Deck 5: How to Value Bonds and Shares

Question 1

Next year's annual dividend divided by the current share price is called the:

A)yield to maturity.
B)total yield.
C)dividend yield.
D)capital gains yield.
E)earnings yield.

Answer 1

dividend yield.

Question 2

Face value is:

A)always higher than current price.
B)always lower than current price.
C)the same as the current price.
D)the coupon amount.
E)None of the above.

Answer 2

None of the above.

Question 3

The market price of a bond is equal to the present value of the:

A)face value minus the present value of the annuity payments.
B)annuity payments plus the future value of the face amount.
C)face value plus the present value of the annuity payments.
D)face value plus the future value of the annuity payments.
E)annuity payments minus the face value of the bond.

Answer 3

face value plus the present value of the annuity payments.

Question 4

The yield to maturity is:

A)the rate that equates the price of the bond with the discounted cash flows.
B)the expected rate to be earned if held to maturity.
C)the rate that is used to determine the market price of the bond.
D)equal to the current yield for bonds priced at par.
E)All of the above.

Question 5

A bond with a 7% coupon that pays interest semi-annually and is priced at par will have a market price of _____ and interest payments in the amount of _____ each.

A)€1,007; €70
B)€1,070; €35
C)€1,070; €70
D)€1,000; €35
E)€1,000; €70

Question 6

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

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

Question 7

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

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.
E)a coupon rate that is less than the yield to maturity.

Question 8

One basis point is equal to:

A).01%.
B).10%.
C)1.0%.
D)10%.
E)100%.

Question 9

The total interest paid on a zero-coupon bond is equal to:

A)zero.
B)the face value minus the issue price.
C)the face value minus the market price on the maturity date.
D)€1,000 minus the face value.
E)€1,000 minus the par value.

Question 10

You own a bond that has a 7% coupon and matures in 12 years.You purchased this bond at par value when it was originally issued.If the current market rate for this type and quality of bond is 7.5%,then you would expect:

A)the bond issuer to increase the amount of each interest payment on these bonds.
B)the yield to maturity to remain constant due to the fixed coupon rate.
C)to realize a capital loss if you sold the bond at the market price today.
D)today's market price to exceed the face value of the bond.
E)the current yield today to be less than 7%.

Question 11

A zero coupon bond:

A)is sold at a large premium.
B)has a price equal to the future value of the face amount given a specified rate of return.
C)can only be issued by a country's central bank.
D)has less interest rate risk than a comparable coupon bond.
E)has implicit interest which is calculated by amortizing the loan.

Question 12

The newly issued bonds of the Wynslow SA offer a 6% coupon with semiannual interest payments.The bonds are currently priced at par value.The effective annual rate provided by these bonds must be:

A)equal to 3%.
B)greater than 3% but less than 4%.
C)equal to 6%.
D)greater than 6% but less than 7%.
E)equal to 12%.

Question 13

The rate at which a share price is expected to appreciate (or depreciate)is called the _____ yield.

A)current
B)total
C)dividend
D)capital gains
E)earnings

Question 14

French Fortunes is preparing a bond offering with an 8% coupon rate.The bonds will be repaid in 10 years.The company plans to issue the bonds at par value and pay interest semiannually.Given this,which of the following statements are correct?
I.The initial selling price of each bond will be €1,000.
II.After the bonds have been outstanding for 1 year,you should use 9 as the number of compounding periods when calculating the market value of the bond.
III.Each interest payment per bond will be €40.
IV.The yield to maturity when the bonds are first issued is 8%.

A)I and II only.
B)II and III only.
C)II,III,and IV only.
D)I,II,and III only.
E)I,III,and IV only.

Question 15

Payments made by a corporation to its shareholders,in the form of either cash,shares or payments in kind,are called:

A)retained earnings.
B)net income.
C)dividends.
D)redistributions.
E)infused equity.

Question 16

An asset characterized by cash flows that increase at a constant rate forever is called a:

A)growing perpetuity.
B)growing annuity.
C)common annuity.
D)perpetuity due.
E)preferred share.

Question 17

A brand with semi-annual interest payments,all else equal,would be priced _________ than one with annual interest payments.

A)higher
B)lower
C)the same
D)it is impossible to tell
E)either higher or the same

Question 18

A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.

