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Common Stock - Principles of Finance - Solved Exam, Exams of Finance

Gautam Buddha University Finance

Common Stock , Rate of Return, Maintain a Constant, Dividend Yield, Simple Motors, Golf World, Required Rate, Required Return, Dividend Growth Rate, Tubby Corporation Stock. Its solved exam paper for Principles of Finance course.

Typology: Exams

2011/2012

Uploaded on 12/20/2012

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Provide the single best response to the following questions. Each question is worth 3.33 points.

1. ABC Corporation's common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is

expected to pay a dividend of $2.89 one year from now. Dividends are expected to grow at a constant

rate indefinitely. What is the required rate of return on ABC stock?

A) 7.3%

B) 8.7%

C) 9.5%

D) 10.6%

E) 11.2%

2. Garage, Inc. is expected to maintain a constant 6% growth rate in its dividends, indefinitely. If the

company has a dividend yield of 5.4%, what is the required return on the company’s stock?

A) 11.72%

B) 11.4%

C) 11.76%

D) 12%

E) 10.8%

3. The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years, and $6.00 in 3

years. You can sell the stock for $110 in 3 years. If you require a 12% return on your investment, how

much would you be willing to pay for a share of this stock today?

A) $87.73

B) $88.63

C) $81.52

D) $110.05

E) $98.25

4. The stock of MTY Golf World currently sells for $89.92 per share. The firm will pay a dividend of

$5.09 in a year. If the required rate of return is 12.00%, what will the stock sell for one year from

now?

A) $ 95.00

B) $ 93.52

C) $ 95.32

D) $ 95.62

E) $100.71

5. What would you pay for a share of ABC Corporation stock today if the next dividend will be $3 per

share, your required return on equity investments is 18%, and the stock is expected to be worth $90

one year from now?

A) $78.81

B) $80.87

C) $82.56

D) $76.27

E) $79.27

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Provide the single best response to the following questions. Each question is worth 3.33 points.

ABC Corporation's common stock dividend yield is 3.61%, it just paid a dividend of $2.75, and is expected to pay a dividend of $2.89 one year from now. Dividends are expected to grow at a constant rate indefinitely. What is the required rate of return on ABC stock? A) 7.3% B) 8.7% C) 9.5% D) 10.6% E) 11.2%
Garage, Inc. is expected to maintain a constant 6% growth rate in its dividends, indefinitely. If the company has a dividend yield of 5.4%, what is the required return on the company’s stock? A) 11.72% B) 11.4% C) 11.76% D) 12% E) 10.8%
The dividend on Simple Motors common stock will be $3 in 1 year, $4.25 in 2 years, and $6.00 in 3 years. You can sell the stock for $110 in 3 years. If you require a 12% return on your investment, how much would you be willing to pay for a share of this stock today? A) $87. B) $88. C) $81. D) $110. E) $98.
The stock of MTY Golf World currently sells for $89.92 per share. The firm will pay a dividend of $5.09 in a year. If the required rate of return is 12.00%, what will the stock sell for one year from now? A) $ 95. B) $ 93. C) $ 95. D) $ 95. E) $100.
What would you pay for a share of ABC Corporation stock today if the next dividend will be $3 per share, your required return on equity investments is 18%, and the stock is expected to be worth $ one year from now? A) $78. B) $80. C) $82. D) $76. E) $79.

ABC Company's preferred stock is selling for $30 a share. If the required return is 8%, what will the annual dividend be four years from now? A) $1. B) $2. C) $3. D) $40. E) $32.
Llano's stock is currently selling for $40.00. The expected dividend one year from now is $2 and the required return is 13%. What is this firm's implied dividend growth rate? A) 3% B) 5% C) 8% D) 10% E) 13%
Tubby Corporation stock sells for $72. The market requires a 14% return on the stock. Assuming a constant dividend growth rate of 6%, what was the most recent dividend on the stock? A) $5. B) $5. C) $4. D) $10. E) $6.
Bifocals has a new preferred issue called “10/10 preferred.” It is a very handsome issue of stock! But pricing it is difficult. You see, it will pay a preferred dividend of $10 per year indefinitely, but the first dividend will not be paid for 10 years. If investors require a 10% return on the 10/10 preferred, what will be the market price of the new stock issue, per share? A) $35. B) $ C) $38. D) $42. E) $46.

