兹维博迪金融学第二版试题库08TB
兹维博迪金融学第二版精彩试题库9TB(1)
Chapter NineValuation of Common StocksThis chapter contains 47 multiple choice questions, 17 short problems, and 9 longer problems. Multiple Choice1.In a quote listing of stocks, the ________ is defined as the annualized dollar dividend dividedby the stock’s price, and is usually expressed as a percentage.(a)cash dividend(b)dividend payout(c)dividend coverage(d)dividend yieldAnswer: (d)2.According to the discounted-dividend model, the price of a share of stock is the ________value of all expected ________ dividends per share, discounted at the market capitalization rate.(a)present; current(b)present; future(c)future; future(d)future; currentAnswer: (b)3.The value of common stock is determined by which of the following expected cash flows?(a)dividends and interest payments(b)dividends and maturity value of stock(c)dividends and net cash flows from operations of the firm(d)interest payments and maturity valueAnswer: (c)4.The ________ is the expected rate of return that investors require in order to be willing toinvest in the stock.(a)market capitalization rate(b)risk-adjusted discount rate(c)cost of debt(d)a and bAnswer: (d)5.The ________ of dividends is the most basic assumption underlying the discounted dividendmodel.(a)industry average(b)non-constant growth(c)constant growth(d)variabilityAnswer: (c)6.BHM stock is expected to pay a dividend of $2.50 a year from now, and its dividends areexpected to grow by 6% per year thereafter. What is the price of a BHM share if the market capitalization rate is 7% per year?(a)$250.00(b)$192.31(c)$25.00(d)$19.23Answer: (c)7.IOU stock is expected to pay a dividend of $1.67 a year from now, and its dividends are notexpected to grow in the foreseeable future. If the market capitalization rate is 7%, what is the current price of a share of IOU stock?(a)$11.69(b)$23.86(c)$116.90(d)$238.60Answer: (b)8.GMATS stock is currently selling for $34.50 a share. The current dividend for this stock is$1.60 and dividends are expected to grow at a constant rate of 10% per year thereafter. What must be the market capitalization rate for a share of GMATS stock?(a)4.90%(b)5.36%(c)14.64%(d)15.10%Answer: (d)9.Avacor stock is expected to pay a dividend of $1.89 a year from now, and its dividends areexpected to grow at a constant rate of 5% per year thereafter. If the market capitalization rate is 14% per year, what is the current price of a share of Avacor stock?(a)$13.50(b)$18.90(c)$21.00(d)$37.80Answer: (c)10.GRITO stock is currently selling for $46.10 a share. If the company is expected to pay adividend of $5.60 a year from now and dividends are not expected to grow thereafter, what is the market capitalization rate for a share of GRITO stock?(a)7.56%(b)8.23%(c)10.50%(d)12.15%Answer: (d)11.In the DDM model, if D1 and k are held constant, what will happen to the price of a stock ifthe constant growth rate gets higher?(a)the price of the stock will be higher(b)the price of the stock will hold constant(c)the price of the stock will be lower(d)it cannot be determined from the information givenAnswer: (a)12.The relation between earnings and dividends in any period is ________.(a)Dividends = Earnings/Net New Investment(b)Dividends = Earnings x Net New Investment(c)Dividends = Earnings + Net New Investment(d)Dividends = Earnings – Net New InvestmentAnswer: (d)13.Consider a firm called Nowhere Corporation, whose earnings per share are $12. The firminvests an amount each year that is just sufficient to replace the production capacity that is wearing out, and so the new investment is zero. The firm pays out all its earnings asdividends. Calculate the price of a share of Nowhere Corporation stock, give that k = 14%.(a)$168.00(b)$166.67(c)$85.71(d)$82.40Answer: (c)14.Consider a firm called SureBet Corporation. SureBet reinvests 55% of its earnings each yearinto new investments that earn a rate of return of 17% per year. Currently, SureBetCorporation has earnings per share of $12 and pays out 45% or $5.40 as dividends. Calculate the growth rate of earnings and dividends.(a)7.65%(b)8.50%(c)9.35%(d)24.75%Answer: (c)15.What adds value to the current price of a share of stock is ________.(a)growth per se(b)tax advantages(c)investment opportunities that earn rates of return > k(d)all of the aboveAnswer: (c)16.In order to evaluate the stock of Beltran Inc., an analyst uses the constant growth discounteddividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, calculate the price for a share of Beltran stock.(a)$171.43(b)$367.35(c)$400.00(d)$857.14Answer: (a)17.In order to evaluate the stock of The Rendell-Vine Corporation, an analyst uses the constantgrowth discounted dividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?(a)$314.29(b)$281.64(c)$171.43(d)$85.72Answer: (d)18.In order to evaluate the stock of Toys’R’Me, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $14 per share is assumed, as are anearnings retention rate of 60% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?(a)$23.34(b)$70.00(c)$93.34(d)$116.67Answer: (a)19.Firms with consistently high P/E multiples are interpreted to have either relatively ________market capitalization rates or relatively ________ present value of value-added investments.(a)low; low(b)high; high(c)high; low(d)low; highAnswer: (d)20.In a “frictionless” financial environment, the shareholders wealth is ________ the dividendpolicy the firm adopts.(a)increased by(b)decreased by(c)not affected by(d)determined byAnswer: (c)21.In a ________ the company pays cash to buy shares of its stock in the stock market, therebyreducing the number of shares outstanding.(a)cash dividend(b)share repurchase(c)stock split(d)a and bAnswer: (b)22.Stock splits and stock dividends ________ the number of shares of stock outstanding.(a)decrease(b)do not alter(c)increase(d)a or bAnswer: (c)23.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet distributes a cash dividend of $1.50 per share, the market value of its assets and of its equity ________ by ________.(a)increases; $1.5 million(b)increases; $10.5 million(c)decreases; $1.5 million(d)decreases; $10.5 millionAnswer: (c)24.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet repurchases shares worth $2.4 million, the resulting number of shares outstanding is ________ , with a price per share of ________.(a)200,000; $15(b)200,000; $12(c)800,000; $15(d)800,000; $12Answer: (d)25.“Frictions” that can cause a firm’s dividend policy to have an effect on the wealth ofshareholders include:(a)regulations(b)taxes(c)cost of external finance(d)all of the aboveAnswer: (d)26.Outside investors may interpret an increase in a corporation’s cash dividend as ________sign.(a)a positive sign(b)a negative sign(c)an indifferent sign(d)b or cAnswer: (a)27.From the perspective of a shareholder with regard to personal taxation, it is always ________for the corporation to pay out cash by ________.(a)better; cash dividends(b)worse; cash dividends(c)worse; share repurchases(d)it varies according to the situationAnswer: (b)28.An increase in a corporation’s cash dividend is most likely to ________.(a)decrease the price of its stock(b)increase the price of its stock(c)have no impact on the price of its stock(d)decrease trading activity of its stockAnswer: (b)29.Raising cash by issuing new stock is ________ to the corporation than raising cash byforegoing the payments of dividends.(a)is less costly(b)is more costly(c)is no different(d)just as costlyAnswer: (b)30.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $2.50 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?(a)10.58%(b)11.21%(c)11.52%(d)12.46%Answer: (c)31.Beazley Inc. just paid a dividend of $3.00 per share. This dividend is expected to grow at asupernormal rate of 15 percent per year for the next two years. It is then expected to grow at a rate of 6 percent per year forever. The appropriate discount rate for Beazley’s stock is 17 percent. What is the price of the stock?