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##### Fin 221 exam 3

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Question;Multiple Choice;Identify the choice;that best completes the statement or answers the question.;1) Ken Williams Ventures' recently issued bonds that mature in 15;years. They have a par value of $1,000 and an annual coupon of 6%. If the;current market interest rate is 8%, at what price should the bonds sell?;A.;$801.80;B.;$814.74;C.;$828.81;D.;$830.53;E.;$847.86;2) Brown Enterprises' bonds currently sell for $1,025. They have a;9-year maturity, an annual coupon of $80, and a par value of $1,000. What is;their yield to maturity?;A.;6.87%;B.;7.03%;C.;7.21%;D.;7.45%;E.;7.61%;3) Kholdy Inc's bonds currently sell for $1,275. They pay a $120;annual coupon and have a 20-year maturity, but they can be called in 5 years at;$1,120. Assume that no costs other than the call premium would be incurred to;call and refund the bonds, and also assume that the yield curve is horizontal;with rates expected to remain at current levels on into the future. What is the;difference between the bond's YTM and its YTC?;A.;1.48%;B.;1.54%;C.;1.68%;D.;1.82%;E.;1.91%;4) A 20-year, $1,000 par value bond has a 9% annual coupon. The bond;currently sells for $925. If the yield to maturity remains at its current rate;what will the price be 5 years from now?;A.;$933.09;B.;$941.86;C.;$951.87;D.;$965.84;E.;$978.40;5) Which of the following statements is CORRECT?;A.;The shorter the time to maturity, the;greater the change in the value of a bond in response to a given change in;interest rates.;B.;The longer the time to maturity, the;smaller the change in the value of a bond in response to a given change in;interest rates.;C.;The time to maturity does not affect;the change in the value of a bond in response to a given change in interest;rates.;D.;You hold a 10-year, zero coupon, bond;and a 10-year bond that has a 6% annual coupon. The same market rate, 6%;applies to both bonds. If the market rate rises from the current level, the;zero coupon bond will experience the larger percentage decline.;E.;You hold a 10-year, zero coupon, bond;and a 10-year bond that has a 6% annual coupon. The same market rate, 6%;applies to both bonds. If the market rate rises from the current level, the;zero coupon bond will experience the smaller percentage decline.;6) Which of the following events would make it more likely that a;company would choose to call its outstanding callable bonds?;A.;Market interest rates decline sharply.;B.;The company's bonds are downgraded.;C.;Market interest rates rise sharply.;D.;Inflation increases significantly.;E.;The company's financial situation;deteriorates significantly.;7) Which of the following would be most likely to increase the;coupon rate that is required to enable a bond to be issued at par?;A.;Adding a call provision.;B.;Adding additional restrictive;covenants that limit management's actions.;C.;Adding a sinking fund.;D.;The rating agencies change the bond's;rating from Baa to Aaa.;E.;Making the bond a first mortgage bond;rather than a debenture.;8) A 12-year bond has an annual coupon rate of 9%. The coupon rate;will remain fixed until the bond matures. The bond has a yield to maturity of;7%. Which of the following statements is CORRECT?;A.;The bond is currently selling at a;price below its par value.;B.;If market interest rates decline, the;price of the bond will also decline.;C.;If market interest rates remain;unchanged, the bond's price one year from now will be lower than it is today.;D.;If market interest rates remain;unchanged, the bond's price one year from now will be higher than it is;today.;E.;The bond should currently be selling;at its par value.;9) Which of the following statements is CORRECT?;A.;All else equal, if a bond's yield to;maturity increases, its price will fall.;B.;All else equal, if a bond's yield to;maturity increases, its current yield will fall.;C.;If a bond's yield to maturity exceeds;its coupon rate, the bond will sell at a premium over par.;D.;If a bond's yield to maturity exceeds;its coupon rate, the bond will sell at par.;E.;If a bond's required rate of return;exceeds its coupon rate, the bond will sell at a premium.;10) A bond that matures in 12 years has a 9% semiannual coupon and a;face value of $1,000. The bond has a nominal yield to maturity of 8%. What is;the price of the bond today?;A.;$;927.52;B.;$;928.39;C.;$1,073.99;D.;$1,075.36;E.;$1,076.23;11) Niendorf Corporation's stock has a required return of 13.00%, the;risk-free rate is 7.00%, and the market risk premium is 4.00%. Now suppose;there is a shift in investor risk aversion, and the market risk premium;increases by 2.00%. What is Niendorf's new required return?;A.;14.00%;B.;15.00%;C.;16.00%;D.;17.00%;E.;18.00%;12) Assume that you are the portfolio manager of the Delaware Fund, a;$4 million mutual fund that contains the following stocks;Stock;Amount;Beta;A;$ 400,000;1.50;B;$ 600,000;0.50;C;$1,000,000;1.25;D;$2,000,000;0.75;The required rate of return in the market is 14.00% and the;risk-free rate is 6.00%. What rate of return should investors expect (and;require) on their investment in this fund?;A.;10.90%;B.;11.50%;C.;12.10%;D.;12.70%;E.;13.30%;13) Which of the following statements is CORRECT? (Assume that the;risk-free rate is a constant.);A.;If the market risk premium increases;by 1%, then the required return on all stocks will rise by 1%.;B.;If the market risk premium increases;by 1%, then the required return will increase for stocks that have a beta;greater than 1.0, but it will decrease for stocks that have a beta less than;1.0.;C.;If the market risk premium increases;by 1%, then the required return will increase by 1% for a stock that has a;beta of 1.0.;D.;The