1 Business Finance 620 CH05-06-10-11 Practice Problems ____ 1. How much should you be willing to pay today for a share of stock with a 6% dividend yield, a 16% required return and an expected price one year from today of $50? A. $42.50 B. $45.00 C. $45.45 D. $47.00 ____ 2. According to the CAPM, the expected risk premium on BMT Corporation common stock is 12.5%. If the market risk premium is 9.5%, what is BMT’s beta? A. 1.32 B. 1.19 C. 0.76 D. The answer cannot be determined from the information provided. ____ 3. An investor buys a six-year A-rated corporate bond when its current yield exceeds its coupon rate, and sells it two years later, when its coupon rate equals its current yield. Which of the following statements concerning this transaction is correct? A. The investor sold the bond at par. B. The investor bought the bond at a premium to par. C. The investor realized a capital loss on the bond sale. D. The investor sold the bond at a discount to par. ____ 4. What dividend yield would be reported in the financial press for a stock paying a $1.35 quarterly dividend whose current market price is 67.50? A. 4.0% B. 2.0% C. 6.0% D. 8.0% ____ 5. A nine-year unrated corporate bond with a $70 annual coupon and a $1,000 par value sells at a discount to par. What happens to the bond’s coupon rate if the market yield on comparable debt drops from 7.2% to 6.8%? A. The coupon rate increases to 7.4%. B. The coupon rate remains at 7.0%. C. The coupon rate decreases to 6.8%. D. The coupon rate remains at 7.2%. ____ 6. A newly issued 23-year zero-coupon bond has a $1,000 par value and an 8.85% YTM. How much should you expect to pay for this bond today? The bond is unrated. A. $142 B. $270 C. $412 D. $1,000 Business Finance 620 CH05-06-10-11 Practice Problems 2 ____ 7. Branson Manufacturing plans to pay the following dividends: > $2.35 one year from today > $2.90 two years from today > $3.40 three years from today After the third year, the board has committed the company to long-term annual dividend growth of 5%. Investors seek a 13% return on the stock. How much should you be willing to pay for a share of Branson stock today? A. $28.93 B. $25.26 C. $30.93 D. $37.64 ____ 8. Stocks that have the same expected risk should have: A. the same annual dividend payment. B. the same market price. C. the same expected return. D. the same sustainable growth rate. ____ 9. You have the following information on the common stock of ABT Products: > The company expects to pay a $3.68 dividend one year from today > The dividend is set to grow at 4.5% annually for the foreseeable future > The stock’s sustainable growth rate is 10.85% > The stock’s ROE is 35% > The required return on the stock is 10%. How much of the stock’s value today represents PVGO? A. $17.85 B. $13.41 C. $66.91 D. $53.40 ____ 10. Three years ago, American Global issued a ten-year, AA-rated corporate bond with a $1,000 face value and a 6.65% annual coupon. If the market yield on comparable debt is 6.90%, how much is the bond worth today? A. $1,000 B. $1,028 C. $986 D. $1,014 ____ 11. Which of the following statements describes the basic principle behind the CAPM? A. A stock's unique risk should be proportional to its market risk. B. A stock's required return should be proportional to its unique risk. C. A stock's expected risk premium should be less than the market risk premium. D. A stock's expected risk premium should be proportional to its beta. Business Finance 620 CH05-06-10-11 Practice Problems 3 ____ 12. If you buy a five-year zero-coupon bond at issue for $500, how much should the bond be worth three years later if market interest rates remain unchanged? The bond’s par value is $1,000. A. $656. B. $723 C. $758 D. $800 ____ 13. Which of the following statements describes a major benefit of investing in mutual funds? A. Mutual fund portfolios usually have betas close to zero. B. Mutual funds provide low-cost reduction of exposure to unique risks. C. Mutual fund portfolios are not subject to systematic risk. D. Mutual funds provide higher returns than investors can expect from holding individual securities. ____ 14. Investors who own bonds with lower credit ratings should expect A. lower yields to maturity. B. higher interest rate risk. C. higher default risk. D. lower coupon payments. ____ 15. Which of the following statements is (are) correct? (1) According to the CAPM, the expected return on a security is proportional to the security’s unsystematic risk. (2) The Security Market Line provides a standard for determining how much return an investor should expect for shouldering a security’s market risk. A. (1) only B. (2) only C. Both (1) and (2) D. Neither (1) nor (2) ____ 16. When new information becomes available in efficient markets, A. stock prices rarely adjust fully to the information until the SEC has reviewed its merits. B. brokerage commissions tend to erase any benefit of trading on the information. C. stock prices tend to adjust to the information reasonably quickly. D. most investors ignore the information until it appears on CNN. ____ 17. A ten-year unrated corporate bond has a $1,000 par value and a $65.75 annual coupon. When this bond trades at a discount to par: A. its face value will exceed its par value. B. its coupon rate will exceed its current yield. C. its market price will exceed its face value. D. its YTM will exceed its current yield. Business Finance 620 CH05-06-10-11 Practice Problems 4 ____ 18. In a diversified portfolio of common stocks, an investor should expect: A. the variance of returns for the portfolio to exceed the corresponding variance for any of the individual stocks. B. the portfolio’s beta to exceed the beta of any of the individual stocks. C. the standard deviation of returns for any of the individual stocks to exceed the corresponding standard deviation for the portfolio. D. the portfolio’s return to exceed the corresponding return for exactly half of the individual stocks. ____ 19. An eight-year A-rated corporate bond has a 7.8% annual coupon and a $1,000 par value. If you buy the bond at issue, and sell it one year later at a 2.5% premium to par, what real rate of return did you earn?. Assume the bond paid one annual coupon and the annual rate of inflation is 3%. A. 7.1% B. 7.8% C. 5.5% D. 8.3% ____ 20. A share of Becker International common stock paid an annual dividend of $3.86 today. The firm’s board has committed the company to long-term annual dividend growth of 3.75%. According to the Gordon Model, if investors are looking for a 14% return, how much should they expect to pay for a share of Becker stock today? A. $37.66 B. $28.98 C. $34.52 D. $39.07 Bill ExamView Pro - BFIN 620 CH05-06-10-11 Practice Problems NEW.tst