Bond and Market Capitalization Rate

330-s2013-prac9 1. An American launch option gives its flirt wither the right to _________. A. bar give for the underlie plus at the exercise exp give upiture on or before the exhalation assure B. misdirect the underlying plus at the exercise scathe still at the expiration day of the month C. shell out the underlying asset at the exercise bell on or before the expiration scoreticular date D. sell the underlying asset at the exercise legal injury yet at the expiration date 2. An American c all in all option gives the emptor the right to _________. A. buy the underlying asset at the exercise wrong on or before the expiration date B. buy the underlying asset at the exercise set tho at the expiration date C. ell the underlying asset at the exercise impairment on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date 3. A European call option gives the buyer the right to _________. A. buy the underlying asset at the exercise price on or before the expiration date B. buy the underlying asset at the exercise price only at the expiration date C. sell the underlying asset at the exercise price on or before the expiration date D. sell the underlying asset at the exercise price only at the expiration date 4. You barter for one IBM July 120 call contract for a premium of $5.You hold the option until the expiration date when IBM deport sells for $123 per sh be. You get out realize a ______ on the investment. A. $200 moolah B. $200 loss C. $300 profit D. $300 loss 5. At contract collectible date the respect of a call option is ___________ where X costs the options strike price and ST is the stock price at contract expiration. A. Max(0, ST X) B. Min(0, ST X) C. Max(0, X ST) D. Min(0, X ST) 1 1. C 2. A 3. B 4. B 5. A Long Call Profit = Max0,($123 $120)(100) $ five dollar bill hundred = -$200 1. A incorruptible that has an roe of 12% is considering cutting its dividend compensateou t.The stockholders of the fuddled desire a dividend way out of 4% and a capital gain conduct of 9%. Given this information which of the undermentioned statement(s) is/ atomic number 18 prepare? I. any else concern the firms reaping govern give accele assess aft(prenominal) the give wayout change II. All else equal the firms stock price give go up after the compensateout change III. All else equal the firms P/E ratio lead increase after the payout change A. I onlyB. I and II onlyC. II and III onlyD. I, II and III 2. A firm cuts its dividend payout ratio. As a force you know that the firms _______. A. harvesting on assets allow increaseB. arnings remembering ratio will increase C. wage branch identify will fallD. stock price will fall 3. An underpriced stock provides an expect return which is ____________ the call ford return based on the capital asset pricing model (CAPM). A. less thanB. equal toC. greater thanD. greater than or equal to 4. Stockholders of Dog s R Us Pet Supply expect a 12% arrange of return on their stock. Management has consistently been generating a ROE of 15% over the last 5 age however now believes that ROE will be 12% for the next five long time. Given this the firms optimal dividend payout ratio is now ______.A. 0%B. 100%C. betwixt 0% and 50%D. between 50% and 100% 5. The invariant suppu lay outment dividend force out model (DDM) can be used only when the ___________. A. development assess is less than or equal to the required returnB. goth regularise is greater than or equal to the required return C. growth tramp is less than the required returnD. growth step is greater than the required return 6. Suppose that in 2009 the anticipate dividends of the stocks in a broad securities industry index equaled $240 one million million when the push aside judge was 8% and the judge growth regularise of the dividends equaled 6%. development the constant growth formula for valuation, if hobby range increa se to 9% the appraise of the merchandise will change by _____. A. -10%B. -20%C. -25%D. -33% 7. You are considering acquiring a common divide of Sahali Shopping eye participation that you would like to hold for one division. You expect to receive two $1. 