QUESTION 1
1. Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 5.7%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?
5.83%
4.93%
7.94%
6.40%
6.79%
QUESTION 2
1. 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 1.10, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P ?
$18.59
$19.78
$18.20
$15.43
$17.41
QUESTION 3
1. Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?
$41.59
$42.65
$43.75
$44.87
$45.99
QUESTION 4
1. Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) ? 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?
0.49%
0.55%
0.61%
0.68%
0.75%
QUESTION 5
1. Mikkelson Corporation's stock had a required return of 15.00% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)
23.37%
21.28%
19.00%
20.14%
16.15%
QUESTION 6
1. Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $57.50, what is its nominal (not effective) annual rate of return?
7.86%
8.14%
7.72%
7.37%
6.96%
QUESTION 7
1. 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 1.35, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P ?
$15.83
$14.02
$11.61
$18.84
$15.07
QUESTION 8
1. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values) as of today is as follows:
Long-term debt (bonds, at par) $23,500,000
Preferred stock 2,000,000
Common stock ($10 par) 10,000,000
Retained earnings 4,000,000
Total debt and equity $39,500,000
2. The bonds have a 7.4% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt?
$23,056,235
$21,580,636
$16,047,140
$18,444,988
$16,969,389
QUESTION 9
1. Kay Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?
0.52%
0.61%
0.38%
0.50%
0.56%
QUESTION 10
1. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
$26.77
$27.89
$29.05
$30.21
$31.42
QUESTION 11
1. Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35. What would the portfolio's new beta be?
1.17
1.23
1.29
1.36
1.43
QUESTION 12
1. Crockett Corporation's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) ? 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?
1.40%
1.55%
1.71%
1.88%
2.06%
QUESTION 13
1. Wachowicz Corporation issued 15-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 14 years to maturity?
$1,077.01
$1,104.62
$1,132.95
$1,162.00
$1,191.79
QUESTION 14
1. Company A has a beta of 0.70, while Company B's beta is 0.80. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
0.57%
0.77%
0.68%
0.67%
0.80%
QUESTION 15
1. Grossnickle Corporation issued 20-year, noncallable, 6.3% 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?
$1,136.58
$950.79
$1,289.58
$1,049.15
$1,092.86
QUESTION 16
1. Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.80%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?
1.16%
1.25%
1.56%
1.08%
1.43%
QUESTION 17
1. Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?
1,063.09
1,090.35
1,118.31
1,146.27
1,174.93
QUESTION 18
1. Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?
8.03%
8.24%
8.45%
8.67%
8.89%
QUESTION 19
1. Kay Corporation's 5-year bonds yield 7.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?
1.50%
1.68%
1.16%
1.76%
1.41%
QUESTION 20
1. Keys Corporation's 5-year bonds yield 7.70% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the liquidity premium for Keys' bonds is LP = 0.5% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Keys' bonds?
3.22%
2.80%
3.28%
2.69%
3.47%
1. Suppose the interest rate on a 1-year T-bond is 5.0% and that on a 2-year T-bond is 5.7%. Assuming the pure expectations theory is correct, what is the market's forecast for 1-year rates 1 year from now?
5.83%
4.93%
7.94%
6.40%
6.79%
QUESTION 2
1. 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 1.10, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P ?
$18.59
$19.78
$18.20
$15.43
$17.41
QUESTION 3
1. Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of 5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the best estimate of the stock's current market value?
$41.59
$42.65
$43.75
$44.87
$45.99
QUESTION 4
1. Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) ? 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?
0.49%
0.55%
0.61%
0.68%
0.75%
QUESTION 5
1. Mikkelson Corporation's stock had a required return of 15.00% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? (Hint: First calculate the beta, then find the required return.)
23.37%
21.28%
19.00%
20.14%
16.15%
QUESTION 6
1. Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $57.50, what is its nominal (not effective) annual rate of return?
7.86%
8.14%
7.72%
7.37%
6.96%
QUESTION 7
1. 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 1.35, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P ?
$15.83
$14.02
$11.61
$18.84
$15.07
QUESTION 8
1. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values) as of today is as follows:
Long-term debt (bonds, at par) $23,500,000
Preferred stock 2,000,000
Common stock ($10 par) 10,000,000
Retained earnings 4,000,000
Total debt and equity $39,500,000
2. The bonds have a 7.4% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt?
$23,056,235
$21,580,636
$16,047,140
$18,444,988
$16,969,389
QUESTION 9
1. Kay Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?
0.52%
0.61%
0.38%
0.50%
0.56%
QUESTION 10
1. Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
$26.77
$27.89
$29.05
$30.21
$31.42
QUESTION 11
1. Suppose you hold a portfolio consisting of a $10,000 investment in each of 8 different common stocks. The portfolio's beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.35. What would the portfolio's new beta be?
1.17
1.23
1.29
1.36
1.43
QUESTION 12
1. Crockett Corporation's 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett's bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) ? 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?
1.40%
1.55%
1.71%
1.88%
2.06%
QUESTION 13
1. Wachowicz Corporation issued 15-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 14 years to maturity?
$1,077.01
$1,104.62
$1,132.95
$1,162.00
$1,191.79
QUESTION 14
1. Company A has a beta of 0.70, while Company B's beta is 0.80. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
0.57%
0.77%
0.68%
0.67%
0.80%
QUESTION 15
1. Grossnickle Corporation issued 20-year, noncallable, 6.3% 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?
$1,136.58
$950.79
$1,289.58
$1,049.15
$1,092.86
QUESTION 16
1. Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 6.80%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?
1.16%
1.25%
1.56%
1.08%
1.43%
QUESTION 17
1. Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?
1,063.09
1,090.35
1,118.31
1,146.27
1,174.93
QUESTION 18
1. Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $45.00, what is its nominal (not effective) annual rate of return?
8.03%
8.24%
8.45%
8.67%
8.89%
QUESTION 19
1. Kay Corporation's 5-year bonds yield 7.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?
1.50%
1.68%
1.16%
1.76%
1.41%
QUESTION 20
1. Keys Corporation's 5-year bonds yield 7.70% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the liquidity premium for Keys' bonds is LP = 0.5% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Keys' bonds?
3.22%
2.80%
3.28%
2.69%
3.47%
