79 correct answer a interest rate risk is the

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79. Correct answer a. Interest rate risk is the variation in the market price of a bond caused by changes in interest rates. The longer the maturity (duration) of the bond, the greater the price fluctuation associated with the given change in market required return. 80. Correct answer c. The expected current value of Frasier’s common stock in $20 as shown below. Dividend = Payout ratio x Earnings per share = .35 x $4.00 = $1.40 Required return = Risk-free rate + Beta (Market rate – Risk-free rate) = .07 + 1.25 (.15 - .07) = .17 Value of stock = Dividend ÷ (Required return – Dividend growth rate) = $1.40 ÷ (.17 - .10) = $20.00 81. Correct answer d. Beta is an index of systematic risk and measures the sensitivity of a stock’s returns to changes in returns on the market portfolio. A firm’s beta is determined by the risk characteristics of the firm. Of the options given, the payout ratio has the least impact on the firm’s riskiness and therefore its beta value. 82. Correct answer c. If a firm has a beta value of 1.0, the stock has the same systematic risk as the market as a whole and should rise and fall with the market. 83. Correct answer b. A futures contract provides for delivery of a commodity at a specified price on a stipulated future date. If the price of wheat is expected to rise, the contract protects future cash flow. 84. Correct answer a. A call provision is a feature in an indenture that permits the issuer to repurchase securities at a fixed price before maturity. 85. Correct answer d. Protective clauses or restrictions in bond indentures and loan agreements are known as covenants and can include items such as working capital requirements and capital expenditure limitations.
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288 86. Correct answer a. Protective clauses or restrictions in bond indentures and loan agreements are known as covenants and can include items such as working capital requirements and capital expenditure limitations. 87. Correct answer d. All of the restrictions listed are likely to be included as protective covenants in the indenture. 88. Correct answer c. The longer the maturity (duration) of the bond, the greater the price fluctuation associated with a given change in market required return. 89. Correct answer d. A firm would be inclined to issue debt rather than equity when the effective tax rate is high as the interest expense associated with debt reduces income and therefore reduces tax expense. 90. Correct answer a. A bond is a long-term debt instrument with a final maturity generally being 10 years or more. If the security has a final maturity shorter than 10 years, it is generally called a note. 91. Correct answer c. The post split price of the stock should be greater than $40.00 if the dividend changed to $.55 as the dividend yield will have increased. 92. Correct answer c. The record date, set when a dividend is declared, is the date on which an investor must be a shareholder in order to be entitled to receive the upcoming dividend.
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