1. Assume you are using the total payout method for determining the price of a share of stock. Which is true?
- When computing the total present value, the total payout is divided by the required rate of return minus the dividend growth rate.
- When computing the total present value, the total payout is divided by the average investor's required rate of return.
- When computing the total present value, the total payout is divided by the dividend growth rate.
- When computing the total present value, the total payout is divided by the sum of the dividend growth rate and the net income growth rate.
- None of the above.
2. Last week, Acme paid its annual dividend of $1.20 a share. The company has been reducing its dividends by 6 percent each year. What is one share of stock worth at a required return of 14 percent?
- $8.06
- $5.64
- $10.80
- $14.10
- None of the above.
3. Which is the correct Fisher equation to calculate the real return on an investment?
- C/FV
- C/PV
- r = (1 + R) - (1 + h) - 1
- r = (1 + R)/(1 + h) - 1
- None of the above.
4. What rate on a tax-free bond is equivalent to a yields 7.3 percent on a taxable bond for an investor with a 25 percent marginal tax rate?
- 5.84%
- 9.13%
- 5.48%
- 6.08%
- None of the above.
5. Which is true?
- All else constant, as the market price of a bond increases the current yield decreases and the yield to maturity decreases.
- All else constant, as the market price of a bond increases the current yield increases and the yield to maturity decreases.
- All else constant, as the market price of a bond increases the current yield increases and the yield to maturity increases.
- All else constant, as the market price of a bond increases the current yield decreases and the yield to maturity increases
- None of the above.
6. Find the yield to maturity on a coupon rate of 7.5 percent, payable semiannually that matures in 6.5 years and has a $1,000 face value?
- 7.59%
- 7.86%
- 7.50%
- 7.42%
- None of the above.
7. The Acme common stock pays an annual dividend of $1.90 a share and is committed to maintaining a constant dividend. How much are you willing to pay for one share of this stock if your required return is 11 percent?
- $15.56
- $16.67
- $17.27
- $18.88
- None of the above.
8. Which is true?
- All else constant, a bond will sell at par when the yield to maturity is less than the coupon rate.
- All else constant, a bond will sell at a premium when the yield to maturity is equal to the coupon rate.
- All else constant, a bond will sell at par when the yield to maturity is greater than the coupon rate.
- All else constant, a bond will sell at a discount when the yield to maturity is higher than the coupon rate.
- None of the above.
9. Which is true of a 25-year zero coupon bond with a face value of $1,000 is issued at an initial price of $463.34? Assume semiannual interest.
- The implicit interest, in dollars, for the first year of the bond's life is $14.44
- The implicit interest, in dollars, for the first year of the bond's life is $37.00
- The implicit interest, in dollars, for the first year of the bond's life is $14.48
- The implicit interest, in dollars, for the first year of the bond's life is $21.47
- None of the above.
10. Acme is going to reduce last year's $2.60 annual dividend by 20 percent a year for the next three years. After that it will maintain a constant dividend of $1.60 a share. What is the market value of this stock if the required rate of return is 13 percent?
- $9.86
- $12.60
- $16.08
- $14.23
- None of the above.
11. Which is true?
- A bond with both a face value and a market value of $1,000 is called a par value bond.
- A bond with both a face value and a market value of $1,000 is called a premium bond.
- A bond with both a face value and a market value of $1,000 is called a discount bond.
- A bond with both a face value and a market value of $1,000 is called a zero coupon bond.
- None of the above.
12. Which one of these is true?
- Default risk premium is included in the term structure of interest rates and remains constant over the term
- Interest rate risk premium is included in the term structure of interest rates and remains constant over the term
- Liquidity premium is included in the term structure of interest rates and remains constant over the term
- Real rate of interest is included in the term structure of interest rates and remains constant over the term
- None of the above.
13. Acme has debt-equity ratio = .48, ROA = 13.6 percent, dividend payout ratio = 30 percent. What is the firm's rate of growth?
- 6.04%
- 9.52%
- 20.13%
- 14.09%
- None of the above.
14. Which is true?
- A bond with a 5 percent coupon that pays interest semiannually and is priced at par will have a market price of $1,005 and interest payments in the amount of $50 each.
- A bond with a 5 percent coupon that pays interest semiannually and is priced at par will have a market price of $1,050 and interest payments in the amount of $25 each.
- A bond with a 5 percent coupon that pays interest semiannually and is priced at par will have a market price of $1,050 and interest payments in the amount of $50 each.
- A bond with a 5 percent coupon that pays interest semiannually and is priced at par will have an undetermined market price and interest payments in the amount of $25 each.
- None of the above.
15. Which is true?
- Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to interest rate risk and time value of money.
- Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to time value of money and inflation.
- Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to taxes and potential default.
- Two of the primary differences between a corporate bond and a Treasury bond with identical maturity dates are related to taxes and inflation.
- None of the above.
16. If annual inflation is 2.31 percent and nominal yield to maturity is 7.25 percent, what is the actual real rate of return?
- 4.79%
- 4.87%
- 4.83%
- 4.94%
- None of the above.
