Super Computer
Company's stock is selling for $100 per share today. It is expected that this stock will pay a
dividend of 5 dollars per share, and then be sold for $120 per share at the end
of one year. Calculate the expected rate
of return for Super Computer Company ‘s stock.
A) 20%
B) 25%
C) 10%
D) 15%
E) None of the above
Answer: B
Response:
r = (120+5-100)/100 = 25%
2. PC Company stockholders expect to receive a
year-end dividend of $10 per share and then be sold for $122 dollars per
share. If the required rate of return for the stock is 20%,
what is the current value of the stock?
A) $100
B) $122
C) $132
D) $110
E) None of the above
Answer: D
Response:
P = (122+10)/1.2 = 110
3. The constant dividend growth formula P0 = D1/(r-g) assumes:
A) The dividends are growing at a constant rate g
forever.
B) r > g
C) g is never negative.
D) Both A and B
E) None of the above
Answer: D
4. Casino Co. is expected to pay a dividend of
$6 per share at the end of year one and these dividends are expected to grow at
a constant rate of 8% per year forever.
If the required rate of return on the stock is 20%, what is the current
value of the stock today?
A) $30
B) $50
C) $100
D) $54
E) None of the above
Answer: B
Response:
P = (6/(0.2-0.08) = 50
5. WorldTour Co. has just now paid a dividend of
$6 per share (Do), the dividends are
expected to grow at a constant rate of 5% per year forever. If the required rate of return on the stock
is 15%, what is the current value on stock (after paying the dividend)?
A) $63
B) $56
C) $40
D) $48
E) None of the above
Answer: A
Response:
P = (6*1.05)/(0.15 0.05) = 63
6. The required rate of return or the market
capitalization rate is estimated as follows:
A) Dividend yield + expected rate of growth in
dividends
B) Dividend yield - expected rate of growth in
dividends
C) Dividend yield / expected rate of growth in
dividends
D) (Dividend yield) * (expected rate of growth in
dividends)
E) None of the above
Answer: A
7. Mcom Co. is expected to pay a dividend of $4
per share at the end of year one and the dividends are expected to grow at a
constant rate of 4% forever. If the
current price of the stock is $25 per share,
calculate the required rate of return or the market capitalization rate
for the stock.
A) 4%
B) 16%
C) 20%
D) None of the above.
E) None of the above
Answer: C
Response:
r = (4/25) + 0.04 = 20%
8. Dividend growth rate for a stable firm can be
estimated as:
A) Plow back ratio * the return on equity (ROE)
B) Plow back ratio / the return on equity (ROE)
C) Plow back ratio +the return on equity (ROE)
D) Plow back ratio - the return on equity (ROE)
E) None of the above
Answer: A
9. MJ Co. pays out 60% of its earnings as
dividends. Its return on equity is
20%. What is the dividend growth rate for the firm?
A) 3%
B) 5%
C) 8%
D) 12%
E) None of the above
Answer: C
Response:
g = (1 - 0.6)*20 = 8%
10. Michigan Motor Company is currently paying a
dividend of $1.50 per year. The
dividends are expected to grow at a rate of 20% for the next three years and
then a constant rate of 6 % thereafter.
What is the expected dividend per share in year 5?
A) $2.59
B) $2.00
C) $2.91
D) $1.50
E) None of the above
Answer: C
Response: D5 = (1.5) * (1.2^3) * (1.06^2) =
2.91
11. Y2K Technology Corporation has just paid a
dividend of $0.40 per share. The
dividends are expected to grow at 30% per year for the next two years and at 5%
per year thereafter. If the required
rate of return in the stock is 15% (APR), calculate the expected price of the
stock next year (after the dividend payment).
A) $1.420
B) $6.33
C) $5.63
D) Any of the above
E) None of the above
Answer: E
Response:
Po =
[(0.4 * 1.3^2)/(1.15)] + [(0.4 * 1.3^2*1.05)/((1.15 * (0.15- 0.05))] =
$6.76
12. Lake Co. has paid a dividend of $2 per share
out of earnings of $4 per share. If the
book value per share is $25, what is the expected growth rate in dividends (g)?
A) 16%
B) 12%
C) 8%
D) 4%
E) None of the above
Answer: C
Response:
g = (1 -0.5) (4/25) = 0.08 or 8%
13. Lake Co. has just paid a dividend $2 per share
out of earnings of $4 per share. If the
book value per share is $25 and is currently selling for $30 per share,
calculate the required rate of return on the stock.
A) 7.2%
B) 15.2%
C) 14.7%
D) 16.6%
E) None of the above
Answer: B
Response:
g = (1- 0.5)(4/25) = 0.08 or 8%; [(2*1.08)/30] + 0.08 = 15.2 %.