(a)$17.64(b)$27.27(c)$33.78(d)$46.15Answer: (c)32.Beazley Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $72 per year.If the required rate of return for this stock is 16 percent, how many shares of preferred stock must Beazley issue?(a)450(b)16,000(c)222,222(d)265,332Answer: (c)33.If you use the constant dividend growth model to value a stock, which of the following iscertain to cause you to increase your estimate of the current value of the stock?(a)Decreasing the required rate of return for the stock(b)Decreasing the estimate of the amount of next year’s dividend(c)Decreasing the expected dividend growth rate(d)All of the aboveAnswer: (a)34.The constant dividend growth model may be used to find the price of a stock in all of thefollowing situations except when:(a)g < k(b)k < g(c)g = 0(d)k≠ gAnswer: (b)35.CarsonCorp just paid an annual dividend of $3.00. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $63.00. The required rate of return for this stock is 15 percent. What is the expected growth rate of CarsonCorp’s dividend?(a)5.00%(b)5.48%(c)6.33%(d)10.00%Answer: (a)36.The common stock of Century Inc. is expected to pay a dividend of $2.00 one year fromtoday. After that the dividend is expected to grow at a rate of 10 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent what is the current price?(a)$12.00(b)$18.29(c)$21.69(d)$25.40Answer: (c)37.A firm’s common stock is trading at $80 per share. In the past the firm has paid a constantdividend of $6 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?(a)$94.50(b)$156.00(c)$171.43(d)$178.29Answer: (d)38.If the model below is to give a reasonable valuation of a stock, which of the followingpossible situations must be excluded?P0 = D1/(r – g)(a)There is no growth.(b)The growth rate exceeds the required rate of return.(c)The required rate of return is exceptionally high.(d)Growth is constant.Answer: (b)39.According to the constant growth model of stock valuation, capital appreciation in commonstock is a direct result of ________.(a)growth in future dividends(b)a reduction in the required rate of return(c)growth in corporate assets(d)a growth rate that exceeds the required rate of returnAnswer: (a)Questions 40 through 43 refer to the following information:New competition in Sophco’s market is going to have an impact on the growth in thefirm’s dividends. A current dividend of $1.00 was paid yesterday by Sophco, and thisdividend is expected to increase by 25% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long-run constant growth of 10%. Sucha “decay” process is one in which dividend growth declines by 5 percentage points peryear up to the point where the expected constant rate of dividend growth is reached. So,year 2 dividend will be 20 percent higher than year 1, year 3 dividends will be 15 percent higher than year 1, and after year 3, dividends will grow by 10 percent forever. Forproblems 40 – 43, assume investors in Sophco require a rate of return of 15%.40.Calculate Sophco’s dividend in year 2.(a)$1.13(b)$1.25(c)$1.5(d)$1.73Answer: (c)41.Calculate the Sophco’s dividend in year 4.(a)$1.24(b)$1.57(c)$1.73(d)$1.90Answer: (d)42.Determine the price of Sophco’s stock at the end of year 3 (just after the dividend has beenpaid).(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (c)43.Calculate the current price of Sophco’s stock.(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (b)Questions 44 through 47 refer to the following information:New competition in Acme Unlimited’s market is going to have an impact on the growth of the firm’s dividends. A current dividend of $1.50 was paid yesterday, and thisdividend is expected to increase by 35% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long run constant growth of 5%. Such a “decay” process is one in which dividend growth declines by 10 percentage points per year up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 25 percent higher than year 1, year 3 dividend will be 15 percent higher, and after year 3, dividends will grow by 5 percent forever. Assume that investors require a rate of return of 17 on Acme Unlimited’s stock.44.Calculate the dividend in year 2.(a)$2.54(b)$2.92(c)$3.21(d)$3.30Answer: (a)45.Calculate the dividend in year 4.(a)$2.35(b)$2.54(c)$3.21(d)$3.53Answer: (c)46.Determine the price of Acme Unlimited’s stock at the end of year 3 (just after the dividendhas been paid).(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (b)47.Calculate the current price of Acme Unlimited’s stock.(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (a)Short Problems1.Discuss the two ways in which a corporation can distribute cash to its shareholders.Answer:There are two ways a corporation can distribute cash to its shareholders: by paying acash dividend or by repurchasing the company’s shares in the stock market. When acompany pays a cash dividend, all shareholders receive cash in amounts proportional to the number of shares they own.In a share repurchase, the company pays cash to buy shares of its stock in the stockmarket, thereby reducing the number of shares outstanding. In this case, onlyshareholders who choose to sell some of their shares will receive cash.2.Does growth “per se” add value to the current price of a share? If not, what does add valueto a share’s current price?Answer:Growth per se does not add value. What adds value is the opportunity to invest inprojects that can earn rates of return in excess of the required rate, k. When a firm’sfuture investment opportunities yield a rate of return equal to k, the stock’s value can be estimated using the formula P0 = E1/k.3.In order to evaluate the stock of DippinDonuts, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $15 per share are assumed, as are anearnings retention rate of 70% and an expected rate of return on future investments of 18% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?Answer:g = 0.7 x 0.18= 12.6%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= 4.50/(0.15-0.126)= $187.50Next find P0 with the formula P0 = E1/k:= 15/0.15= $100The NPV of future investments is the difference between these two values: $187.50 –$100 = $87.504.In order to evaluate the stock of EasyStreet Corporation, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $16 per share are assumed, as are anearnings retention rate of 60% and expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?Answer:g = 0.6 X 0.17= 10.2%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= $6.40/(0.14 – 0.102)= $168.42Next find P0 with the formula P0 = E1/k:= 16/0.14= $114.29The NPV of future investments is the difference between the two values: $168.42 –$114.29 = $54.13.anic Earth stock is expected to pay a dividend of $2.70 per share a year from now, and itsdividends are expected to grow by 7% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate?Answer:Use the constant growth formula to solve for k:P0 = D1/(k – g)30 = 2.70/(k – 0.07)k = 16%6.Walch stock currently sells for $27.62 a share, and is expected to pay a dividend of D1 a yearfrom now. If its dividends are expected to grow by 4.5% per year thereafter and thecapitalization rate is 15% per year, what is the value of D1?Answer:Use the constant growth formula to solve for D1:P0 = D1/(k – g)D1 = P0(k – g)= $27.62(0.15 – 0.045)= $2.907.Discuss how outside investors may interpret an increase in a corporation’s cash dividend asopposed to a decrease.Answer:Investors may interpret an increase in a corporation’s cash dividend as a positive sign since it would suggest that management is confident the earnings can be sustained in the future.The result is most likely to be an increase in stock price. A decrease could be viewed as a bad signal that will most likely cause a decline in stock price.8.