11/9/2015

Untimed Quiz 4: FI301ZA Financial Management

Untimed Quiz 4
Due Nov 10 at 11:59pm
Allowed Attempts 2

Points 25

Questions 25

Available Nov 6 at 12:10pm ­ Nov 10 at 11:59pm 4 days

Time Limit None

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Attempt History

Attempt

Time

Score

LATEST

Attempt 1

26 minutes

9 out of 25

 Correct answers will be available on Nov 11 at 8am.
Score for this attempt: 9 out of 25
Submitted Nov 9 at 8:02pm
This attempt took 26 minutes.

1 / 1 pts

Question 1
Financial Calculator Section
The following question(s) may require the use of a financial calculator.

A $1,000 par value bond sells for $1,216. It matures in 20 years, has a 14 percent coupon, pays interest semiannually, and can be called in 5 years at a price of $1,100. What is the bond's YTM? 6.05% 10.00% 10.06% 8.59% 11.26%

Rationale:

Cash flow time line:

Financial calculator solution: Inputs: N = 40; PV = −1,216; PMT = 70; FV = 1,000 Output: I = 5.6307 ≈ 5.63% = rd/2. YTM
5.63% × 2 = 11.26%

Question 2

1 / 1 pts

A bond's value will increase as interest rates rise over time. True

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Untimed Quiz 4: FI301ZA Financial Management False

Incorrect

Question 3

0 / 1 pts

A bond with a $100 annual interest payment and $1,000 face value with five years to maturity (not expected to default) would sell for a premium if interest rates were below 9% and would sell for a discount if interest rates were greater than 11%. True False

Incorrect

Question 4

0 / 1 pts

Financial Calculator Section
The following question(s) may require the use of a financial calculator.

An 8 percent annual coupon, noncallable bond has ten years until it matures and a yield to maturity of 9.1 percent. What should be the price of a 10­year bond of equal risk which pays an 8 percent semiannual coupon? Assume both bonds have a maturity value of $1,000. $898.64 $736.86 $854.27 $941.08 $964.23

Rationale:
Step 1: Determine the interest rate to use in order to evaluate the semiannual bond's price: In order for the 2 bonds to be of equal risk, their effective YTM must be equal. The annual bond's nominal YTM = effective YTM = 9.1%. Thus, we need to calculate the semiannual bond's nominal YTM. With a financial calculator: EFF% = 9.1 P/YR = 2
Solve for NOM% = 8.9019%. Note that this is stated on an annual basis. To convert to a semiannual basis divide it by 2: 8.9019%/2 = 4.451%. Step 2: Calculate the semiannual bond's price: N = 20 I = 4.451 PMT = 40 FV =
1,000 Solve for PV = $941.08.

Incorrect

Question 5

0 / 1 pts

Financial Calculator Section
The following question(s) may require the use of a financial calculator.

Assume that McDonald's and Burger King have similar $1,000 par value bond issues outstanding. The bonds are equally risky. The
Burger King bond has interest payments of $80 paid annually and matures 20 years from today. The McDonald's bond has interest payments of $80 paid semiannually, and it also matures in 20 years. If the simple required rate of return, rd , is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds? No difference. $2.20

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2/10

11/9/2015

Untimed Quiz 4: FI301ZA Financial Management $3.77 $17.53 $6.28

Rationale:

Cash flow time lines:

Financial calculator section: Burger King Vd Calculate EAR to apply to Burger King bonds using interest rate conversion feature, and calculate the value VBK, of Burger King bonds: Inputs: P/YR = 2; NOM% = 12. Output: EFF% = EAR =
12.36% Inputs: N = 20; I = 12.36; PMT = 80; FV = 1,000. Output: PV = −$681.54 McDonalds Inputs: N = 40; I = 6; PMT =
40; FV = 1.000 Output: PV = $699.07 Calculate the difference between the two bonds' PVs Difference: Vd(McD) − Vd(BK) =
699.07 − 681.54 = $17.53

Incorrect

Question 6

0 / 1 pts

Assume that you wish to purchase a 20­year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent simple yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? $619 $674 $761 $828 $902

Rationale:

Cash flow time line:

Financial calculator solution: Inputs: N = 40; I = 5; PMT = 40; FV = 1,000. Outputs: PV = −$828.41; Vd = $828.

