1.
The current dividend yield on Clayton's Metals common stock is3.2 percent. The company just paid a $1.48 annual dividend andannounced plans to pay $1.54 next year. The dividend growth rate isexpected to remain constant at the current level. What is therequired rate of return on this stock?
7.25 percent
7.82 percent
8.08 percent
8.75 percent
8.39 percent
2.
Which one of the following is computed by dividing next year'sannual dividend by the current stock price?
total yield
dividend yield
yield to maturity
growth rate
capital gains yield
3.
The bonds issued by Stainless Tubs bear an 8 percent coupon,payable semiannually. The bonds mature in 11 years and have a$1,000 face value. Currently, the bonds sell for $952. What is theyield to maturity?
7.92 percent
9.20 percent
8.69 percent
7.87 percent
8.08 percent
4.
Which one of the following applies to a premium bond?
Coupon rate > yield-to-maturity > current yield.
Coupon rate > current yield > yield to maturity.
Coupon rate < yield to maturity < current yield.
Yield to maturity > current yield > coupon rate.
Coupon rate = current yield = yield-to-maturity.
Please answer all the questions. Thank you.
1.
The current dividend yield on Clayton's Metals common stock is3.2 percent. The company just paid a $1.48 annual dividend andannounced plans to pay $1.54 next year. The dividend growth rate isexpected to remain constant at the current level. What is therequired rate of return on this stock?
7.25 percent
7.82 percent
8.08 percent
8.75 percent
8.39 percent
2.
Which one of the following is computed by dividing next year'sannual dividend by the current stock price?
total yield
dividend yield
yield to maturity
growth rate
capital gains yield
3.
The bonds issued by Stainless Tubs bear an 8 percent coupon,payable semiannually. The bonds mature in 11 years and have a$1,000 face value. Currently, the bonds sell for $952. What is theyield to maturity?
7.92 percent
9.20 percent
8.69 percent
7.87 percent
8.08 percent
4.
Which one of the following applies to a premium bond? |
Coupon rate > yield-to-maturity > current yield. |
Coupon rate > current yield > yield to maturity. |
Coupon rate < yield to maturity < current yield. |
Yield to maturity > current yield > coupon rate.
Coupon rate = current yield = yield-to-maturity. Please answer all the questions. Thank you. |
For unlimited access to Homework Help, a Homework+ subscription is required.
Related questions
1. Ten years ago, the Circus Corp.sold a 20-year bond issue with a 9 percent annual coupon rate and a3 percent call premium. Today, Circus called the bonds. The bondsoriginally were sold at their face value of $1,000. Compute therealized rate of return (yield to call) for investors who purchasedthe bonds when they were issued and who surrender them today inexchange for the call price.
2. (EXCELTEMPLATE) Grass Whackerâs is considering whether or not torefund a $90 million, 6 percent coupon, 30 year bond issue that wassold 8 years ago. It is amortizing $1.8 million of flotation costsover the issueâs 30-year life. A new 22-year issue would carry aninterest rate of 5.35 percent. A call premium of 5 percent would berequired to retire the old bonds and flotation costs on the newissue would be $1.35 million (also to be amortized). GrassWhackerâs marginal tax rate is 34 percent. The new bonds would beissued 1 month before the old bonds are called, with the proceedsbeing invested in short-term securities returning 1.5 percentannually. What is the NPV of the refund? Use the NPV function inExcel and the PV function in Excel. Answers should be the same.
Use the Excel Template andthe following information to answer the next threequestions:
Peterson Packaging Inc. does not currently pay dividends. Thecompany will start with a $0.50 dividend at the end of year threeand grow it by 10% for each of the next seven years until it nearlyreaches $1.00. After seven years of growth, it will fix itsdividend at $1.00 forever. The required return on the stock is15%.
3. (EXCEL TEMPLATE)What is the current stock price? Use the NPV function.
4. (EXCEL TEMPLATE)What is the expected stock price in years 1-10? Use the NPVfunction.
5. (EXCEL TEMPLATE)Calculate the dividend yield and capital gains yield that aninvestor should expect for each year.
