Boon 1344, ‘Midterm 11 ASobrabian Fall 2007 Version A 1. The Great Giant Corp. has a management contract with their newly hired president. The contract requires a {ump sum payment of $25 million be paid to the president upon the completion of her frst ten years of service, The company wants to set aside an oqual amount of funds each year to cover this anticipated cash ‘outflow. The company can earn 6.5 percent on these Funds, How much must the company set aside each ‘year for this purpose? A. $1,775,042.93, B. $1,798,346.17 ©. $1,801,033.67 D, $1,852,617.25 B, $1,938,01822 2. Assume that you are using the dividend growth model to value stocks. If you expect the market rate of return to inerease across the board on all equity securities, then you should also expect th: ‘A. market values of al stocks to increase, all else constant, 'B. market values of all stocks to remain constant as the dividend growth will offset the increese in the market rate. CC. market values of all stocks to decrease all else constant. D. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain « ‘constant price. E, dividend growth rates to inerease to offset this change. 4, D'Angelo’ bonds have a face value of $1,000 and a current market price of $1010. The bonds have a 7 percent coupon rate. What is the current yield on these bonds? A. 693 percent B. 6.97 percent C. 1.00 percent D. 7.03 pereent B, 7.07 percent Peel4, ‘An account managed by the bond trustce for carly bond redemption payments is called a: A. sinking fund, B. collateral payment account C. dood in trust account. D. call provision, EB, par value fund, ‘A 12-year, 5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the change in the price of this bond if the market yield rises to 6 percent from the current yield of 4.5 percent? A. 11.11 percent decrease B. 12.38 percent decrease C. 1238 percent increase D. 14.13 percent decrease E. 14.13 peroent increase 3. Am agent who buys and sells securities from inventory is called a A. broker, B, trader, ©. capitalist D. principal E, dealer All else constant, a bond will sell at___when the yield to maturity is_ the coupon rate, A. a premiums higher than BB. a premium; equal to . atper; higher than D. at pa; fess than EB, a discount; higher than8, Your employer contributes $25 a week to your retirement plan. Assume that you work for your employer for another twenty years and that the applicable discount rate is 5 percent. Given these assumptions, what is this employee benefit worth to you today? A, $13,144.43 B, $15,920.55 ©. $16,430.54 D. $16,446.34 E. $16,519.02 9, The market in which new securities ar originally sold to investors called the ___ market, r 1 A. desler B. auction . over the counter D. secondary primary 0. The Ajax Co, just decided to save $1,500 a month forthe next fve years asa safety net for recessionary periods The money willbe set aside in a separate savings account which pays 3.25 percent interest ‘compounded monthly. They deposit the first $1,500 today. If the company had wanted to deposit an ‘equivalent lump sum today, how much would they have had to deposit? A. $82,96459 B, $83,189.29 . $83,42887 D. $83,687.23 B, $84,998.01 |. The dividend growth mode! 1 assumes that dividends increase ata constant rate forever. TL can be used to compute a stock price at any point of time. TL. states that the market price of a stock is only affected by the amount ofthe dividend, TY. considers capital ains but ignores the dividend yield. A. Lonly B, Honly ©, and IV only D. Tand Tony B. 1,1, and I only Pape12, Martin's Yachts has paid annual dividends of $1.40, $1.75, and $2.00 a share over the past three years, respectively. The company now predicts that it will maintain a constant dividend since its business has leveled off and sales are expected to remain relatively constant. Given the lack of future grovt, you will ‘only buy this stock if you ean earn atleast a 15 percent rate of return, What is the maximum amount you are willing to pay to buy one share ofthis stock today? A. $10.00 B. $1333 . $1667 D, $1888 E, $20.00 13. A zero coupon bond with a face value of $1,000 is issued with an initial price of $463.34, The bond ‘matures in 25 years. What isthe implicit interes, in dollars, for the frst year of the bonds life? A. $9.08 B. S126 c si4as D, $21.47 F $31.25 14, A securities market primarily comprised of dealers who buy and sell for their awa inventories is generally referred to asa(n)__ market. A. auction B. private CC over-the-counter D. regional E, electronic network Page15. Which of the following statements conceming the effective anmaal rate are corset? T. When making financial decisions, you should compare effective snnual rates rather than annust percentage rales. TL The more frequently interest is compounded, the higher the effective anmual rat, TL. A quoted rate of 6 percent compounded continuously has a higher effective eonual rate than if the ale were compounded daily TV. When choosing which Joun to accept, you should select the offer with the highest effective anausl rate, A. Land only B, Tand1V only ©. 