NAME:
FIN 3100
Practice Exam 2
Dr. Lucy Aékert
You may use a calculator and formula sheet. You must turn your formula sheet in with
your exam. No other materials are permitted.
Part 1: Multiple Choice (4 points each). Please circle only one answer or all will be
counted incorrect.
1. The written agreement between the corporation and its creditors is called the bond
structure
indenture.
c. debenture.
d. security.
e. face.
a.
2. A $1,000 face value bond is currently traded at 1,133.50. The bond pays semi-annual
payments of $44.50 and matures in 11 years. What is the coupon rate?
a. 3.23 percent
8.90 percent
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c. 22.25 percent
d. 4.45 percent
e. 32.25 percent
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3. Stock X has a beta of 0.82 and standard deviation of returns of 24%. Stock Y has a
beta of 0.92 and a standard deviation of returns of 26%. Which stock has more total risk?
a. Stock
Stock Y
c. There is not enough information to determine which #smore risk.
d. They have the same risk.
4. A preferred stock pays a quarterly dividend of $2.50 every 3 months. If the required
return per year is 10%, what is the price of this stock today?
a.
$15.00
$10000
c.
d.
e.
$75.00
$50.00
$25.00
2
5. A stock is currently selling for $25.00. The firm is expected to pay a dividend of $3.00
at the end of the year. If dividends are expected to grow at a constant rate of 4% per year,
what return do investors require?
() 16.0%
b.
c.
d.
e.
12.0%
4.0%
9.0%
16.5%
6. A decrease in the unsystematic risk of a portfolio will
the portfolio's beta.
(ä5 not change
increase
c. decrease
d. either increase or not change
e. either decrease or not change
7. A bond has 15 years to maturity and an annual coupon of 12%. The face value of the
bond is $1,000 and coupon payments are made semiannually. The bond is currently
trading in the market at $880. What can you say about the YTM on this bond?
b.
c.
d.
The YTM is greater than 12%.
The YTM is less than 12%.
The YTM is equal to 12%.
I can't say anything for sure about the YTM.
8. You have $150,000 to invest in a stock portfolio. Your choices are stock A with an
expected return of '16% and stock B with an expected return of 10%. Your goal is to
create a portfolio with an expected return of 14%. How much money do you invest in
stock B?
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a $133,333
b. $67,777
$50,o,00
;:i $100,000
e. $75,000
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9. What is the market risk premium when the market returns 8.2% and T-bills return 3.1%?
a. 8.2%
b 113%
13.1%
e. 11.55%
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10. Given annual returns of 14%, 8%, -10% and 4%, what is the geometric average?
a 400%
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6. 5.00%
d. 7.00%
e. 6.78%
11. What is the arithmetic average of the returns in question 10?
-
(ã4,00%
b 3.6 1 %
c.5.00%
d. 7.00%
e. 6.78%
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12. What is the standard deviation of the returns in question 10?
a.1.04%
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d. 0.60%
e.7.57%
13. A firm can go bankrupt for not declaring dividends.
a. True
®False
c. Uncertain.
14. The goal of diversification is to eliminate
a.
cic.
d.
e.
total risk.
firm-specific risk.
systematic risk.
the market risk premium.
the effects of beta.
15. The rate required in the market on a bond is called the
a.
()
c.
d.
e.
current yield.
yield to maturity.
call yield.
liquidity premium.
risk premium.
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16. Moi International wants to issue 20-year, zero coupon bonds that yield 5 percent.
What price should they charge for these bonds if they have a par value of $1,000?
Assume annual compounding.
a $30831
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b. $274.11
c.
e.
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$376.89
$258.42
$1,110.96
17. A stock has an expected return of 15%. The risk-free rate is 3%, and the market risk
premium is 8%. What is the beta for this stock?
C)
b.
C.
d.
e.
1.50
II
0.625
)
2.20
1.00
1.375
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18. The beta of the overall market is
a.
b.
0;0.
0;1.
C.
1;1.
/c)
and the beta of a risk-free security of is
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e.
infinite
19. The stock of RWC has a beta of 1.28. The expected return on the market is 8 percent
and the risk-free rate is 1.5 percent. What is the expected return on thisstock?
a.
b
c.
e.
10.24 percent
8.0 percent
11.74 percent
9.82percent
13.38 percent
.
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C)
20. All of the following are characteristics of common stock except the
a. ability to vote for corporate directors.
b. ability to vote on key issues such as a merger.
c. right to share proportionally in any residual value in a bankruptcy proceeding.
ci. right to share proportionally in dividends paid to common shareholders.
(e.'priority over all others in a bankruptcy proceeding.
10
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Part 2: Problem. Show all work for partial credit.
a.
(8 points) Wentworth Inc. has bonds on the market with 22 years to maturity,
face value of $1,000, YTM of 4.2%, and an annual coupon rate of 6%. The bonds
make semiannual coupon payments. What is the current price of the bond?
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(12 points) Wentworth Inc. also has common stock that trades actively. The
stockholders just received a dividend of $1.00 a share. The dividend is expected to
increase by 40% for the next 2 years and then the firm expects to maintain a constant
dividend growth rate of 5 percent per year. The required return is 9 percent.
a. What are the expected dividends in years 1 and 2?
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b. What would you be willing to pay for this stock today?
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Additional Practice for Exam 2
Wentworth Inc. also has common stock that trades actively. At the end of the year the
stockholders will receive a dividend of $1.00 a share. The dividend is expected to
increase by 40% for the next 2 years and then the firm expects to maintain a constant
dividend growth rate of 5 percent per year. The required return is 9 percent.
a. What are the expected dividends in years 1 and 2?
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b. What would you be willing to pay for this stock today?
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