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther Assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing pays a cash dividend of $2.50 per share, what will the balance sheet look like afterward?Answer:Balance sheet after payment of cash dividend:Assets Liabilities and Shareholders’ EquityCash: $1.9 million Debt: $3 millionOther assets: $11 million Equity: $9.9 millionTotal: $12.9 million Total: $12.9 millionNumber of shares outstanding = 440,000Price per share = $22.509.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther assets: $11 million Equity: $11 millionTotal: $14 million Total: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing Corporation repurchases shares worth $2.5 million, what will the new balance sheet for SureThing Corporation look like?Answer:Balance sheet after share repurchase:Assets Liabilities and Shareholders’ EquityCash: $0.5 million Debt: $3 millionOther assets: $11 million Equity: $8.5 millionTotal: $11.5 million Total: $11.5 million Number of shares outstanding = 340,000Price per share = $2510.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ Equity Cash: $3 million Debt: $3 million Other assets: $11 million Equity: $11 million Total: $14 million Total: $14 million Number of shares outstanding = 440,000Price per share = $25If SureThing is paying a 20% stock dividend, what will the number of shares outstanding be?What will be the price per share?What would be the effect of a two-for-one stock split?Answer:After paying a 20% stock dividend:Number of shares outstanding = 528,000Price per share = $20.83After a two-for-one stock split:Number of shares outstanding = 880,000Price per share = $12.5011.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $3.00 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?Answer:D1 is 3.00. Given 6% annual growth, D1 = 3.00 x 1.06 = 4.80.Use the constant growth formula to solve for k:P0 = D1/(k – g)48 = 4.80/(k – 0.06)48k – 2.88 = 4.8048k = 7.68k = 16%12.Halpert Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $48 per year.If the required rate of return for this stock is 15 percent, how many shares of preferred stock must Halpert issue?Answer:P0 = D1kP0 = $480.15= $320Number of shares = $100,000,000/$320= 312,500 shares13.Aslan Inc. just paid a dividend of $5.00 per share. This dividend is expected to grow at asupernormal rate of 20 percent per year for the next two years. It is then expected to grow at a rate of 5 percent per year forever. The appropriate discount rate for Aslan’s stock is 17percent. What is the price of the stock?Answer:D0 = $5D1 = $5(1.2)= $6.00D2 = $6.00(1.2)= $7.20D3 = $7.20(1.05) = $7.56P2 = D3/(k – g)= $7.56/(0.17 – 0.05)= $63.00P0 = $6.00/(1.17) + ($7.20 + $63.00)/(1.17)2= $56.4114.Druids Corp. just paid an annual dividend of $2.50. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $38.40. The required rate of return for this stock is 15 percent. What is the expected growth rate of Druids dividend?Answer:D0 = $2.50D1 = $2.50(1 + g)P0 = $38.40k = 15%Use the constant growth formula to solve for g:P0 = D1/(k – g)38.40 = 2.50(1 + g)/(0.15 – g)5.76 – 38.4g = 2.5 + 2.5g3.26 = 40.9g0.0797 = g15.The common stock of Century Inc. is expected to pay a dividend of $1.80 one year fromtoday. After that the dividend is expected to grow at a rate of 15 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent, what is the current price?Answer:D1 = $1.80D2 = $2.07D3 = $2.38D4 = $2.50P3 = $2.50/(0.15 – 0.05)= $25.00P0 = 1.80/(1.15) + 2.07/ (1.15)2 + (2.38 + 25.00)/(1.15)3= $21.1416.A firm’s common stock is trading at $54 per share. In the past the firm has paid a constantdividend of $4 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, thedividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?Answer:P0 = $54Dividends have been constant, so:P0 = D1kk = $4/$54= 7.4%Now g = 4% and k stays same:P0 = 4(1.04)/(0.074 – 0.04)= $122.3517.Consider a stock that just paid a $3.00 dividend. You expect dividends on this stock to growat 25 percent per year for the next 3 years and 10 percent per year thereafter. If you require an18 percent return, how much are you willing to pay for this stock?Answer:D0 = $3D1 = $3(1.25)= $3.75D2 = 3.75(1.25)= $4.69D3 = 4.69(1.25)= $5.86D4 = $5.86(1.10)= $6.45P3 = $6.45/(0.18 – 0.10)= $80.63P0 = 3.75/(1.18) + $4.69/(1.18)2 + $86.63/(1.18)3= $59.19Longer Problems1.WannaGrow Corporation has expected earnings per share of $8. It has a history of payingcash dividends equal to 30% of earnings. The market capitalization rate for WannaGrow stock is 15% per year, and the expected rate of return on future investments is 18% per year.Using the constant growth rate discounted dividend model:a.What is the expected growth rate of dividends?b.What is the model’s estimate of the present value of the stock?c.What is the expected price of a share a year from now?Answer:a.g = earnings retention rate x ROE= 0.7 x 0.18= 12.6%b.D1 = 0.3 x $8= $2.40Use the constant growth formula to solve for D1:P0 = D1/(k – g)= $2.40/(0.15 – 0.126)= $100c.P1 = P0 (1 + g)= $100(1.126)P1 = $112.602.Dividends’R’Us Corporation is an all equity financed firm with a total market value of$150 million. The company holds $20 million in cash and has $130 million in other assets.There are 2,500,000 shares of common stock outstanding for this company, each with a market price of $52. Consider the following decisions and the impact on Dividends’R’Us Corporation’s stock price and on number of shares outstanding.a.The company pays a cash dividend of $5 per share.b.The company repurchases 250,000 shares.c.The company pays a 20% stock dividend.d.The company has a two-for-one stock split.Answer:a.The company pays out a total of $12.5 million in cash dividends. The stock pricefalls to $47 per share. Shareholder wealth may decline because personal taxesmay have to be paid on the cash dividend. The number of shares outstanding isstill 2.5 million shares.b.The stock price is unchanged. The number of shares outstanding is now2,250,000 shares.c.The number of shares outstanding is 1.2 x 2.5 million = 3 million shares.The stock price is $43.34.d.The number of shares doubles to 5,000,000.The stock price halves to $26.3.The stock of WishToGrow Corporation is currently selling for $15 per share. Earnings pershare in the coming year are expected to be $3. The company has a policy of paying out 70% of its earnings each year in dividends. The remaining 30% is retained and invested in projects that earn a 19% rate of return each year. This situation is expected to continue into theforeseeable future.ing the constant growth rate DDM, what rate of return do WannaGrow investorsrequire?b.By how much does its value exceed what it would be if all earnings were paid asdividends and nothing were reinvested?c.If WannaGrow were to cut its dividend payout ratio to 35%, what would happen to itsstock price?Answer:a.P0 = $15, E1 = $3, D1 = 0.7 x $3= $2.10g = 0.3 x 0.19= 5.7%P0 = D1/(k – g)15 = $2.10/(k – 0.057)k = 19.7%b.If all earnings were paid as dividends its price would be:P0 = 3/0.197= $15.23The current price is actually $0.23 less in value than the above model.c. D1 = 0.35 x $3 g = 0.65 x 0.19= $1.05 = 12.35%P0 = 1.05/(0.197 – 0.1235)= $14.29The stock price would drop by $0.71.。
(完整word版)兹维博迪金融学第二版试题库2TB
Chapter TwoFinancial Markets and InstitutionsThis chapter contains 49 multiple-choice questions, 20 short problems and 10 longer problems。
Multiple Choice1. A market that has no one specific location is termed a(n) ________ market.(a)over—the—counter(b)geographic location(c)intermediary(d)conceptualAnswer: （a)2. ________ problems arise because parties to contracts often cannot easily monitor or control one another。
