Sample quiz 2: Fin 819

1. Super Computer Company's stock is selling for $100 per share today. It is expected that
this stock will pay a dividend of 5 dollars per share, and then be sold for $120 per share at
the end of one year. Calculate the expected rate of return for Super Computer Company
s stock.

A) 20%
B) 25%
C) 10%
D) 15%
E) None of the above

Answer: B
Response: r = (120+5-100)/100 = 25%

2. PC Company stockholders expect to receive a year-end dividend of $10 per share and
then be sold for $122 dollars per share. If the required rate of return for the stock is
20%, what is the current value of the stock?
A) $100
B) $122
C) $132
D) $110
E) None of the above

Answer: D
Response: P = (122+10)/1.2 = 110

3. The constant dividend growth formula P0 = D1/(r-g) assumes:

A) The dividends are growing at a constant rate g forever.
B) r > g
C) g is never negative.
D) Both A and B
E) None of the above

Answer: D

4. Casino Co. is expected to pay a dividend of $6 per share at the end of year one and these
dividends are expected to grow at a constant rate of 8% per year forever. If the required
rate of return on the stock is 20%, what is the current value of the stock today?
A) $30
B) $50
C) $100
D) $54
E) None of the above
 Answer: B
Response: P = (6/(0.2-0.08) = 50

5.WorldTour Co. has just now paid a dividend of $6 per share (Do), the dividends are expected to
grow at a constant rate of 5% per year forever. If the required rate of return on the stock is 15%,
what is the current value on stock (after paying the dividend)?
A) $63
B) $56
C) $40
D) $48
E) None of the above

Answer: A
Response: P = (6*1.05)/(0.15 0.05) = 63

6. The required rate of return or the market capitalization rate is estimated as follows:
A) Dividend yield + expected rate of growth in dividends
B) Dividend yield - expected rate of growth in dividends
C) Dividend yield / expected rate of growth in dividends
D) (Dividend yield) * (expected rate of growth in dividends)
E) None of the above

Answer: A

7. Mcom Co. is expected to pay a dividend of $4 per share at the end of year one and the
dividends are expected to grow at a constant rate of 4% forever. If the current price of
the stock is $25 per share, calculate the required rate of return or the market
capitalization rate for the stock.
A) 4%
B) 16%
C) 20%
D) None of the above.
E) None of the above

Answer: C
Response: r = (4/25) + 0.04 = 20%

8. Dividend growth rate for a stable firm can be estimated as:

A) Plow back ratio * the return on equity (ROE)
B) Plow back ratio / the return on equity (ROE)
C) Plow back ratio +the return on equity (ROE)
D) Plow back ratio - the return on equity (ROE)
E) None of the above

Answer: A
 9. MJ Co. pays out 60% of its earnings as dividends. Its return on equity is 20%. What is
the dividend growth rate for the firm?
A) 3%
B) 5%
C) 8%
D) 12%
E) None of the above

Answer: C
Response: g = (1 - 0.6)*20 = 8%

10. Michigan Motor Company is currently paying a dividend of $1.50 per year. The
dividends are expected to grow at a rate of 20% for the next three years and then a
constant rate of 6 % thereafter. What is the expected dividend per share in year 5?
A) $2.59
B) $2.00
C) $2.91
D) $1.50
E) None of the above

Answer: C
Response: D5 = (1.5) * (1.2^3) * (1.06^2) = 2.91

11.Y2K Technology Corporation has just paid a dividend of $0.40 per share. The dividends are
expected to grow at 30% per year for the next two years and at 5% per year thereafter. If the
required rate of return in the stock is 15% (APR), calculate the expected price of the stock next
year (after the dividend payment).
A) $1.420
B) $6.33
C) $5.63
D) Any of the above
E) None of the above

Answer: E
Response: Po = [(0.4 * 1.3^2)/(1.15)] + [(0.4 * 1.3^2*1.05)/((1.15 * (0.15- 0.05))] =
$6.76

12. Lake Co. has paid a dividend of $2 per share out of earnings of $4 per share. If the book
value per share is $25, what is the expected growth rate in dividends (g)?
A) 16%
B) 12%
C) 8%
D) 4%
E) None of the above

Answer: C
Response: g = (1 -0.5) (4/25) = 0.08 or 8%
13.Lake Co. has just paid a dividend $2 per share out of earnings of $4 per share. If the book
value per share is $25 and is currently selling for $30 per share, calculate the required rate of
return on the stock.
A) 7.2%
B) 15.2%
C) 14.7%
D) 16.6%
E) None of the above

Answer: B
Response: g = (1- 0.5)(4/25) = 0.08 or 8%; [(2*1.08)/30] + 0.08 = 15.2 %.