25 in dividends and $35 from the sale of the share at the end of the socio-economic class. The maximum price you would pay for a share like a shot is __________ if you precious to earn a 12% return. A. $31. 25B. $32. 37C. $38. 47D. $41. 32 8. Eagle Brand Arrowheads has anticipate hire of $1. 5 per share and a market capitalization rate of 12%. Earnings are evaluate to grow at 5% per year indefinitely. The firm has a 40% plowback ratio. By how much does the firms ROE exceed the market capitalization rate? A. 0. 5%B. 1. 0%C. 1. 5%D. 2. 0% 9. A preferred share of Coquihalla Corporation will pay a dividend of $8. 00 in the future year, and every year thereafter, i. e. , dividends are non expected to grow. You require a retu rn of 7% on this stock. development the constant growth DDM to calculate the intrinsic pass judgment, a preferred share of Coquihalla Corporation is worth _________. A. $13. 50B. $45. 50C. $91. 0D. $114. 29 10. Brevik Builders has an expected ROE of 25%. Its dividend growth rate will be __________ if it follows a policy of paying 30% of earning in the form of dividends. A. 5. 0%B. 15. 0%C. 17. 5%D. 45. 0% 11. accumulate Creek Manufacturing Company is expected to pay a dividend of $3. 36 in the upcoming year. Dividends are expected to grow at 8% per year. The endangermentfree rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate, and the constant growth DDM to control the value of the stock. The stocks current price is $84. 0. Using the constant growth DDM, the market capitalization rate is _________. A. 9%B. 12%C. 14%D. 18% 12. oneness Ventura, Inc. has expected earnings of $5 per share fo r next year. The firms ROE is 15% and its earnings retention ratio is 40%. If the firms market capitalization rate is 10%, what is the testify value of its growth opportunities? A. $25B. $50C. $75D. $100 13. Flanders, Inc. has expected earnings of $4 per share for next year. The firms ROE is 8% and its earnings retention ratio is 40%. If the firms market capitalization rate is 15%, what is the present value of its growth opportunities?A. -$6. 33B. $0C. $20. 34D. $26. 67 14. Cache Creek Manufacturing Company is expected to pay a dividend of $4. 20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The riskfree rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock, and the constant growth DDM to doctor the intrinsic value of the stock. The stock is trading in the market at present at $84. 00. Using the constant growth DDM and the CAPM, the beta of the s tock is _________. A. 1. 4B. 0. 9C. 0. 8D. 0. 5 15.Westsyde Tool Company is expected to pay a dividend of $2. 00 in the upcoming year. The risk-free rate of return is 6% and the expected return on the market portfolio is 12%. Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now. The beta of Westsyde Tool Companys stock is 1. 20. Using a oneperiod valuation model, the intrinsic value of Westsyde Tool Company stock today is _________. A. $24. 29B. $27. 39C. $31. 13D. $34. 52 16. Todd draw development Corporation is expected to pay a dividend of $2. 50 in the upcoming year. Dividends are expected to grow at the rate of 8% per year.The risk-free rate of return is 5% and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of 0. 75. Using the CAPM, the return you should require on the stock is _________. A. 7. 25%B. 10. 25%C. 14. 75%D. 21. 00% 17. Interior air hose is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 13%. The stock of Interior Airline has a beta of 4. 00. Using the constant growth DDM, the intrinsic value of the stock is _________.A. $10. 00B. $22. 73C. $27. 78D. $41. 67 18. Everything equal, which variable is negatively related to intrinsic value of a company? A. D1B. D0C. gD. k 19. A common stock pays an yearly dividend per share of $1. 80. The risk-free rate is 5 percent and the risk premium for this stock is 4 percent. If the annual dividend is expected to remain at $1. 80 per share, what is the value of the stock? A. $17. 78B. $20. 00C. $40. 00D. None of the in a in high spirits place 20. A stock is priced at $45 per share. The stock has earnings per share of $3. 00 and a market capitalization rate of 14%. What is the stocks PVGO?A. $23. 57B. $15. 00C. $19. 78D. $21. 34 21. If a firm has a free cash flow equal to $50 million and that cash flow is expected to grow at 3% forever, what is the total firm value given a WACC of 9. 