Question 1

The closing price of a stock 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?

Accepted Answer

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

Question 2

The newly issued bonds of the Cain Corp.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:

Accepted Answer

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 3

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 4

Part of the Rock,Inc.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%?

Accepted Answer

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

Question 5

The discount rate in equity valuation is composed entirely of:

Accepted Answer

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 6

The term structure can be described as the:

Accepted Answer

A)  relationship of spot rates of interest and bond prices. 
B)  relationship of coupon rates and money rates. 
C)  relationship of spot rates of interest and maturity. 
D)  relationship of coupon rates and maturity.

Question 7

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

Accepted Answer

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

Question 8

What can you deduce about forward rates of interest if the liquidity-preference hypothesis of the term structure is correct?

Accepted Answer

A)  The forward rate is less than investor's expectations of next years one year interest rate. 
B)  The forward rate is greater than investor's expectations of next years one year interest rate. 
C)  The forward rate is equal to investor's expectations of next years one year interest rate. 
D)  The forward rate is equal to the risk-free interest rate.

Question 9

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.

Accepted Answer

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

Question 10

Zero-coupon bonds:

Accepted Answer

A)  always sell at a discount before maturity. 
B)  always sell at a premium before maturity. 
C)  have no face value. 
D)  have no maturity.

Question 11

The average Japanese P/E ratio was reported as between 40 and 100 in recent years while the average U.S.P/E ratio was 25.The reason for the higher Japanese P/E ratio has been partially explained by:

Accepted Answer

A)  growth opportunities over stated earnings. 
B)  understated earnings and low interest rates. 
C)  overstated earnings and low interest rates. 
D)  understated earnings and overstated growth opportunities. 
E)  low interest rates and greater growth opportunities.

Question 12

The discount rate can be thought of as the sum of what two parts?

Accepted Answer

A)  ROE, retention ratio. 
B)  Dividend yield, growth rate in dividends. 
C)  Price, growth rate in dividends. 
D)  Dividend yield, price. 
E)  ROA, ROE.

Question 13

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 14

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

Accepted Answer

A)  $.77 
B)  $.80 
C)  $.84 
D)  $.87 
E)  $.88

Question 15

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 16

Spot rates are the interest rates that prevail in the market from:

Accepted Answer

A)  the current period until the sale of the security. 
B)  time zero until the asset's maturity. 
C)  one period forward to maturity. 
D)  some unknown future period.

Question 17

The Double Dip Co.is expecting its ice cream sales to decline due to the increased interest in healthy eating.Thus,the company has announced that it will be reducing its annual dividend by 5% a year for the next two years.After that,it will maintain a constant dividend of $1 a share.Two weeks ago,the company paid a dividend of $1.40 per share.What is this stock worth if you require a 9% rate of return?

Accepted Answer

A)  $10.86 
B)  $11.11 
C)  $11.64 
D)  $12.98 
E)  $14.23

Question 18

The value of common stock today depends on:

Accepted Answer

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.

Question 19

A consol:

Accepted Answer

A)  always sells at a premium. 
B)  always sells at a discount. 
C)  is an agent that makes interest payments. 
D)  has no maturity. 
E)  pays no interest.

Question 20

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?

Accepted Answer

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

Exam 6: How to Value Bonds and Stocks