Question 1

A bond is listed in the Financial Post as a 8.800 of September 22/25.This bonds pays:

Accepted Answer

A)  $88.25 in July and January. 
B)  $44 in July and January. 
C)  $88.25 in July. 
D)  $88 in July. 
A)  $88.25 in July and January. 
B)  $44 in July and January. 
C)  $88.25 in July. 
D)  $88 in July.

Question 2

Stand Still Co.has been earning $1 per share on 400,000 shares,and paying out all of the earnings.The discount rate for a company of this risk is 10%.The company has an investment opportunity with a cost of $1,500,000 and expects to earn $230,000 after taxes,but they must reinvest 35% of these earnings to continue to maintain the expansion in earnings.What is the value of the company without the investment and what is the value with the investment?

Accepted Answer

A)  $200,000; $1,500,000 
B)  $4,000,000; $6,600,000 
C)  $4,000,000; $3,995,000 
D)  $400,000; $15,000,000 
A)  $200,000; $1,500,000 
B)  $4,000,000; $6,600,000 
C)  $4,000,000; $3,995,000 
D)  $400,000; $15,000,000

Question 3

The zero coupon bonds of Quipta Inc.have a market price of $394.47,a face value of $1,000,and a yield to maturity of 6.87%.How many years is it until this bond matures?

Accepted Answer

A)  7 years 
B)  10 years 
C)  14 years 
D)  18 years 
E)  21 years 
A)  7 years 
B)  10 years 
C)  14 years 
D)  18 years 
E)  21 years

Question 4

Firms with higher expected growth opportunities usually sell for:

Accepted Answer

A)  a lower price earnings multiple. 
B)  the same price earnings multiple for all firms. 
C)  a higher price earnings multiple. 
D)  a price that depends on the payout ratio only. 
E)  a price independent of the P/E. 
A)  a lower price earnings multiple. 
B)  the same price earnings multiple for all firms. 
C)  a higher price earnings multiple. 
D)  a price that depends on the payout ratio only. 
E)  a price independent of the P/E.

Question 5

The dividend growth rate is equal to the product of what two ratios?

Accepted Answer

A)  ROA, current ratio. 
B)  ROE, retention ratio. 
C)  PM, ROA. 
D)  ROA, ROE. 
A)  ROA, current ratio. 
B)  ROE, retention ratio. 
C)  PM, ROA. 
D)  ROA, ROE.

Question 6

Show that a firm with earnings of $10,000 a year in perpetuity would be better off paying all earnings in dividends rather than investing 25% of its earnings (also in perpetuity)in projects earning 14% if its discount rate is 15%.

Accepted Answer

The answer of Show that a firm with earnings of...

Question 7

Martha's Vineyard recently paid a $3.60 annual dividend on its common stock.This dividend increases at an average rate of 3.5% per year.The stock is currently selling for $62.10 a share.What is the market rate of return?

Accepted Answer

A)  2.5% 
B)  3.5% 
C)  5.5% 
D)  6.0% 
E)  9.5% 
A)  2.5% 
B)  3.5% 
C)  5.5% 
D)  6.0% 
E)  9.5%

Question 8

Given the following set of spot rates:

Accepted Answer

@#IMG-DLM& Calculate the 1-year forward rates over

Question 9

A pure discount bond:

Accepted Answer

A)  has no face value. 
B)  pays interest annually. 
C)  pays interest semiannually. 
D)  pays no coupon. 
A)  has no face value. 
B)  pays interest annually. 
C)  pays interest semiannually. 
D)  pays no coupon.

Question 10

The value of a 20 year zero-coupon bond when the market required rate of return of 9% (semi-annual)is:

Accepted Answer

A)  $414.64. 
B)  $318.38. 
C)  $171.93. 
D)  $178.43. 
A)  $414.64. 
B)  $318.38. 
C)  $171.93. 
D)  $178.43.

Question 11

ABC Imports paid a $1.00 per share annual dividend last week.Dividends are expected to increase by 5% annually.What is one share of this stock worth to you today if the appropriate discount rate is 14%?

Accepted Answer

A)  $7.14 
B)  $7.50 
C)  $11.11 
D)  $11.67 
E)  $12.25 
A)  $7.14 
B)  $7.50 
C)  $11.11 
D)  $11.67 
E)  $12.25

Question 12

The liquidity preference hypothesis explains that the 2nd year forward rates are set higher than the expected spot rate over year two because:

Accepted Answer

A)  of a downward sloping yield curve. 
B)  of long term rates being greater than short term rates. 
C)  investors must be induced to buy the riskier two year bond. 
D)  two year bonds are less risk than one years bonds when rates are higher. 
A)  of a downward sloping yield curve. 
B)  of long term rates being greater than short term rates. 
C)  investors must be induced to buy the riskier two year bond. 
D)  two year bonds are less risk than one years bonds when rates are higher.

Question 13

&P Inc.common stock sells for $39.86 a share at a market rate of return of 9.5%.The company just paid its annual dividend of $1.20.What is the rate of growth of its dividend?

