QUESTION 1
A corporation undertaking an expansion project issues 20 year bonds to finance the project. Which of the following is most likely true?
a. The company does not need to make payments on the bonds unless it has positive earnings for the year
b. The company has borrowed money and must pay interest on the amount borrowed
c. The company did not have any outstanding bonds when it issued the new ones
d. The bonds must have sold at a premium since expansion projects are generally risky
e. None of the above is likely to be true.
QUESTION 2
A bond sold five weeks ago for $1,100. The bond is worth $1,050 in today's market. Assuming no changes in risk, which of the following is true?
a. The face value of the bond must be $1,100
b. The bond must be within one year of maturity
c. Interest rates must be lower now than they were five weeks ago
d. The bond's current yield has increased from five weeks ago
e. The coupon payment of the bond must have increased
QUESTION 3
A bond with face value of $1,000 has annual coupon payments of $100 and was issued 7 years ago. The bond currently sells for $1,000 and has 8 years left to maturity. This bond's...........must be 10%.
I) yield to maturity
II) current yield
III) coupon rate
a. I) only
b. I) and II) only
c. III) only
d. II) and III) only
e. I),II) and III)
QUESTION 4
If you purchase a bond which is selling at a discount, collect the annual coupon for one year a year after purchase, and then sell the bond for the same price at which it was purchased, your total return from the year will:
a. equal the current yield
b. equal the yield to maturity
c. equal the coupon rate
d. exceed the yield to maturity
e. be less than the coupon rate
QUESTION 5
True or False: For a bond, total return = yield to maturity = market's required return
True
False
QUESTION 6
............................... returns measure the percentage change in the purchasing power, not the percentage change in the number of pounds (or other unit of currency) that is received.
a. Real
b. Nominal
c. Yield to maturity
d. Holding period
e. Coupon
QUESTION 7
Suppose you read in the financial press that 30-year Treasury bonds are yielding 8.5 percent. This is an example of .....................
a. a real return
b. a nominal return
c. an inflation premium
d. a default risk premium
e. none of the above
QUESTION 8
Suppose you purchase a zero coupon bond, face value $1000 maturing in 20 years, for $214.55. If the yield to maturity on the bond remains unchanged, what will the price of the bond be at the end of five years from now?
a. $315.24
b. $387.52
c. $410.91
d. $680.58
e. $1000
QUESTION 9
What would you pay (to the nearest $0.10) for a bond that pays an annual coupon of $35, has a face value of $1,000, matures in 7 years, and has a yield to maturity of 8%?
a. $765.7
b. $875.3
c. $900.2
d. $910.1
e. $976.4
QUESTION 10
The bonds of Microhard, Inc. carry a 10% annual coupon, have a $1,000 face value, and mature in 4 years. Bonds of equivalent risk yield 7%. The market value of Microhard's bond's should be:
a. $1,011.20
b. $1,087.25
c. $1,095.66
d. $1,101.62
e. $1,160.25
QUESTION 11
Using a dividend growth model, the total return on a share of common stocks is comprised of a:
a. capital gains yield and a dividend growth rate
b. capital gains growth rate and a dividend growth rate
c. dividend payout ratio and a required rate of return
d. dividend yield and the present dividend
e. dividend yield and a capital gains yield
QUESTION 12
Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm's stock at the end of four years (P4) is:
I. D5/(r-g)
II. P0 x (1+g)4
III. D0 x (1+g)/(r-g)
a. I only
b. II only
c. I and II only
d. I and III only
e. I, II and III
QUESTION 13
Dividends on the common stock of Stable Inc. are expected to grow at a constant rate forever. If you are given Stable's last dividend amount, its dividend growth rate, and a discount rate, you can compute.
I. The price today
II. The price at the end of five years from now
III. The dividend that is expected to be paid ten years from now
a. I only
b. I and II only
c. I and III only
d. II and III only
e. I, II and III
QUESTION 14
True or False: If one uses the perpetuity model to value stock. One assumes that P0 = P1 = ... = P∞, implying that the annual return from owning the stock is zero.
True
False
QUESTION 15
What would you pay for a share of ABC Corporation stock today if it is going to pay £2 dividend and be worth £110 in one year? You require a 12% return on you equity investments.
a. £95
b. £100
c. £110
d. £115
e. £120
QUESTION 16
The dividend on Newcastle Motors common stock will be £2 in 1 year, £3.50 in 2 years, and £5 in 3 years. A business associate has committed to buying the stock from you for £75 in 3 years. If you require a 10% return on your investment, how much would you be willing to pay for a share of this stock?
a. £59.69
b. £64.65
c. £64.82
d. £65.66
e. £71.30
QUESTION 17
A stock that pays a constant dividend of £2.50 currently sells for £20. What is the required rate of return?
a. 11.0%
b. 11.5%
c. 12.0%
d. 12.5%
e. 13.0%
QUESTION 18
What would you pay for a stock that is expected to pay a £1.50 dividend in one year if the expected dividend growth rate is 3% and you require a 16% return on your investment?
a. £11.54
b. £12.33
c. £12.43
d. £13.14
e. £14.30
QUESTION 19
The Tops stock is currently selling for £50.00. The expected dividend in one period is £1.50 and the required return is 10%. What is the firm's dividend growth rate assuming constant growth?
a. 7%
b. 8%
c. 9%
d. 10%
e. 15%
QUESTION 20
Benny Corp. announces that the dividend for the next period (one year from now) will be £2.50 per share rather than the originally expected £1.50 per share. From then on, it is expected that dividends will resume the historical constant growth of 5% per year. What would you expect to happen to the price of their stock as a result of the higher level if dividends? Ignore any tax effects.
a. The price will likely double
b. The price will likely rise by less than 100%
c. The price will likely rise by exactly 50%
d. The price will remain unchanged
e. The price will likely rise by the present value of £1