Use the financial statements shown below to answer the nextthree questions. Free cash flow is expected to grow at 4 percentafter 2019. The weighted average cost of capital is 6.9 percent.The bonds are currently selling at 103% of par. The preferred stockhas a current market value of $51.51 million.
Balance Sheet (in millions)
Actual 2018 | Projected 2019 | Actual 2018 | Projected 2019 | ||
Cash | 81.90 | 61.60 | Accounts payable | 26.10 | 22.20 |
Marketable securities | 53.80 | 54.20 | Notes payable | 101.00 | 4.70 |
Accounts Receivable | 26.40 | 27.00 | Accruals | 8.00 | 7.37 |
Inventory | 198.20 | 186.90 | Total current liabilities | 135.10 | 34.27 |
Total Current Assets | 360.30 | 329.70 | Long term bonds | 9.20 | 4.50 |
Preferred Stock | 50.20 | 52.40 | |||
Common stock | 230.00 | 230.00 | |||
Retained earnings | 307.00 | 367.23 | |||
Net fixed assets | 371.20 | 358.70 | Total common equity | 537.00 | 597.23 |
Total assets | 731.50 | 688.40 | Total liabilities & equity | 731.50 | 688.40 |
Income Statement (in millions)
Actual 2018 | Projected 2019 | |
Sales | 907.30 | 955.10 |
Operating expenses | 764.40 | 802.80 |
Depreciation | 21.30 | 21.30 |
Earnings before interest & taxes | 121.90 | 131.00 |
Interest | 0.60 | 0.60 |
Earnings before taxes | 121.30 | 130.40 |
Taxes | 45.90 | 50.10 |
Net income before preferred dividends | 75.40 | 80.30 |
Preferred dividends | 2.50 | 1.60 |
Net Income available for common | 72.90 | 78.70 |
Common dividends | 16.40 | 18.47 |
Addition to retained earnings | 56.50 | 60.23 |
Number of shares (in millions) | 12.70 | 12.70 |
6. What is the free cash flow for 2019?
7. What is the value of operations as of 2018?
8. What is the price per share for 2018?
Instructions: Use the formula below to compute the problems: âPlease Read the question carefully.â
Kd = Yield (1 â T)
1. Telecom Systems can issue debt yielding 8 percent. The company is in a 35 percent bracket. What is its after-tax cost of debt?
2. After-tax cost of debt: Royal Jewelers Inc., has an aftertax cost of debt of 6 percent. With a tax rate of 40 percent, what can you assume the yield on the debt is?
3.
Cash flow: Assume a corporation has earnings before depreciation and taxes of $100,000, depreciation of $50,000, and that it has a 30 percent tax bracket. Compute its cash flow using the format below.
Earnings before depreciation and taxes _____
Depreciation _____
Earnings before taxes _____
Taxes @ 30% _____
Earnings after taxes _____
Depreciation _____
4.
Cost of preferred stock: Medco Corporation can sell preferred stock for $80 with an estimated flotation cost of $3. It is anticipated the preferred stock will pay $6 per share in dividends.
a. Compute the cost of preferred stock for Medco Corp.
b. Do we need to make a tax adjustment for the issuing firm?
5. Cost of preferred stock: The Meredith Corporation issued $100 par value preferred stock 10 years ago. The stock provided an 8 percent yield at the time of issue. The preferred stock is now selling for $75. What is the current yield or cost of the preferred stock? (Disregard flotation costs.)
6. Costs of retained earnings and new common stock: Barton Electronics wants you to calculate its cost of common stock. During the next 12 months, the company expects to pay dividends (D1) of $1.20 per share, and the current price of its common stock is $30 per share. The expected growth rate is 9 percent.
a. Compute the cost of retained earnings (Ke). Use Formula 11-6.
b. If a $2 flotation cost is involved, compute the cost of new common stock (Kn). Use Formula 11-7.
7. A firm's cost of preferred stock is equal to the preferred dividend divided by market price plus the dividend growth rate (Kp= D/Po+ g).