17. Acme just paid a dividend of $.50 a share. The dividends are expected to increase by 20 percent a year for the next two years and then increase by 3 percent annually thereafter. What is the current value of a share if the appropriate discount rate is 12 percent?
- $7.68
- $6.91
- $7.38
- $8.26
- None of the above.
18. Which is true?
- The rate at which a stock's price is expected to appreciate (or depreciate) is called the current yield.
- The rate at which a stock's price is expected to appreciate (or depreciate) is called the capital gains yield.
- The rate at which a stock's price is expected to appreciate (or depreciate) is called the dividend yield.
- The rate at which a stock's price is expected to appreciate (or depreciate) is called the total yield.
- None of the above.
19. Which one of these is true?
- Capital gains yield represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends
- Real rate of return represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends
- Interest yield represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends
- Inflation rate represents the portion of a stock's rate of return that is attributable to the growth rate of the dividends
- None of the above.
20. Which is true?
- Based on the dividend growth model, an increase in investors' overall level of required returns will cause the market values of all stocks to decrease, all else held constant.
- Based on the dividend growth model, an increase in investors' overall level of required returns will not affect overall stock market prices.
- pBased on the dividend growth model, an increase in investors' overall level of required returns will cause dividend growth rates to increase to offset this change.
- Based on the dividend growth model, an increase in investors' overall level of required returns will cause non-dividend paying stocks to decrease in price while dividend-paying stock prices remain constant.
- None of the above.
21. What is true?
- The owner of preferred stock owns shares that generally have a stated liquidating value of $1,000 per share.
- The owner of preferred stock has the right to veto the outcome of an election held by the common shareholders.
- The owner of preferred stock has the right to collect payment on any unpaid dividends as long as the stock is non-cumulative preferred.
- The owner of preferred stock is entitled to a distribution of income prior to the common shareholders.
- none of the above.
22. Which is true?
- The total return on a stock is equal to the annual dividend divided by the current stock price.
- The total return on a stock is equal to the difference between the capital gains yield and the dividend yield.
- The total return on a stock is equal to the capital gains yield plus the dividend yield.
- The total return on a stock is equal to (1 + Dividend yield ) × (1 + Inflation rate).
- None of the above.
23. Carl, an individual investor, sold 100 shares of Acme stock. Emily, another individual investor, purchased those shares but never met Carl. What is true?
- You know for certain that this trade occurred in the Primary market
- You know for certain that this trade occurred in the Dealer market
- You know for certain that this trade occurred in the NASDAQ market
- You know for certain that this trade occurred in the Secondary market
- None of the above.
24. Acme has expected earnings after taxes for Year 5 of $385,000 and has 60,000 outstanding shares. The current value of the firm's earnings for the next five years, Years 1 through 5, is $567,000. The comparable PE for the firm is 11.4. What is the estimated value of one share of this stock if the required rate of return is 16 percent?
- $74.15
- $77.85
- $82.60
- $88.80
- None of the above.
25. You purchased, at par, a fixed-rate bond that has a coupon rate of 6.5 percent and matures in 12 years. If the current market rate for this type and quality of bond is 6.8 percent, then you would expect:
- the bond issuer to increase the amount of each interest payment.
- the yield to maturity to remain constant due to the fixed coupon rate.
- the current yield today to be less than 6.5 percent.
- today's market price to exceed the face value of the bond.
- None of the above.
26. Which is true?
- The upper and lower limits on the coupon rate of a floating-rate bond are referred to as the bond's put.
- The upper and lower limits on the coupon rate of a floating-rate bond are referred to as the bond's "make-whole" provision.
- pThe upper and lower limits on the coupon rate of a floating-rate bond are referred to as the bond's call.
- The upper and lower limits on the coupon rate of a floating-rate bond are referred to as the bond's income limit.
- None of the above.
27. Acme has 234,000 shares of stock outstanding and each share receives one vote for each open seat on the board of directors. There are three open seats at this time. How many shares must you own if the firm uses cumulative voting to guarantee your personal election to the board?
- 117,001 shares
- 78,001 shares
- 90,001 shares
- 58,501 shares
- None of the above.
28. Which of the following items are generally included in a bond indenture?
I. Sinking fund requirements
II. Security description
III. Bid and asked prices
IV. Total amount of bonds issued
I, II, and IV only
I and II only
I, II, III, and IV
II, III, and IV only
II and IV only
29. Which one of these bonds is subject to the greatest interest rate risk?
- 5-year, zero coupon bond
- 5-year bond with a 4.5 percent coupon rate
- 5-year bond with a 5 percent coupon rate
- 10-year, zero coupon bond
- Two of the above have the same interest rate risk.
30. Acme's last annual dividend was $2 a share. The company plans to lower the dividend by $.50 each year for the next three years, pay nothing in year 4, and pay a final liquidating dividend of $22 a share in year 5. If the required return is 16 percent, what is the current per share value of this stock?
- $12.83
- $13.08
- $9.80
- $14.13
- None of the above.