A+ Answers



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%