1. Preferred stock is riskier than long-term debt because its claim on assets and income come after those of bonds?

a. True

b. False

2. Shelly Inc. bonds have a corporate rate of 8 percent. The interest is paid semiannually, and the bonds mature in 12 years. Their par value is $1,000. If you’re required rate of returns is 9 percent what is the value of the bond? What is the value if the interest is paid annually?

a. If the interest is paid semiannually, the value of the bonds is $_____

b. If the interest paid annually, the value of the bond is $______

3. Assume a firm had such financial problems that it was about to liquidated after bankruptcy. All of the firm’s assets are to be sold following claims against the firm’s bondholders, preferred stockholders, common stockholders, and federal income taxes. Of the claims mentioned, what priority would common stockholders have?

a. First

b. Second

c. Third

d. Forth

4. TC Corp paid a dividend of $5 per share. The dividend is expected to grow at a constant rate of 6.5%PER YEAR. If TC Corp stock is selling for $50.00 per share the stock holders are expected rate of return is

a. 17.15%

b. 16.50%

c. 13.56%

d. 11.50%

5. At the beginning of the year, you bought a $1,000 par value corporate bond with an annual coupon rate of 15% and a maturity date of 16 years. When you bought the bond, it had an expected yield to maturity of 12 percent. Today the bond sells for $1,390.

What did you pay for the bond?

If you sold the bond at the end of the year, what would be your one period return investment? Assume that you did not receive any interest payment during the holding period.

a.The price you paid is $_____

b. If you sold the bond today, your one year period return investment is ____%

6. (Common Stock valuation) Honeywag common stock is expected to pay $1.50dividends next year, and the market price is projected to be $49.60 per share by year end. If investors require a rate of return of 10%, what is the current value of the stock?

a. The current value of the stock is $__

7. Shackleford Corporation net income this year is $80,000. The company generally retains 35% of net income for reinvestment. The company’s common equity currently has a book value of $5,000,000. They just paid a dividend of $1.37, and the required rate of return on stock is 12%. Compute the value of this stock if dividends are expected to continue to grow indefinitely at the company’s internal growth rate.

a. $15.63

b. $4.35

c. $22.61

d. $11.42

8. Studio 5, Inc. has an issue of preferred that pays a dividend of $4.00. The preferred stockholders require a rate of return on this stock of 9%. At what price should the preferred stock sell for? Round off to the nearest $0.10

a. $88.80

b. $44.40

c. $62.50

d. $36.00

9. (Preferred stock expected return) You are planning to purchase 200 shares of preferred stock and must choose between Stock A and Stock B. Stock A pays an annual dividend of $4.50 and is currently selling for $35. Stock B pays and annual dividend of $4.30 and is selling for $37. If your required return is 12.4%, which stock should you choose?

a. What is the expected return on Stock A? _____%

b. What is the expected return on Stock B? ____%

c. If your required return is 12.24yo should choose either Stock A, Stock B or none.

10. Stock W has the following returns for various states of the economy:

State of the Economy Probability Stock W’s Return

Recession 9%-72%

Below Average 16%-15%

Average 51%-16%

Above Average 14%-35%

Boom 10%-85%

Stock W’s standard deviation of return is

a. 12%

b. 29%

c. 37%

d. 43%

11. The expected yield on junk bonds is higher than on AAA rated bonds because of the higher default risk associated with junk bonds.

a. True

b. False

12. Historically, investments with the highest returns have the lowest standard deviations because investors do not like risk.

a. True

b. False

13. (Common Stock valuation) You intend to purchase Marigo common stock at $49.00 per share, hold it 1 year, and then sell it after a dividend of $6.75 is paid. How much will the stock have appreciate for you to satisfy your required rate of return of 16%?

a. The stock price to appreciate ___%

14. ?

15. ?

16. Which of the following affect’s value to an investor?

I. Amount of an asset’s expected cash flow

II. The riskiness of the cash flow

III. Timing of an assets cash flow

IV. Investors required rate of return

a. I., II, IV.

b. I., II., III., IV.

c. I., II. IV.

d. I. II. III.

17. Which of the following is most correct concerning diversification and risk?

a. Diversification is mainly achieved by the selection of individuals securities of asset held in a portfolio

b. Assets allocation is important for pension funds not for individual investors

c. Diversification is mainly achieved by asset allocation decision, not the selection of individual securities within each asset category.

d. Large company stocks and small company stocks together in a portfolio lead to a dramatic reduction in risk because their returns are negatively correlated

18. (Bond Valuation) You own a a 10 year $1,000 par value bond paying 8% interest annually. The market price of the bond is $875, and you required rate of return is 12%.

a. What is the expected rate of return of the 10 year, $1,000 par value bond paying 8% interest annually if its market price is $875? ___%

b. What is the value of the bond to you given your 12% required rate of return? $___

c. Should you sell the bond or continue to own it?

I. You should sell the bond because the bond’s yield to maturity is higher than expected rate of return and thus is it’s undervalued.

II. You should continue to hold the bond’s yield to maturity is higher than expected rate of return and thus is it’s undervalued.

III. You should sell the bond because the bond’s yield to maturity is lower than your expected rate of return and thus it is overvalued.

IV. You should continue to hold the bond because the bond’s yield to maturity is lower than your expected rate of return and thus it is overvalued.

S

19. (Capital asset pricing model) MFI INC. has a beta of 1.01. IF the expected market return is 11% and the risk free rate is 6.5%, what is the appropriate required return of MFI(Using CAPM)

a. Using CAPM the appropriate required return of MFI is ____%

20. If market interest rates decline

a. Short-term bonds will rise in value more than long-term

b. Long-term bonds will rise in value more than short term

c. Short term bonds will decline in value more than long term

d. Long term bonds will decline in value more than short term bonds

21. (common stock valuation) Daloton Inc. has a return on equity of 12.4% and retains 54% of its earnings for reinvestment purposes. It recently paid a dividend of $3.00 and the stock is currently selling for $43.

A. What is the growth rate for Dalton Inc.? _____%

B. What is the expected return for Dalton stock? ___%

C. If you require a 13% return, should you invest in the firm? Yes or No?

22. Charlie Corp. has two bonds outstanding. Both bonds mature in 10 years, have a face value of $1,000 and have a yield maturity of 8%. One bond and the other bond has a coupon rate if 8%. Which of the following statement is true?

a. All rational investors will prefer 8% bond because it pays more interest

b. Both Bonds must sell for the same price if markets are in equilibrium

c. The zero coupon bond must have a higher price because of its greater capital gain potential

d. The zero coupon bond must sell for a lower price than the bond with an 8% coupon rate

23. The return on the market portfolio is currently 12%. Mobile phone corporation stockholders require a rate of return of 30% and the stock has a beta of 3.2. According to CAPM, determine the risk free rate?

a. 6.50%

b. 9.80%

c. 4.64%

d. 3.82%

24. The portfolio beta is simply the sum of the betas of the individual stocks in the portfolio?

a. True

b. False

25. The risk free rate of interest is 4% and the market premium is 9%. Howard Corporation has a beta of 2.0 and last year generated a return of 16% with a standard deviation of returns of 27%. The required return on Howard Corp stock is?

a. 14%

b. 26%

c. 22%

d. 36%

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