FINA1003/1310 CD Corporate Finance

Semester 1 2016-2017
Assignment 2AB (Due: 25th Oct, 2016 Tue 17:30)
Hard copy submission through 9th Floor KKL assignment box only
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Student ID:
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Multiple Choice Questions (60 points)
1.

An indenture is:
A. another name for a bond's coupon.
B. the written record of all the holders of a bond issue.
C. a bond that is past its maturity date but has yet to be repaid.
D. a bond that is secured by the inventory held by the bond's issuer.
E. the legal agreement between the bond issuer and the bondholders.

2.

A sinking fund is managed by a trustee for which one of the following purposes?
A. paying interest payments
B. early bond redemption
C. converting bonds into equity securities
D. paying preferred dividends
E. reducing coupon rates

3.

The items included in an indenture that limit certain actions of the issuer in order
to protect bondholder's interests are referred to as the:
A. trustee relationships.
B. bylaws.
C. legal bounds.
D. "plain vanilla" conditions.
E. protective covenants.

4.

The Fisher effect is defined as the relationship between which of the following
variables?
A. default risk premium, inflation risk premium, and real rates
B. nominal rates, real rates, and interest rate risk premium
C. interest rate risk premium, real rates, and default risk premium
D. real rates, inflation rates, and nominal rates

E. real rates, interest rate risk premium, and nominal rates

5.

The interest rate risk premium is the:

A. additional compensation paid to investors to offset rising prices.
B. compensation investors demand for accepting interest rate risk.
C. difference between the yield to maturity and the current yield.
D. difference between the market interest rate and the coupon rate.
E. difference between the coupon rate and the current yield.

6.

A Treasury yield curve plots Treasury interest rates relative to which one of the
following?
A. market rates
B. comparable corporate bond rates
C. the risk-free rate
D. inflation
E. maturity

7.

The liquidity premium is compensation to investors for:

A. purchasing a bond in the secondary market.
B. the lack of an active market wherein a bond can be sold for its actual value.
C. acquiring a bond with an unfavorable tax status.
D. redeeming a bond prior to maturity.
E. purchasing a bond that has defaulted on its coupon payments.

8.

A bond has a market price that exceeds its face value. Which of the following
features currently apply to this bond?
I. discounted price
II. premium price
III. yield-to-maturity that exceeds the coupon rate
IV. yield-to-maturity that is less than the coupon rate
A. III only
B. I and III only
C. I and IV only
D. II and III only
E. II and IV only

9.

All else constant, a bond will sell at _____ when the coupon rate is _____ the
yield to maturity.

A. a premium; less than

B. a premium; equal to
C. a discount; less than
D. a discount; higher than
E. par; less than
10. The Walthers Company has a semi-annual coupon bond outstanding. An increase
in the market rate of interest will have which one of the following effects on this
bond?
A. increase the coupon rate
B. decrease the coupon rate
C. increase the market price
D. decrease the market price
E. increase the time period
11. Which one of the following types of stock is defined by the fact that it receives
no preferential treatment in respect to either dividends or bankruptcy
proceedings?
A. dual class
B. cumulative
C. non-cumulative
D. preferred
E. common
12. You cannot attend the shareholder's meeting for Alpha United so you authorize
another shareholder to vote on your behalf. What is the granting of this authority
called?
A. altering
B. cumulative voting
C. straight voting
D. indenture agreement
E. voting by proxy
13. Which one of the following is a type of equity security that has a fixed dividend
and a priority status over other equity securities?
A. senior bond
B. debenture
C. warrant

