Question 1: You expect KT Industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The expected growth rate for KTI's dividends is closest to:
A) 6.0%
B) 7.5%
C) 4.5%
D) 3.0%
Question 2: You expect KT industries (KTI) will have earnings per share of $3 this year and expect that they will pay out $1.50 of these earnings to shareholders in the form of a dividend. KTI's return on new investments is 15% and their equity cost of capital is 12%. The value of a share of KTI's stock is closest to:
A) $39.25
B) $20.00
C) $33.35
D) $12.50
Question 3: JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:
A) $25.00
B) $15.00
C) $31.25
D) $27.50
Question 4: You expect that Bean Enterprises will have earnings per share of $2 for the coming year. Bean plans to retain all of its earnings for the next three years. For the subsequent two years, the firm plans on retaining 50% of its earnings. It will then retain only 25% of its earnings from that point forward. Retained earnings will be invested in projects with an expected return of 20% per year. If Bean's equity cost of capital is 12%, then the price of a share of Bean's stock is closest to:
A) $17.00
B) $10.75
C) $27.75
D) $43.50
Question 5: Sinclair Pharmaceuticals, a small drug company, develops a vaccine that will protect against Helicobacter pylori, a bacteria that is the cause of a number of diseases of the stomach. It is expected that Sinclair Pharmaceuticals will experience extremely high growth over the next three years and will reinvest all of its earnings in expanding the company over this time. Earnings were $1.20 per share before the development of the vaccine and are expected to grow by 40% per year for the next three years. After this time, it is expected growth will drop to 5% and stay there for the expected future. Four years from now Sinclair will pay dividends that are 75% of its earnings. If its equity cost of capital is 10%, what is the value of a share of Sinclair Pharmaceuticals today?
A) $33.33
B) $39.05
C) $48.30
D) $52.00
Question 6: Suppose you invested $98 in the Ishares High Yield Fund (HYG) a month ago. It paid a dividend of $0.47 today and then you sold it for $99. What was your dividend yield and capital gains yield on the investment?
A) 0.45%, 1.09%
B) 0.47%, 1.02%
C) 0.47%, 1.08%
D) 1.02%, 1.12%
Question 7: Amazon.com stock prices gave a realized return of 5%, -5%, 10%, and -10% over four successive quarters. What is the annual realized return for Amazon.com for the year?
A) -1.25%
B) 2.50%
C) 0.00%
D) 1.25%
Use the following information for four questions:
Consider an economy with two types of firms, S type and I type. S type firms always move together, but I type firms move independently of each other. For both types of firms there is a 70% probability that the firm will have a 20% return and a 30% probability that the firm will have a -30% return.
Question 8: What is the expected return for an individual firm?
A) 3%
B) 5%
C) 14%
D) -5%
Question 9: The standard deviation for the return on an individual firm is closest to:
A) 23%
B) 5%
C) 20%
D) 30%
Question 10: If there are 10 firms are of type S in this economy, and you are holding a portfolio of these 10 firms of type S. The standard deviation for the return on your portfolio is closest to:
A) 20%
B) 23%
C) 30%
D) 230%
Question 11: If there are 10 firms are of type I in this economy, and you are holding a portfolio of these 10 firms of type I. The standard deviation for the return on your portfolio is likely to be:
A) 0%
B) greater than 0% but less than 25%
C) greater than 25% but less than 200%
D) greater than 200%
Question 12: A corporate bond makes payments of $9.67 every month for ten years with a final payment of $2009.67. Which of the following best describes this bond?
A) a 10-year bond with a face value of $2000 and a coupon rate of 4.8% with monthly payments
B) a 10-year bond with a face value of $2000 and a coupon rate of 5.8% with monthly payments
C) a 10-year bond with a face value of $2009.67 and a coupon rate of 4.8% with monthly payments
D) a 10-year bond with a face value of $2009.67 and a coupon rate of 5.8% with monthly payments
Question 13: Elinore is asked to invest $5000 in a friend's business with the promise that the friend will repay $5500 in one year's time. Elinore finds her best alternative to this investment, with similar risk, is one that will pay her $5400 in one year's time. U.S. securities of similar term offer a rate of return of 6%. What is the opportunity cost of capital in this case?
A) 6%
B) 8%
C) 9%
D) 10%