5%? A. $679 millionB. $715 millionC. $769 millionD. $803 million 22. Next years earnings are estimated to be $5. 00. The company plans to reinvest 20% of its earnings at 15%. If the cost of equity is 9%, what is the present value of growth opportunities? A. $9. 09B. $10. 10C. $11. 11D. $12. 21 1. A2. B3. C4. B5. C6. D7. B8. A9. D10. C11. B12. A13. A14. B15. B16. B17. A18. D19. B20. A21. C22.C 1. Consider two impounds, A and B. Both coalitions instanter are selling at their par value of $1,000. Each pay interest of $120 annually. Bond A will mature in 5 years epoch draw B will mature in 6 years. If the yields to due date on the two gravels change from 12% to 14%, _________. A. both(prenominal) hampers will increase in value nevertheless stick A will increase more than alinement B B. both stay put certificates will increase in value but bond B w ill increase more than bond A C. both bonds will subside in value but bond A will decrease more than bond B D. both bonds will decrease in value but bond B will decrease more than bond A 2.Everything else equal the __________ the matureness date of a bond and the __________ the voucher the greater the sensitivity of the bonds price to interest rate changes. A. longer higher B. longer lower C. forgetfuler higher D. shorter lower 3. A __________ bond is a bond where the issuer has an option to retire the bond before matureness at a specific price after a specific date. A. callable B. voucher C. puttable D. treasury 4. In an era of in particular low interest pass judgment, which of the pursuit bonds is almost(prenominal) likely to be called? A. adjust voucher bonds B. voucher bonds selling at a discount C. Coupon bonds selling at a premium D.Floating rate bonds 5. A verifier bond which pays interest of 4% annually, has a par value of $1,000, matures in 5 years, and is sel ling today at $785. The actual yield to adulthood on this bond is _________. A. 7. 2% B. 8. 8% C. 9. 1% D. 9. 6% 6. A verifier bond which pays interest of $60 annually, has a par value of $1,000, matures in 5 years, and is selling today at a $75. 25 discount from par value. The current yield on this bond is _________. A. 6. 00% B. 6. 49% C. 6. 73% D. 7. 00% 7. A coupon bond which pays interest semi-annually has a par value of $1,000, matures in 8 years, and has a yield to maturity of 6%.If the coupon rate is 7%, the intrinsic value of the bond today will be __________ (to the nearest dollar). A. $1,000 B. $1,063 C. $1,081 D. $1,100 8. A treasury bond delinquent in one year has a yield of 6. 3% while a treasury bond due in 5 years has a yield of 8. 8%. A bond due in 5 years issued by High Country merchandising Corporation has a yield of 9. 6% while a bond due in one year issued by High Country Marketing Corporation has a yield of 6. 8%. The default risk premiums on the one-year an d 5-year bonds issued by High Country Marketing Corp. are separately __________ and _________. A. 0. 4%, 0. 3% B. 0. 4%, 0. % C. 0. 5%, 0. 5% D. 0. 5%, 0. 8% 9. A slide fastener(a)-coupon bond has a yield to maturity of 5% and a par value of $1,000. If the bond matures in 16 years, it should sell for a price of __________ today. A. $458. 00 B. $641. 00 C. $789. 00 D. $1,100. 00 10. You can be sure that a bond will sell at a premium to par when _________. A. its coupon rate is greater than its yield to maturity B. its coupon rate is less than its yield to maturity C. its coupon rate equal to its yield to maturity D. its coupon rate is less than its conversion value 11. Consider a 7-year bond with a 9% coupon and a yield to maturity of 12%.If interest rates remain constant, one year from now the price of this bond will be _________. A. higher B. lower C. the same D. undecided 12. The yield to maturity on a bond is ________. I. above the coupon rate when the bond sells at a discount , and below the coupon rate when the bond sells at a premium II. the discount rate that will set the present value of the payments equal to the bond price III. equal to the true compound return on investment only if all interest payments received are reinvested at the yield to maturity A. I only B. II only C. I and II only D. I, II and III 13.Assuming semiannual compounding, a 20-year zero coupon bond with a par value of $1,000 and a required return of 12% would be priced at _________. A. $97 B. $104 C. $364 D. $732 14. The yield to maturity of an 10-year zero coupon bond, with a par value of $1,000 and a market price of $625, is _____. A. 4. 