FIN 331 2018 Spring 2nd(1) PDF

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Finance 331 2nd Exam-Spring 2018

1. Towson Inc.'s bonds currently sell for $980 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)? a. 2.79% b. 3.69% c. 4.65% d. 5.08% e. 6.72%

2. What is the present value of the following cash flow stream at a rate of 6.25%? Years:

0

1

2

3

4

$0

$75

$225

$0

$300

a. $411.57 b. $433.23 c. $456.03 d. $480.03 e. $505.30 3. The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. Your required return for the stock is 9.75%. What is the present value of the company's stock? a. $18.62 b. $19.08 c. $19.56 d. $20.05 e. $20.55 4. Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.50%, a maturity premium of 0.2% per year to maturity applies, i.e., MRP = 0.20(t)%, where t is the years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 1.35% applies to A-rated corporate bonds. What is the percentage point difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond? a. 0.77% b. 0.81% c. 0.85% d. 0.89% e. 0.94% 5. Which of the following statements is CORRECT?

a. The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides. b. The discounted payback method eliminates all of the problems associated with the payback method. c. When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability. d. To find the MIRR, we discount the terminal value at the constant growth rate. e. A project’s NPV profile must intersect the X-axis at the project’s WACC. 6. Suppose 1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 4.80%. Assuming the pure expectations theory is correct, what is the yield on a 1-year T-bond expected to be one year from now? a. 5.44% b. 5.61% c. 5.72% d. 6.11% e. 6.22% 7. Beta measures: a. market risk b. total risk c. Inflation risk d. treasury risk e. unsystematic risk 8. Cooley Company's stock has a beta of 1.32, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return? a. 8.75% b. 10.01% c. 10.13% d. 10.93% e. 11.51% 9. Inflation, recession, and high interest rates are economic events that are best characterized as being a. systematic risk factors that can be diversified away. b. company-specific risk factors that can be diversified away. c. among the factors that are responsible for market risk. d. risks that are beyond the control of investors and thus should not be considered by security analysts e. irrelevant except to governmental authorities like the Federal Reserve. 10. Assume that the market interest rates decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price? a. An 8-year bond with a 9% coupon. b. A 1-year bond with a 15% coupon. c. A 3-year bond with a 10% coupon. d. A 10-year zero coupon bond.

e. A 10-year bond with a 10% coupon. 11. Which of the following statements is CORRECT, other things held constant? a. Interest rates and real risk free rates tend to move in opposite directions. b. If companies have fewer good investment opportunities, interest rates are likely to increase. c. If individuals increase their savings rate, interest rates are likely to increase. d. If expected inflation increases, interest rates are likely to increase. e. Interest rates on all debt securities tend to rise during recessions 12. Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What is the approximate rate of return you would expect on a 1-year Treasury security? a. 5.14% b. 5.42% c. 5.70% d. 5.99% e. 6.28% 13. Which of the following events would make it more likely that a company would call its outstanding callable bonds? a. The company’s bonds are downgraded. b. Market interest rates rise sharply. c. Market interest rates decline sharply. d. The company's financial situation deteriorates significantly. e. Inflation increases significantly. 14. McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. What is the bond’s yield to call (YTC)? a. 2.62% b. 2.88% c. 3.17% d. 4.26% e. 5.83% 15. Which of the following statements is CORRECT a. Senior debt is debt that has been more recently issued b. Debt with a collateral backing has no risk. c. Convertible bonds generally have lower yields than non-convertible bonds of similar risk d. Junk bonds typically provide a lower yield to maturity than investment-grade bonds. e. A debenture is a secured bond that is backed by the firm 16. Malko Enterprises’ bonds currently sell for $990. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield? a. 6.44%

