Deck 10: Valuation Concepts

Question 1

Which of the following statements is correct?

A) The constant growth DCF model can be used to value a stock only if the stock's dividends are expected to grow forever at a constant rate which is less than the required rate of return on the stock.
B) If the growth rate is negative, the constant growth DCF model cannot be used.
C) The constant growth DCF model may be written as r₀ = D₀/P₀ +g
D) The constant growth DCF model may be written as P₀ = D₀/(r + g).
E) The constant growth DCF model may be written as P₀ = D₀/(r − g).

Answer 1

The constant growth DCF model can be used to value a stock only if the stock's dividends are expected to grow forever at a constant rate which is less than the required rate of return on the stock.

Question 2

You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months.If your simple annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond?

A) $826.31
B) $1,086.15
C) $957.50
D) $1,431.49
E) $1,124.62

Answer 2

$1,124.62

Question 3

Which of the following statements is correct?

A) A 10-year bond would have more interest rate price risk than a 5-year bond, but all 10-year bonds have the same interest rate price risk.
B) A 10-year bond would have more reinvestment rate risk than a 5-year bond, but all 10-year bonds have the same reinvestment rate risk.
C) If their maturities were the same, a 5 percent coupon bond would have more interest rate price risk than a 10 percent coupon bond.
D) If their maturities were the same, a 5 percent coupon bond would have less interest rate price risk than a 10 percent coupon bond.
E) Zero-coupon bonds have more interest rate price risk than any other type bond, even perpetuities.

Answer 3

If their maturities were the same, a 5 percent coupon bond would have more interest rate price risk than a 10 percent coupon bond.

Question 4

Assuming g will remain constant, the dividend yield is a good measure of the required return on a common stock under which of the following circumstances?

A) g = 0.
B) g > 0.
C) g < 0.
D) Under no circumstances.
E) Answers a and b are both correct.

Question 5

Which of the following statements is most correct?

A) All else equal, an increase in interest rates will have a greater effect on the prices of long-term bonds than it will on the prices of short-term bonds.
B) All else equal, an increase in interest rates will have a greater effect on higher-coupon bonds than it will have on lower-coupon bonds.
C) An increase in interest rates will have a greater effect on a zero-coupon bond with 10 years maturity than it will have on a 9-year bond with a 10 percent annual coupon.
D) All of the above are correct.
E) Answers a and c are both correct.

Question 6

If the model below is to give a "reasonable" valuation of a stock, which of the following is not a valid assumption for the model?

A) Growth, g, is negative.
B) There will be no growth, i.e., g is zero.
C) The growth rate exceeds the required rate of return.
D) The required return is exceptionally high (r_s > 30%).
E) All of the above are workable assumptions and are valid in the sense that the model can be used even if they hold true.

Question 7

If the expected rate of return on a stock exceeds the required rate,

A) The stock is experiencing supernormal growth.
B) The stock should be sold.
C) The company is probably not trying to maximize price per share.
D) The stock is a good buy.
E) Dividends are not being declared.

Question 8

You have just purchased a 10-year, $1,000 par value bond.The coupon rate on this bond is 8 percent annually, with interest being paid each 6 months.If you expect to earn a 10 percent simple rate of return on this bond, how much did you pay for it?

A) $1,122.87
B) $1,003.42
C) $875.38
D) $950.75
E) $812.15

Question 9

Suppose a stock is not currently paying dividends, and its management has announced that it will not pay a dividend for at least 5 years, but that it does expect to start paying dividends sometime in the future.Under these conditions, which of the following statements is correct?

A) Since it is expected to someday pay dividends, the value of the stock today can be found with this equation: P₀ = /(r − g).
B) The value of the stock cannot be found, even theoretically, by finding the present value of expected future dividends.
C) According to the text, such a stock should have a value of zero.Any actual value could only come from bids by people who want to control the company in order to draw salaries.
D) The value of the stock could be found by DCF procedures, but we would have to insert zeros for until such time as we expect the company to begin paying dividends.

Question 10

Which of the following statements is most correct?

A) If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must also exceed its coupon rate.
B) If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value.
C) If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate.
D) Answers b and c are both correct.
E) None of the above answers is correct.

Question 11

Which of the following statements is correct?