14. The value of
the stock:
A) Increases as the dividend growth rate
increases
B) Increases as the required rate of return
decreases
C) Increases as the required rate of return
increases
D) Both A and B
E) None of the above
Answer: D
15. Woe
Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50
per share. If the required rate of
return on the stock is 15% and dividends are growing at a current rate of 10% per
year, calculate the present value of the growth opportunity for the stock
(PVGO).
A) $80
B) $50
C) $30
D) $26
E) None of the above
Answer: C
Response: No growth value = 7.5/0.15 = 50; Po = 4/ (0.15-0.1) = 80; PVGO = 80-50 = 30
16. Current price of Company X's stock is $80. The table below gives the data on the nend of
the year prices and probabilities dependent on the state of the economy. Calculate the expected return for the stock
(no dividends).
A) 12.0%
B) 15.0%
C) 20.5%
D) 17.5%
E) None of the above
Answer: E
Response:
Expected Price = 0.5*130 + 0.5*90 = 110; Expected return = (110 -80)/80 = 37.5%
17. The yield to
maturity of a bond can be thought of as the:
A) Net present value (NPV) of the bond
B) Internal rate of return (IRR) of the bond
C) Modified internal rate of return (MIRR) of
the bond
D) Payback period
E) None of the above
Answer: B
18. Consider a bond with a face value of $1,000,
a coupon rate of 0%, a yield to maturity of 9%, and seven years to maturity. This bond's duration is:
A) 6.7 years
B) 7.5 years
C) 9.6 years
D) 7.0 years
E) None of the above
Answer: D
Response:
Duration: n = 7 years
19. Consider a bond with a duration of 15.5 years
and a yield of 6%. This bond's
volatility is:
A) 9.3%
B) 6.8%
C) 14.6%
D) 6.0%
E) None of the above
Answer: C
Response:
Volatility (%) = Duration/(1 + i) = 15.5/1.06 = 14.6%
20. If the 3-year spot rate is 12% and the 2-year
spot rate is 10%, what is the one-year forward rate of interest two years from
now?
A) 3.7%
B) 16.1%
C) 9.5%
D) Any of the above
E) None of the above
Answer: B
Response:
f = [(1.12^3)/(1.1^2)]-1 = 16.1%
21. Interest represented by "r3" is:
A) spot rate on a three -year investment(APR)
B) spot rate on a two- year investment(APR)
C) expected spot rate 2 years from today
D) expected spot rate one year from today
E) None of the above
Answer: A
22. The term structure of interest rates can be
described as the:
A) Relationship between the spot interest rates
and the bond prices
B) Relationship between spot interest rates and
stock prices
C) Relationship between spot interest rates and their
maturities
D) Any of
the above
E) None of the above
Answer: C
23. Which of the following statements is true?
A) The spot interest rate is a weighted average
of yields to maturity
B) Yield to maturity is the weighted average of
spot interest rates
C) The yield to maturity is always higher than
the spot rates
D) All of the above
E) None of the above
Answer: B
24. A forward rate prevailing from period 2 to
period 3 can be:
A) Readily observed in the market place
B) Extracted from spot interest rate with 1 and
2 years to maturity
C) Extracted from 2 and 3 year spot interest
rates
D) None of the above
E) Any of the above
Answer: C
25. If the forward rate of interest from year 1
to year 2 is larger than the 1-year spot rate, what is the 2-year spot rate?
A) Smaller than the 1-year spot rate
B) Larger than the 1-year spot rate
C) Can't say without knowing the 3-year spot rate
D) The same as the forward rate from year 1 to
year 2
E) None of the above
Answer: B
Use the following information
to answer questions 26-30.
Today’s spot rates are given
in the following.
Year r
1
6%
2
5.5%
3
5%
4
4.5%
26. What is the today’s shape
of the yield curve for the term structure of interest rates of the next four
years?
A) flat
B) downward sloped
C) upward sloped
D) cannot be decided
E) none
of the above
Answer: B
27. What is the price of a
ten percent coupon bond with a maturity
of two years with a face value of $1000 and annual coupon payment?
A) $1082.6
B) $ 950.5
C) $580.5
D) $1100.5
E) none of the above
Answer: A
Bond price =100/1.06+1100/1.0552=$1082.6
28. What is the yield to
maturity for a zero coupon bond with a maturity of two years?
A) cannot be decided, since the market price of
the bond is not given.
B) 5.5%
C) 6%
D) 4.5%
E) none of the above
Answer: B
29. What is the tomorrow’s spot
rate of one year ?
A) 5.5%
B) 6%
C) cannot be decided by using today’s term
structure of the interest rates
D) 4.5%
E) none of the above
Answer: C
30. What is the forward rate
from year 3 to year 4?
A) 6.0%
B) 5.0%
C) 4.5%
D) 3.01%
E) none of the above
Answer: D
f4 =1.0454/1.053-1=3.01%
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