Part I
First part is Multiple choice questions and Part B is math work shown answers...
( ) 1. When the discount rate decreases; the price of the fixed rate coupon bond _________.
A. No change.
B. Increase.
C. Decrease.
( ) 2. The lower the default risk, the _____ the credit rating for bonds.
A. Higher
B. Lower
C. No change
( ) 3. If a bond has an 8 % coupon (annual payments) rate, a 4-year maturity, and similar bonds are selling for an 11 % yield, what is the price of the bond?
A. $1,000.00
B. $ 910.35
C. $ 906.93
D. $ 880.22
( ) 4. A stock purchased at $50 at the beginning of the year paid $10 in dividends and was sold for a net price of $52 at the end of the year. The total annual return is
A. 20 percent
B. 24 percent
C. 28 percent
D. 30 percent
( ) 5. what is the estimated value of a stock, which just paid a $10 dividend, expects dividends to grow at 10%, and requires a 20% return?
A. $100
B. $110
C. $120
D. $121
( ) 6. ABC Corporation is selling an IPO of stock. They expect to pay the new shares equivalent of $4 dividend per share and expect the stock to be priced at $50 in three years. The market required rate of return is estimated to be 20%. What is value of the stock today?
A. $24.64
B. $37.36
C. $45.72
D. $50.00
( ) 7. Box Co. is selling an IPO of stock. They expect to pay the new shares equivalent of $9 dividend per share and expect the stock to be priced at $120 in four years. The market required rate of return is estimated to be 18 per cent. What is value of the stock today?
A. $73.92
B. $79.50
C. $86.10
D. $120.00
( ) 8. What is the estimated value of a stock, which paid a $10 dividend D0last year, expects dividends to grow at 5%, and requires a 20% return?
A. $66.67
B. $70.00
C. $73.50
D. $80.00
( ) 9. A stock, currently trading at $100 expects to pay an $11 dividend this year. The dividends and stock price has been growing at 7 per cent for 10 years. What is the expected total return on the stock this year?
A. 11%
B. 17 %
C. 18 %
D. 21%
( ) 10. The expected acquisition of a firm typically results in _______ in the target's stock price.
A. An increase
B. A decrease
C. No change
D. None of these
( ) 11. The efficient market hypothesis____________.
A. Implies that security prices properly reflect information available to investors
B. Has little empirical validity
C. Implies that active traders will find it difficult to outperform a buy-and-hold strategy
D. B and C
E. A and C
Part II Problem Solving
1. You are interested in buying a $1,000 par value bond with 20 years to maturity and a 8% coupon rate that is paid semiannually. How much should you be willing to pay for the bond if the required rate of return (discount rate) is 10%?
2. If a semiannualbond with a face value of $1,000 has an8% annual coupon rate and a 10-year maturity. The current price of the bond is approximate $933.55. What's the annual yield-to-maturity on this bond?
3. On the issue date, you bought a 30-year maturity, 8% semi-annual coupon bond. The bond then sold at YTM of 7%. Now, five years later, the similar bond sells at YTM of 6%. If you hold the bond now, what is your realized rate of return for the 5 year holding period?
4. Briefly describe the efficient market theory and list some evidences for the theory and some evidences against the theory.
5. Todd Co. just paid dividends of $2.00 (D0) per share. These dividends are expected to grow at an 18% rate for the next three years and at a 6% rate thereafter (forever). What is the value of the stock if the appropriate discount rate is 12%?