Conceptual Questions: 1. A bond will sell at when the coupon rate is the yield to maturity. A. a premium; less than B. a premium; equal to C. a discount; less than D. a discount; higher than E. par; less than 2. A company is preparing a bond offering with a coupon rate of 6 percent, paid semiannually, and a face value of $1,000. The bonds will mature in 10 years and will be sold at par. Given this, which one of the following statements is correct? A. The bonds will become discount bonds if the market rate of interest declines. B. The bonds will pay 10 interest payments of $60 cach. C. The bonds will sell at a premium if the market rate is 5.5 percent. D. The bonds will initially sell for $1,030 each. E. The final payment will be in the amount of $1,060. 3. The Fisher effect is defined as the relationship between which of the following variables? A. Default risk premium, inflation risk premium, and real rates B. Nominal rates, real rates, and interest rate risk premium C. Interest rate risk premium, real rates, and default risk premium D. Real rates, inflation rates, and nominal rates E. Real rates, interest rate risk premium, and nominal rates 4. National Trucking has paid an annual dividend of $I per share on its common stock for the nast 15 years and is expected to continue paying a dollar a share long into the future. Given this, one share of the firm's stock is: A. basically worthless as it offers no growth potential. B. equal in value to the present value of $1 paid one year from today. C. priced the same as a $1 perpetuity. D. valued at an assumed growth rate of I percent. E. worth $1 a share in the current market. 5. An increase in which of the following will decrease the current value of a stock according to the B. Number of future dividends, provided the total number of dividends is less than infinite constant growth model? A. Discount rate C Dividend amount D. Dividend growth rate E. Both the discount rate and the dividend growth rale 6. A company has a capital structure that includes bonds, preferred stock, and common stock. Which one of the following rights is most likely to be granted to the preferred shareholders? A. Right to share in company profits prior to other shareholders B. Right to elect the corporate directors C. Right to vote on proposed mergers D. Right to all residual income after the common dividends have been paid E. Right to a permanent seat on the board of directors 7. ABC stock is listed on NYSE. The firm is planning to issue some new equity shares for sale to the general public. This sale will definitely occur in which one of the following markets? A. Private B. Auction C. Tertiary D. Secondary E. Primary 8. The calculation of expected return on a portfolio considers which of the following factors? I. Percentage of the portfolio invested in each individual security II. Projected states of the economy II. The performance of each security given various economic states IV. Probability of occurrence for each state of the economy A. I and II only B. II and IV only C. I, III, and IV only D. II, III, and IV only E. I, II, III, and IV 9, Which one of the following is an example of systematic risk? A. Investors panic causing stock prices around the globe to fall precipitously B. A flood washes away a firm's warehouse C. A city imposes an additional one percent sales tax on all products D. A toymaker has to recall its top-selling toy E. Com prices increase due to increased demand for alternative fuels 10. The principle of diversification tells us that: A. concentrating an investment in two or three large stocks will eliminate all of the unsystematic B. concentrating an investment in three companies all within the same industry will greatly reduce the systematic risk. risk. C. spreading an investment across five diverse companies will not lower the total risk. D. spreading an investment across many diverse assets will eliminate all of the systematic risk. E. spreading an investment across many diverse assets will eliminate some of the total risk. Quantitative Questions: 1.A company has bonds on the market making annual coupon payments. The bonds have 7 years to maturity, a par value of $1,000, and selling for $986. At this price, the bonds yield 7.8 percent. What must the coupon rate be on the bonds? A. 7.53% B. 6.34 % C. 8.62 % D. 9.22% E. 7.80% 2. ABC, Inc, is a young start-up company. No dividends will be paid on the stock over the next 9 years per share 10 years from today and will increase the dividend by 5 percent per year thereafter. If the required because the firm needs to plow back its earnings to fuel growth. The conpany will paya dividend ofs12 return on this stock is 14 percent, what is the current share price? A. $34 B. $41 C. $52 D. $48 E. $37 3. A company is expected to pay the following dividends over the next four years: $18, $14, $13, and required return on the stock is 12 percent, what is the current share price? $6.50. Afterward, the company will maintain a constant 4 percent growth rate in dividends forever. If the A. $88.34 B. $98.76 C. $100.78 D. $73,98 E. $94.32 4. A portfolio consists of stock Q and stock R. The portfolio is invested 52 percent in stock Q and 48 percent in stock R. Given the information below, answer the following questions: State of Probability of State of Economy Returns if State Occurs Economy Stock Q Stock R Boom 10% 14% 16% Normal 8 % 90% 11 % (1) What are the expected retums and standard deviations for stock Q and Stock R? (2) What are the expected returm and standard deviation for the portfolio