Question 1

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.

Question 2

S&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%

Question 3

Which of the following amounts is closest to the present value of a bond with coupon payment of $80 and a face value of $1,000? Interest payments are made at the end of each of 2 years, and the bond matures in 2 years. The spot interest rate for the first year is 10%, and the spot interest rate for the second year is 12%.

Accepted Answer

A)  $910 
B)  $934 
C)  $949 
D)  $1,000

Question 4

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%

Question 5

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.

Question 6

Given the following set of spot rates:

Accepted Answer

The answer of Given the following set of spot rates:
...

Question 7

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%

Question 8

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.

Question 9

A number of publicly traded firms pay no dividends yet investors are willing to buy shares in these firms. How is this possible? Does this violate our basic principle of stock valuation? Explain.

Accepted Answer

The answer of A number of publicly traded firms pay...

Question 10

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%.

Question 11

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.

Question 12

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.

Question 13

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

The answer of Explain why some bond investors are subject...

Question 14

If a company is currently paying $.40 in dividends and they are expected to grow at 7% for the next 6 years and then grow at 4% thereafter the dividend expected in year 8 is:

Accepted Answer

A)  $4.33. 
B)  $0.65. 
C)  $4.39. 
D)  $0.69. 
E)  $0.67.

Question 15

What would be the maximum an investor should pay for the common stock of a firm that has no growth opportunities but pays a dividend of $1.36 per year? The next dividend will be paid in exactly 1 year. The required rate of return is 12.5%.

Accepted Answer

A)  $17.00 
B)  $9.52 
C)  $10.88 
D)  $12.24

Question 16

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

Accepted Answer

A)  discount; decrease this discount. 
B)  discount; increase this discount. 
C)  premium; decrease this premium. 
D)  premium; increase this premium.

Question 17

A consol is selling at $1,200 with an interest rate of 5%. How much would this bond sell for if the interest rate were 8% instead?

Accepted Answer

A)  $200. 
B)  $750. 
C)  $1,650. 
D)  $1,920.

Question 18

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

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

Question 20

Which of the following statements is true?

Accepted Answer

A)  The spot rate is a weighted average of the yields to maturity. 
B)  The spot rate is always higher than the yield to maturity. 
C)  The yield to maturity is a weighted average of spot rates. 
D)  The yield to maturity is always higher than the spot rate.

Exam 6: How to Value Bonds and Stocks