(a)Payment(b)Counter(c)Incentive(d)ExchangeAnswer: （c）3. Incentive problems take a variety of forms and include：(a)moral hazard(b)adverse selection(c)principal-agent(d)all of the aboveAnswer: (d）4. The ________ problem exists when having insurance against some risk causes the insured party to take greater risk or to take less care in preventing the event that gives rise to the loss.(a)moral hazard(b)adverse selection(c)principal—agent(d)all of the aboveAnswer： (a）5。
兹维博迪金融学第二版精彩试题库9TB（1）
兹维博迪金融学第二版精彩试题库9TB（1）Chapter NineValuation of Common StocksThis chapter contains 47 multiple choice questions, 17 short problems, and 9 longer problems. Multiple Choice1.In a quote listing of stocks, the ________ is defined as the annualized dollar dividend dividedby the stock’s price, and is usually expressed as a percentage.(a)cash dividend(b)dividend payout(c)dividend coverage(d)dividend yieldAnswer: (d)2.According to the discounted-dividend model, the price ofa share of stock is the ________value of all expected ________ dividends per share, discounted at the market capitalization rate.(a)present; current(b)present; future(c)future; future(d)future; currentAnswer: (b)3.The value of common stock is determined by which of the following expected cash flows?(a)dividends and interest payments(b)dividends and maturity value of stock(c)dividends and net cash flows from operations of the firm(d)interest payments and maturity valueAnswer: (c)4.The ________ is the expected rate of return that investors require in order to be willing toinvest in the stock.(a)market capitalization rate(b)risk-adjusted discount rate(c)cost of debt(d)a and bAnswer: (d)5.The ________ of dividends is the most basic assumption underlying the discounted dividendmodel.(a)industry average(b)non-constant growth(c)constant growth(d)variabilityAnswer: (c)6.BHM stock is expected to pay a dividend of $2.50 a year from now, and its dividends areexpected to grow by 6% per year thereafter. What is the price of a BHM share if the market capitalization rate is 7% per year?(a)$250.00(b)$192.31(c)$25.00(d)$19.23Answer: (c)7.IOU stock is expected to pay a dividend of $1.67 a year from now, and its dividends are notexpected to grow in the foreseeable future. If the market capitalization rate is 7%, what is the current price of a share ofIOU stock?(a)$11.69(b)$23.86(c)$116.90(d)$238.60Answer: (b)8.GMATS stock is currently selling for $34.50 a share. The current dividend for this stock is$1.60 and dividends are expected to grow at a constant rate of 10% per year thereafter. What must be the market capitalization rate for a share of GMATS stock?(a)4.90%(b)5.36%(c)14.64%(d)15.10%Answer: (d)9.Avacor stock is expected to pay a dividend of $1.89 a year from now, and its dividends areexpected to grow at a constant rate of 5% per year thereafter. If the market capitalization rate is 14% per year, what is the current price of a share of Avacor stock?(a)$13.50(b)$18.90(c)$21.00(d)$37.80Answer: (c)10.GRITO stock is currently selling for $46.10 a share. If the company is expected to pay adividend of $5.60 a year from now and dividends are not expected to grow thereafter, what is the market capitalizationrate for a share of GRITO stock?(a)7.56%(b)8.23%(c)10.50%(d)12.15%Answer: (d)11.In the DDM model, if D1 and k are held constant, what will happen to the price of a stock ifthe constant growth rate gets higher?(a)the price of the stock will be higher(b)the price of the stock will hold constant(c)the price of the stock will be lower(d)it cannot be determined from the information givenAnswer: (a)12.The relation between earnings and dividends in any period is ________.(a)Dividends = Earnings/Net New Investment(b)Dividends = Earnings x Net New Investment(c)Dividends = Earnings + Net New Investment(d)Dividends = Earnings – Net New InvestmentAnswer: (d)13.Consider a firm called Nowhere Corporation, whose earnings per share are $12. The firminvests an amount each year that is just sufficient to replace the production capacity that is wearing out, and so the new investment is zero. The firm pays out all its earnings as dividends. Calculate the price of a share of Nowhere Corporation stock, give that k = 14%.(a)$168.00(b)$166.67(c)$85.71(d)$82.40Answer: (c)14.Consider a firm called SureBet Corporation. SureBet reinvests 55% of its earnings each yearinto new investments that earn a rate of return of 17% per year. Currently, SureBetCorporation has earnings per share of $12 and pays out 45% or $5.40 as dividends. Calculate the growth rate of earnings and dividends.(a)7.65%(b)8.50%(c)9.35%(d)24.75%Answer: (c)15.What adds value to the current price of a share of stock is ________.(a)growth per se(b)tax advantages(c)investment opportunities that earn rates of return > k(d)all of the aboveAnswer: (c)16.In order to evaluate the stock of Beltran Inc., an analyst uses the constant growth discounteddividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, calculate the price for a share of Beltran stock.(a)$171.43(b)$367.35(c)$400.00(d)$857.14Answer: (a)17.In order to evaluate the stock of The Rendell-Vine Corporation, an analyst uses the constantgrowth discounted dividend model. Expected earnings of $12 per share is assumed, as are an earnings retention rate of 70% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?(a)$314.29(b)$281.64(c)$171.43(d)$85.72Answer: (d)18.In order to evaluate the stock of Toys’R’Me, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $14 per share is assumed, as are anearnings retention rate of 60% and an expected rate of return on future investments of 17% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?(a)$23.34(b)$70.00(c)$93.34(d)$116.67Answer: (a)19.Firms with consistently high P/E multiples are interpretedto have either relatively ________market capitalization rates or relatively ________ present value of value-added investments.(a)low; low(b)high; high(c)high; low(d)low; highAnswer: (d)20.In a “frictionless” financial environment, the shareholders wealth is ________ the dividendpolicy the firm adopts.(a)increased by(b)decreased by(c)not affected by(d)determined byAnswer: (c)21.In a ________ the company pays cash to buy shares of its stock in the stock market, therebyreducing the number of shares outstanding.(a)cash dividend(b)share repurchase(c)stock split(d)a and bAnswer: (b)22.Stock splits and stock dividends ________ the number of shares of stock outstanding.(a)decrease(b)do not alter(c)increase(d)a or bAnswer: (c)23.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet distributes a cash dividend of $1.50 per share, the market value of its assets and of its equity ________ by ________.(a)increases; $1.5 million(b)increases; $10.5 million(c)decreases; $1.5 million(d)decreases; $10.5 millionAnswer: (c)24.SureBet Corporation has total assets with a market value of $15 million: $3 million in cashand $12 million in other assets. The market value of its debt is $3 million; of its equity $12 million. There are 1,000,000 shares of SureBet common stock outstanding, each with amarket price of $12. If SureBet repurchases shares worth $2.4 million, the resulting number of shares outstanding is ________ , with a price per share of ________.(a)200,000; $15(b)200,000; $12(c)800,000; $15(d)800,000; $12Answer: (d)25.“Frictions” that can cause a firm’s dividend policy to have an effect on the wealth ofshareholders include:(a)regulations(b)taxes(c)cost of external finance(d)all of the aboveAnswer: (d)26.Outside investors may interpret an increase in a corporation’s cash dividend as ________sign.(a)a positive sign(b)a negative sign(c)an indifferent sign(d)b or cAnswer: (a)27.From the perspective of a shareholder with regard to personal taxation, it is always ________for the corporation to pay out cash by ________.(a)better; cash dividends(b)worse; cash dividends(c)worse; share repurchases(d)it varies according to the situationAnswer: (b)28.An increase in a corporation’s cash dividend is most likely to ________.