University of Rio Grande Fall 2008 Financial Management (Fin 20403/30403) Practice Problems for Midterm 2 1. If a 30-year, $1,000 bond has a 9% coupon and is currently selling for $826, its current yield is: 2. J&J Manufacturing issued a bond with a $1,000 par value. The bond has a coupon rate of 7% and makes payments semiannually. If the bond has 30 years remaining and the annual market interest rate is 9.4%, what will the bond sell for today? 3. Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. The yield on similar bonds is now 12%. What is its price? 4. Barf Corporation's 10% coupon rate bond was issued for 30 years 25 years ago at a par value of $1000. Today's interest rate is 10%, what is it selling for today? 5. Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon rate of 15%. What is it yielding if it is selling for $938.81? 6. You are considering the purchase of an AT&P bond with a 13% coupon rate. Interest is paid and compounded semiannually. The bond will mature in 8 years, and has a $1,000 face value. The bond currently sells for $867. Calculate the ANNUAL yield to maturity for this bond. (Round to nearest percentage) 7. Riordan Inc. has a bond outstanding that has a $1,000 par value, semiannual coupon rate of 4% and a current yield of 7.9%. What is the price of the bond? (Round to nearest $) 8. If a 30-year bond with a quoted price of $810, pays $40 interest semiannually, its current yield would be about: 9. One year ago a $1,000 face value 6% coupon bond was selling for $918.93. Since then, the market return decreased by two percentage points. The bond pays interest semiannually and now has four years to maturity. The bond's price today is: 10. You are interested in a $1,000, 20-year bond that is currently selling for $1,171.59. If you require a 10% return on your investment, what is the minimum coupon rate you can accept? The bond makes semiannual coupon payments. 11. You are considering the purchase of Sanders Corp., a constant growth stock. The stock paid a recent dividend of $3.00. The next dividend is expected to be $3.18. If the stock is returning 15%, calculate its dividend yield. 12. PDQ, Inc. stock is selling for $80 today. You are expecting a dividend of $3 next year and you plan to sell the stock for $95 one year from now. Calculate the one-year return on PDQ stock. 13. TOYS4U stock is selling for $70 today. Similar stocks return 15%. You have estimated a capital gains yield of 10%. Calculate the next dividend expected on the stock. 14. The price of a share of stock today is $50.00, and the projected selling price in one year is $55.00. The estimated dividend during the year is $1.00. The expected return on the stock is 15. The price of a share of stock today is $25.00. If the return on the share is estimated at 18% and the stock generally pays a dividend of $1 per year, what is its projected selling price in one year? 16. Analysts expect a stock to be selling for $22 in one year. It is also expected to pay a $1 dividend during the year. If you require a 15% return on this kind of investment, what is the most you can pay for the stock today. 17. Assume a dividend today of $2.50 with anticipated growth over the next three years of 10%. The estimated dividend at the third year is: 18. Sharbaugh Inc.'s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4% per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what should the stock sell for today? 19. A stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning about 13%. The estimated selling price of this stock is: 20. A stock is selling for $20.00 (P0). The projected selling price one year from now (P1) is $22.50, and the projected dividend payment one year from now (D1) is $1.00. What is the expected return on an investment in the stock made today? 21. A share of stock is currently selling for $31.80. If the anticipated constant growth rate for dividends is 6% and investors are seeking a 16% return, what is the dividend just paid? 22. You are considering investing in B & B, Inc.'s stock and your broker has told you that you can purchase it for $72. You require a return 12% for this type of investment. The last dividend (D0) that B & B paid was $4 and a 6% constant growth rate is anticipated. Should you purchase B & B, Inc.? 23. Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a share of Fast Wheels if similar stocks return 14 percent? 24. Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent annually. If investors in Pace require a return of 14%, what is the expected dividend next year? 25. Delta Company has some very exciting prospects in the near future. As a result it is expected to grow at a rate of 20% for the next year. After that it will grow at 7% indefinitely. The interest rate is currently 14% and Delta paid a dividend of $2.60 recently. What should Delta sell for today? 