Financial Management - Exam 3

Prof. Trainor

 

Name_____________________________________

 

1.  A firm plans on paying a dividend next year of $1.50.  Dividends are expected to grow at 5% after that.  If the current stock price of this firm is $25, what must be its cost of capital?

A.  11%

B.  11.5%

C.  6%

D.  12%

E.  None of the above

 

2.  Assume you buy a stock with a current dividend of $2, it has a cost of capital of 14% and dividends of this firm are expected to grow at 6%.  If you sell this stock next year, how much should you expect to make on this stock?

A.  $1.59

B. $2.00

C. $2.12

D. $3.59

E.  3.71

 

3.  In Gordon=s dividend growth model, P0 = D1/(k-g) which of the following would increase the value of the stock?

A.  If the growth rate of dividends increased

B.  If the cost of capital increased

C.  If the Dividend next year increased

D.  Both A and C

E.  None of the above

 

4.  If a firm=s current dividend is $1.00 and is growing at 4%, what should the firm=s stock price be in 30 years if its cost of capital is 12%?

A.  $40.54

B.  $38.98

C. $12.50

D. $42.16

E.  None of the above

 

5.  The current dividend on Spirex Corporation's common stock was $3.00, 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.          $30.00

b.         $33.00

c.         $15.00

d.         $45.00

E.          None of the above

 

6.  Assume a corporation comes out with a new product called the transporter.  Because of start up costs, the corporation does not plan on paying any dividends for the first 10 years.  In the 11th year(D11) the dividend is expected to be $30 and will continue to grow thereafter at 10%.  If the cost of capital for this corporation is 12%, what is the intrinsic value of this stock today?  Hint: Find P10 and discount it back to today at the cost of capital.

a. $1,500

b. $578.31

c. $431.21

d. $482.96

E.  None of the above

 

7.  Assume BRE=s current dividend is 50 cents and future dividends are expected to be reduced by 10% per year.  If the cost of capital for BRE is 15%, how much should you pay for this stock?

a.  $10.00

b.  $9.00

c.  $1.80

d.  $2.00

E.  None of the above

 

8.  The current dividend for IBM is $8.45.  IBM=s current stock price is $130 a share.  If IBM=s cost of capital if 12%, what must be the dividend growth rate?

A.  5.9%

B.  5.5%

C.  7.7%

D.  4%

E.  None of the above

 

9.  The Gordon dividend growth model assumes that

A.  g > k

B.  The dividend is greater that k

C.  k > g

D.  g > D1

E.  None of the above

 

10.  Gordon=s dividend growth model assumes that dividends will grow at a constant rate forever.  We know in a static fixed resource universe, nothing can grow forever.  However, this assumption is not that important.  For example, a firm has a current dividend of $3, a cost of capital of 10%, and a dividend growth rate of 4%.  100 years from now, its dividend would be $151.51.  However, this dividend only contributes what amount to the current stock price?  Round to nearest penny.

A. $151.51

B. $51.51

C. $.01

D. $1.01

E. $10.99

11.  Assume next years dividend for a corporation is expected to be a $1.  The growth rate of this dividend is expected to be zero.  If your required return on this stock is 5%, what would you be willing to pay for it?

A.  Zero

B. $1

C. $10

D. $20

E.  None of the above

 

12.  Assume next years dividend is $2 for a corporation, it=s growth rate is 6% and its cost of capital is 10%.  If you think next years dividend is actually going to be $2.50 which will grow at 8% instead of 6%, how much more would the stock be worth?

A. $25

B. $50

C. $75

D. $100

E.  None of the above

 

13.  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 once a year.  If the bond is yielding a nominal 12 percent, how much did you pay for it?

a.          $773.99

b.         $1,000.42

c.         $1,268.40

d.         $877.11

E.          None of the above

 

14.  You intend to purchase a 10‑year, $1,000 face value bond that pays interest of $40 every 6 months.  If your nominal annual required rate of return is 10 percent, how much should you be willing to pay for this bond?

a.          $ 877.11

b.         $ 875.38

c.         $ 631.33

d.         $922.78

E.         None of the above

 

15.  If you buy a 5 year zero coupon bond when yields are 4% and sell the bond 2 years later when yields are 6%, how much did you make or lose on this bond?

1.                   $56.09

2.                   -$17.69

1.                  $17.69

D.        $67.06

E.         None of the above

 

16.  If you buy a 1 year 8% annual coupon bond yielding 8% and hold it to maturity, how much money did you make or lose over the year?

2.                  $0

3.                  $80

4.                  $1,000

5.                  $1,080

E.         None of the above

17.  McGwire Company's pension fund projected that a significant number of its employees would take advantage of an early retirement program the company plans to offer in five years.  Anticipating the need to fund these pensions, the firm bought zero coupon U.S. Treasury Trust Certificates maturing in five years.  The stripped Treasuries are currently priced to yield 8 percent.  Their total maturity value is $6,000,000.  What is their total cost (price) to McGwire today?

a.         $5,555,556

b.         $4,061,036

c.         $4,053,385

d.         $4,083,499

E.         None of the above

 

18.  If a perpetuity yields 6% when it pays $120 a year, what is the price of this bond?

a.         $120

b.         $1,000

c.         $1,200

d.         $2,000

E.         None of the above

 

19.  What is the percentage price change for a 10 year zero coupon Treasury bond when interest rates fall instantaneously from 10 to 9%?

a.  1%

b.  -1%

c.  9.56%

d.  -10.00%

 

20.  Which of the following is true?

A.  When yields go up, bond prices decrease.

B.  When yields go up, bond prices increase.

C.  When coupon rates goes up, bond prices decrease.

D.  Both A and C

 

21.  If you expect interest rates to rise, where should you put your money?

A.  In 30 year bonds

B.  In 10 year bonds

C.  In 5 year bonds

D.  In a money market/checking account fund

 

22.  What is the yield on a 10 year annual coupon bond that pays an $80 coupon, when it=s selling for $1000.

A.  7.2%

B.  8.0%

C.  8.4%

D.  7.56%

 

23.  What is the yield on a 10 year annual coupon bond that pays an $80 coupon and is selling for $800.

A.  7.23%

B.  8.0%

C.  11.46%

D.  7.56%

 

 

24.  When you buy a bond and sell it three years later, what would be your profit?

A.  Price you sell it for minus price you buy it for

B.  Price you sell it for minus price you buy it for plus one coupon

C.  Price you sell it for minus price you buy it for plus 3 coupons

D.  Price you buy it for minus price you sell it for plus 3 coupons

 

25.  Which of the following is true?

A.  When the coupon rate is greater than the yield, the bond sells at a discount.

B.  When the coupon rate is less than the yield, the bond sells at a premium.

C.  When the yield is greater than the coupon rate, the bond sells at par.

D.  All of the above

E.  None of the above

 

 

Answers:

1. a                  11.  d               21. d

2. e                  12.  c               22. b

3. d                  13. a                23. c

4. d,                 14.  b               24. c

5. b                  15. c                25. e

6. d                  16. b               

7. c,                 17. d               

8. e, 5.16%      18. d               

9. c                  19. c,              

10. c                20. a