A)Treasury
B)municipal
C)floating-rate
D)junk
E)zero coupon

Question 19

The equity valuation model that determines the current share price by dividing the next annual dividend amount by the excess of the discount rate less the dividend growth rate is called the _____ model.

A)zero growth
B)dividend growth
C)capital pricing
D)earnings capitalization
E)differential growth

Question 20

A form of equity which receives no preferential treatment in either the payment of dividends or in bankruptcy distributions is called a(n)_____ share.

A)dual class
B)cumulative
C)deferred
D)preference
E)ordinary

Question 21

Consider a bond which pays 7% semiannually and has 8 years to maturity.The market requires an interest rate of 8% on bonds of this risk.What is this bond's price?

A)€942.50
B)€911.52
C)€941.74
D)€1,064.81
E)None of the above.

Question 22

An equity listing contains the following information: P/E 17.5,closing price 33.10,dividend .80,YTD% chg 3.4,and net chg -.50.Which of the following statements are correct given this information?
I.The share price has increased by 3.4% during the current year.
II.The closing price on the previous trading day was €32.60.
III.The earnings per share are approximately €1.89.
IV.The current yield is 17.5%.

A)I and II only.
B)I and III only.
C)II and III only.
D)III and IV only.
E)I,III,and IV only.

Question 23

The constant dividend growth model is:

A)generally used in practice because most shares have a constant growth rate.
B)generally used in practice because the historical growth rate of most shares is constant.
C)generally not used in practice because most shares grow at a non constant rate.
D)generally not used in practice because the constant growth rate is usually higher than the required rate of return.
E)based on the assumption the FTSE 100 represents a good estimate of the market index.

Question 24

Latcher AB is a relatively new firm that is still in a period of rapid development.The company plans on retaining all of its earnings for the next six years.Seven years from now,the company projects paying an annual dividend of €.25 a share and then increasing that amount by 3% annually thereafter.To value this equity as of today,you would most likely determine the value of the share _____ years from today before determining today's value.

A)4
B)5
C)6
D)7
E)8

Question 25

The closing share price is quoted at 22.87,with a P/E of 26 and a net change of 1.42.Based on this information,which one of the following statements is correct?

A)The closing price on the previous day was €1.42 higher than today's closing price.
B)A dealer will buy the share at €22.87 and sell it at €26.
C)The share price increased in value between yesterday's close and today's close by €.0142.
D)The earnings per share are equal to 1/26^th of €22.87.
E)The earnings per share have increased by €1.42 this year.

Question 26

A General Co.bond has an 8% coupon and pays interest annually.The face value is €1,000 and the current market price is €1,020.50.The bond matures in 20 years.What is the yield to maturity?

A)7.79%
B)7.82%
C)8.00%
D)8.04%
E)8.12%

Question 27

If its yield to maturity is less than its coupon rate,a bond will sell at a _____,and increases in market interest rates will _____.

A)discount; decrease this discount.
B)discount; increase this discount.
C)premium; decrease this premium.
D)premium; increase this premium.
E)None of the above.

Question 28

The bonds issued by Jensen & Son bear a 6% coupon,payable semiannually.The bond matures in 8 years and has a €1,000 face value.Currently,the bond sells at par.What is the yield to maturity?

A)5.87%
B)5.97%
C)6.00%
D)6.09%
E)6.17%

Question 29

Fred Flintlock wants to earn a total of 10% on his investments.He recently purchased shares of ABC equity at a price of €20.The share pays a €1 a year dividend.The price of ABC shares need to _____ if Fred is to achieve his 10% rate of return.

A)remain constant
B)decrease by 5%
C)increase by 5%
D)increase by 10%
E)increase by 15%

Question 30

Scott SpA has a general dividend policy whereby it pays a constant annual dividend of €1 per share of.The firm has 1,000 shares outstanding.The company:

A)must always show a current liability of €1,000 for dividends payable.
B)is obligated to continue paying €1 per share per year.
C)will be declared in default and can face bankruptcy if it does not pay €1 per year to each shareholder on a timely basis.
D)has a liability which must be paid at a later date should the company miss paying an annual dividend payment.
E)must still declare each dividend before it becomes an actual company liability.