A) The discount or premium on a bond can be expressed as the difference between the coupon payment on an old bond which originally sold at par and the coupon payment on a new bond, selling at par, where the difference in payments is discounted at the new market rate.
B) The price of a coupon bond is determined primarily by the number of years to maturity.
C) On a coupon paying bond, the final interest payment is made one period before maturity and then, at maturity, the bond's face value is paid as the final payment.
D) The actual capital gains yield for a one-year holding period on a bond can never be greater than the current yield on the bond.
E) All of the above statements are false.

Question 12

Which of the following is not true about bonds? In all of the statements, assume other things are held constant.

A) Price sensitivity, that is, the change in price due to a given change in the required rate of return, increases as a bond's maturity increases.
B) For a given bond of any maturity, a given percentage point increase in the interest rate (r_d) causes a larger dollar capital loss than the capital gain stemming from an identical decrease in the interest rate.
C) For any given maturity, a given percentage point increase in the interest rate causes a smaller dollar capital loss than the capital gain stemming from an identical decrease in the interest rate.
D) From a borrower's point of view, interest paid on bonds is tax-deductible.
E) A 20-year zero-coupon bond has less reinvestment rate risk than a 20-year coupon bond.

Question 13

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

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

Question 14

Which of the following statements is correct?

A) Rising inflation makes the actual yield to maturity on a bond greater than the quoted yield to maturity which is based on market prices.
B) The yield to maturity for a coupon bond that sells at its par value consists entirely of an interest yield; it has a zero expected capital gains yield.
C) On an expected yield basis, the expected capital gains yield will always be positive because an investor would not purchase a bond with an expected capital loss.
D) The market value of a bond will always approach its par value as its maturity date approaches.This holds true even if the firm enters bankruptcy.
E) All of the above statements are false.

Question 15

Which of the following statements is most correct?

A) The current yield on Bond A exceeds the current yield on Bond B; therefore, Bond A must have a higher yield to maturity than Bond B.
B) If a bond is selling at a discount, the current yield is a better measure of return than the yield to maturity.
C) If a coupon bond is selling at par, its current yield equals its yield to maturity.
D) Both a and b are correct.
E) Both b and c are correct.

Question 16

Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40.If you require a 10 percent simple yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond?

A) $619
B) $674
C) $761
D) $828
E) $902

Question 17

Which of the following statements is correct?

A) Bond prices and interest rates move in the same direction, i.e., if interest rates rise, so will bond prices.
B) The market price of a discount bond will approach the bond's par value as the maturity date approaches.Barring changes in the probability of default, there is no way the value of the bond can fail to increase each year as the time to maturity approaches.
C) The "current yield" on a noncallable discount bond will normally exceed the bond's yield to maturity.
D) The "current yield" on a noncallable discount bond will normally exceed the bond's coupon interest rate.

Question 18

If interest rates fall from 8 percent to 7 percent, which of the following bonds will have the largest percentage increase in its value?

A) A 10-year zero-coupon bond.
B) A 10-year bond with a 10 percent semiannual coupon.
C) A 10-year bond with a 10 percent annual coupon.
D) A 5-year zero-coupon bond.
E) A 5-year bond with a 12 percent annual coupon.

Question 19

Which of the following statements is correct?

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 r_d = 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 r_d = YTM = 5%, we could be sure that the bond would sell at a discount below its $1,000 par value.

Question 20

One of the basic relationships in interest rate theory is that, other things held constant, for a given change in the required rate of return, the ____ the time to maturity, the ____ the change in price.

A) longer; smaller
B) shorter; larger
C) longer; greater
D) shorter; smaller
E) Answers c and d are both correct.

Question 21

Suppose that you read in The Wall Street Journal that a bond has a coupon rate of 9 percent, a price of 71 3/8, and pays interest annually.Rounded to the nearest whole percent, what would be the bond's "current" yield?

A) 11%
B) 13%
C) 15%
D) 17%
E) 20%

Question 22

Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years.Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2.In addition, you expect to sell the stock for $150 at the end of Year 2.If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today?

A) $164.19
B) $75.29
C) $107.53
D) $118.35
E) $131.74

Question 23

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)?

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

Question 24

You are contemplating the purchase of a 20-year bond that pays $50 in interest each six months.You plan to hold this bond for only 10 years, at which time you will sell it in the marketplace.You require a 12 percent annual return, but you believe the market will require only an 8 percent return when you sell the bond 10 years hence.Assuming you are a rational investor, how much should you be willing to pay for the bond today?

