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Exam2-fin300-final_solutions

# Exam2-fin300-final_solutions - Student I.D Student Name...

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Student I.D. Student Name Finance 300 Mid-term II Fall 2006 SOLUTIONS – A, B and C 1. Answer Multiple Choice questions on this paper by circling correct answer. We will not grade any calculations, just the final answer. 2. Do not spend too long on any one question 3. For problem questions show all calculations 4. When you are told to stop writing – STOP WRITING 5. There are 12 pages to the exam – check you have all 12 pages (they are numbered at the bottom of the page) 6. Write legibly 7. Write your student I.D. at the top of each page in space provided 8. Circle the discussion section in which you want your exam handed back on table below Bin Tiantian Alex 8:50 9:55 9:55 1.20 1.20 2.25 2.25 Which section are you registered for? 9:30 a.m. 1:00 p.m 1 Grading Q1 Q2 Q3 Q4 Q5 Q6 Q7 Q8

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Student I.D. Question (20 points). Each Question is worth 2.5 points A. The total rate of return earned on a stock is comprised of which two of the following? I. current yield II. yield to maturity III. dividend yield IV. capital gains yield a. I and II only b. I and IV only c. II and III only d. II and IV only e. III and IV only B. A stock is expected to pay no dividends for the first three years, i.e., D 1 = \$0, D 2 = \$0, and D 3 = \$0. The dividend for Year 4 is expected to be \$5.00 (i.e., D4 = \$5.00), and it is anticipated that the dividend will grow at a constant rate of 8 percent a year thereafter. The risk-free rate is 4 percent, the market risk premium is 6 percent, and the stock's beta is 1.5. Assuming the stock is fairly priced, what is the current price of the stock? a. \$ 69.31 b. \$ 72.96 c. \$ 79.38 d. \$ 86.38 e. \$100.00 C. Shares of the Katydid Co. common stock are currently selling for \$27.73. The last dividend paid was \$1.60 per share. The market rate of return is 10 percent. At what rate is the dividend growing? a. 2.50 percent b. 4.00 percent c. 5.98 percent d. 13.05 percent e. 14.91 percent D. Assume that you are using the dividend growth model to value stocks. If you expect the required rate of return to increase across the board on all equity securities, then you should also expect the: a. market values of all stocks to increase, all else constant. b. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate. c. market values of all stocks to decrease, all else constant. d. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price. e. dividend growth rates to increase to offset this change. E. Yancy is considering a project which will produce cash inflows of \$900 a year for 4 years. The project has a 9 percent required rate of return and an initial cost of \$2,800. What is the discounted payback period? a. 3.11 years b. 3.18 years c. 3.82 years d. 4.18 years e. never 2
Student I.D. F. Which of the following statements is incorrect ? a. Assuming a project has normal cash flows, the NPV will be positive if the IRR is less than the cost of capital.

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