(a)decrease the price of its stock(b)increase the price of its stock(c)have no impact on the price of its stock(d)decrease trading activity of its stockAnswer: (b)29.Raising cash by issuing new stock is ________ to the corporation than raising cash byforegoing the payments of dividends.(a)is less costly(b)is more costly(c)is no different(d)just as costlyAnswer: (b)30.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $2.50 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?(a)10.58%(b)11.21%(c)11.52%(d)12.46%Answer: (c)31.Beazley Inc. just paid a dividend of $3.00 per share. This dividend is expected to grow at asupernormal rate of 15 percent per year for the next two years. It is then expected to grow at a rate of 6 percent per year forever. The appropriate discount rate for Beazley’s stock is 17 percent. What is the price of the stock?(a)$17.64(b)$27.27(c)$33.78(d)$46.15Answer: (c)32.Beazley Corporation would like to raise $100,000,000 byissuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $72 per year.If the required rate of return for this stock is 16 percent, how many shares of preferred stock must Beazley issue?(a)450(b)16,000(c)222,222(d)265,332Answer: (c)33.If you use the constant dividend growth model to value a stock, which of the following iscertain to cause you to increase your estimate of the current value of the stock?(a)Decreasing the required rate of return for the stock(b)Decreasing the estimate of the amount of next year’s dividend(c)Decreasing the expected dividend growth rate(d)All of the aboveAnswer: (a)34.The constant dividend growth model may be used to find the price of a stock in all of thefollowing situations except when:(a)g < k(b)k < g(c)g = 0(d)k≠ gAnswer: (b)35.CarsonCorp just paid an annual dividend of $3.00. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $63.00. The required rate of return for this stock is 15 percent. What is the expected growth rate of CarsonCorp’s dividend?(a)5.00%(b)5.48%(c)6.33%(d)10.00%Answer: (a)36.The common stock of Century Inc. is expected to pay a dividend of $2.00 one year fromtoday. After that the dividend is expected to grow at a rate of 10 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent what is the current price?(a)$12.00(b)$18.29(c)$21.69(d)$25.40Answer: (c)37.A firm’s common stock is trading at $80 per share. In the past the firm has paid a constantdividend of $6 per share. However, the company has just announced new investments that the market did not know about. The market expects that with these new investments, the dividends should grow at 4% per year forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?(a)$94.50(b)$156.00(c)$171.43(d)$178.29Answer: (d)38.If the model below is to give a reasonable valuation of a stock, which of the followingpossible situations must be excluded?P0 = D1/(r – g)(a)There is no growth.(b)The growth rate exceeds the required rate of return.(c)The required rate of return is exceptionally high.(d)Growth is constant.Answer: (b)39.According to the constant growth model of stock valuation, capital appreciation in commonstock is a direct result of ________.(a)growth in future dividends(b)a reduction in the required rate of return(c)growth in corporate assets(d)a growth rate that exceeds the required rate of returnAnswer: (a)Questions 40 through 43 refer to the following information: New competition in Sophco’s market is going to have an impact on the growth in thefirm’s dividends. A current divid end of $1.00 was paid yesterday by Sophco, and thisdividend is expected to increase by 25% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long-run constant growth of 10%. Sucha “decay” process is one in which dividend growth declines by 5 percentage points peryear up to the point where the expected constant rate of dividend growth is reached. So,year 2 dividend will be 20 percent higher than year 1, year 3 dividends will be 15 percent higher than year 1, and after year 3, dividends will grow by 10 percent forever. Forproblems 40 – 43, assume investors in Sophco require a rate of return of 15%.40.Calculate Sophco’s dividend in year 2.(a)$1.13(b)$1.25(c)$1.5(d)$1.73Answer: (c)41.Calculate the Sophco’s dividend in year 4.(a)$1.24(b)$1.57(c)$1.73(d)$1.90Answer: (d)42.Determine the price of Sophco’s stock at the end of year 3 (just after the dividend has beenpaid).(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (c)43.Calculate the current price of Sophco’s stock.(a)$26.12(b)$28.34(c)$38.00(d)$39.73Answer: (b)Questions 44 through 47 refer to the following information: New competition in Acme Unlimited’s market is going to have an impact on the growth of the firm’s dividends. A current dividend of $1.50 was paid yesterday, and thisdividend is expected to increase by 35% in the first year. After that point, the growth individends is expected to “decay” to the firm’s long run constant growth of 5%. Such a “decay” process is one in which dividend growth declines by 10 percentage points per year up to the point where the expected constant rate of dividend growth is reached. So, year 2 dividend will be 25 percent higher than year 1, year 3 dividend will be 15 percent higher, and after year 3, dividends will grow by 5 percent forever. Assume that investors require a rate of return of 17 on Acme Unlimited’s stock.44.Calculate the dividend in year 2.(a)$2.54(b)$2.92(c)$3.21(d)$3.30Answer: (a)45.Calculate the dividend in year 4.(a)$2.35(b)$2.54(c)$3.21(d)$3.53Answer: (c)46.Determine the price of Acme Unlimited’s stock at theend of year 3 (just after the dividendhas been paid).(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (b)47.Calculate the current price of Acme Unlimited’s sto ck.(a)$22.13(b)$26.75(c)$29.67(d)$34.24Answer: (a)Short Problems1.Discuss the two ways in which a corporation can distribute cash to its shareholders.Answer:There are two ways a corporation can distribute cash to its shareholders: by paying acash dividend or by repurchasing the company’s shares in the stock market. When acompany pays a cash dividend, all shareholders receive cash in amounts proportional to the number of shares they own.In a share repurchase, the company pays cash to buy shares of its stock in the stockmarket, thereby reducing the number of shares outstanding. In this case, onlyshareholders who choose to sell some of their shares will receive cash.2.Does growth “per se” add value to the current price of ashare? If not, what does add valueto a share’s current price?Answer:Growth per se does not add value. What adds value is the opportunity to invest inprojects that can earn rates of return in excess of the required rate, k. When a firm’sfuture investment opportunities yield a rate of return equal to k, the stock’s value can be estimated using the formula P0 = E1/k.3.In order to evaluate the stock of DippinDonuts, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $15 per share are assumed, as are anearnings retention rate of 70% and an expected rate of return on future investments of 18% per year. If the market capitalization rate is 15% per year, what is the implied net present value of future investments?Answer:g = 0.7 x 0.18= 12.6%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= 4.50/(0.15-0.126)= $187.50Next find P0 with the formula P0 = E1/k:= 15/0.15= $100The NPV of future investments is the difference between these two values: $187.50 –$100 = $87.504.In order to evaluate the stock of EasyStreet Corporation, an analyst uses the constant growthdiscounted dividend model. Expected earnings of $16 per share are assumed, as are anearnings retention rate of 60% and expected rate of return on future investments of 17% per year. If the market capitalization rate is 14% per year, what is the implied net present value of future investments?Answer:g = 0.6 X 