A) $1,126.85
B) $1,081.43
C) $737.50
D) $927.68
E) $856.91

Question 25

A share of common stock has just paid a dividend of $2.00.If the expected long-run growth rate for this stock is 15 percent, and if investors require a 19 percent rate of return, what is the price of the stock?

A) $57.50
B) $62.25
C) $71.86
D) $64.00
E) $44.92

Question 26

You are the owner of 100 bonds issued by Euler, Ltd.These bonds have 8 years remaining to maturity, an annual coupon payment of $80, and a par value of $1,000.Unfortunately, Euler is on the brink of bankruptcy.The creditors, including yourself, have agreed to a postponement of the next 4 interest payments (otherwise, the next interest payment would have been due in 1 year).The remaining interest payments, for Years 5 through 8, will be made as scheduled.The postponed payments will accrue interest at an annual rate of 6 percent, and they will then be paid as a lump sum at maturity 8 years hence.The required rate of return on these bonds, considering their substantial risk, is now 28 percent.What is the present value of each bond?

A) $538.21
B) $426.73
C) $384.84
D) $266.88
E) $249.98

Question 27

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?

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

Question 28

Gourmet Cheese Shoppe opened at the end of 2001.In its first full year of operations, 2002, earnings per share (EPS) was $0.26.Four years later, in 2005, EPS was up to $0.38, and 7 years after that, in 2012, EPS was up to $0.535.It appears that the first 4 years represented a supernormal growth situation and since then a more normal growth rate has been sustained.What are the rates of growth for the earlier period and for the later period?

A) 6%; 5%
B) 6%; 3%
C) 10%; 8%
D) 10%; 5%
E) 12%; 7%

Question 29

A share of perpetual preferred stock pays an annual dividend of $6 per share.If investors require a 12 percent rate of return, what should be the price of this preferred stock?

A) $57.25
B) $50.00
C) $62.38
D) $46.75
E) $41.64

Question 30

The Jones Company has decided to undertake a large project.Consequently, there is a need for additional funds.The financial manager plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30.If the required return on this stock is currently 20 percent, what should be the stock's market value?

A) $150
B) $100
C) $50
D) $25
E) $10

Question 31

A share of preferred stock pays a dividend of $0.50 each quarter.If you are willing to pay $20.00 for this preferred stock, what is your simple (not effective) annual rate of return?

A) 10%
B) 8%
C) 6%
D) 12%
E) 14%

Question 32

Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months.If you require a simple annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond?

A) $821.92
B) $1,207.57
C) $986.43
D) $1,120.71
E) $1,358.24

Question 33

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?

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

Question 34

The last dividend paid by Klein Company was $1.00.Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever.Klein's required rate of return on equity (r_s) is 12 percent.What is the current price of Klein's common stock?

A) $21.00
B) $33.33
C) $42.25
D) $50.16
E) $58.75

Question 35

A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent.If you require a 14 percent rate of return, what is the current dividend on this stock?

A) $3.00
B) $3.81
C) $4.29
D) $4.75
E) $6.13

Question 36

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?

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

Question 37

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation.The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually.The required simple rate on this debt has now risen to 16 percent.What is the current value of this bond?

A) $1,273
B) $1,000
C) $7,783
D) $550
E) $450

Question 38

You are trying to determine the appropriate price to pay for a share of common stock.If you purchase this stock, you plan to hold it for 1 year.At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154.The appropriate rate of return for this stock is 16 percent.What should be the current price of this stock?

A) $137.50
B) $150.22
C) $162.18
D) $98.25
E) $175.83

Question 39

In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis.KJM Corporation's balance sheet as of January 1, 2010 is as follows: The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000.They mature on January 1, 2020.The yield to maturity is 12 percent, so the bonds now sell below par.What is the current market value of the firm's debt?

A) $5,412,000
B) $5,480,000
C) $2,531,000
D) $7,706,000
E) $7,056,000

Question 40

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?

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

Question 41

Due to unfavorable economic conditions, EFB Company's earnings and dividends are expected to remain unchanged for the next 3 years.After 3 years, dividends are expected to grow at a 10 percent annual rate forever.The last dividend was $2.00, and the required rate of return is 20 percent.What should be the current market value of EFB stock?

A) $13.46
B) $14.51
C) $15.22
D) $16.03
E) $16.94

Question 42

A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50.If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for this stock?