1M and MT only D. Ui, I, an€1V only © LU tMhand Vv 16. The Merry Weather Firm wants to raise $10 million to expand their business. To accomplish this, they plan to sell 30-year, $1,000 face value zero-coupon bonds, The bonds will be priced to yield 6 percent, What is, the minimum surmber of bonds they must sell t© raise the $10 million they need? A. 47411 B. 52,667 ©. $7485 D. 60,000 B17 35 17. Which one ofthe following bonds has the greatest interest rate risk? A, Sear; 9 percent coupon B. 5-year; 7 porcent coupon CC. 7-year; 7 percent coupon D, 9-year; 9 percent coupon -B, 9-year; 7 percent coupon 18, You are scheduled to recoive annual payments of $10,000 for each of the next 25 years. Your discount rate is 8.5 percent, What is the difference in the present value if you receive these payments atthe beginning of cach year rater than atthe end of each year? A, $8,699, 2B $9217 C. $9,706 . $10,000 E, $10,850 rapes19, Mother and Daughtor Enterprises isa relatively new fm that appears to be on the rad to great sucess. The company paid their fst annual dividend yesterday inthe amount of 8.28 a share. The eompany plans to double th annual dividend payment forthe nett three years. After that time, they are planning on paying a constant $1.50 per share indefinitely, What is one share ofthis stock worth today ifthe market {at of etum on similar securities is 11.5 perocnt? A. $941 B. $1140 ©. $1146 D. $11.93 E. $1243 20. The Extreme Reaches Corp. last paid a $1.50 per share annual dividend. The company is planning on paying $3.00, $5.00, $7.50, and $10.00 a share over the next four years, respectively. After that the dividend will be a constant $2.50 per share per year. What is the market price of this stock if the market rato of rotum is 1 percent? A. SITO4 B. $2239 c. $2657 D. $29.08 B, $33.71 21. The relationship betwoen nominal interest rates on defaultfree, pure discount securities and the time to ‘maturity is called the: A. liquidity effect 1B, Fisher effect. , term structure of interest rates. D. inflation premium. B, interest rte risk premium, 22, Michact’, Inc. just paid $1.40 to their shareholders as the annual dividend. Simultaneously, the company announced that future dividends will be increasing by 4.5 percent. If you require an 8 percent rate of return, how much are you willing to pay to purchase one share of Michael's stock? A SLI B. $3251 c. $40.00 D. $41.80 B, $43.68 Pee23. An agreement giving the bond issuer the option to repurchase the bond at a specified price prior to maturity isthe___ provision. A. sinking fund B. call . seniority D. collateral E, trustee 24, Winston Enterprises has a 15-year bond issue outstanding that pays a 9 percent coupon. The bond is currently priced at $894.60 and has a par value of $1,000. Interest is paid semiannually. What isthe yield to maturity? A. 867 peroent B. 10.13 percent ©. 10.16 percent D. 10.40 percent EB, 1045 peroent 25, The current yield on Alpha's common stock is 4.8 percent. The company just paid a $2.10 dividend. The ‘rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain ‘constant atthe current level. What i the required rate of return on Aphe’s stock? ‘A, 10,04 percent B, 16.07 percent C. 21.88 percent D, 43.75 percent E, 45.94 peroent PageE Gp 1348 Salton re FA rT Exar I> 4 Sohievblon (4), pg puzcx Lu yr, 25, conace = OX [ur ei J/ 065 cr 1,854,601 2s} 2M). eC. 3. (1a. A . cre Cyp = ae = 6-134 lofa ae iat) A 7 5. (13). B- fee sp Pe : " el! 4 aapell “ ve oe | = oat. 57 ie jaa Ce tm llst pe )™ Pre 96-6 gol WAT sade | oayo4 ' ((). 6 qn Egl). ¢. We 25 ! = 2x fp— -—_—sj: bi Leaged/ thy pve \6, A3e. 53786 - q (MD €& sy (e 8 be) Myre = tye UAT) PA gun = fe a aggre? 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B a4(4 ).0 , 1 7 gt4 bor Asef wae + ee Oh (+e) . oe 20S L eee ic 5 (e) A.Formulae Sheet i PY x(1+r)! =F%, FY, PY)" =1 12 lV, IPP) 1a +r) 1 cae enone tman)=Co| APY (Anmaty Dut) = APV (Orilinary Annuity) x (141) (for cash inflow) PMI (Annuity Dut)= PMT (Ordinary Annuity) (1+r) (for cash outfiow) ‘APY (Ortinary Amat) = feet AFV (Annuity Due) = AFV (Ordinary Annuity) x (1+?) PY (Perpetuity)= Clr mt ean=(1+ 28)" -1 EAR=e -1 Bond Price Cu ffi-t try re] 270) (for coupon payments paid annually) : p= Dextite) D, Constant dividend model 2B xis) 8 Constant dividend growth model: Py D, 8 Required rear: 7 = (D,/P,)+8