8. The coefficient of variation, calculated as the standard deviation of expected returns divided by the expected return, is a standardized measure of the risk per unit of expected return.
a. True
b. False
9. The standard deviation is a better measure of risk than the coefficient of variation if the expected returns of the securities being compared differ significantly.
a. True
b. False
10. The CAPM is built on historic conditions, although in most cases we use expected future data in applying it. Because betas used in the CAPM are calculated using expected future data, they are not subject to changes in future volatility. This is one of the strengths of the CAPM.
a. True
b. False
11. You have the following data on three stocks:
Stock | Standard Deviation | Beta |
A | 20% | 0.59 |
B | 10% | 0.61 |
C | 12% | 1.29 |
If you are a strict risk minimizer, you would choose Stock if it is to be held in isolation and Stock if it is to be held as part of a well-diversified portfolio.
a. A; A.
b. A; B.
c. B; A.
d. C; A.
e. C; B.
12. A portfolioâs risk is measured by the weighted average of the standard deviations of the securities in the portfolio. It is this aspect of portfolios that allows investors to combine stocks and thus reduce the riskiness of their portfolios.
a. True
b. False
13. You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT?
a. The price of Bond B will decrease over time, but the price of Bond A will increase over time.
b. The prices of both bonds will remain unchanged.
c. The price of Bond A will decrease over time, but the price of Bond B will increase over time.
d. The prices of both bonds will increase by 7% per year.
e. The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate.
14. A 12-year bond has an annual coupon of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?
a. If market interest rates decline, the price of the bond will also decline.
b. The bond is currently selling at a price below its par value.
c. If market interest rates remain unchanged, the bondâs price one year from now will be lower than it is today.
d. The bond should currently be selling at its par value.
e. If market interest rates remain unchanged, the bondâs price one year from now will be higher than it is today.
15. Suppose the real risk-free rate is 3.50% and the future rate of inflation is expected to be constant at 2.20%. What rate of return would you expect on a 1-year Treasury security, assuming the pure expectations theory is valid? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.
a. 5.14%
b. 5.42%
c. 5.70%
d. 5.99%
e. 6.28%
16. Suppose 1-year T-bills currently yield 7.00% and the future inflation rate is expected to be constant at 3.20% per year. What is the real risk-free rate of return, r*? Disregard any cross-product terms, i.e., if averaging is required, use the arithmetic average.
a. 3.80%
b. 3.99%
c. 4.19%
d. 4.40%
e. 4.62%
17. Assume that interest rates on 20-year Treasury and corporate bonds are as follows:
T-bond = 7.72% AAA = 8.72% A = 9.64% BBB = 10.18%
The differences in these rates were probably caused primarily by:
a. Tax effects.
b. Default and liquidity risk differences.
c. Maturity risk differences.
d. Inflation differences.
e. Real risk-free rate differences.
18. You plan to analyze the value of a potential investment by calculating the sum of the present values of its expected cash flows. Which of the following would lower the calculated value of the investment?
a. The cash flows are in the form of a deferred annuity, and they total to $100,000. You learn that the annuity lasts for only 5 rather than 10 years, hence that each payment is for $20,000 rather than for $10,000.
b. The discount rate increases.
c. The riskiness of the investmentâs cash flows decreases.
d. The total amount of cash flows remains the same, but more of the cash flows are received in the earlier years and less are received in the later years.
e. The discount rate decreases.
19. Assume that inflation is expected to decline steadily in the future, but that the real risk-free rate, r*, will remain constant. Which of the following statements is CORRECT, other things held constant?
a. If the pure expectations theory holds, the Treasury yield curve must be downward sloping.
b. If the pure expectations theory holds, the corporate yield curve must be downward sloping.
c. If there is a positive maturity risk premium, the Treasury yield curve must be upward sloping.
d. If inflation is expected to decline, there can be no maturity risk premium.
e. The expectations theory cannot hold if inflation is decreasing.
20. Disregarding risk, if money has time value, it is impossible for the present value of a given sum to exceed its future value.
a. True
b. False