A) $67.81
B) $22.49
C) $58.15
D) $31.00
E) $43.97

Question 43

Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years to go before it matures.If you buy this bond, you expect to hold it for 5 years and then to sell it in the market.You (and other investors) currently require a simple annual rate of 16 percent, but you expect the market to require a rate of only 12 percent when you sell the bond due to a general decline in interest rates.How much should you be willing to pay for this bond?

A) $842.00
B) $1,115.81
C) $1,359.26
D) $966.99
E) $731.85

Question 44

Cold Boxes Ltd.has 100 bonds outstanding (maturity value = $1,000).The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually.The bonds mature in 5 years, and their current market value is $768 per bond.What is the annual coupon interest rate?

A) 8%
B) 6%
C) 4%
D) 2%
E) 0%

Question 45

Suppose you are willing to pay $30 today for a share of stock which you expect to sell at the end of one year for $32.If you require an annual rate of return of 12 percent, what must be the amount of the annual dividend which you expect to receive at the end of Year 1?

A) $2.25
B) $1.00
C) $1.60
D) $3.00
E) $1.95

Question 46

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?

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

Question 47

DAA's stock is selling for $15 per share.The firm's income, assets, and stock price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years.No dividends have been declared as yet, but the firm intends to declare a dividend of = $2.00 at the end of the last year of its supernormal growth.After that, dividends are expected to grow at the firm's normal growth rate of 6 percent.The firm's required rate of return is 18 percent.The stock is

A) Undervalued by $3.03.
B) Overvalued by $3.03.
C) Correctly valued.
D) Overvalued by $2.25.
E) Undervalued by $2.25.

Question 48

JRJ Corporation recently issued 10-year bonds at a price of $1,000.These bonds pay $60 in interest each six months.Their price has remained stable since they were issued, i.e., they still sell for $1,000.Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months.If both bonds have the same yield, how many new bonds must JRJ issue to raise $2,000,000 cash?

A) 2,400
B) 2,596
C) 3,000
D) 5,000
E) 4,275

Question 49

Recently, Ohio Hospitals Inc.filed for bankruptcy.The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect.The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually.The new agreement allows the firm to pay no interest for 5 years.Then, interest payments will be resumed for the next 5 years.Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid.However, no interest will be paid on the deferred interest.If the required return is 20 percent, what should the bonds sell for in the market today?

A) $242.26
B) $281.69
C) $578.31
D) $362.44
E) $813.69

Question 50

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

Question 51

You have a chance to purchase a perpetual security that has a stated annual payment (cash flow) of $50.However, this is an unusual security in that the payment will increase at an annual rate of 5 percent per year; this increase is designed to help you keep up with inflation.The next payment to be received (your first payment, due in 1 year) will be $52.50.If your required rate of return is 15 percent, how much should you be willing to pay for this security?

A) $350
B) $482
C) $525
D) $556
E) $610

Question 52

The Satellite Building Company has fallen on hard times.Its management expects to pay no dividends for the next 2 years.However, the dividend for Year 3, , will be $1.00 per share, and the dividend is expected to grow at a rate of 3 percent in Year 4, 6 percent in Year 5, and 10 percent in Year 6 and thereafter.If the required return for Satellite is 20 percent, what is the current equilibrium price of the stock?

A) $0
B) $5.26
C) $6.34
D) $12.00
E) $13.09

Question 53

The Textbook Production Company has been hit hard due to increased competition.The company's analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever.Assume that r_s = 11 percent and D₀ = $2.00.What will be the price of the company's stock three years from now?

A) $27.17
B) $6.23
C) $28.50
D) $10.18
E) $20.63

Question 54

Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity of 9 percent.The bonds have a par value of $1,000 and were sold for $178.43 each.What is the expected interest expense on these bonds for Year 8?

A)
$29.35
B)
$32.00
C)
$90.00
D)
$26.12
E)
$25.79

Question 55

You are offered a $1,000 par value bond which has a stepped-up coupon interest rate.The annual coupon rate is 10 percent coupon, payable semiannually ($50 each 6 months) for the first 15 years, and then the annual coupon increases to 13 percent, also payable semiannually, for the next 15 years.The first interest payment will be made 6 months from today, and the $1,000 principal amount will be returned at the end of Year 30.You currently have savings in an account which is earning a 9 percent simple rate, but with quarterly compounding; this is your opportunity cost for purposes of analyzing the bond.What is the value of the bond to you today?