Question 7

1 / 1 pts

Because short­term interest rates are much more volatile than long­term rates, you would, in the real world, be subject to much more interest rate price risk if you purchased a 30­day bond than if you bought a 30­year bond. True

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3/10

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Untimed Quiz 4: FI301ZA Financial Management False

Incorrect

Question 8

0 / 1 pts

Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation.
The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually.
The required simple rate on this debt has now risen to 16 percent. What is the current value of this bond? $1,273 $1,000 $7,783 $550 $450

Rationale:

Cash flow time line:

Financial calculator solution: Inputs: N = 30; I = 8; PMT = 40; FV = 1,000. Output: PV = −$549.69; Vd = $549.69 = $550.

Incorrect

Question 9

0 / 1 pts

Financial Calculator Section
The following question(s) may require the use of a financial calculator.

Fish & Chips Inc. has two bond issues outstanding, and both sell for $701.22. The first issue has a coupon rate of 8 percent and 20 years to maturity. The second has an identical yield to maturity as the first bond, but only 5 years until maturity. Both issues pay interest annually. What is the annual interest payment on the second issue? $120.00 $37.12 $56.42 $29.68 $11.16

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Untimed Quiz 4: FI301ZA Financial Management

Rationale:

Cash flow time lines:

Financial calculator solution: Calculate YTM or rd for first issue Inputs: N = 20; PV = −701.22; PMT = 80; FV = 1,000.
Output: I = 12% Calculate PMT on second issue using 12% = rd = YTM Inputs: N = 20; PV = −701.22; FV = 1,000 Output:
PMT = $37.116 ≈ $37.12

Incorrect

Question 10

0 / 1 pts

If two bonds have the same maturity and the same expected rate of return, but one has a higher coupon, the price of the low coupon bond will be more affected by a given change in interest rates. True False

Incorrect

Question 11

0 / 1 pts

If you buy a bond that is selling for less than its face, or maturity, value what will happen to the price (value) of the bond as the maturity date nears if market interest rates do not change during the life of the bond? Because interest rates remain constant, nothing happens to the market value of the bond.

The price of the bond should decrease even further below the bond's face value because the rates in the market are too high. The price of the bond will increase as the bond gets closer to its maturity because the bond's value has to equal its face value at maturity. This question cannot be answered without additional information. None of the above is a correct answer.

Incorrect

Question 12

0 / 1 pts

Listed below are some provisions that are often contained in bond indentures:
1.

Fixed assets may be used as security.

2.

The bond may be subordinated to other classes of debt.

3.

The bond may be made convertible.

4.

The bond may have a sinking fund.

5.

The bond may have a call provision.

6.

The bond may have restrictive covenants in its indenture.

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11/9/2015

Untimed Quiz 4: FI301ZA Financial Management
Which of the above provisions, each viewed alone, would tend to reduce the yield to maturity investors would otherwise require on a newly issued bond? 1, 2, 3, 4, 5, 6 1, 2, 3, 4, 6 1, 3, 4, 5, 6 1, 3, 4, 6 1, 4, 6

Question 13

1 / 1 pts

Restrictive covenants are designed so as to protect both the bondholder and the issuer even though they may constrain the actions of the firm's managers. Such covenants are contained in the bond's indenture. True False

Question 14

1 / 1 pts

According to the textbook model, under conditions of nonconstant growth, the discount rate utilized to find the present value of the expected cash flows will be the same for the initial growth period as for the normal growth period. True False

Question 15

1 / 1 pts

A preemptive right is a provision in the corporate charter or by laws that gives common stockholders the right to purchase on a pro rata basis new issues of common stock. True False

Incorrect

Question 16

0 / 1 pts

A share of stock has a dividend of D0 = $5. The dividend is expected to grow at a 20 percent annual rate for the next 10 years, then at a
15 percent rate for 10 more years, and then at a long­run normal growth rate of 10 percent forever. If investors require a 10 percent return on this stock, what is its current price? $100.00 $82.35

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6/10

11/9/2015

Untimed Quiz 4: FI301ZA Financial Management $195.50 $212.62

The data given in the problem are internally inconsistent, i.e., the situation described is impossible in that no equilibrium price can be produced.

Rationale: The data in the problem are unrealistic and inconsistent with the requirements of the growth model; r less than g implies a negative stock price. If r equals g, the denominator is zero, and the numerical result is undefined, r must be greater than g for a reasonable application of the model.

