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Exam 29: Basic Financial Tools: A review

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Question 41

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The last dividend paid by Coppard Inc. was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

A) $30.57
B) $31.52
C) $32.49
D) $33.50
E) $34.50

F) A) and B)
G) All of the above

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Question 42

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Consider the following information for three stocks, A, B, and C. The stocks' returns are positively but not perfectly positively correlated with one another, i.e., the correlations are all between 0 and 1. $\begin{array}{cccc}\text { Stock } & \begin{array}{c}\text { Expected } \\\text { Return }\end{array} & \begin{array}{c}\text { Standard } \\\text { Deviation }\end{array} & \text { Beta } \\\mathrm{A} & 10 \% & 20 \% & 1.0 \\\mathrm{~B} & 10 \% & 10 \% & 1.0 \\\mathrm{C} & 12 \% & 17 \% & 1.4\end{array}$ Portfolio AB has half of its funds invested in Stock A and half in Stock B. Portfolio ABC has one third of its funds invested in each of the three stocks. The risk-free rate is 5%, and the market is in equilibrium, so required returns equal expected returns. Which of the following statements is CORRECT?

A) portfolio ab's coefficient of variation is greater than 2.0.
B) portfolio ab's required return is greater than the required return on stock a.
C) portfolio abc's expected return is 10.66667%.
D) portfolio abc has a standard deviation of 20%.
E) portfolio ab has a standard deviation of 20%.

F) B) and E)
G) A) and B)

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Question 43

Multiple Choice

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Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?

At a rate of 6.5%, what is the future value of the following cash flow stream?

Julian and Jonathan are twin brothers (and so were born on the same day) . Today, both turned 25. Their grandfather began putting $2,500 per year into a trust fund for Julian on his 20th birthday, and he just made a 6th payment into the fund. The grandfather (or his estate's trustee) will make 40 more $2,500 payments until a 46th and final payment is made on Julian's 65th birthday. The grandfather set things up this way because he wants Julian to work, not be a "trust fund baby," but he also wants to ensure that Julian is provided for in his old age.σσUntil now, the grandfather has been disappointed with Jonathan and so has not given him anything. However, they recently reconciled, and the grandfather decided to make an equivalent provision for Jonathan. He will make the first payment to a trust for Jonathan today, and he has instructed his trustee to make 40 additional equal annual payments until Jonathan turns 65, when the 41st and final payment will be made. If both trusts earn an annual return of 8%, how much must the grandfather put into Jonathan's trust today and each subsequent year to enable him to have the same retirement nest egg as Julian after the last payment is made on their 65th birthday?

You agree to make 24 deposits of $500 at the beginning of each month into a bank account. At the end of the 24th month, you will have $13,000 in your account. If the bank compounds interest monthly, what nominal annual interest rate will you be earning?

Fiske Roofing Supplies' stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)

Suppose you borrowed $14,000 at a rate of 10.0% and must repay it in 5 equal installments at the end of each of the next 5 years. How much interest would you have to pay in the first year?

Paul McLaren holds the following portfolio: $\begin{array}{lll}Stock&Investment&Beta\\A&\$ 150,000 & 1.40 \\B&50,000 & 0.80 \\C&100,000 & 1.00 \\D&75,000 & 1.20\\Total&\$ 375,000 \\\end{array}$ Paul plans to sell Stock A and replace it with Stock E, which has a beta of 0.75. By how much will the portfolio beta change?

If a bank compounds savings accounts quarterly, the effective annual rate will exceed the nominal rate.

How much would $1, growing at 3.5% per year, be worth after 75 years?

Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? $\begin{array}{l}\begin{array} { l } \text { Expected dividend, } D_{1}\\\text { Current Price,} P_{0} \\\text { Expected constant growth rate }\end{array}\begin{array} { l } \$ 3.00 \\\$ 50 \\6.0 \%\end{array}\end{array}$

Sommers Co.'s bonds currently sell for $1,080 and have a par value of $1,000. They pay a $100 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,125. What is their yield to maturity (YTM) ?

According to the nonconstant growth model discussed in the textbook, the discount rate used to find the present value of the expected cash flows during the initial growth period is the same as the discount rate used to find the PVs of cash flows during the subsequent constant growth period.

Dyer Furniture is expected to pay a dividend of D1 = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is Dyer's current stock price?

A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if interest rates are below 10% and at a discount if interest rates are greater than 10%.

Which of the following statements is CORRECT, assuming stocks are in equilibrium?

One year ago Lerner and Luckmann Co. issued 15-year, noncallable, 7.5% annual coupon bonds at their par value of $1,000. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 14 years to maturity?

When a loan is amortized, a relatively low percentage of the payment goes to reduce the outstanding principal in the early years, and the principal repayment's percentage increases in the loan's later years.

Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. Your portfolio consists of 50% A and 50% B. Which of the following statements is CORRECT?