Question 31

The constant dividend growth model: I.assumes that dividends increase at a constant rate forever.
II.can be used to compute a share price at any point of time.
III.states that the market price of a share is only affected by the amount of the dividend.
IV.considers capital gains but ignores the dividend yield.

A)I only.
B)II only.
C)III and IV only.
D)I and II only.
E)I,II,and III only.

Question 32

Differential growth refers to a firm that increases its dividend by:

A)three or more percent per year.
B)a rate which is most likely not sustainable over an extended period of time.
C)a constant rate of two or more percent per year.
D)€.10 or more per year.
E)an amount in excess of €.10 a year.

Question 33

The discount rate in equity valuation is composed entirely of:

A)the dividends paid and the capital gains yield.
B)the dividend yield and the growth rate.
C)the dividends paid and the growth rate.
D)the capital gains earned and the growth rate.
E)the capital gains earned and the dividends paid.

Question 34

The value of a 20 year zero-coupon bond when the market required rate of return of 9% (semiannual)is ____.

A)€171.93
B)€178.43
C)€318.38
D)€414.64
E)None of the above.

Question 35

The Robert Phillips Co.currently pays no dividend.The company is anticipating dividends of €0,€0,€0,€.10,€.20,and €.30 over the next 6 years,respectively.After that,the company anticipates increasing the dividend by 4% annually.The first step in computing the value of this equity today,is to compute the value of the share when it reaches constant growth in year:

A)3
B)4
C)5
D)6
E)7

Question 36

The total rate of return earned on a share is comprised of which two of the following?
I.current yield
II.yield to maturity
III.dividend yield
IV.capital gains yield

A)I and II only.
B)I and IV only.
C)II and III only.
D)II and IV only.
E)III and IV only.

Question 37

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

A)the initial investment necessary for a new project.
B)the net present value per share of an investment in a new project.
C)a continual reinvestment of earnings when r < g.
D)a single period investment when r > g.
E)None of the above.

Question 38

The share price today depends on:

A)the expected future holding period and the discount rate.
B)the expected future dividends and the capital gains.
C)the expected future dividends,capital gains and the discount rate.
D)the expected future holding period and capital gains.
E)None of the above.

Question 39

The underlying assumption of the dividend growth model is that a share is worth:

A)the same amount to every investor regardless of their desired rate of return.
B)the present value of the future income which the share generates.
C)an amount computed as the next annual dividend divided by the market rate of return.
D)the same amount as any other share that pays the same current dividend and has the same required rate of return.
E)an amount computed as the next annual dividend divided by the required rate of return.

Question 40

A bond is listed as a 12 3/4s of July 2009.This bonds pays:

A)€127.50 in July and January.
B)€63.75 in July and January.
C)€127.50 in July.
D)€63.75 in July.
E)None of the above.

Question 41

Your firm offers a 10-year,zero coupon bond.The yield to maturity is 8.8%.What is the current market price of a €1,000 face value bond?

A)€430.24
B)€473.26
C)€835.56
D)€919.12
E)€1,088.00

Question 42

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)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 43

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

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

Question 44

Party Time has a 6% coupon bond that matures in 11 years.The bond pays interest semiannually.What is the market price of a €1,000 face value bond if the yield to maturity is 12.9%?

A)€434.59
B)€580.86
C)€600.34
D)€605.92
E)€947.87

Question 45

Angelina's made two announcements concerning its equity today.First,the company announced that its next annual dividend has been set at €2.16 a share.Secondly,the company announced that all future dividends will increase by 4% annually.What is the maximum amount you should pay to purchase a share of Angelina's share if your goal is to earn a 10% rate of return?

A)€21.60
B)€22.46
C)€27.44
D)€34.62
E)€36.00

Question 46

Ted NV offers a zero coupon bond with an 11.3% yield to maturity.The bond matures in 16 years.What is the current price of a €1,000 face value bond?

A)€178.78
B)€180.33
C)€188.36
D)€190.09
E)€192.18

Question 47

The MerryWeather Firm wants to raise €10 million to expand its business.To accomplish this,it plans to sell 30-year,€1,000 face value zero-coupon bonds.The bonds will be priced to yield 6%.What is the minimum number of bonds it must sell to raise the €10 million it needs?