D. common stock
E. preferred stock
14. An increase in which of the following will increase the current value of a stock
according to the dividend growth model?
I. dividend amount
II. number of future dividends, provided the current number is less than infinite
III. discount rate
IV. dividend growth rate
A. I and II only
B. III and IV only
C. I, II, and III only
D. I, II, and IV only
E. I, II, III, and IV
15. The dividend growth model:
I. assumes that dividends increase at a constant rate forever.
II. can be used to compute a stock price at any point in time.
III. can be used to value zero-growth stocks.
IV. requires the growth rate to be less than the required return.
A. I and III only
B. II and IV only
C. I, III, and IV only
D. I, II, and IV only
E. I, II, III, and IV
16. Which one of the following statements is correct?
A. The capital gains yield is the annual rate of change in a stock's price.
B. Preferred stocks have constant growth dividends.
C. A constant dividend stock cannot be valued using the dividend growth model.
D. The dividend growth model can be used to compute the current value of any
stock.
E. An increase in the required return will decrease the capital gains yield.
17. Supernormal growth is a growth rate that:
A. is both positive and follows a year or more of negative growth.
B. exceeds a firm's previous year's rate of growth.
C. is generally constant for an infinite period of time.

D. is unsustainable over the long term.

E. applies to a single, abnormal year.
18. Winston Co. has a dividend-paying stock with a total return for the year of -6.5
percent. Which one of the following must be true?
A. The dividend must be constant.
B. The stock has a negative capital gains yield.
C. The dividend yield must be zero.
D. The required rate of return for this stock increased over the year.
E. The firm is experiencing supernormal growth
19. The two-stage dividend growth model evaluates the current price of a stock
based on the assumption a stock will:
A. pay an increasing dividend for a period of time and then cease paying
dividends altogether.
B. increase the dividend amount every other year.
C. pay a constant dividend for the first two quarters of each year and then
increase the dividend the last two quarters of each year.
D. grow at a fixed rate for a period of time after which it will grow at a different
rate indefinitely.
E. pay increasing dividends for a fixed period of time, cease paying dividends for
a period of time, and then commence paying increasing dividends for an
indefinite period of time.
20. Hardy Lumber has a capital structure which includes bonds, preferred stock, and
common stock.
Which of the following rights have most likely been granted to the preferred
shareholders?
I. right to share in company profits prior to other shareholders
II. right to elect the corporate directors
III. right to vote on proposed mergers
IV. right to all residual income after the common dividends have been paid
A. I only
B. I and III only
C. I and IV only
D. II, III, and IV only
E. I, II, III, and IV

Multiple Choice Questions (40 points)

1. Banyan Tree Corporation has bonds on the market with 30 years to maturity, a
YTM of 9%, a face value of $1,000 and a current price of $899.89. The bonds
make quarterly payments. 3 years later, the YTM becomes 11%, what is the value
of the bond and the current yield at that time? (10 points)

2. You purchase a bond (face value is $1,000) with a dirty price of $1035. The bond
has a coupon rate of 5.9%, and there are four months to the next annual coupon
date. What is the clean price of the bond? (5 points)

3. Bond XP is a premium bond with a 12% coupon. Bond XD is a 6% coupon bond

currently selling at a discount. Both bonds make annual payments, have a YTM of
9%, and have five years to maturity. (10 points)
If interest rates remain unchanged, what are the bond prices this year and next
year, expected capital gains yields over the next year for both bonds?
Explain the interrelationships among current yields, capital gains yields, and
YTM based on the previous part findings?

4. Silicon is a blue chip company listed on NASDAQ and since it has businesses in

more than 60 countries, it is expected that it can distribute stable dividends with a
growth rate of 2% every year and the market expects it can generate 5% return on
the common stock. The dividends of the common stock just distributed were $5
per share. (8 points)
What is the common stock price today?
What is the theoretical common stock price 3 years later?
Silicon also issued preferred shares (constant dividends paid every year forever)
with a stated value of $100 each with 5% dividends 5 years ago and the next
dividend will be paid today. The required return on the preferred stock is
3%.What is the price of the preferred stock today?

5. Macquarie Bank just paid a dividend of $1.25 per share. The dividends are
expected to grow at 28% for the next eight years and then level off to 6% growth
rate indefinitely. If the required return is 13%, what is the stock price of the bank
today? (7 points)