0.17= 10.2%Use the constant growth formula to solve for P0:P0 = D1/(k – g)= $6.40/(0.14 – 0.102)= $168.42Next find P0 with the formula P0 = E1/k:= 16/0.14= $114.29The NPV of future investments is the difference between the two values: $168.42 –$114.29 = $54.13./doc/2e3789790.html,anic Earth stock is expected to pay a dividend of $2.70 per share a year from now, and itsdividends are expected to grow by 7% per year thereafter. If its price is now $30 per share, what must be the market capitalization rate?Answer:Use the constant growth formula to solve for k:P0 = D1/(k – g)30 = 2.70/(k – 0.07)k = 16%6.Walch stock currently sells for $27.62 a share, and is expected to pay a dividend of D1 a yearfrom now. If its dividends are expected to grow by 4.5% per year thereafter and thecapitalization rate is 15% per year, what is the value of D1?Answer:Use the constant growth formula to solve for D1:P0 = D1/(k – g)D1 = P0(k – g)= $27.62(0.15 – 0.045)= $2.907.Discuss how outside investors may interpret an increase ina corporation’s cash dividend asopposed to a decrease.Answer:Inves tors may interpret an increase in a corporation’s cash dividend as a positive sign since it would suggest that management is confident the earnings can be sustained in the future.The result is most likely to be an increase in stock price. A decrease could be viewed as a bad signal that will most likely cause a decline in stock price.8.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther Assets: $11 million Equity: $11 millionTotal: $14 million T otal: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing pays a cash dividend of $2.50 per share, what will the balance sheet look like afterward?Answer:Balance sheet after payment of cash dividend:Assets Liabilities and Shareholders’ EquityCash: $1.9 million Debt: $3 millionOther assets: $11 million Equity: $9.9 millionTotal: $12.9 million Total: $12.9 millionNumber of shares outstanding = 440,000Price per share = $22.509.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ EquityCash: $3 million Debt: $3 millionOther assets: $11 million Equity: $11 millionTotal: $14 million T otal: $14 millionNumber of shares outstanding = 440,000Price per share = $25If SureThing Corporation repurchases shares worth $2.5 million, what will the new balance sheet for SureThing Corporation look like?Answer:Balance sheet after share repurchase:Assets Liabilities and Shareholders’ EquityCash: $0.5 million Debt: $3 millionOther assets: $11 million Equity: $8.5 millionTotal: $11.5 million Total: $11.5 million Number of shares outstanding = 340,000Price per share = $2510.Consider the balance sheet of SureThing Corporation:Assets Liabilities and Shareholders’ Eq uity Cash: $3 million Debt: $3 million Other assets: $11 million Equity: $11 million Total: $14 million Total: $14 million Number of shares outstanding = 440,000Price per share = $25If SureThing is paying a 20% stock dividend, what will the number of shares outstanding be?What will be the price per share?What would be the effect of a two-for-one stock split?Answer:After paying a 20% stock dividend:Number of shares outstanding = 528,000Price per share = $20.83After a two-for-one stock split:Number of shares outstanding = 880,000Price per share = $12.5011.Gough Fraser is considering purchasing the stock of ASIOA Companies, which he plans tohold indefinitely. ASIOA just paid an annual dividend of $3.00 and the price of the stock is $48 per share. The earnings and dividends of the company are expected to grow forever at a rate of 6 percent per year. What annual rate of return does Gough expect on his investment?Answer:D1 is 3.00. Given 6% annual growth, D1 = 3.00 x 1.06 = 4.80.Use the constant growth formula to solve for k:P0 = D1/(k – g)48 = 4.80/(k – 0.06)48k – 2.88 = 4.8048k = 7.68k = 16%12.Halpert Corporation would like to raise $100,000,000 by issuing preferred stock. Thepreferred stock will have a par value of $1,000 per share and pay a dividend of $48 per year.If the required rate of return for this stock is 15 percent, how many shares of preferred stock must Halpert issue?Answer:P0 = D1kP0 = $480.15= $320Number of shares = $100,000,000/$320= 312,500 shares13.Aslan Inc. just paid a dividend of $5.00 per share. This dividend is expected to grow at asupernormal rate of 20 percent per year for the next two years. It is then expected to grow at a rate of 5 percent per year forever. The appropriate discount rate for Aslan’s stock is 17 percent. What is the price of the stock?Answer:D0 = $5D1 = $5(1.2)= $6.00D2 = $6.00(1.2)= $7.20D3 = $7.20(1.05) = $7.56P2 = D3/(k – g)= $7.56/(0.17 – 0.05)= $63.00P0 = $6.00/(1.17) + ($7.20 + $63.00)/(1.17)2= $56.4114.Druids Corp. just paid an annual dividend of $2.50. Dividends are expected to grow at aconstant rate forever. The price of the stock is currently $38.40. The required rate of return for this stock is 15 percent. What is the expected growth rate of Druids dividend?Answer:D0 = $2.50D1 = $2.50(1 + g)P0 = $38.40k = 15%Use the constant growth formula to solve for g:P0 = D1/(k – g)38.40 = 2.50(1 + g)/(0.15 – g)5.76 – 38.4g = 2.5 + 2.5g3.26 = 40.9g0.0797 = g15.The common stock of Century Inc. is expected to pay a dividend of $1.80 one year fromtoday. After that the dividend is expected to grow at a rate of 15 percent per year for two years and then at a rate of 5 percent per year forever. If the required rate of return for this stock is 15 percent, what is the current price?Answer:D1 = $1.80D2 = $2.07D3 = $2.38D4 = $2.50P3 = $2.50/(0.15 – 0.05)= $25.00P0 = 1.80/(1.15) + 2.07/ (1.15)2 + (2.38 + 25.00)/(1.15)3 = $21.14。
兹维博迪金融学第二版试题库17TB
Chapter SeventeenReal OptionsThis chapter contains 28 multiple choice questions, 10 short problems, and 5 longer problems.Multiple Choice1.There is a basic similarity between the options involved in investment projects and ________ optionson stocks.(a)switch(b)call(c)abandon(d)expandAnswer: (b)2.In comparing the similarity between options in investment projects and call options on stocks, thedecision maker has the ________ to buy something of value at a future date.(a)obligation(b)right but not the obligation(c)desire but not the right(d)financial meansAnswer: (b)3.In general, the ________ the uncertainty about future outcomes, the ________ the need to accountexplicitly for any options.(a)greater; greater(b)greater; less(c)less; greater(d)none of the aboveAnswer: (a)4.A(n) ________ in the uncertainty about a project's future payoffs ________ its value.(a)increase, decreases(b)increase, increases(c)decrease increases(d)increase, does not changeAnswer: (b)5.An option to ________ a project corresponds to an American put option.(a)defer(b)abandon(c)rescale(d)reverseAnswer: (b)6.An option to ________ allows the project to be expanded or contracted for some fixed price.(a)defer(b)abandon(c)rescale(d)reverseAnswer: (c)7.An option to ________ allows the postponement of the beginning of an investment project.(a)defer(b)abandon(c)rescale(d)reverseAnswer: (a)8.An option to ________ corresponds to an American call option.(a)defer(b)abandon(c)rescale(d)reverseAnswer: (a)9.If a company’s investment in a new project has a salvage va lue of zero, this investment is said to be________.(a)uncertain(b)irreversible(c)deferrable(d)mutableAnswer: (b)10.The option to ________ an investment decision is valuable even if the expected price in the future isequal to the current price.(a)defer(b)reverse(c)renew(d)obligateAnswer: (a)11.Taking management's flexibility explicitly into account ________ a project’s NPV.(a)decreases(b)increases(c)does not change(d)reversesAnswer: (b)12.________ can be used to determine a set of possible NPVs, with respect to variables within an project,to determine if the optimal strategy is to abandon, defer, or immediately proceed with the investment.