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econ423quiz6answer - Econ 423 Summer 2009 Lauren Heller...

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Unformatted text preview: Econ 423, Summer 2009 Lauren Heller Homework Quiz #6 Name - Mul‘l'iple. Choieai By signing my name and PID above, agree to abide by the honor code during this quiz. I will only use the homework that I have completed on my own, and will not use any other notes or materials. MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) A stock currently sells for $25 per share and pays $0.24 per year in dividends. What is an investor‘s 1) valuation of this stock if she expects it to be selling for $30 in one year and requires 15 percent return on equity investments? A) $30.24 B) $27.74 C) $26.09 .2630 B) $29.03 2) In the one—period valuation model, a stock's value falls if the rises. 2) A) dividend current price equired return on equity expected future price E) both (b) and (c) are correct. 3) According to the Gordon growth model, what is an investor's valuation of a stock whose current 3) dividend is $1.00 per year if dividends are expected to grow at a constant rate of 10 percent over a lo - neriod of time and the investor's required return is 11 percent? 3110 B) $11 C) $10 D) $5.24 E) $100 A) $10.81 Auto Zone stock if the retaile '3 earnings per share are projected to be $1.85? @5537 C) $9.25 D) $21.85 5) A firm is expected to pay a dividend of $1.00 next year and the dividend is expected to grow at a 5) constant rate of 4 percent over time. Some investors have required returns on investments in equity of 12 percent, some 10 percent, and some 8 percent. The market price of this firm's stock will be slightly above A) $12.50. @1667. C) $18. D) $25. 6) Exchange traded funds {ETFs) have which of the following features? 6) A) Their value is based on the underlying net asset value of the stocks held in the index basket. B) They are indexed rather than actively managed. Ci They are listed and traded as individual stocks on a stock exchange. 4) Suppose the average industry PE ratio for auto parts retailers is 20. What is the current price of 4) j 5 ll of the above. 7) A PE may indicate that the market feels the firm's earnings are very risk and is 7) therefore willing to pay a for them. A) low; low; discount .igh; low; premium C) high; high; discount I) high; high; premium 8) Which of the following is true of mortgage interest rates? A) In exchange for points, lenders reduce interest rates on mortgage loans. B) Longer— term mortgages have higher interest rates than shorter—term mortgages. C) Mortgage rates are lower than Treasury bond rates because of the tax deductibility of mortgage interest payments. All of the above are true. nly A and B of the above are true. 9) Bor wers tend to prefer to , whereas lenders prefer fined-rate loans; ARMs; ARMS. B) fixed—rate loans; ARMS; fixed—rate loans. ) ARMS; fixed—rate loans; ARMS. D) ARMS; fixed—rate loans; fixed—rate loans. 10) A ower with a 30—year loan can create a GEM by fiimply increasing the monthly payments beyond what is required and designating that the excess be applied entirely to the principal. B) converting his conventional mortgage into a CPM. C) converting his conventional mortgage into an ARM. D) converting his ARM into a conventional mortgage. 11) Second mortgages serve the following purposes: A} they allow borrowers to get a tax deduction on loans secured by their primary residence or vacation home. B) they give borrowers a way to use the equity they have in their homes as security for another loan. C} they allow borrowers to convert their conventional mortgages into GEMs. D all of the above. only A and B of the above. 12} All of the following add to concerns about the safety and soundness of Fannie Mae and Freddie M except their @figh capital—asset ratio that gives rise to conflicts of interest. B) large publicly issued debt relative to that of the federal government. C) political influence. D} multiple goals of profit maximization and working to further the public interest. 13) If the dollar appreciates from 0.8 euros per dollar to 1.2 euros per dollar, the euro depreciates from dollars to dollars per euro. A) 0.83; 1.25 W125,- 0.83 C} 1.50,- 0.67 D) 0.67; 1.50 14) When the exchange rate for the euro changes from $1.20 to $1.00, then, holding everything else constant, the euro has A) appreciated and German cars sold in the United States become more expensive. B depreciated and American wheat sold in Germany becomes less expensive. @epreciated and American wheat sold in Germany becomes more expensive. D) appreciated and German cars sold in the United States become less expensive. Page 2 of 4 8)*E_ 10) MA A ash; 12) A 13) 45 14) a 15) Suppose Soft People, Inc. is selling at $19.00 and currently pays an annual dividend of $0.65 per share. Analysts project that the stock will be priced around $23.00 in one year. What is the expected return? A) 3.42% B) 14.57% 21 05% 4.47% None of the above. 16) LaserAce is selling at $22.00 per share. The most recent annual dividend paid was $0.80. Using the Gordon Growth model, if the market requires a return of 11%, what is the expected dividend growth rate for LaserAce? A) 3.6% B) 5.2% C) 11.0% 15.04% one of the above. 17) N at—T—Cat industries just went public. As a growing firm, it is not expected to pay a dividend for the first five years. After that, investors expect Nat—T—Cat to pay an annual dividend $1.00 per sh .- (i.e., D6 = 1.00), with no growth. 1f the required return is 10%, what is the current stock price? 66.21 B) $9.09 C) $10.00 D) $19.09 B) None of the above. 18) Compute the price of a share of stock that pays a $1 per year dividend and that you expect to be able to sell in one year for $20, assuming you require a 15% return. A $17.39 18.26 ) $19.05 D) $24.15 E) None of the above. 19) A mortgage on a house worth $350,000 requires what down payment to avoid PMI insurance? A) $0 B) $20,000 $35,000 70,000 ) None of the above. Page 3 of 4 a0 16} g 17) A :8) EL 19) D ...
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