Practice Questions for Test 2

# Practice Questions for Test 2 - formula MRP =(t – 1*0.2...

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Practice Questions for Test #2 (BUS 320) 1. The ABC Company is expected to pay a dividend of \$1.50 per share at the end of the year, and that dividend is expected to grow at a constant rate of 7% per year in the future. The company's beta is 1.5, the market risk premium is 5%, and the risk-free rate is 3%. Calculate the stock’s intrinsic value? If you currently did not own the stock and it was currently price at \$20 per share, would you buy it based on your analysis above and why? 2. XYZ Corporation's 5-year bonds yield 6.50%, and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 3.0%, the inflation premium for 5 years bonds is IP = 1.50%, the liquidity premium for XYZ bonds is LP = 0.7% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the

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Unformatted text preview: formula MRP = (t – 1)*0.2%, where t = number of years to maturity. What is the default risk premium (DRP) on XYZ bonds? 3. Smith Corporation's bonds have a 15-year maturity, a 8% coupon (paid semiannually), and a par value of \$1,000. The market interest rate (r d ) is 10%, based on semiannual compounding. What is the bond’s price? 4. The value of a 20 year zero coupon bond when the market required rate of return of 8% (semiannual) is: 5. An analyst believes that economic conditions during the next year will be either Strong, Normal, or Weak, and she thinks that the Jones Company's returns will have the following probability distribution. What's the Expected Return of Jones's stock? Conditions Probability Return Strong 25% 20% Normal 50 10 Weak 25 -10...
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