(a)A decision tree(b)The APV method(c)Probability mapping(d)Sensitivity analysisAnswer: (d)13.The ________ formula can be applied to capital budgeting problems.(a)Dividend valuation(b)Capital structure valuation(c)Black-Scholes(d)all of the aboveAnswer: (c)14.In a capital budgeting framework, we can use the same valuation models developed to price________.(a)European exchange rate futures(b)American exchange rate futures(c)European preferred stock valuations(d)European call options on a stockAnswer: (d)15.In the context of option pricing, the value of flexibility ________ the volatility of the project.(a)undermines(b)is unaffected by(c)increases with(d)decreases withAnswer: (c)16.Failing to take into account the managerial options to delay the start of a project, or once started toexpand or abandon it, will cause an analyst evaluating the project to ________.(a)overestimate its NPV(b)underestimate its NPV(c)overestimate its initial costs(d)underestimate its initial costsAnswer: (b)17.A company is considering a new project that would require an initial investment of $5 million and inits second phase one year from now another investment of $105 million t o build a plant. From today’s perspective the value of the completed plant a year from now is a random variable with a mean of $110 million and a standard deviation of 0.2. The riskless interest rate is 5% per year. If one were to evaluate this investment with the Black-Scholes formula in order to take its flexibility into account, which of the following is true?(a)the value of E to be used in the formula is $110 million(b)the value of S to be used in the formula is $100 million(c)the value of C is found to be $8.02 million(d)none of the aboveAnswer: (b)18.True Blue Inc. is considering acquiring another firm, Mellow Yellow Inc. Let us assume that they areboth 100% equity financed firms, that is, neither firm has any debt outstanding. Each firm has 1 million shares of common stock outstanding that can be freely bought and sold in a competitive market. The current market value of Mellow Yellow Inc. is $50 million and its standard deviation is0.2. Suppose Mellow Yellow’s management offers True Blue an option to ac quire 100% of MellowYellow’s shares a year from now for $55 million. The riskless interest rate is 5% per year. If the option costs $2.25 million, the NPV is:(a)$5.27 million(b)$3.02 million(c)$0.77 million(d)$0Answer: (c)19.Consider the example in question 17. Assuming all other data remains the same, what would the NPVbe if the price to acquire Mellow Yellow’s stock were to $58 million instead of $55 million?(a)–$5.02 million(b)–$0.15 million(c)$2.1 million(d)$4.35 millionAnswer: (b)20.Consider the example in question 17. Assuming all other data remains the same, what would the NPVbe if Mellow Yellow’s standard deviation were 0.3 instead of 0.2?(a)(b)$0.85 million(c)$2.76 million(d)$5.01 millionAnswer: (c)21.Consider the example in question 17. What would the NPV be is the price to acquire Mellow Yellowwere $62 million instead of $55 million and its standard deviation were 0.4 instead of 0.2? Assume all other data remains the same.(a)$2.61 million(b)$4.86 million(c)$7.11 million(d)The NPV is the same as for the original data in question 17.Answer: (a)22.An option to abandon a project is an example of a(n) ________ option.(a)explicit purchase(b)managerial(c)call(d)irreversibleAnswer: (b)23.If a company is considering the acquisition of another company and has the opportunity to do so ayear from now the type of option this capital budgeting may entail is called a(n) ________ option.(a)explicit purchase(b)technical(c)growth(d)fundamentalAnswer: (a)24.Recognizing the similarity between call options and managerial options is important because________.(a)it clarifies the role of uncertainty in evaluating projects(b)it structures the analysis of investment projects as a sequence of management decisions overtime(c)it gives us a method for estimating the option value of projects by applying the quantitativemodels developed for valuing call options on stocks(d)all of the aboveAnswer: (d)e the Black-Scholes formula to calculate the value of an option where T = 2 years, = 0.3, theexercise price = $200 million, the current price is $181.41, and the riskless interest rate is 5% per year.(a)$15.86 million(b)$30.22 million(c)$30.66 million(d)$51.71 millionAnswer: (c)26.Consider Benedick Corp., which has the opportunity to invest in a hydro-electricity plant. An initialoutlay of $19 million is required to build the facility to house the equipment. In the second phase, one year from now, equipment costing $210 million must be purchased. Suppose from today's perspective the value of the plant a year from now is a random variable with a mean of $240 million and astandard deviation of 0.35 million. Use the Black-Scholes formula to compute the value of the option.(a)$22.15 million(b)$27.65 million(c)$27.89 million(d)$40.44 millionAnswer: (c)27.What is the NPV of the project in question 27?(a)$19 million(b)$8.89 million(c)$8.65 million(d)$3.15 millionAnswer: (b)28.Consider the scenario in question 27. If the standard deviation is changed to 0.25, what happens to thevalue of the option?(a)It is unchanged(b)It increases by approximately $8 million(c)It decreases by approximately $8 million(d)It is reduced by approximately 10%Answer: (c)pute the NPV of the project from question 27 if its standard deviation is now 0.25.(a)$0(b)$1 million(c)$12 million(d)$16.65 millionAnswer: (b)Short Problems1.What are some important “real options” a manger has with regards to investment projects? Why is itimportant to be aware of them?Answer:Many, if not most, corporate investment opportunities present the ability for managers to delaythe start of a project, or once started, to expand it or abandon it. Failure to take into accountthese real options will cause an analyst evaluating the project to underestimate its NPV.2.Discuss deferral, abandon, rescale options.Answer:The option to postpone the beginning of an investment project is a deferral option and can bemapped nicely into an American call option. Here the exercise price of the option is the project’s required initial investment and the maturity date of the option corresponds to the final decision point beyond which the decision cannot be postponed. An option to abandon a project corresponds to an American put option. The exercise price for the option would be the amount that must be paid to terminate the project. This could be a contracted amount or simply the market value of theproject if it is liquidated. On both sides of a deferral option and an option to abandon may liepossibilities to exercise an option to rescale the project where the project can be expanded orcontracted for some fixed price.3.What is the fundamental similarity between options in investment projects and call options on stocks?Answer:The fundamental similarity is that the decision maker has the right but not the obligation tobuy something of value at a future date.4.Discuss irreversibility in terms of an investment decision.Answer:Consider the situation of a company contemplating whether to invest in a factory. The investment is completely irreversible, meaning that the custom-built facility can be used to produce noalternative product nor can it be modified to do so except at a prohibitive cost. Hence after theinitial investment the factory immediately has no value in an alternative use. This is for practical purposes equivalent to assuming the salvage value is zero. Once the investment is undertaken the costs are sunk and cannot be recovered.ing the Black-Scholes formula, calculate the value of an option where T = 3 years, the standarddeviation of the annualized continuously compounded rate of return on stock = 0.3, the exercise price = $400 million, the current price of the stock is $350 