UNIT 7: RISKS, RETURNS, AND THE COST OF CAPITAL – LAB: WILEYPLUS ASSIGNMENTS

Multiple Choice Question 38

 

Briar Corp is issuing a 10-year bond with a coupon rate of 7 percent. The interest rate for similar bonds is currently 9 percent. Assuming annual payments, what is the present value of the bond? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

 

 

 

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[removed] $990

 

 

 

[removed] $945

 

 

 

[removed] $1,066

 

 

 

[removed] $872

 

 

 

 

 

Multiple Choice Question 43

 

Giant Electronics is issuing 20-year bonds that will pay coupons semiannually. The coupon rate on this bond is 7.8 percent. If the market rate for such bonds is 7 percent, what will the bonds sell for today? (Do not round intermediate computations. Round your final answer to the nearest dollar.)

 

 

 

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[removed] $1,085

 

 

 

[removed] $923

 

 

 

[removed] $861

 

 

 

[removed] $1,037

 

 

 

 

 

Nathan Akpan is planning to invest in a seven-year bond that pays annual coupons at a rate of 7 percent. It is currently selling at $927.23. What is the current market yield on such bonds? (Round to the closest answer.)

 

 

 

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[removed] 7.5%

 

 

 

[removed] 10.4%

 

 

 

[removed] 8.4%

 

 

 

[removed] 9.5%

 

 

 

Multiple Choice Question 67

 

Which of the following statements is true?

 

 

 

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[removed] The real rate of interest varies with the business cycle, with the lowest rates seen at the end of a period of business expansion and the highest at the bottom of a recession.

 

 

 

[removed] The interest rate risk premium always adds a downward bias to the slope of the yield curve.

 

 

 

[removed] The longer the maturity of a security, the greater its interest rate risk.

 

 

 

[removed] If investors believe inflation will be subsiding in the future, the prevailing yield will be upward sloping.

 

 

 

Multiple Choice Question 71

 

Which of the following statements is true?

 

 

 

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[removed] The lower the transaction costs are, the greater a security’s marketability.

 

 

 

[removed] The interest rate, or yield, on a security varies with its degree of marketability.

 

 

 

[removed] U.S. Treasury bills have the largest and most active secondary market and are considered to be the most marketable of all securities.

 

 

 

[removed] All of the above are true.

 

 

 

Multiple Choice Question 72

 

Which of the following statements is NOT true?

 

 

 

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[removed] The risk that the lender may not receive payments as promised is called default risk.

 

 

 

[removed] Investors must pay a premium to purchase a security that exposes them to default risk.

 

 

 

[removed] U.S. Treasury securities are the best proxy measure for the risk-free rate.

 

 

 

[removed] All of the above are true statements.

 

Multiple Choice Question 76

 

Which of the following statements is true?

 

 

 

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[removed] Because investors are risk averse, they require a premium to purchase a security that exposes them to default risk.

 

 

 

[removed] All else equal, the higher a bond’s rating the higher the coupon rate.

 

 

 

[removed] Federal laws typically allow insurance companies and pension funds to purchase non-investment grade bonds.

 

 

 

[removed] Investment grade bonds are those rated single B and higher.

 

Multiple Choice Question 50

 

Which of the following statements is true?

 

 

 

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[removed] Preferred stockholders are considered to be the true owners of public corporations.

 

 

 

[removed] Preferred stock can never be converted to common stock.

 

 

 

[removed] Dividends paid to preferred stockholders are not fixed.

 

 

 

[removed] Preferred stockholders do not typically have voting rights.

 

Multiple Choice Question 52

 

Assume that you are considering the purchase of a stock which will pay dividends of $4.50 during the next year. Further assume that you will be able to sell the stock for $85.00 one year from today and that your required rate of return is 15 percent. How much would you be willing to pay for the stock today? (Round off to the nearest $0.01)

 

 

 

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[removed] $77.83

 

 

 

[removed] $94.10

 

 

 

[removed] $89.50

 

 

 

[removed] $65.37

 

Multiple Choice Question 53

 

Which of the following statements is NOT true about the general dividend valuation model?

 

 

 

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[removed] The price of a share of stock is the present value of all expected future dividends.

 

 

 

[removed] The model does not assume any specific pattern for future dividends, such as a constant growth rate.

 

 

 

[removed] It makes a specific assumption about when the share of stock is going to be sold in the future.

 

 

 

[removed] The model calls for forecasting an infinite number of dividends for a stock.
   

 

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Donot round intermediate calculations. Round final answer to two decimal places.)

 

 

 

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[removed] $11.88

 

 

 

[removed] $11.50

 

 

 

[removed] $10.76

 

 

 

[removed] $9.80

 

Multiple Choice Question 65

 

Xinhua Manufacturing Company has been generating stable revenues but sees no growth in it for the foreseeable future. The company’s last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round the final answer to two decimal places.)

 

 

 

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[removed] $21.23

 

 

 

[removed] $39.00

 

 

 

[removed] $3.69

 

 

 

[removed] $27.08

 

Zephyr Electricals is a company with no growth potential. Its last dividend payment was $4.50, and it expects no change in future dividends. What is the current price of the company’s stock given a discount rate of 9 percent?

 

 

 

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[removed] $50.00

 

 

 

[removed] $45.00

 

 

 

[removed] $500.00

 

 

 

[removed] $40.50

 

Multiple Choice Question 76

 

The constant growth dividend model would be useful to determine the value of all, but which of the following firms?

 

 

 

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[removed] A firm whose earnings and dividends are growing at a fairly steady rate.

 

 

 

[removed] A firm whose expected sales, profits, and dividends are flat.

 

 

 

[removed] A firm whose earnings and dividends are declining at a fairly steady rate.

 

 

 

[removed] A firm whose sales, profits, and dividends are growing at an annual average compound rate of 5 percent.

 

Multiple Choice Question 79

 

Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four years. It will then settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.)

 

 

 

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[removed] $65.68

 

 

 

[removed] $85.94

 

 

 

[removed] $97.19

 

 

 

[removed] $50.59

 

Multiple Choice Question 80

 

Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth rate to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current market price of the stock?(Do not round intermediate calculations. Round final answer to two decimal places.)

 

 

 

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[removed] $57.54

 

 

 

[removed] $93.63

 

 

 

[removed] $80.29

 

 

 

[removed] $69.41

 

Multiple Choice Question 88

 

The Columbia Consumer Products Co. has issued perpetual preferred stock with a $100 par value. The firm pays a quarterly dividend of $2.60 on this stock. What is the current price of this preferred stock given a required rate of return of 12.5 percent?

 

 

 

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[removed] $83.20

 

 

 

[removed] $47.25

 

 

 

[removed] $20.80

 

 

 

[removed] $80.00

 

 

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