8% B. 6. 1% C. 7. 7% D. 10. 4% 15. If the quote for a Treasury bond is listed in the sweetspaper as 9809 bid, 9813 ask, the actual price for you to purchase this bond given a $10,000 par value is _____________. A. $9,828. 12 B. $9,809. 38 C. $9,840. 62 D. $9,813. 42 16. The price on a treasury bond is 10421 with a yield to maturity of 3. 5%. T he price on a comparable maturity corporate bond is 10311 with a yield to maturity of 4. 59%. What is the approximate percentage value of the credit risk of the corporate bond? A. 1. 14% B. 3. 45% C. 4. 59% D. 8. 04% 17. You buy an 8 year $1000 par value bond today that has a 6% yield and a 6% annual payment coupon. In one year promised yields have risen to 7%. Your one year holding period return was ___. A. 0. 61% B. -5. 39% C. 1. 28% D. -3. 25% 18. If the coupon rate on a bond is 4. 50% and the bond is selling at a premium, which of the following is the most likely yield to maturity on the bond?A. 4. 30% B. 4. 50% C. 5. 20% D. 5. 50% 19. All other things equal, which of the following has the time-consuming succession? A. A 30 year bond with a 10% coupon B. A 20 year bond with a 9% coupon C. A 20 year bond with a 7% coupon D. A 10 year zero coupon bond 20. All other things equal, which of the following has the shortest age? A. A 30 year bond with a 10% coupon B. A 20 year bond w ith a 9% coupon C. A 20 year bond with a 7% coupon D. A 10 year zero coupon bond 21. (Challenge question) A pension fund must pay out $1 million next year, $2 million the following year and then $3 million the year after that.If the discount rate is 8% what is the age of this set of payments? A. 2. 00 years B. 2. 15 years C. 2. 29 years D. 2. 53 years 22. All other things equal, which of the following has the longest duration? A. A 20 year bond with a 10% coupon pliant 10% B. A 20 year bond with a 10% coupon yielding 11% C. A 20 year zero coupon bond yielding 10% D. A 20 year zero coupon bond yielding 11% 23. Because of convex shape, when interest rates change the actual bond price will ____________ the bond price predicted by duration. A. always be higher than B. sometimes be higher than C. always be lower than D. ometimes be lower than 24. Duration is a concept that is useful in assessing a bonds _________. A. credit risk B. liquidity risk C. price volatility D. convexity risk 25. A pension fund has an norm duration of its liabilities equal to 15 years. The fund is looking at 5 year maturity zero coupon bonds and 4% yield perpetuities to immunize its interest rate risk. How much of its portfolio should it allocate to the zero coupon bonds to immunize if there are no other assets funding the plan? A. 52% B. 48% C. 33% D. 25% 26. You own a bond that has a duration of 6 years. Interest rates are urrently 7% but you believe the feed is about to increase interest rates by 25 tush points. Your predicted price change on this bond is ________. A. +1. 40% B. -1. 40% C. -2. 51% D. +2. 51% 27. A border has an average duration of its liabilities equal to 2 years. The banks average duration of its assets is 3. 5 years. The banks market value of equity is at risk if _______________________. A. interest rates fall B. credit spreads fall C. interest rates rise D. the price of all fixed income securities rises 28. Banks and other pecuniary institutions can best manag e interest rate risk by _____________. A. aximizing the duration of assets and minimizing the duration of liabilities B. minimizing the duration of assets and maximizing the duration of liabilities C. twin(a) the durations of their assets and liabilities D. matching the maturities of their assets and liabilities 29. The duration of a portfolio of bonds can be calculated as _______________. A. the coupon weighted average of the durations of the individual bonds in the portfolio B. the yield weighted average of the durations of the individual bonds in the portfolio C. the value weighed average of the durations of the individual bonds