A) $1,614.53
B) $1,419.18
C) $1,306.21
D) $1,250.25
E) $1,155.98

Question 56

Assume that you can purchase a 15-year, $1,000 face value bond which pays interest on a semiannual basis, for $1,324.23.If the market's effective annual required rate of return is 8.16 percent (or 4 percent semi-annually), how much interest does this bond pay each year?

A) $64.81
B) $56.37
C) $117.50
D) $132.19
E) $126.48

Question 57

Assume that you own a hundred $1,000 par value bonds, with a total face value of $100,000.These bonds have a 4 percent coupon, pay interest semiannually, and have 5 years remaining until they mature.New bonds with the same risk and maturity provide yields to maturity of 14 percent.You are considering selling your bonds and depositing the proceeds in a savings account which pays interest at a rate of 6 percent, annual compounding.If you do make the transaction, you will liquidate the savings account by making 5 equal withdrawals, the first coming 1 year from now.What will be the amount of each annual withdrawal?

A) $12,940
B) $15,403
C) $24,860
D) $29,425
E) $64,880

Question 58

A share of stock has a dividend of D₀ = $5.The dividend is expected to grow at a 20 percent annual rate for the next 10 years, then at a 15 percent rate for 10 more years, and then at a long-run normal growth rate of 10 percent forever.If investors require a 10 percent return on this stock, what is its current price?

A) $100.00
B) $82.35
C) $195.50
D) $212.62
E) The data given in the problem are internally inconsistent, i.e., the situation described is impossible in that no equilibrium price can be produced.

Question 59

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?

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

Question 60

You are willing to pay $15,625 to purchase a perpetuity which will pay you and your heirs $1,250 each year, forever.If your required rate of return does not change, how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity instead of a perpetuity?

A) $10,342
B) $11,931
C) $12,273
D) $13,922
E) $17,157

Question 61

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?

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

Question 62

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 (r_s) is 10 percent.What is the current price of the common stock?

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

Question 63

Assume that the average firm in your company's industry is expected to grow at a constant rate of 5 percent, and its dividend yield is 4 percent.Your company is about as risky as the average firm in the industry, but it has just developed a line of innovative new products which leads you to expect that its earnings and dividends will grow at a rate of 40 percent [ = D₀(1 + g) = D₀(1.40)] this year and 25 percent the following year, after which growth should match the 5 percent industry average rate.The last dividend paid (D₀) was $2.What is the value per share of your firm's stock?

A) $42.60
B) $82.84
C) $91.88
D) $101.15
E) $110.37

Question 64

Assume that the State of Florida sold tax-exempt, zero coupon bonds with a $1,000 maturity value 5 years ago.The bonds had a 25-year maturity when they were issued, and the interest rate built into the issue was 8 percent, compounded semiannually.The bonds are now callable at a premium of 4 percent over the accrued value.What effective annual rate of return would an investor who bought the bonds when they were issued and who still owns them earn if they were called today?

A) 4.41%
B) 6.73%
C) 8.25%
D) 9.01%
E) 9.52%

Question 65

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?

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

Question 66

Semiannual payment bonds with the same risk (Aaa) and maturity (20 years) as your company's bonds have a simple (not effective annual rate) yield of 9 percent.Your company's treasurer is thinking of issuing at par some $1,000 par value, 20-year, quarterly payment bonds.She has asked you to determine what quarterly interest payment, in dollars, the company would have to set in order to provide the same effective annual rate (EAR) as those on the 20-year, semiannual payment bonds.What would the quarterly interest payment be, in dollars?

A) $45.00
B) $25.00
C) $22.25
D) $27.50
E) $23.00

Question 67

Club Auto Parts' last dividend, D₀, was $0.50, and the company expects to experience no growth for the next 2 years.However, Club 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 will sustain thereafter.Club has a required rate of return of 12 percent.What should be the price per share of Club stock at the beginning of the third year, ?