Question 17

1 / 1 pts

Berg Inc. has just paid a dividend of $2.00. Its stock is now selling for $48 per share. The firm is half as risky as the market. The expected return on the market is 14 percent, and the yield on U.S. Treasury bonds is 11 percent. If the market is in equilibrium, what rate of growth is expected? 13% 10% 4% 8% −2%

Rationale:
Numerical solution: Required rate of return: rs = 11% + (14% − 11%) 0.5 = 12.5%. Calculate growth rate using rs:

$6 − $48g
= $2 + $2g (Multiply both sides by (0.125 − g))
$50g
= $4 g = 0.08 = 8%.
Required return equals total yield (Dividend yield + Capital gains yield). Dividend yield = $2.16/$48.00 = 4.5%; Capital gains yields = g = 8%.

Question 18

1 / 1 pts

From a social welfare perspective, common stock is a desirable form of financing in part because it involves no fixed charge payments.
Its inclusion in a firm's capital structure makes the firm less vulnerable to the consequences of unanticipated declines in sales and earnings than if only debt were available. True False

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Untimed Quiz 4: FI301ZA Financial Management

Incorrect

Question 19

0 / 1 pts

Ms. Manners Catering (MMC) has paid a constant $1.50 per share dividend to its common stockholders for the past 25 years. MMC expects to continue this policy for the next two years, and then begin to increase the dividend at a constant rate equal to 2 percent per year into perpetuity. Investors require a 12 percent rate of return to purchase MMC's common stock. What is the market value of
MMC's common stock? $14.73 $15.00 $15.58 $15.30 $12.20

Incorrect

Question 20

0 / 1 pts

One advantage of common stock as a source of funds is that the underwriting and distribution costs of common stock are usually much lower than those for debt. True False

Question 21

1 / 1 pts

Preemptive rights are important to stockholders because they provide protection against a dilution of value when new shares are issued. True False

Incorrect

Question 22

0 / 1 pts

Suppose you are willing to pay $30 today for a share of stock which you expect to sell at the end of one year for $32. If you require an annual rate of return of 12 percent, what must be the amount of the annual dividend which you expect to receive at the end of Year 1? $2.25 $1.00 $1.60 $3.00 $1.95

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Untimed Quiz 4: FI301ZA Financial Management

Rationale: Total yield = 12%. Capital gains yield = ($32 − $30)/$30 = 6.67%. Dividend yield = 12.0% − 6.67% = 5.33%.
Expected dividend = P0(Dividend yield) = $30(0.0533) = $1.60.

Incorrect

Question 23

0 / 1 pts

Which of the following statements is correct?

The constant growth DDM model can be used to value a stock only if the stock's dividends are expected to grow forever at a constant rate which is less than the required rate of return on the stock. If the growth rate is negative, the constant growth DDM model cannot be used. The constant growth DDM model may be written as r = D /P + g.
0
0 0 The constant growth DDM model may be written as P = D /(r + g).
0
0 The constant growth DDM model may be written as P = D /(r − g).
0
0

Rationale: Statement a is the condition necessary for the constant growth model. All the other statements are false.

Incorrect

Question 24

0 / 1 pts

You are considering an investment in the common stock of Cowher Corp. The stock is expected to pay a dividend of $2 per share at the end of the year (i.e., D1 = $2.0 ). The stock has a beta equal to 1.2. The risk­free rate is 6 percent. The market risk premium is 5 percent. The stock's dividend is expected to grow at some constant rage, g. The stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe the stock price will be at the end of three years? (In other words, what is P3 ?) $40.00 $42.35 $45.67 $46.31 $49.00

Rationale:
Step 1 Calculate rs: rs = rRF + (RPM)β = 6% + (5%)1.2 = 12%. Step 2 Calculate g:

7% = g Step 3 Calculate: = $40(1.07)3 = $49.00

Incorrect

Question 25

0 / 1 pts

Financial Calculator Section

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11/9/2015

Untimed Quiz 4: FI301ZA Financial Management
The following question(s) may require the use of a financial calculator.

Your company paid a dividend of $2.00 last year. The growth rate is expected to be 4 percent for 1 year, 5 percent the next year, then 6 percent for the following year, and then the growth rate is expected to be a constant 7 percent thereafter. The required rate of return on equity (ks) is 10 percent. What is the current price of the common stock? $53.45 $60.98 $64.49 $67.47 $69.21

Rationale:
Enter in calculator

= 0,

= 2.08,

= 2.1840, and

= 84.8833. Then enter I = 10, and press NPV to get

NPV = P0 = $67.47.

Quiz Score: 9 out of 25

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10/10