1.
A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10%
coupon. Neither is callable, and both have the same yield to maturity. If the yield to
maturity of both bonds increases by the same amount, which of the following
statements would be CORRECT?
a. The prices of both bonds will decrease by the same amount.
b. Both bonds would decline in price, but the 10-year bond would have the
greater percentage decline in price.
c. The prices of both bonds would increase by the same amount.
d. One bond's price would increase, while the other bond’s price would
decrease.
e. The prices of the two bonds would remain constant.
2. Tucker Corporation is planning to issue new 20-year bonds. The current plan is to
make the bonds non-callable, but this may be changed. If the bonds are made
callable after 5 years at a 5% call premium, how would this aLect their required rate
of return?
a. Because of the call premium, the required rate of return would decline.
b. There is no reason to expect a change in the required rate of return.
c. The required rate of return would decline because the bond would then be
less risky to a bondholder.
d. The required rate of return would increase because the bond would then
be more risky to a bondholder.
e. It is impossible to say without more information.
3. Two constant growth stocks are in equilibrium, have the same price, and have the
same required rate of return. Which of the following statements is CORRECT?
a. The two stocks must have the same dividend per share.
b. If one stock has a higher dividend yield, it must also have a lower
dividend growth rate.
c. If one stock has a higher dividend yield, it must also have a higher dividend
growth rate.
d. The two stocks must have the same dividend growth rate.
e. The two stocks must have the same dividend yield.
4. Which of the following statements is CORRECT?
a. The constant growth model is often appropriate for evaluating start-up
companies that do not have a stable history of growth but are expected to
reach stable growth within the next few years.
b. If a stock has a required rate of return rs = 12% and its dividend is expected to
grow at a constant rate of 5%, this implies that the stock’s dividend yield is
also 5%.
c. The stock valuation model, P0 = D1/(rs - g), can be used to value firms
whose dividends are expected to decline at a constant rate, i.e., to grow
at a negative rate.
d. The price of a stock is the present value of all expected future dividends,
discounted at the dividend growth rate.
e. The constant growth model cannot be used for a zero growth stock, where
the dividend is expected to remain constant over time.
5. Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have
a par value of $1,000 and an annual coupon of 5.7%. If the current market interest
rate is 7.0%, at what price should the bonds sell?
a. $817.12
b. $838.07
c. $859.56
d. $881.60
e. $903..64
6. Assume that you are considering the purchase of a 20-year, noncallable bond with
an annual coupon rate of 9.5%. The bond has a face value of $1,000, and it makes
semiannual interest payments. If you require an 8.4% nominal yield to maturity on
this investment, what is the maximum price you should be willing to pay for the
bond?
a. $1,105.69
b. $1,133.34
c. $1,161.67
d. $1,190.71
e. $1,220.48
7. Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at
their par value of $1,000 one year ago. Today, the market interest rate on these
bonds is 5.5%. What is the current price of the bonds, given that they now have 19
years to maturity?
a. $1,113.48
b. $1,142.03
c. $1,171.32
d. $1,201.35
e. $1,232.15
8. Molen Inc. has an outstanding issue of perpetual preferred stock with an annual
dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at
what price should the stock sell?
a. $104.27
b. $106.95
c. $109.69
d. $112.50
e. $115.38
9. 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. The company's
beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What
is the company's current stock price, P0?
a. $18.62
b. $19.08
c. $19.56
d. $20.05
e. $20.55
10. Ackert Company's last dividend was $1.55. The dividend growth rate is expected to
be constant at 1.5% for 2 years, after which dividends are expected to grow at a rate
of 8.0% forever. The firm's required return (rs) is 12.0%. What is the best estimate of
the current stock price?
a. $37.05
b. $38.16
c. $39.30
d. $40.48
e. $41.70