A)47,411
B)52,667
C)57,435
D)60,000
E)117,435

Question 48

High Noon Sun has a 5%,semiannual coupon bond with a current market price of €988.52.The bond has a par value of €1,000 and a yield to maturity of 5.29%.How many years is it until this bond matures?

A)4.0 years
B)4.5 years
C)6.5 years
D)8.0 years
E)9.0 years

Question 49

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.

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

Question 50

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

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

Question 51

How much are you willing to pay for one share of equity if the company just paid an €.80 annual dividend,the dividends increase by 4% annually and you require an 8% rate of return?

A)€19.23
B)€20.00
C)€20.40
D)€20.80
E)€21.63

Question 52

The zero coupon bonds of Markco 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?

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

Question 53

Winston Enterprises has a 15-year bond issue outstanding that pays a 9% coupon.The bond is currently priced at €894.60 and has a par value of €1,000.Interest is paid semiannually.What is the yield to maturity?

A)8.67%
B)10.13%
C)10.16%
D)10.40%
E)10.45%

Question 54

Gugenheim offers a 7% coupon bond with annual payments.The yield to maturity is 5.85% and the maturity date is 9 years.What is the market price of a €1,000 face value bond?

A)€742.66
B)€868.67
C)€869.67
D)€1,078.73
E)€1,079.59

Question 55

A corporate bond with a face value of €1,000 matures in 4 years and has a 8% coupon paid at the end of each year.The current price of the bond is €932.What is the yield to maturity for this bond?

A)5.05%
B)6.48%
C)8.58%
D)10.15%
E)11.92%

Question 56

Zeta Corporation has issued a €1,000 face value zero-coupon bond.Which of the following values is closest to the correct price for the bond if the appropriate discount rate is 4% and the bond matures in 8 years?

A)€730.69
B)€968.00
C)€1,000.00
D)€1,032.00
E)This problem cannot be worked without the annual interest payments provided.

Question 57

The Lo Sun Corporation offers a 6% bond with a current market price of €875.05.The yield to maturity is 7.34%.The face value is €1,000.Interest is paid semiannually.How many years is it until this bond matures?

A)16 years
B)18 years
C)24 years
D)30 years
E)32 years

Question 58

A corporate bond is quoted at a current price of 102.767.What is the market price of a bond with a €1,000 face value?

A)€1,000.28
B)€1,002.77
C)€1,027.67
D)€1,102.77
E)€1,276.70

Question 59

A zero coupon bond with a face value of €1,000 is issued with an initial price of €463.34.The bond matures in 25 years.What is the implicit interest,in euros,for the first year of the bond's life?

A)€9.08
B)€12.56
C)€14.48
D)€21.47
E)€31.25

Question 60

Wine and Roses plc offers a 7% coupon bond with semiannual payments and a yield to maturity of 7.73%.The bonds mature in 9 years.What is the market price of a €1,000 face value bond?

A)€953.28
B)€963.88
C)€1,108.16
D)€1,401.26
E)€1,401.86

Question 61

The ordinary equity of Energizer's pays an annual dividend that is expected to increase by 10% annually.The equity commands a market rate of return of 12% and sells for €60.50 a share.What is the expected amount of the next dividend to be paid on Energizer's ordinary equity?

A)€.90
B)€1.00
C)€1.10
D)€1.21
E)€1.33

Question 62

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%?

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

Question 63

Wilbert's Clothing Stores just paid a €1.20 annual dividend.The company has a policy whereby the dividend increases by 2.5% annually.You would like to purchase 100 shares in this firm but realize that you will not have the funds to do so for another three years.If you desire a 10% rate of return,how much should you expect to pay for 100 shares when you can afford to buy this equity? Ignore trading costs.

A)€1,640
B)€1,681
C)€1,723
D)€1,766
E)€1,810

Question 64

Majestic Homes share traditionally provides an 8% rate of return.The company just paid a €2 a year dividend which is expected to increase by 5% per year.If you are planning on buying 1,000 shares next year,how much should you expect to pay per share if the market rate of return for this type of security is 9% at the time of your purchase?

A)€48.60
B)€52.50
C)€55.13
D)€57.89
E)€70.00

Question 65

Turnips and Parsley ordinary equity 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?