b. 7.35% c. 7.58% d. 8.11% e. 9.47% 17. The Francis Company is expected to pay a dividend of D = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6% per year in the future. The company's beta is 1.20, the market risk premium is 5.5%, and the risk-free rate is 4%. What is the present value of the company’s stock price? a. $22.83 b. $27.99 c. $27.17 d. $22.01 e. $24.18 18. Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semi-annual coupon, and a par value of $1,000. The going interest rate is 6.2%, based on semi-annual compounding. What is the bond’s present value? a. $1,047.19 b. $1,074.05 c. $1,101.58 d. $1,129.12 e. $1,157.35 19. Stock A's stock has a beta of 1.30, and its required return is 12%. Stock B's beta is 0.80. If the riskfree rate is 4.75%, what is the required rate of return on B's stock? a. 8.76% b. 8.98% c. 9.21% d. 9.44% e. 9.68% 20. Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1 $3.00 Current Price, P0 $50 Expected constant growth rate 6% a. The stock’s required return is 10%. b. The stock’s expected dividend yield and growth rate are equal. c. The stock’s expected dividend yield is 5%. d. The stock’s expected capital gains yield is 5%. e. The stock’s expected price one year from now is $100.00. 21. Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12%

return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return? a. 7.72% b. 8.12% c. 8.55% d. 9.00% e. 9.50% 22. If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks a. the stock is experiencing supernormal growth. b. the stock is overvalued and should be sold. c. the stock is undervalued and a good buy. d. management is probably not trying to maximize the price per share. e. dividends are not likely to be declared. 23. Weaver Chocolate Co. expects to earn $3.50 per share this coming year, its expected dividend payout ratio is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for $50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock? a. 9.28% b. 10.68% c. 10.79% d. 12.73% e. 13.50% 24. LaPango Inc. estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? a. Project B, which is of below-average risk and has a return of 8.5%. b. Project C, which is of above-average risk and has a return of 11%. c. Project A, which is of average risk and has a return of 9%. d. None of the projects should be accepted. e. All of the projects should be accepted. 25. Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: rRF = 4.10%; RPM = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of equity from retained earnings? a. 9.67% b. 9.97% c. 10.28% d. 10.60% e. 10.93% END

KEY TO 2nd Exam-Spring 2018

1. Towson Inc.'s bonds currently sell for $980 and have a par value of $1,000. They pay a $65 annual coupon and have a 15-year maturity, but they can be called in 5 years at $1,100. What is their yield to maturity (YTM)? a. 2.79% b. 3.69% c. 4.65% d. 5.08% e. 6.72% 2. What is the present value of the following cash flow stream at a rate of 6.25%? Years:

0

1

2

3

4

$0

$75

$225

$0

$300

a. $411.57 b. $433.23 c. $456.03 d. $480.03 e. $505.30 3. The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. Your required return for the stock is 9.75%. What is the present value of the company's stock? a. $18.62 b. $19.08 c. $19.56 d. $20.05 e. $20.55 4. Suppose the real risk-free rate is 3.50%, the average future inflation rate is 2.50%, a maturity premium of 0.2% per year to maturity applies, i.e., MRP = 0.20(t)%, where t is the years to maturity. Suppose also that a liquidity premium of 0.50% and a default risk premium of 1.35% applies to A-rated corporate bonds. What is the percentage point difference in the yields on a 5-year A-rated corporate bond and on a 10-year Treasury bond? a. 0.77% b. 0.81% c. 0.85% d. 0.89% e. 0.94% 5. Which of the following statements is CORRECT? a. The IRR method appeals to some managers because it gives an estimate of the rate of return on projects rather than a dollar amount, which the NPV method provides.