A) $19.98
B) $25.06
C) $31.21
D) $19.48
E) $27.55

Question 68

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

Question 69

The Hart Mountain Company has recently discovered a new type of kitty litter which is extremely absorbent.It is expected that the firm will experience (beginning now) an unusually high growth rate (20 percent) during the period (3 years) it has exclusive rights to the property where the raw material used to make this kitty litter is found.However, beginning with the fourth year the firm's competition will have access to the material, and from that time on the firm will achieve a normal growth rate of 8 percent annually.During the rapid growth period, the firm's dividend payout ratio (percent of EPS paid as dividends) will be relatively low (20 percent) in order to conserve funds for reinvestment.However, the decrease in growth in the fourth year will be accompanied by an increase in dividend payout to 50 percent.Last year's earnings were E₀ = $2.00 per share, and the firm's required return is 10 percent.What should be the current price of the common stock?

A) $66.50
B) $87.96
C) $71.53
D) $61.78
E) $93.50

Question 70

NYC Company has decided to make a major investment.The investment will require a substantial early cash outflow, and inflows will be relatively late.As a result, it is expected that the impact on the firm's earnings for the first 2 years will cause a negative growth of 5 percent annually.Further, it is anticipated that the firm will then experience 2 years of zero growth, after which it will begin a positive annual sustainable growth of 6 percent.If the firm's required return is 10 percent and its last dividend, D₀, was $2 per share, what should be the current price per share?

A) $32.66
B) $47.83
C) $53.64
D) $38.47
E) $42.49

Question 71

Tony's Pizzeria plans to issue bonds with a par value of $1,000 and 10 years to maturity.These bonds will pay $45 interest every 6 months.Current market conditions are such that the bonds will be sold to net $937.79.What is the YTM of the issue as a broker would quote it to an investor?

A) 11%
B) 10%
C) 9%
D) 8%
E) 7%

Question 72

The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58.A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000.What is the YTM (stated on a simple, or annual, basis) if the bonds mature 10 years from today?

A) 8%
B) 6%
C) 4%
D) 2%
E) 1%

Question 73

An 8 percent annual coupon, noncallable bond has ten years until it matures and a yield to maturity of 9.1 percent.What should be the price of a 10-year bond of equal risk which pays an 8 percent semiannual coupon? Assume both bonds have a maturity value of $1,000.

A) $898.64
B) $736.86
C) $854.27
D) $941.08
E) $964.23

Question 74

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?

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

Question 75

Worldwide Inc., a large conglomerate, has decided to acquire another firm.Analysts are forecasting a period (2 years) of extraordinary growth (20 percent), followed by another 2 years of unusual growth (10 percent), and finally a normal (sustainable) growth rate of 6 percent annually.If the last dividend was D₀ = $1.00 per share and the required return is 8 percent, what should the market price be today?

A) $93.70
B) $72.76
C) $99.66
D) $98.57
E) $68.87

Question 76

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?

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

Question 77

Assume that McDonald's and Burger King have similar $1,000 par value bond issues outstanding.The bonds are equally risky.The Burger King bond has interest payments of $80 paid annually and matures 20 years from today.The McDonald's bond has interest payments of $80 paid semiannually, and it also matures in 20 years.If the simple required rate of return, r_d, is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds?

A) No difference.
B) $2.20
C) $3.77
D) $17.53
E) $6.28

Question 78

Garcia Inc.has a current dividend of $3.00 per share (D₀ = $3.00).Analysts expect that the dividend will grow at a rate of 25 percent a year for the next three years, and thereafter it will grow at a constant rate of 10 percent a year.The company's cost of equity capital is estimated to be 15 percent.What is the current stock price of Garcia Inc.?

A) $75.00
B) $88.55
C) $95.42
D) $103.25
E) $110.00

Question 79

Modular Systems Inc.just paid dividend D₀, and it is expecting both earnings and dividends to grow by 0 percent in Year 1 and 2, by 5 percent in Year 3, and at a rate of 10 percent in Year 4 and thereafter.The required return on Modular is 15 percent, and it sells at its equilibrium price, P₀ = $49.87.What is the expected value of the next dividend, ? (Hint: Draw a time line and then set up and solve an equation with one unknown, .)

A) It cannot be estimated without more data.
B) $1.35
C) $1.85
D) $2.35
E) $2.85

Question 80

You have just been offered a $1,000 par value bond for $847.88.The coupon rate is 8 percent, payable annually, and interest rates on new issues of the same degree of risk are 10 percent.You want to know how many more interest payments you will receive, but the party selling the bond cannot remember.Can you determine how many interest payments remain?

A) 14
B) 15
C) 12
D) 20
E) 10