26. Genestek Inc. just paid a $5.00 dividend. Due to a new product about to be released, analysts expect the company to grow at a supernormal rate of 15% for three years. After that it is expected to grow at a normal rate of 4% indefinitely. Stocks similar to Genestek are currently earning shareholders a return of 12%. The estimated selling price of the stock is: 27. Static Inc. has had a hard time recently. In order to help the firm survive a downturn in the market for its products, management has announced that it doesn't plan to pay dividends for the next three years. A modest dividend of $2.00 is projected for the fourth year after which dividends are expected to grow at 5% indefinitely. Similar stocks return 10%. How much should Static's stock sell for today? 28. Sudberry Systems Corp. is launching a new product that analysts expect will propel its growth to 18% for about a year. After that everyone expects the firm to return to a more normal 5% growth rate indefinitely. Sudberry recently paid an annual dividend of $3.50. Similar stocks are currently returning 9%. What is the most an investor should be willing to pay for a share of Sudberry? 29. Frazier Inc. paid a dividend of $4 last year (D0). The firm is expecting dividends to grow at 21% in years 1-2 and 10% in Year 3. After that growth will be constant at 8% per year. Similar investments return 14%. Calculate the value of the stock today. 30. Find the value of a share of preferred stock that pays $6.00 per year given a return of 16%. 31. What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10? 32. If a share of preferred stock pays a quarterly dividend of $1.50, has a $40 par value, and is currently selling for $50.00, it is earning an annual return of: 33. A share of Jones Inc. preferred stock pays a dividend of $1.25 each quarter. You are willing to pay $37.50 for this stock. Your annual return on the investment is: 34. You have invested in a project that has the following payoff schedule: Payoff Probability of Occurrence $40 .15 $50 .20 $60 .30 $70 .30 $80 .05 What is the expected value of the investment's payoff? (Round to the nearest $1) 35. Which of the following investments is clearly preferred to the others? Investment A B C 18% 20% 20% k 20% 20% 18% F 36. Sibling Incorporated has a beta of 1.0. If the expected return on the market is 14%, what is the expected return on Sibling Incorporated's stock? 37. PDQ Company's common stock has a beta of 1.2. If the expected risk free return is 4% and the market offers a risk premium of 7% over the risk free rate, what is the expected return on PDQ's common stock? 38. Car Buff, Inc. common stock has a beta of 1.3. If the expected risk free return is 4% and the expected market risk premium is 12%, what is the expected return on Car Buff’s stock? 39. If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return? 40. According to the capital asset pricing model, if the risk free rate is 5.5%, and the market return is 14%, a security with a beta of 1.4 should return what? 41. You are considering investing in a project with the following possible outcomes: States Probability of Occurrence Investment Returns State 1: Economic boom 15% 16% State 2: Economic growth 45% 12% State 3: Economic decline 25% 5% State 4: Depression 15% -5% Calculate the expected rate of return and standard deviation of returns for this investment, respectively. 42. If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2,000 1.5 Stock B $5,000 1.2 Stock C $3,000 .8 What is the beta of the portfolio? 43. If you hold a $1.3 million portfolio made up of the following stocks: Market value Beta Stock A .2 million 1.5 Stock B .5 million 1.2 Stock C .6 million .8 What is the beta of the portfolio? 44. If you hold a portfolio made up of the following stocks: Investment Value Beta Stock A $2,000 1.5 Stock B $5,000 1.2 Stock C $3,000 .8 if the market’s expected return is 15%, and the risk free rate of return is 4%, what is the expected return of the portfolio? 45. The Elvisalive Corporation, makers of Elvis memorabilia, has a beta of 2.75. The return on the market portfolio is 14% and the risk free rate is 4%. According to CAPM, what is the risk premium on a stock with a beta of 1? 46. Assume that an investment is forecasted to produce the following returns: a 20% probability of a $1,200 return; a 50% probability of a $5,600 return; and a 30% probability of a $9,500 return. What is the expected amount of return this investment will produce? Answers 1 2 3 10.90% $760.91 1236.44 8 9 10 9.90% 1000 12% 15 16 17 $28.50 $20 $3.33 22 23 24 No, stock overpriced $9.00 $1.45 29 30 31 $78.27 $37.50 8.82% 36 37 38 4 1000 5 16% 6 7 16% 1013 14% 12.40% 19.60% 43 44 45 1.06 16.54% 10% 11 9% 18 $23.11 25 $42.86 32 12.00% 12 22.50% 19 $30.29 26 $70.36 33 13.30% 39 13% 46 $5,890 40 17.40% 13 14 $3.50 12% 20 21 17.50% $3.00 27 28 $28.69 $103.25 34 35 $59 C 41 42 8.3%, 6.7% 1.14%