Use the following to answer questions 10-11:

The implied earnings per share, in the most recent reporting period, must be: A) $2. B) $2. C) $1. D) $2. E) $2.

52 Weeks Yld Vol

Hi Lo Stock Sym Div % PE 100s Hi Lo Close Chg.

48.72 34.00 Duke Energy DUK? 6.6 18 20925 37.50 34.00 35.00 –

Suppose you have a project with the payback period exactly equal to the life of the project. What do you know about the IRR of the project? A) It is exactly equal to 0. B) It is exactly equal to 1. C) It is equal to the cost of capital. D) The IRR is unknown, even if we know the equality of cash flows and costs. E) It is equal to the payback period.
If a project with conventional cash flows has an IRR greater than the required return, then: A) The profitability index is less than one. B) The IRR must be greater than the NPV. C) The payback period is exactly equal to seven. D) The profitability index is greater than one. E) The NPV is negative.
Calculate the NPV of the following project using a discount rate of 10%: Yr 0 = –$800; Yr 1 = –$80; Yr 2 = $100; Yr 3 = $300; Yr 4 = $500; Yr 5 = $ A) $ 8. B) $ 87. C) $208. D) $232. E) $520.
A project costs $300 and has cash flows of $50 for the first three years and $75 in each of the project's last three years. What is the payback period of the project? A) 3.00 years B) 3.75 years C) 4.50 years D) 5.00 years E) 5.50 years
Suppose a project costs $2,200 and produces cash flows of $640, $800 and $1,900 in each of the first three years, respectively. What is the IRR of the project? A) 17.27% B) 50.61% C) 28.79% D) 19.7% E) 17.9%
You are told the Profitability Index of a project is exactly one. What does this mean? A) The discount rate employed equals the internal rate of return. B) The sum of the cash inflows exactly equals the sum of the cash outflows. C) The present value of the cash inflows exactly equals the present value of the cash outflows. D) A and C only E) A, B and C are all true.

Timmons, Inc., has 9% bonds, with an annual coupon, on the market with 12 years left to maturity. If the yield to maturity is 8%, what is the bond’s current price? A) $1, B) $1, C) $1, D) $ E) $

22. Lambert Co. issued 15-year bonds two years ago at an annual coupon rate of 8.4%. The bonds make semi-annual payments (payments twice a year), and currently sell for 84% of par value. What is the YTM of these bonds? A) 8.4% B) 7.06% C) 16.8% D) 14.1% E) 10.7%

When pricing bonds, if a bond's coupon rate is more than the required rate of return, then: A) The bond sells at a larger premium if it has a long maturity and at a smaller premium if it has a short maturity. B) The holder of the bond will realize a capital loss if the bond is held to maturity. C) The bond sells at par because the required rate of return is adjusted to reflect the discrepancy. D) The bond sells at a premium if it has a long maturity and at a discount if it has a short maturity. E) The holder of the bond is assured of a profit regardless of when the bond is eventually sold.
A bond that makes no coupon payments is called a _______ bond. A) Treasury B) municipal C) floating rate D) junk E) zero coupon
If you divide a bond's annual coupon payment by its current yield you get the ___________. A) yield to maturity B) investors' required rate of return C) annual coupon rate D) cost of capital E) bond price
Joe Kernan Co. has bonds on the market with 13.5 years to maturity; they have an annualized YTM of 8.5%, and a current price of $1,090. The bonds make semi-annual payments (two payments per year). What must be the coupon rate on these bonds? A) 9.6%. B) 8.5%. C) 4.8%. D) 7.8%. E) 4.25%.