Question

Question 1

The next dividend payment by A Company will be $1.73 per share. The dividends are anticipated to maintain a 0.06% growth rate forever. If the stock currently sells for $16.44 per share, what is the investors' required return rate? (Round the final answer to 4 decimal places.)

Question 2

You have an 0.066% semiannual-pay bond with a face value of $1,000 that matures in 11 years. If the yield is 0.09%, what is the price of this bond? Round your answer to 2 decimal points.

(Please note the percentage is express in decimals in this question, e.g. 14% is expressed as 0.14%)?

QUESTION 3

1. Shareholders of convertible preferred stock generally have the:

	A.	Obligation to convert their shares into callable shares of common stock.
	B.	Right to convert their shares into shares of common stock.
	C.	Right to convert their shares into bonds with an equivalent yield-to-maturity.
	D.	Obligation to convert their shares into shares of common stock.
	E.	Right to convert their shares into cash at par value at their discretion.

QUESTION 4

1. Which type of bond allows the issuer to buy back the bonds before maturity?
   
   

	A.	Retractable bond.
	B.	Convertible bond.
	C.	Zero-coupon bond.
	D.	Callable bond.
	E.	High yield bond.

QUESTION 5

1. A supernormal growth stock generally:

	A.	Has dividends that grow at a high rate for the life of the stock.
	B.	Is valued using the preferred stock valuation technique.
	C.	Is associated with a company that is experiencing rapid contraction.
	D.	Has high growth dividends only for a limited number of years.
	E.	Tends to increase its dividends per share by 30% or more for an extended number of years.

QUESTION 6

1. Which one of the following will increase the present value of an annuity?

	A.	Payment of annuity in the end instead of payment at the beginning.
	B.	Lowering the discount rate.
	C.	Reducing the future value of the cash flow.
	D.	Increasing the number of payments.
	E.	Lowering the payment amount.

QUESTION 7

1. Which is the best definition of a perpetuity?
   
   

	A.	The interest rate charged per period multiplied by the number of periods per year.
	B.	An annuity for which the cash flows occur at the beginning of the period.
	C.	An annuity in which the cash flows continue forever.
	D.	A level stream of cash flows for a fixed period of time.
	E.	A constant stream of cash flows without end that is expected to rise indefinitely.

QUESTION 8

1. Which is the best definition of an effective annual rate (EAR)?
   
   

	A.	The interest rate expressed as if it were compounded once per year.
	B.	A level stream of cash flows for a fixed period of time.
	C.	An annuity for which the cash flows occur at the beginning of the period.
	D.	The interest rate expressed in terms of the interest payment made each period. Also, quoted interest rate
	E.	The interest rate charged per period multiplied by the number of periods per year.

QUESTION 9

1. Which one of the following statements is true concerning bond ratings?
   
   

	A.	Bond ratings are based on both the risk of default and the interest rate risk.
	B.	All else equal, a bond rated BB should pay a higher return than a bond rated B.
	C.	A bond rated BBB or lower is considered a junk bond.
	D.	Bond ratings are based only on the risk of default.
	E.	By mutual agreement, DBRS and Standard & Poor's issue comparable ratings on all bonds.

QUESTION 10

1. When a bondholder is granted the right to force the issuer to repay the bond prior to maturity, the bond:

	A.	Contains a zero-out provision.
	B.	Contains a call provision.
	C.	Contains a put provision.
	D.	Is a convertible bond.
	E.	Is an income bond.

Answer 1

1) The required rate of return can be calculated with help of constant dividend growth model. According to this-

where, Po is the current market price.
D1= Dividend payable in 1 year
g = Growth rate
Ke = required rate of return of equity

Here,

D1 = $1.73 , Po = $16.44 and g = 0.06%

Putting all these values we get-

16.44 (Ke - 0.0006) = 1.73

16.44 Ke - 0.009864 = 1.73

16.44Ke = 1.73 + 0.009864

16.44 Ke = 1.739864

Ke = 1.739864 / 16.44

Ke = 0.105831144

or

Ke = 10.5831 % (approx)

Hope it helps!