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%