effect of a change in the market;risk premium depends on the level of the risk-free rate.;E.;The effect of a change in the market;risk premium depends on the slope of the yield curve.;14) Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of;the following statements must be true about these securities? (Assume;the market is in equilibrium.);A.;When held in isolation, Stock A has;more risk than Stock B.;B.;Stock B would be a more desirable;addition to a portfolio than Stock A.;C.;Stock A would be a more desirable;addition to a portfolio than Stock B.;D.;In equilibrium, the expected return on;Stock A will be greater than that on Stock B.;E.;In equilibrium, the expected return on;Stock B will be greater than that on Stock A.;15) Which of the following statements best describes what would be;expected to happen as you randomly select stocks and add them to your;portfolio?;A.;Adding more such stocks will reduce;the portfolio's unsystematic, or diversifiable, risk.;B.;Adding more such stocks will reduce;the portfolio's beta.;C.;Adding more such stocks will increase;the portfolio's expected return.;D.;Adding more such stocks will reduce;the portfolio's market risk.;E.;Adding more such stocks will have no;effect on the portfolio's risk.;16) Bob has a $50,000 stock portfolio with a beta of 1.2, an expected;return of 10.8%, and a standard deviation of 25%. Becky has a $50,000 portfolio;with a beta of 0.8, an expected return of 9.2%, and her standard deviation is;also 25%. The correlation coefficient, r, between Bob's and Becky's portfolios;is zero. Bob and Becky are engaged to be married. Which of the following best;describes their combined $100,000 portfolio?;A.;The combined portfolio's expected;return will be greater than the simple weighted average of the;expected returns of the two individual portfolios, 10.0%.;B.;The combined portfolio's expected return;will be less than the simple weighted average of the expected returns;of the two individual portfolios, 10.0%.;C.;The combined portfolio's beta will be equal;to a simple average of the betas of the two individual portfolios, 1.0;its expected return will be equal to a simple weighted average of the;expected returns of the two individual portfolios, 10.0%, and its standard;deviation will be less than the simple average of the two portfolios;standard deviations, 25%.;D.;The combined portfolio's standard;deviation will be equal to a simple average of the two portfolios;standard deviations, 25%.;E.;The combined portfolio's standard;deviation will be greater than the simple average of the two;portfolios' standard deviations, 25%.;17) The risk-free rate is 5%. Stock A has a beta= 1.0 and Stock B has;a beta= 1.4. Stock A has a required return of 11%. What is Stock B's;required return?;A.;12.4%;B.;13.4%;C.;14.4%;D.;15.4%;E.;16.4%;18) Ripken Iron Works faces the following probability distribution;Stock's;Expected;State of;Probability of;Return if;this;the Economy;State Occurring;State;Occurs;Boom;0.25;25%;Normal;0.50;15;Recession;0.25;5;What is the coefficient of variation on the company's stock?;A.;0.06;B.;0.47;C.;0.54;D.;0.67;E.;0.71;19) A stock just paid a dividend of $1. The required rate of;return is rs= 11%, and the constant growth rate is 5%. What is the current;stock price?;A.;$15.00;B.;$17.50;C.;$20.00;D.;$22.50;E.;$25.00;20) The Lashgari Company is expected to pay a dividend of $1;per share at the end of the year, and that dividend is expected to grow at a;constant rate of 5% per year in the future. The company's beta is 1.2, the;market risk premium is 5%, and the risk-free rate is 3%. What is the company's;current stock price?;A.;$15.00;B.;$20.00;C.;$25.00;D.;$30.00;E.;$35.00;21) You must estimate the intrinsic value of Gallovits Technologies;stock. Gallovits's end-of-year free cash flow (FCF) is expected to be $25;million, and it is expected to grow at a constant rate of 8.5% a year;thereafter. The company's WACC is 11%. Gallovits has $200 million of long-term;debt plus preferred stock, and there are 30 million shares of common stock;outstanding. What is Gallovits' estimated intrinsic value per share of common;stock?;A.;$22.67;B.;$24.00;C.;$25.33;D.;$26.67;E.;$28.00;22) The P. Born Company's last dividend was $1.50. The dividend growth;rate is expected to be constant at 20% for 3 years, after which dividends are;expected to grow at a rate of 6% forever. If Born's required return (rs);is 13%, what is the company's current stock price?;A.;$25.16;B.;$27.89;C.;$28.26;D.;$30.34;E.;$32.28;23) If a stock's expected return exceeds its required return, this;suggests that;A.;The stock is experiencing supernormal;growth.;B.;The stock should be sold.;C.;The company is probably not trying to;maximize price per share.;D.;The stock is probably a good buy.;E.;Dividends are not being declared.;24) Stock A has a beta of 1.1 and Stock B has a beta of 0.9. The;market risk premium is 6%, and the risk-free rate is 6.3%. Both stocks have a;constant dividend growth rate of 7% a year. If the market is in equilibrium;which of the following statements is CORRECT?;A.;Stock A must have a higher dividend;yield than Stock B.;B.;Stock A must have a higher stock price;than Stock B.;C.;Stock B's dividend yield equals its;expected dividend growth rate.;D.;Stock B must have the higher required;return.;E.;Stock B could have the higher expected;return.;25) Cartwright Brothers' stock is currently selling for $40 a share.;The stock is expected to pay a $2 dividend at the end of the year. The dividend;growth rate is expected to be a constant 7% per year, forever. The risk-free;rate and market risk premium are each 6%. What is the stock's beta?;A.;1.06;B.;1.00;C.;2.00;D.;0.83;E.;1.08

Paper#45207 | Written in 18-Jul-2015

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