14.The value of the stock:

A) Increases as the dividend growth rate increases
B) Increases as the required rate of return decreases
C) Increases as the required rate of return increases
D) Both A and B
E) None of the above

Answer: D

15. Woe Co. is expected to pay a dividend or $4.00 per share out of earnings of $7.50 per
share. If the required rate of return on the stock is 15% and dividends are growing at a current
rate of 10% per year, calculate the present value of the growth opportunity for the stock (PVGO).
A) $80
B) $50
C) $30
D) $26
E) None of the above

Answer: C
Response: No growth value = 7.5/0.15 = 50; Po = 4/ (0.15-0.1) = 80; PVGO = 80-50 = 30

16.Current price of Company X's stock is $80. The table below gives the data on the nend of the
year prices and probabilities dependent on the state of the economy. Calculate the expected
return for the stock (no dividends).

Economy Probability End of the year price

Growth .5 $130
Recession .5 $ 90

A) 12.0%
B) 15.0%
C) 20.5%
D) 17.5%
 E) None of the above

Answer: E
Response: Expected Price = 0.5*130 + 0.5*90 = 110; Expected return = (110 -80)/80 =
37.5%

17. The yield to maturity of a bond can be thought of as the:

A) Net present value (NPV) of the bond
B) Internal rate of return (IRR) of the bond
C) Modified internal rate of return (MIRR) of the bond
D) Payback period
E) None of the above

Answer: B

18. Consider a bond with a face value of $1,000, a coupon rate of 0%, a yield to maturity of
9%, and seven years to maturity. This bond's duration is:
A) 6.7 years
B) 7.5 years
C) 9.6 years
D) 7.0 years
E) None of the above

Answer: D
Response: Duration: n = 7 years

19. Consider a bond with a duration of 15.5 years and a yield of 6%. This bond's volatility
is:
A) 9.3%
B) 6.8%
C) 14.6%
D) 6.0%
E) None of the above

Answer: C
Response: Volatility (%) = Duration/(1 + i) = 15.5/1.06 = 14.6%

20. If the 3-year spot rate is 12% and the 2-year spot rate is 10%, what is the one-year
forward rate of interest two years from now?
A) 3.7%
B) 16.1%
C) 9.5%
D) Any of the above
E) None of the above

Answer: B
Response: f = [(1.12^3)/(1.1^2)]-1 = 16.1%
21.Interest represented by "r3" is:
A) spot rate on a three -year investment(APR)
B) spot rate on a two- year investment(APR)
C) expected spot rate 2 years from today
D) expected spot rate one year from today
E) None of the above

Answer: A

22. The term structure of interest rates can be described as the:

A) Relationship between the spot interest rates and the bond prices
B) Relationship between spot interest rates and stock prices
C) Relationship between spot interest rates and their maturities
D) Any of the above
E) None of the above

Answer: C

23. Which of the following statements is true?

A) The spot interest rate is a weighted average of yields to maturity
B) Yield to maturity is the weighted average of spot interest rates
C) The yield to maturity is always higher than the spot rates
D) All of the above
E) None of the above

Answer: B

24. A forward rate prevailing from period 2 to period 3 can be:

A) Readily observed in the market place
B) Extracted from spot interest rate with 1 and 2 years to maturity
C) Extracted from 2 and 3 year spot interest rates
D) None of the above
E) Any of the above

Answer: C

25. If the forward rate of interest from year 1 to year 2 is larger than the 1-year spot rate,
what is the 2-year spot rate?
A) Smaller than the 1-year spot rate
B) Larger than the 1-year spot rate
C) Can't say without knowing the 3-year spot rate
D) The same as the forward rate from year 1 to year 2
E) None of the above

Answer: B

Use the following information to answer questions 26-30.

Todays spot rates are given in the following.

Year r

1 6%
2 5.5%
3 5%
4 4.5%

26. What is the todays shape of the yield curve for the term structure of interest rates of
the next four years?
A) flat
B) downward sloped
C) upward sloped
D) cannot be decided
E) none of the above

Answer: B

27. What is the price of a ten percent coupon bond with a maturity of two years with a
face value of $1000 and annual coupon payment?
A) $1082.6
B) $ 950.5
C) $580.5
D) $1100.5
E) none of the above

Answer: A
Bond price =100/1.06+1100/1.0552=$1082.6

28. What is the yield to maturity for a zero coupon bond with a maturity of two years?
A) cannot be decided, since the market price of the bond is not given.
B) 5.5%
C) 6%
D) 4.5%
E) none of the above

Answer: B

29. What is the tomorrows spot rate of one year ?

A) 5.5%
B) 6%
C) cannot be decided by using todays term structure of the interest rates
D) 4.5%
E) none of the above

Answer: C
30. What is the forward rate from year 3 to year 4?
A) 6.0%
B) 5.0%
C) 4.5%
D) 3.01%
E) none of the above

Answer: D

f4 =1.0454/1.053-1=3.01%