Test 2 Sample - Student Name: Test 2(50...

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Unformatted text preview: Student Name: Test 2 (50 Minutes, 40 Points) Multiple Choice Questions (10 points or about 12.5 minutes) One point for each correct answer for a total of 10 points. No documentation necessary. 1. The coupon of a bond is the: a. amount of discount received when a bond is purchased. b. amount paid to a bond dealer when a bond is purchased. c. difference between the bid and ask price. d. annual interest divided by the current bond price. e. stated interest payment on a bond. 2. The annual interest on a bond divided by the bond's market price is called the: a. yield to maturity. b. yield to call. c. total yield. d. current yield. e. required yield. 3. A bond that pays no interest payments and sells at a deep discount is called a(n) _____ bond. a. callable b. income c. zero coupon d. convertible e. tax ­free 4. A premium bond has a: I. market price equal to the face value. II. market price that exceeds the face value. III. yield to maturity that exceeds the coupon rate. IV. yield to maturity that is less than the coupon rate. a. I only b. I and III only c. II and III only d. I and IV only e. II and IV only Student Name: 5. Which one of the following bonds is the most sensitive to interest rate movements? a. zero ­coupon, 5 year b. 7 percent annual coupon, 5 year c. zero ­coupon, 10 year d. 5 percent semi ­annual coupon, 10 year e. 5 percent annual coupon, 10 year 6. Which of the following affect the current price of a stock? I. dividend growth rate II. required return III. dividend paid this year IV. expected dividend next year a. I and III only b. II and IV only c. I, II, and IV only d. II, III, and IV only e. I, II, III, and IV 7. The price of a stock at year 5 can be expressed as: a. P0 • g5. b. D0 • (1 + R)5. c. P1 • (1 + R)5. d. D6 / (R − g). e. D5 / (R − g). 8. Sun Tans pays a constant annual dividend. Over the past year, the required return on this firm's stock increased. Given this information you know that over the past year: a. the stock price had to decrease. b. the stock price had to increase. c. the capital gains rate had to increase. d. the capital gains rate had to decrease. e. the stock price decreased and the capital gains yield increased. Student Name: 9. The common stock of the Paper & Printing Co. is selling for $22 a share and has a dividend yield of 4.5 percent. What is the dividend amount? a. $.49 b. $.67 c. $.99 d. $2.05 e. $2.22 10. The Flower & Gift Co. pays a constant annual dividend of $1.74 a share and currently sells for $15.00 a share. What is the rate of return? a. 3.87 percent b. 4.64 percent c. 5.80 percent d. 10.40 percent e. 11.60 percent Student Name: Problems Work out the following problems. Make sure you document your work by writing down the formula or calculator keys and values that you’ve used. 11. In your stock research you’ve came across the following dividend projections for a particular stock: it just paid its annual dividend of $2.75 and will increase its dividends by 20% for the next two years. After that the market is so saturated with the company’s products that analysts predict a NEGATIVE dividend growth of 2% forever. (14 points total or 17.5 minutes) a. How much are dividends at the end of years 1, 2, 3 and 4? (3 points) b. The market’s required return for similar companies is 25%. Based on this required return, what should the stock be worth at the end of year 2? (3 points) c. What should the stock be trading at today? (4 points) d. After two years, just after the company paid its last hyper growth dividend, you observe that the stock is trading at $12.54. What new perpetual growth rate is implied with this stock price? (4 points) Student Name: 12. Imagine you’ve purchased the following bond in 2000 for $1,050: Semi ­annual bond with 12% coupon, maturity year 2030. (12 points total or 15 minutes) a. In the year 2000, what was the yield to maturity when the bond was originally bought? (3 points) b. Assume interest rates didn’t change in the first few years. For how much was the bond trading in 2005? (3 points) c. Interest have dropped considerably in the meantime and the yield to maturity for these bonds are now at 5%. What is the price for the bond now in 2009? (3 points) d. You just sold the bonds in the market at the current price you just calculated. What was the return on your investment also known as the Holding Period Yield? (3 points) Student Name: 13. A company needs to raise $10,000,000 to build a new facility and is considering issuing semi ­annual 10 ­year zero ­coupon bonds for funding. The yield to maturity on similar bonds in the market is 8%. (4 points or 5 minutes) a. What would the offering price of the zero ­coupon bonds be? (2 points) b. How many bonds must the company sell to the market? (1 point) c. How much cash does the company need to retire the bond in ten years from now? (1point) ...
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This note was uploaded on 04/05/2011 for the course FIN 350 taught by Professor Debruinne during the Winter '11 term at Grand Valley State.

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