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

Question 66

B&K Enterprises will pay an annual dividend of €2.08 a share on its ordinary equity next year.Last week,the company paid a dividend of €2.00 a share.The company adheres to a constant rate of growth dividend policy.What will one share of B&K ordinary equity be worth ten years from now if the applicable discount rate is 8%?

A)€71.16
B)€74.01
C)€76.97
D)€80.05
E)€83.25

Question 67

Shares of ordinary equity of the Samson Co.offer an expected total return of 12%.The dividend is increasing at a constant 8% per year.The dividend yield must be:

A)-4%.
B)4%.
C)8%.
D)12%.
E)20%.

Question 68

You have decided that you would like to own some shares of GH NV but need an expected 12% rate of return to compensate for the perceived risk of such ownership.What is the maximum you are willing to spend per share to buy GH equity if the company pays a constant €3.50 annual dividend per share?

A)€26.04
B)€29.17
C)€32.67
D)€34.29
E)€36.59

Question 69

The ordinary equity of Grady had an 11.25% rate of return last year.The dividend amount was €.70 a share which equated to a dividend yield of 1.5%.What was the rate of price appreciation on the equity?

A)1.50%
B)8.00%
C)9.75%
D)11.25%
E)12.75%

Question 70

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

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

Question 71

The Merriweather Co.just announced that it will pay a dividend next year of €1.60 and is establishing a policy whereby the dividend will increase by 3.5% annually thereafter.How much will one share be worth five years from now if the required rate of return is 12%?

A)€21.60
B)€22.36
C)€23.14
D)€23.95
E)€24.79

Question 72

The current yield on Alpha's ordinary equity is 4.8%.The company just paid a €2.10 dividend.The rumor is that the dividend will be €2.205 next year.The dividend growth rate is expected to remain constant at the current.What is the required rate of return on Alpha's equity?

A)10.04%
B)16.07%
C)21.88%
D)43.75%
E)45.94%

Question 73

Martin's Yachts has paid annual dividends of €1.40,€1.75,and €2.00 a share over the past three years,respectively.The company now predicts that it will maintain a constant dividend since its business hased off and sales are expected to remain relatively constant.Given the lack of future growth,you will only buy this equity if you can earn at least a 15% rate of return.What is the maximum amount you are willing to pay to buy one share today?

A)€10.00
B)€13.33
C)€16.67
D)€18.88
E)€20.00

Question 74

Weisbro and Sons ordinary equity sells for €21 a share and pays an annual dividend that increases by 5% annually.The market rate of return on this equity is 9%.What is the amount of the last dividend paid by Weisbro and Sons?

A)€.77
B)€.80
C)€.84
D)€.87
E)€.88

Question 75

A share pays a constant annual dividend and sells for €31.11.If the dividend yield of this equity is 9%,what is the dividend amount?

A)€1.40
B)€1.80
C)€2.20
D)€2.40
E)€2.80

Question 76

The Reading Co.has adopted a policy of increasing the annual dividend on its ordinary equity at a constant rate of 3% annually.The last dividend it paid was €0.90 a share.What will the company's dividend be in six years?

A)€0.90
B)€0.93
C)€1.04
D)€1.07
E)€1.11

Question 77

The Extreme Reaches Corp.last paid a €1.50 per share annual dividend.The company is planning on paying €3.00,€5.00,€7.50,and €10.00 a share over the next four years,respectively.After that the dividend will be a constant €2.50 per share per year.What is the market price of this equity if the market rate of return is 15%?

A)€17.04
B)€22.39
C)€26.57
D)€29.08
E)€33.71

Question 78

Bet'R Bilt Bikes just announced that its annual dividend for this coming year will be €2.42 a share and that all future dividends are expected to increase by 2.5% annually.What is the market rate of return if this equity is currently selling for €22 a share?

A)9.5%
B)11.0%
C)12.5%
D)13.5%
E)15.0%

Question 79

Leslie's Unique Clothing Stores offers a share that pays an annual dividend of €2.00.The company has promised to maintain a constant dividend.How much are you willing to pay for one share if you want to earn 12% return on your equity investments?

A)€10.00
B)€13.33
C)€16.67
D)€18.88
E)€20.00

Question 80

The ordinary equity of Eddie's Engines,Inc.sells for €25.71 a share.The equity 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 equity?

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