Stock and Bond Valuation Questions

12. A security that pays a constant dividend every year forever is known as:
a. A zero-coupon bond
b. Preferred stock
c. Class A Common stock
d. A Reverse Perpetual Mortgage obligation security
e. A callable bond
13. A 10-year annual coupon bond was issued four years ago at par. Since then the bond’s
yield to maturity (YTM) has decreased from 9% to 7%. Which of the following
statements is true about the current market price of the bond?
a. The bond is selling at a discount
b. The bond is selling at par
c. The bond is selling at a premium
d. The bond is selling at book value
e. Insufficient information
14. What should be the price of a $1,000 par value, 10% annual coupon rate (coupon interest
paid semi-annually) bond with 30 years remaining to maturity, assuming a discount rate
of 9%?
a. $1,101.88
b. $1,102.44
c. $1,103.19
d. $1,104.48
e. $1,105.72
15. You have just discovered a $1,000 par value corporate bond with a maturity of 10 years.
The bond’s yield to maturity is 9% and the bond is currently selling for $743.29. What is
the bond’s annual coupon rate (the bond pays coupon payments annually)?
a. 5%
b. 6%
c. 7%
d. 8%
e. 9%
16. What is the yield to maturity of a $1,000 par value bond with a coupon rate of 10% (semi-
annual coupon payments) that matures in 30 years assuming the bond is currently selling
for $838.13?
a. 6.0%
b. 6.2%
c. 10.0%
d. 12.0%
e. 12.4%
17. XYZ, Inc. just paid a dividend of $3 per share. The industry analysts predict that XYZ’s
dividends will grow at a constant rate of 4% forever. If the stock is currently trading at
$25 per share, what is the required rate of return on this stock?
a. 8.48%
b. 12.00%
c. 12.48%
d. 16.00%
e. 16.48%
18. Unitongue Talk, Inc. just paid a $2.00 annual dividend. Investors believe that the
dividends will grow at a rate of 20% per year for each of the next two years and 5% per
year thereafter. Assuming a discount rate of 10%, what should the current price of the
stock be?
a. $60.50
b. $57.60
c. $54.55
d. $49.87
e. $43.56

1. B
2. C
3. C
4. A
5. D
6. E
7. C

Stock and Bond Valuation Questions

13. A 15-year annual coupon bond was issued four years ago at par. Since then the bond’s
yield to maturity (YTM) has increased from 6% to 8%. Which of the following statements is
true about the current market price of the bond?
a. The bond is selling at a discount
b. The bond is selling at par
c. The bond is selling at a premium
d. The bond is selling at book value
e. Insufficient information
14. A $1,000 par value, fixed coupon bond has 15 years remaining until maturity. The bond
has a coupon rate of 6 percent and it pays quarterly coupon payments. If the market rate for
this bond is 8 percent, what is the price of the bond?
a. $828.81
b. $826.20
c. $1,513.98
d. $195.52
e. $1,320.84
15. Compute the yield to maturity on a $5,000 par value bond with a coupon rate of 10
percent (semi-annual coupon payments) that matures in 20 years and currently sells for
$4,718.50.
a. 2.35%
b. 4.71%
c. 5.34%
d. 10.69%
e. 12.22%
16. You have just discovered a $1,000 par value corporate bond with a maturity of 8 years.
The bond’s yield to maturity is 9% and the bond is currently selling for $1,280.85. What is
the bond’s annual coupon rate (the bond pays coupon payments semi-annually)?
a. 12.5%
b. 13.0%
c. 13.5%
d. 14.0%
e. None of the above.
17. If an analyst uses the constant dividend growth model to value a stock (i.e., P0 = D1/(rs –
g)), which of the following is certain to cause the analyst to decrease her estimate of the
current value of the stock?
a. Decreasing the required rate of return for the stock.
b. Increasing the estimate of the amount of next year’s dividend.
c. Decreasing the expected dividend growth rate.
d. Increasing the price earnings multiple.
e. An announcement that the President of the firm had been fired.
18. Mediapont Inc. just paid $2 in dividends. The industry analysts anticipate that the
company will pay a dividend of $3 for the next 4 years (the first dividend to be paid 1 year
from today). After that, dividends are expected to increase by 10% every year. The expected
market rate of return for the stock of Mediapont Inc. is 14%. Compute the current stock price.
a. $57.59
b. $53.15
c. $42.65
d. $25.78
e. $62.13
19. XYZ, Inc. just paid a dividend of $3 per share. The industry analysts predict that XYZ’s
dividends will grow at a constant rate of 4% forever. If the stock is currently trading at $25
per share, what is the required rate of return on this stock?
a. 8.48%
b. 12.00%
c. 12.48%
d. 16.00%
e. 16.48%
13. A 14. B 15. D 16. D 17. C 18. A 19. E

1. This morning, Mary bought a ten-year bond that pays a 6.5% semiannual coupon. She
paid $994 for the $1,000 face value bond. If the market interest rate on this type of bond
increases to 7% tonight, how much will Mary receive for her first interest payment?

A. $32.50
B. $35.00
C. $65.00
D. $69.58
E. $70.00
2. Duke Corporation's bonds have a face value of $1,000 and a 5% coupon paid
semiannually; the bonds mature in 9 years. If the yield to maturity is 3%, what is the price
of the bond?
A. $1000.00
 B. $1068.74
C. $1120.94
D. $1156.73
E. $1378.07
3. Suppose you purchase Consolidated Corporation’s bond for $180. The bond is a zero
coupon bond with a face value of $1,000, and a 25-year maturity. If the yield to maturity
on the bond remains unchanged, what will be the price of the bond one year before
maturity?
A. $180.00
B. $820.00
C. $933.71
D. $967.20
E. $1000.00
4. The stock of Acme, Inc. currently sells for $90 per share. The firm just paid a dividend of
$5.09 and the dividend is expected to grow at a constant rate in perpetuity. If the required
rate of return is 12%, what is the dividend growth rate?
A. 0%
B. 3.91%
C. 6.00%
D. 10.89%
E. 25.31%
5. MQA, Inc. just paid a dividend of $1.50. The firm is expected to pay a dividend of $1.75,
$2.00 and $2.50 at the end of the next three years, respectively. Dividends are expected
to grow at 6% per year thereafter. Given a required return of 14%, what would you pay
for the stock today?
A. $13.42
B. $27.12
C. $28.98
D. $30.48
E. $31.25
6. The Seattle Corporation has been presented with an investment opportunity that will yield
cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in years 5 through
9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the
firm's cost of capital is 10 percent. Assume cash flows occur evenly during the year,
1/365th each day. What is the regular payback period (not the discounted payback) for
this investment?
A. 5.23 years
B. 4.86 years
C. 4.00 years
D. 6.12 years
E. 4.35 years