b. The discounted payback method eliminates all of the problems associated with the payback method. c. When evaluating independent projects, the NPV and IRR methods often yield conflicting results regarding a project's acceptability. d. To find the MIRR, we discount the terminal value at the constant growth rate. e. A project’s NPV profile must intersect the X-axis at the project’s WACC. 6. Suppose 1-year Treasury bonds yield 4.00% while 2-year T-bonds yield 4.80%. Assuming the pure expectations theory is correct, what is the yield on a 1-year T-bond expected to be one year from now? a. 5.44% b. 5.61% c. 5.72% d. 6.11% e. 6.22% 7. Beta measures: a. market risk b. total risk c. Inflation risk d. treasury risk e. unsystematic risk 8. Cooley Company's stock has a beta of 1.32, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return? a. 8.75% b. 10.01% c. 10.13% d. 10.93% e. 11.51% 9. Inflation, recession, and high interest rates are economic events that are best characterized as being a. systematic risk factors that can be diversified away. b. company-specific risk factors that can be diversified away. c. among the factors that are responsible for market risk. d. risks that are beyond the control of investors and thus should not be considered by security analysts e. irrelevant except to governmental authorities like the Federal Reserve. 10. Assume that the market interest rates decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price? a. An 8-year bond with a 9% coupon. b. A 1-year bond with a 15% coupon. c. A 3-year bond with a 10% coupon. d. A 10-year zero coupon bond. e. A 10-year bond with a 10% coupon.

11. Which of the following statements is CORRECT, other things held constant? a. Interest rates and real risk free rates tend to move in opposite directions. b. If companies have fewer good investment opportunities, interest rates are likely to increase. c. If individuals increase their savings rate, interest rates are likely to increase. d. If expected inflation increases, interest rates are likely to increase. e. Interest rates on all debt securities tend to rise during recessions 12. Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What is the approximate rate of return you would expect on a 1-year Treasury security? a. 5.14% b. 5.42% c. 5.70% d. 5.99% e. 6.28% 13. Which of the following events would make it more likely that a company would call its outstanding callable bonds? a. The company’s bonds are downgraded. b. Market interest rates rise sharply. c. Market interest rates decline sharply. d. The company's financial situation deteriorates significantly. e. Inflation increases significantly. 14. McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a 25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. What is the bond’s yield to call (YTC)? a. 2.62% b. 2.88% c. 3.17% d. 4.26% e. 5.83% 15. Which of the following statements is CORRECT a. Senior debt is debt that has been more recently issued b. Debt with a collateral backing has no risk. c. Convertible bonds generally have lower yields than non-convertible bonds of similar risk d. Junk bonds typically provide a lower yield to maturity than investment-grade bonds. e. A debenture is a secured bond that is backed by the firm 16. Malko Enterprises’ bonds currently sell for $990. They have a 6-year maturity, an annual coupon of $75, and a par value of $1,000. What is their current yield? a. 6.44% b. 7.35% c. 7.58%

d. 8.11% e. 9.47% 17. The Francis Company is expected to pay a dividend of D = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6% per year in the future. The company's beta is 1.20, the market risk premium is 5.5%, and the risk-free rate is 4%. What is the present value of the company’s stock price? a. $22.83 b. $27.99 c. $27.17 d. $22.01 e. $24.18 18. Moerdyk Corporation's bonds have a 15-year maturity, a 7.25% semi-annual coupon, and a par value of $1,000. The going interest rate is 6.2%, based on semi-annual compounding. What is the bond’s present value? a. $1,047.19 b. $1,074.05 c. $1,101.58 d. $1,129.12 e. $1,157.35 19. Stock A's stock has a beta of 1.30, and its required return is 12%. Stock B's beta is 0.80. If the riskfree rate is 4.75%, what is the required rate of return on B's stock? a. 8.76% b. 8.98% c. 9.21% d. 9.44% e. 9.68% 20. Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT? Expected dividend, D1 $3.00 Current Price, P0 $50 Expected constant growth rate 6% a. The stock’s required return is 10%. b. The stock’s expected dividend yield and growth rate are equal. c. The stock’s expected dividend yield is 5%. d. The stock’s expected capital gains yield is 5%. e. The stock’s expected price one year from now is $100.00. 21. Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return? a. 7.72%

b. 8.12% c. 8.55% d. 9.00% e. 9.50% .25*30 + .5*12 + .25*(18) 22. If in the opinion of a given investor a stock’s expected return exceeds its required return, this suggests that the investor thinks a. the stock is experiencing supernormal growth. b. the stock is overvalued and should be sold....