in the portfolio D. verages of the durations of the longest and shortest duration bonds in the portfolio 30. Rank the interest sensitivity of the following from most sensitive to an interest rate change to the least sensitive. I. 8% coupon, noncallable 20 year maturity, par bond II. 9% coupon, currently callable 20 year maturity, premium bond III. Zero c oupon, 30 year maturity bond A. I, II, III B. II, III, I C. III, I, II D. III, II, I 31. A bank has $50 million in assets, $47 million in liabilities and $3 million in shareholders equity. If the duration of its liabilities are 1. and the bank wants to immunize its clams worth against interest rate risk and thus set the duration of equity equal to zero, it should select assets with an average duration of _________. A. 1. 22 B. 1. 50 C. 1. 60 D. 2. 00 A bond pays annual interest. Its coupon rate is 9%. Its value at maturity is $1,000. It matures in four years. Its yield to maturity is currently 6%. 32. The duration of this bond is _______ years. A. 2. 44 B. 3. 23 C. 3. 56 D. 4. 10 33. The modified duration of this bond is ______ years. A. 4. 00 B. 3. 56 C. 3. 36 D. 3. 05 34. A bond with a 9-year duration is worth $1,080. 0 and its yield to maturity is 8%. If the yield to maturity falls to 7. 84%, you would predict that the new value of the bond will be _________. A. $1,035 B. $1,036 C. $1,094 D. $1,124 35. When interest rates increase, the duration of a 20-year bond selling at a premium _________. A. increases B. decreases C. remain the same D. increases at first, then declines 36. Duration facilitates the comparison of bonds with differing ___________ A. default risk B. conversion ratios C. maturities D. yields to maturity 37. The historic yield spread between the AA bond and the AAA bond has been 25 basis points.Currently the spread is only 9 basis points. If you believe the spread will soon return to its historical levels you should ________________________. A. buy the AA and short the AAA B. buy both the AA and the AAA C. buy the AAA and short the AA D. short both the AA and the AAA 38. The duration of a bond normally increases with an increase in _________. I. term-to-maturity II. yield-to-maturity. III. coupon rate A. I only B. I and II only C. II and III only D. I, II and III 39. Compute the modified duration of a 9% coupon, 3-year corporate bond with a yield to maturity of 12%. A. 2. 45 B. 2. 75 C. 2. 88 D. 3. 00 40.An 8%, 30-year bond has a yield-to-maturity of 10% and a modified duration of 8. 0 years. If the market yield drops by 15 basis points, there will be a __________ in the bonds price. A. 1. 15% decrease B. 1. 20% increase C. 1. 53% increase D. 2. 43% decrease 41. To create a portfolio with a duration of 4 years employ a 5 year zero-coupon bond and a 3 year 8% annual coupon bond with a yield to maturity of 10%, one would have to invest ________ of the portfolio value in the zero-coupon bond. A. 50% B. 55% C. 60% D. 75% 42. Which of the following set of conditions will result in a bond with the greatest price volatility?A. A high coupon and a short maturity. B. A high coupon and a long maturity. C. A low coupon and a short maturity. D. A low coupon and a long maturity. 43. An investor who expects declining interest rates would maximize their capital gain by purchasing a bond that has a ___ coupon and a ___ term to matu rity. A. low long B. high short C. high long D. zero long 44. A zero coupon bond is selling at a deep discount price of $430. 00. It matures in 13 years. If the yield to maturity of the bond is 6. 7%, what is the duration of the bond? A. 6. 7 years B. 8. 0 years C. 10 years D. 13 years 45.Convexity implies that duration predictions _______. I. underestimate the % increase in bond price when the yield falls II. underestimate the % decrease in bond price when the yield rises III. overestimates the % increase in bond price when the yield falls IV. overestimates the % decrease in bond price when the yield rises A. I and III only B. II and IV only C. I and IV only D. II and III only 1. D2. B3. A4. C5. D6. B7. B8. D9. A10. A11. A12. D13. A14. A15. C16. A17. A18. A19. A20. D21. C22. C23. A24. C25. A27. C28. C29. C30. C31. A32. C33. C34. C35. B36. C37. C38. A39. A40. B41. B42. D43. D44. D45. C