should be paid for Overland common stock? Overland has just paid a dividend of $2.25.These dividends are expected to grow at a rate of 5% in the foreseeable future.The risk of this company suggests that future cash flows should be discounted at a rate of 11%.

Accepted Answer

A)  $39.38 
B)  $37.50 
C)  $21.48 
D)  $20.45 
A)  $39.38 
B)  $37.50 
C)  $21.48 
D)  $20.45

Question 12

Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3 years.There are exactly six months before the first interest payment.

Accepted Answer

A)  $1,014. 
B)  $1,055. 
C)  $888. 
D)  $1,025. 
E)  $1,000. 
A)  $1,014. 
B)  $1,055. 
C)  $888. 
D)  $1,025. 
E)  $1,000.

Question 13

Jackson Central has a 6-year,8% annual coupon bond with a $1,000 par value.Earls Enterprises has a 12-year,8% annual coupon bond with a $1,000 par value.Both bonds currently have a yield to maturity of 6%.Which of the following statements are correct if the market yield increases to 7%?

Accepted Answer

A)  Both bonds would decrease in value by 4.61%. 
B)  The Earls bond will increase in value by $88.25. 
C)  The Jackson bond will increase in value by 4.61%. 
D)  The Earls bond will decrease in value by 7.56%. 
E)  The Earls bond will decrease in value by $50.68. 
A)  Both bonds would decrease in value by 4.61%. 
B)  The Earls bond will increase in value by $88.25. 
C)  The Jackson bond will increase in value by 4.61%. 
D)  The Earls bond will decrease in value by 7.56%. 
E)  The Earls bond will decrease in value by $50.68.

Question 14

A firm is known as a 'Cash Cow':

Accepted Answer

A)  because it has several good growth opportunities. 
B)  because it pays out all of its non-growing earnings. 
C)  because dividends are growing at a rapid rate. 
D)  because the discount rate is extremely low. 
A)  because it has several good growth opportunities. 
B)  because it pays out all of its non-growing earnings. 
C)  because dividends are growing at a rapid rate. 
D)  because the discount rate is extremely low.

Question 15

A firm's value increases when it invests in projects that have:

Accepted Answer

A)  a rate of return less than the discount rate. 
B)  a rate of return equal to the discount rate. 
C)  a rate of return greater than the discount rate. 
D)  a rate of return equal to or less than the discount rate. 
A)  a rate of return less than the discount rate. 
B)  a rate of return equal to the discount rate. 
C)  a rate of return greater than the discount rate. 
D)  a rate of return equal to or less than the discount rate.

Question 16

Suppose that there are three zero coupon bonds with maturity date 1 year,2 year and 3 year respectively.The current price of the 1 year,2 year and 3 year bonds respectively are $826.45,$718.18 and $640.66 respectively.The yield to maturity of the first year bond is:

Accepted Answer

A)  21%. 
B)  18%. 
C)  12%. 
D)  11%. 
A)  21%. 
B)  18%. 
C)  12%. 
D)  11%.

Question 17

The Bell Weather Co.is a new firm in a rapidly growing industry.The company is planning on increasing its annual dividend by 20% a year for the next four years and then decreasing the growth rate to 5% per year.The company just paid its annual dividend in the amount of $1.00 per share.What is the current value of one share if the required rate of return is 9.25%?

Accepted Answer

A)  $35.63 
B)  $38.19 
C)  $41.05 
D)  $43.19 
E)  $45.81 
A)  $35.63 
B)  $38.19 
C)  $41.05 
D)  $43.19 
E)  $45.81

Question 18

A level coupon bond:

Accepted Answer

A)  pays the same principal every period. 
B)  pays the same taxes every period. 
C)  is a zero coupon annuity. 
D)  is an annuity over the life of the bond. 
A)  pays the same principal every period. 
B)  pays the same taxes every period. 
C)  is a zero coupon annuity. 
D)  is an annuity over the life of the bond.

Question 19

The common stock of Eddie's Engines Corp.sells for $25.71 a share.The stock is expected to pay $1.80 per share next month when the annual dividend is distributed.Eddie's has established a pattern of increasing its dividends by 4% annually and expects to continue doing so.What is the market rate of return on this stock?

Accepted Answer

A)  7% 
B)  9% 
C)  11% 
D)  13% 
E)  15% 
A)  7% 
B)  9% 
C)  11% 
D)  13% 
E)  15%

Question 20

In the above example,the price of the bond is

Accepted Answer

A)  $1121 
B)  $1000 
C)  $1325 
D)  $1200 
A)  $1121 
B)  $1000 
C)  $1325 
D)  $1200

Exam 6: How to Value Bonds and Stocks

All else constant,a coupon bond that is selling at a premium,must have:

LCP,a newly formed medical group,is currently paying dividends of $.50.These dividends are expected to grow at a 20% rate for the next 5 years and at a 3% rate thereafter.What is the value of the stock if the appropriate discount rate is 12%?

A forward rate prevailing from period three through to period four can be:

The No-zip Snap Company had net earnings of $127,000 this past year.Dividends were paid of $38,100 on the company's equity of $1,587,500.If No-Zip has 100,000 shares outstanding with a current market price of $11 5/8 per share,what is the required rate of return?

In the above problem,the yield to maturity of the 2 year bond is:

Mortgage Instruments Inc.is expected to pay dividends of $1.03 next year.The company just paid dividends of $1.This growth rate is expected to continue.How much should be paid for Mortgage Instruments stock just after the dividend if the appropriate discount rate is 5%?

Explain why some bond investors are subject to liquidity risk and/or default risk.How does each of these risks affect the yield of a bond?

Given the opportunity to invest in one of the three bonds listed below,which would you purchase? Assume an interest rate of 7%.

A 12-year,5% coupon bond pays interest annually.The bond has a face value of $1,000.What is the percentage change in the price of this bond if the market yield rises to 6% from the current yield of 4.5%?

If the quoted dividend yield in the paper was 2.2% and the dividend was listed as $0.72 what price is used in the calculation of dividend yield?

Which of the following amounts is closest to the value of a bond that pays $55 semiannually and has an effective semiannual interest rate of 5%? The face value is $1,000 and the bond matures in 3 years.There are exactly six months before the first interest payment.

Jackson Central has a 6-year,8% annual coupon bond with a $1,000 par value.Earls Enterprises has a 12-year,8% annual coupon bond with a $1,000 par value.Both bonds currently have a yield to maturity of 6%.Which of the following statements are correct if the market yield increases to 7%?

A firm is known as a 'Cash Cow':

A firm's value increases when it invests in projects that have:

Suppose that there are three zero coupon bonds with maturity date 1 year,2 year and 3 year respectively.The current price of the 1 year,2 year and 3 year bonds respectively are $826.45,$718.18 and $640.66 respectively.The yield to maturity of the first year bond is:

A level coupon bond:

In the above example,the price of the bond is

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

Net Present Value and Other Investment Rules

Net Present Value and Capital Budgeting

Risk Analysis,real Options,and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk,return,and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

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Short-Term Finance and Planning

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