Panuaes, Kay Roll No. Name Financial Management -1 uiz-3 Max Time: 45 minutes Date: 12" Dee, 2014. Instructo: Class: PGP18/Section C Read Instructions Carefull a) For correct responses,4 marks will be awarded. For wrong answers, 1 mark will be deducted. b) Mark your answers only in the space provided. No other method of answering will be accepted. ¢) There may be more than one correct answer for certain questions. Credit will be given only to the best answer Answers - 1 12 13.14 [5 [6[7 [8 ]9 | 10] 11] 12] 13] 14] 15] 16] 17] 18] 19 | 20 Leip ie tCIG IEIAICT CLA DIATBIETC DIALS) 21 | 22 | 23 | 24 | 25 EICTAID [AJ Questions 1. Balu owns a bond that will pay him Rs 75 each year in interest plus Rs 1,000 principal payment at maturity. What is the Rs 1,000 called? A. coupon, B. face value C. discount D. yield E. dirty price 2. The rate at which a stock's price is expected to appreciate (or depreciate) is called the ___yield. A. current B. total C. dividend D. capital gains E. earnings3. Which one of the following bonds is the least sensitive to an increase in interest rate? A. 3-year; 4 percent coupon B. 3-year; 6 percent coupon C. 5-year; 6 percent coupon D. 7-year, 6 percent coupon E. 7-year; 4 percent coupon 4, You expect interest rates to decline in the near future even though the bond market is not indicating any sign of this change. Which one of the following bonds should you purchase now to maximize your gains if the rate decline does occur? ‘A, short-term; low coupon. B. short-term; high coupon C. long-term; zero coupon D. long-term; low coupon E, long-term; high coupon 5. Oil Well Supply offers 7.5 percent coupon bonds with semiannual payments and a yield to maturity of 7.68 percent. The bonds mature in 6 years. What is the market price per bond if the face value is Rs 1,000? - ‘A, $989.70 B. $991.47 C. $996.48 D. $1,002.60 E. $1,013.48 6. You are purchasing a 25-year, zero-coupon bond. The yield to maturity is 8.68 percent and the face value is $1,000. What is the current market price? A. $106.67 B. $108.18 C. $119.52 D. $121.50 BE. $124.81 7. A 16-year, 4.5 percent coupon bond pays interest annually. The bond has a face value of $1,000. What is the percentage change in the price of this bond if the market yield to maturity rises to 5.7 percent from the current rate of 5.5 percent?A.2.14 percent decrease B. 1.97 percent decrease C. 0.21 percent increase D. 1.97 percent increase E. 2.14 percent increase 8. Blackwell bonds have a face value of $1,000 and are currently selling at 984. The bonds have 5 percent coupon rate. What is the current yield on these bonds? A. 4.67 percent B. 4.78 percent C. 5.08 percent D. 5.33 percent B, 5.54 percent 9. If bond has a modified duration of 5 and convexity of 100, if interest rates increase by 50 basis points, what will be the percentage change in price? A. -7.83% B. +7.83% C.-2.375% D. -2.50% E. -5.00% 10. The duration of a perpetuity with a yield of 8% is A.13.50 years. B. 12.11 years. C. 6.66 years. D. cannot be determined. E. none of the above. 11, For a zero coupon bond. A. Duration is zero B, Duration is one-half the term to maturity C. Duration is undefined D. Duration is the same as the term to maturity E. None of the above12. The constant dividend growth model: I. assumes that dividends increase at a constant rate forever. IL can be used to compute a stock price at any point of time. IIL, states that the market price of a stock is only affected by the amount of the dividend, TV. considers capital gains but ignores the dividend yield. A. Lonly B. Ionly C. land IV only D. Iand Il only E. I, IL, and If only 13, What would be the percentage change in the price of a bond with a modified duration of 7, given that interest rates fall 75 basis points (ie. 0.75%)? A. +5.25% B,-5.25% C. 452.5% D. -52.5% E. None of the above 14, What would be the % change in price of a bond with a Macaulay Duration of 10 if interest rates rise by 50 basis points (ie. 0.5%) The current YTM is 5%. A.+4.76% B, -4.76% C.44.81% Dz -4.81% E. None of the above 15. The real interest rate is 3% and the inflation rate is 5%. What is the nominal interest rate? A.3% B.5% C1.5% D.2% E.8.15%16, Assume that you are using the dividend growth model to value stocks. If you expect the market rate of reiurn to increase across the board on all equity securities, then you should also expect the: ‘A. market values of all stocks to increase, all else constant. B. market values of all stocks to remain constant as the dividend growth will offset the increase in the market rate. C. market values of all stocks to decrease, all else constant. D. stocks that do not pay dividends to decrease in price while the dividend-paying stocks maintain a constant price. E. dividend growth rates to increase to offset this change. 17. Fred Flintlock wants to earn a total of 10% on his investments. He recently purchased shares of ABC stock at a price of $20 a share. The stock pays a $1 a year dividend. The price of ABC stock needs to___if Fred is to achieve his 10% rate of return, A. remain constant B. decrease by 5% C. increase by 5% D. increase by 10% B. increase by 15% 18. The closing price of a stock is quoted at 22.87, with a P/E of 26 and a net change of 1.42. Based on this information, which one of the following statements is comect? ‘A. The closing price on the previous day was $1.42 higher than today's closing price. B. A dealer will buy the stock at $22.87 and sell it at $26 a share. C. The stock increased in value between yesterday's close and today's close by $.0142. D. The earnings per share are equal to 1/26" of $22.87. E. The earnings per share have increased by $1.42 this year. 19. The current yield on Alphas common stock is 4.8%. The company just paid a $2.10 dividend. The rumor is that the dividend will be $2.205 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock? A. 10.04% B. 16.07% C. 21.88% D. 43.75% E, 45.94%20. Shares of common stock of the Samson Co, offer an expected total return of 12%. The dividend is increasing at a constant 8% per year. The dividend yield must be: A. 4%, B. 4%, C. 8%, Dz 12%, E. 20%. 21. A stock pays a constant annual dividend and sells for $31.11 a share. If the dividend yield of this stock is 9%, what is the dividend amount? A. $1.40 B. $1.80 C. $2.20 D. $2.40 E. $2.80 22, S&P Enterprises will pay an annual dividend of $2.08 a share on its common stock next year. Last week, the company paid a dividend of $2.00 a share. The company adheres to a constant rate of growth dividend policy. What will one share of S&P common stock be worth ten years from now if the applicable discount rate is 8%? A. STL16 B. $74.01 C. $76.97 D. $80.05 E. $83.25 23, Last week, Railway Cabooses paid its annual dividend of $1.20 per share. The ‘company has been reducing the dividends by 10% each year. How much are you willing to pay to purchase stock in this company if your required rate of retum is 14%? A. $4.50 B. $7.71 C. $10.80 D. $15.60 E. $27.00 24, PE ratio is 1) positively related to cost of capital Il) negatively related to cost of capital IID) positively related to NPVGO IV) negatively related to NPVGOA. Tonly B. IVonly C. Land I only D. Hand Il only E, Il, and IV only 25. EV/EBITDA ratio of five different companies are given below. Everything else equal, which ‘one would you choose? AS room 6 7 . 8 9) eeeenes: