Northern Kentucky University FIN 605 Module 4 Quiz {Answered}

Quiz 4 A zero coupon bond is a bond that  will sell for a premium  is a premium value bond  has a high current yield  originally sold at a discount The common stock of Kyocera currently sells for $88.50 and its current dividend is $1.10. Determine the implied growth rate for Kyocera assuming that an investor’s required rate of return is 14% and that earnings and dividends are expected to grow at a constant rate.  12.3%  13.9%  13.8%  12.6% Normally the coupon rates on new bonds  are set just over the prevailing prime rate  are set equal to the market rate plus an inflation premium  do no change over the life of the issue  float with changes in the prime rate One of the assumptions of the constant growth dividend valuation model is that  the required rate of return increases at a constant rate  the investor’s required rate of return is equal to the expected dividend yield  the dividend rate (in dollars) will remain constant  the required rate of return is greater than the dividend growth rate The call feature is an advantage to the issuing firm  if the bond has a low par value  if interest rates decline  if interest rates increase  if the bond has a floating rate 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 stock of Fast Wheels to an investor who requires a 14 percent rate of return?  $9.54  $5.14  $9.00  $8.16 This study source was downloaded by from CourseH on :25:03 GMT -05:00 neither earnings nor dividends are expected to grow in the future. What is the value of Zero-Sum’s stock to an investor requires a 14 percent rate of return?  $10.00  $14.00  0  $20.00 The valuation of common stock is considerably more complicated than the valuation of bonds or preferred stocks because:  Common stock dividends are normally expected to grow and not remain constant  The returns from common stocks are generally larger and more certain than the returns from bonds and preferred stocks  The returns can take two forms. i.e. annual cash payments and price appreciation  The returns can be in annual cash payments or price appreciation, and they are normally expected to grow and not remain constant Which of the following is the highest risk debt issue?  Debenture  Senior debt  Equipment trust certificate  Mortgage bond Two-years ago, Trans-Atlantic Airlines sold a $250 million bond issue to finance the purchase of new jet airliners. These bonds were issued in $1000 denominations with an original maturity of 12 years and a coupon rate of 12%. Determine the value today of one of these bonds to an investor who requires a 14% rate of return on these securities.  $626  $463  $270  $897 A zero coupon bond is an example of a(n) ____  Fixed income security and an original issue deep discount bond  Tax-exempt bond  Fixed income security  Original issue deep discount bond Baywa has an outstanding bond that has a coupon rate of 8.3%. What is the market price of this bond if it pays interest semi-annually, has 15 years to maturity, and the current required rate of return is 9% on bonds of similar quality?  $1,000 $1059  $954  $943 What is the value of the PacTen bond with a 10 percent coupon that matures in 15 years? Assume the current market rate for this bond is 16 percent and that interest is paid semiannually.  $1,000  $661.90  $875.51  $1,227.78 What is the value of a Northern Pacific bond with an 11 percent coupon, maturing in 15 years? Assume the market rate for this bond is 14 percent and that interest is paid semiannually.  $1,000  $853.30  $813.50  $790.74 If the general level of interest rates in the economy moves up, then investors will require a ___ rate of return on securities, and, in general, stock prices should ___, ceteris paribus.  higher, decline  lower, increase  lower, decline  higher, increase The value of a 15-year bond will change ____ for a given change in the required rate of return than the value of a 5 year bond.  exactly the same  less  the same percentage  more If the competition is an industry increases, the future growth potential should  be negative  increase  not to be affected  decrease In the constant-growth dividend valuation model, the required rate of return must be ___ the dividend growth rate in order for the formula price to be meaningful.  equal to  greater than  less than  proportional to The stock of Music City is selling for $37.50 and pays a current annual dividend $1.10. What is the implied growth rate of dividends for this firm (assume dividends are expected to grow at a constant rate) if an investor’s required rate of return is 14 percent?  14.0%  11.07%  11.4%  10.75% The call feature of a long-term bond  is an optional retirement provision  states the call price  allows the issuer to replace a high coupon bond with one with a lower coupon bond  all answers are correct During the past 8 years, UTX Company common stock dividends have grown from $2.70 to $5.00 per share (currently). Determine the value of UTX common stock to an investor who requires a 16% rate of return, assuming that dividends continue growing for the foreseeable future at the same rate as over the past 8 years.  $31.25  $62,50  $67.50  $46.96 Junk bonds are  are issued by firms with a high debt ratio  issued with coupon rates at least 8 percentage points or more above the highest quality issues  usually rated Ba or higher  are issued by firms with a low debt ration What is the value of a share of stock of HOV Inc. to an investor who requires a 12 percent rate of return if HOV’s current dividend is $1.20? Assume earnings and dividends are expected to grow at a compound annual rate of 7 percent.  $25.68  $18.34  $19.62  $24.00