Accepted Answer

A)  5.2% 
B)  5.5% 
C)  5.9% 
D)  6.0% 
E)  6.3% 
A)  5.2% 
B)  5.5% 
C)  5.9% 
D)  6.0% 
E)  6.3%

Question 14

Suppose that a bond that will mature in two years has a face value of $1000 and 20% coupon rate.The one year spot market interest rate is 13% and the expected second period's forward rate is 12%.According to the expectation hypothesis,the two year spot rate is:

Accepted Answer

A)  11.50% 
B)  9.12% 
C)  12.74% 
D)  7.00% 
A)  11.50% 
B)  9.12% 
C)  12.74% 
D)  7.00%

Question 15

Given r1 = .050 and r2 = .054,what can you deduce about investor's expectations of future short-term interest rates if the expectations hypothesis is correct?

Accepted Answer

A)  Investors expect future short-term rates to be greater than current short-term rates. 
B)  Investors expect future short-term rates to be less than current short-term rates. 
C)  Investors expect future short-term rates to be equal to current short-term rates. 
D)  Investors expect future short-term rates to be higher than current forward rates. 
A)  Investors expect future short-term rates to be greater than current short-term rates. 
B)  Investors expect future short-term rates to be less than current short-term rates. 
C)  Investors expect future short-term rates to be equal to current short-term rates. 
D)  Investors expect future short-term rates to be higher than current forward rates.

Question 16

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.The estimated growth for No-Zip is:

Accepted Answer

A)  2.4% 
B)  5.6% 
C)  7.2% 
D)  16.8% 
A)  2.4% 
B)  5.6% 
C)  7.2% 
D)  16.8%

Question 17

The expectations hypothesis states that the forward rate over second period is:

Accepted Answer

A)  set to the spot rate expected to prevail over the second period. 
B)  equal to the first period spot rate. 
C)  always greater than the spot rate in period one. 
D)  always greater than the period 3 forward rate. 
A)  set to the spot rate expected to prevail over the second period. 
B)  equal to the first period spot rate. 
C)  always greater than the spot rate in period one. 
D)  always greater than the period 3 forward rate.

Question 18

The net present value of a growth opportunity,NPVGO,can be defined as:

Accepted Answer

A)  the present value of an investment in one new project. 
B)  the steady growth in dividends from continual re-investment with positive NPV. 
C)  continual reinvestment of earnings when r  g. 
A)  the present value of an investment in one new project. 
B)  the steady growth in dividends from continual re-investment with positive NPV. 
C)  continual reinvestment of earnings when r  g.

Question 19

All else constant,a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

Accepted Answer

A)  a premium; higher than 
B)  a premium; equal to 
C)  at par; higher than 
D)  a discount; higher than 
A)  a premium; higher than 
B)  a premium; equal to 
C)  at par; higher than 
D)  a discount; higher than

Question 20

Define what is meant by interest rate risk.Assume you are the manager of a $100 million portfolio of corporate bonds and you believe interest rates will fall.What adjustments should you make to your portfolio based on your beliefs?

Accepted Answer

Interest rate risk is the risk that aris

Exam 6: How to Value Bonds and Stocks

A bond is listed in the Financial Post as a 8.800 of September 22/25.This bonds pays:

The zero coupon bonds of Quipta Inc.have a market price of $394.47,a face value of $1,000,and a yield to maturity of 6.87%.How many years is it until this bond matures?

Firms with higher expected growth opportunities usually sell for:

The dividend growth rate is equal to the product of what two ratios?

Show that a firm with earnings of $10,000 a year in perpetuity would be better off paying all earnings in dividends rather than investing 25% of its earnings (also in perpetuity)in projects earning 14% if its discount rate is 15%.

Martha's Vineyard recently paid a $3.60 annual dividend on its common stock.This dividend increases at an average rate of 3.5% per year.The stock is currently selling for $62.10 a share.What is the market rate of return?

Given the following set of spot rates:

A pure discount bond:

The value of a 20 year zero-coupon bond when the market required rate of return of 9% (semi-annual)is:

ABC Imports paid a $1.00 per share annual dividend last week.Dividends are expected to increase by 5% annually.What is one share of this stock worth to you today if the appropriate discount rate is 14%?

The liquidity preference hypothesis explains that the 2nd year forward rates are set higher than the expected spot rate over year two because:

&P Inc.common stock sells for $39.86 a share at a market rate of return of 9.5%.The company just paid its annual dividend of $1.20.What is the rate of growth of its dividend?

Suppose that a bond that will mature in two years has a face value of $1000 and 20% coupon rate.The one year spot market interest rate is 13% and the expected second period's forward rate is 12%.According to the expectation hypothesis,the two year spot rate is:

Given r1 = .050 and r2 = .054,what can you deduce about investor's expectations of future short-term interest rates if the expectations hypothesis is correct?

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.The estimated growth for No-Zip is:

The expectations hypothesis states that the forward rate over second period is:

The net present value of a growth opportunity,NPVGO,can be defined as:

All else constant,a bond will sell at _____ when the yield to maturity is _____ the coupon rate.

Define what is meant by interest rate risk.Assume you are the manager of a $100 million portfolio of corporate bonds and you believe interest rates will fall.What adjustments should you make to your portfolio based on your beliefs?

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

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

Filters

The liquidity preference hypothesis explains that the 2^nd year forward rates are set higher than the expected spot rate over year two because:

Given r₁ = .050 and r₂ = .054,what can you deduce about investor's expectations of future short-term interest rates if the expectations hypothesis is correct?

All else constant,a bond will sell at _ when the yield to maturity is _ the coupon rate.