million, and the riskless interest rate is 5% per year.Answer:S E r T σResult6. A new project would required a company to make an initial outlay of $125 million. In 3 years, phasetwo of the project would require the company to purchase buildings and equipment at a cost of $400 million. From today’s perspective the value of phase two when completed is a random variable with a mean of $425 million and a standard deviation of 0.4. The riskless interest rate is 5% per year.Compute the NPV of the investment. Should the project be undertaken?Answer:S E r T σResultNPV = C – Initial investment= $94.09 – $125 million= –$30.91 millionA project should only be undertaken if it has a positive NPV, so this project should not bepursued.7.See question 6. What happens to the NPV of the investment project if the volatility = 0.6?Answer:S E r T σResultNPV = C – Initial investment= $137.45 – $125 million= $12.44 millionThe increase in volatility results in an increases value of the call, making the NPV positive.8.Consider a firm, McIntyre Oil Corporation, which is considering the acquisition of another firm,Argyll Inc. Let us assume that both of these firms are both 100% equity financed firms, that is, neither firm has any debt outstanding. Each firm has 1 million shares of common stock outstanding that can be freely bought and sold in a competitive market. The current value of Argyll Inc. is $80 million and its standard deviation is 0.283. The riskless interest rate is 6%. Suppose Argyll'smanagement offers McIntyre Corp. an option to acquire 100% of Argyll's shares two years from now for $90 million. What is the value of the option?Answer:S E r T σResult9.Refer to question 8. Argyll offers the option to McIntyre at a price of $10 million. Is this investmentworthwhile to McIntyre?Answer:NPV = C – Initial investment= $12.76 million – $10 million= $2.76 millionSince the NPV is positive, the project is worthwhile10.A company is considering a new project that would require an initial investment of $5 million and inits second phase one year from now another investment of $105 mil lion to build a plant. From today’s perspective the value of the completed plant a year from now is a random variable with a mean of $110 million and a standard deviation of 0.2. The riskless interest rate is 5% per year. Discuss how one should view this situation in the context of the Black-Scholes formula.Answer:By undertaking the first phase of the project, the company would in effect be paying $5 million to “buy an option” that will mature in one year. The option is to undertake phase two of the pr oject, and its “exercise price” is $105 million. The present value of the completed project is $100 million.The Black-Scholes formula says that this option is worth approximately $8 million. The project, therefore, has a positive NPV of approximately $3 m illion, although if we ignore management’s option to discontinue the project after the first year and do a conventional DCF analysis the NPV is negative. Our conclusion is that taking management’s flexibility explicitly into account increases a project’s NPV. Moreover, from the theory of option pricing, we know that the value of flexibility increases with the volatility of the project.Longer Problems1.Discuss why it is important to recognize the similarities between call options and managerial or realoptions.Answer:(1) It helps in structuring the analysis of the investment project as a sequence ofmanagerial decisions over time.(2) It clarifies the role of uncertainty in evaluating projects.(3) It gives us a method for estimating the option value of projects by applying thequantitative models developed for valuing call options on stocks.2.Discuss the more complex real options of switching options and compound options.Answer:More complex real options would include switching options, which requires the payment of a fixed amount to change operating or production modes. An example would be an electric generatingplant that could switch between using alternative sources of fuel (perhaps coal and natural gas).The option to close down and restart a production line, or exit and then reenter a market are also examples of switching options that can be modeled as portfolios of American put and call options.Complex investment projects, which are typically organized into a set of alternative stages withcritical decision at the end of each stage, can be analyzed as compound options in which options on options exist. For example, a major drug company’s product cycles consist of a research stage in which alternative compounds are tested, a product development stage in which clinical trials are conducted, and a marketing stage in which the final product is brought to market. Each stageinvolves new investments that are conditional on exercise of the option to proceed with the previous stage.3.Discuss real options in the context of the movie industry.Answer:The movie industry provides a good example of the importance of real-option values in evaluating investment projects. Often a movie studio will buy the rights to a movie script and then wait todecide if and when to actually produce it. Thus, the studio has the option to wait. Once production starts, and at every subsequent step in the process, the studio has the option to discontinue theproject in response to information about cost overruns or changing tastes of the moviegoing public.Another very important managerial option in the movie business is the option of the film studio to make sequels. If the original movie turns out to be a success, then the studio has the exclusive right to make additional movies with the same title and characters. The option to make sequels can be a significant part of a movie project’s total value.4.W. Jofish Inc. is considering the acquisition of another firm, B.B. John Corp. Let us assume that bothof these firms are both 100% equity financed firms, that is, neither firm has any debt outstanding.Each firm has 1 million shares of common stock outstanding that can be freely bought and sold in a competitive market. The current value of B.B. John Corp. is $120 million and its standard deviation is0.3. The riskless interest rate is 5%. Suppose B.B. John Corp.’s management offers W. Jofish Inc. anoption to acquire 100% of B.B. John’s shares two years from now for $135 million. The option is priced at $10 million. What is the value of the option? Is this investment worthwhile to W. Jofish?How would the evaluation change if the standard deviation of B.B. John were actually 0.5 instead of0.3?Answer:S E r T σResultNPV = C – Initial investment= $10.98 million – $10 million= $0.98 millionSince the NPV is positive, the project is worthwhile.The value of flexibility increases with the volatility of the project, so we would expect the NPV to increase if the standard deviation increases:S E r T σResultNPV = C – Initial investment= $20.53 million – $10 million= $10.53 millionAs expected, the increase in volatility dramatically increases the NPV of the project.5. A company is considering a new project that would require an initial investment of $25 million and inits second phase one year from now another investment of $210 million to build a plant. From t oday’s perspective the value of the completed plant a year from now is a random variable with a mean of $225 million and a standard deviation of 0.35. The riskless interest rate is 5% per year. What is the NPV of the project?Answer:S E r T ResultNPV = C – Initial investment= $27.89 million – $25 million= $2.89 millionSince the project has a positive NPV, the company should pursue it.。
兹维博迪金融学第二版试题库08TB
Chapter EightValuation of Known Cash Flows: BondsThis chapter contains 50 multiple choice questions, 18 short problems and 9 longer problems.Multiple Choice1. A ________ is a quantitative method used to infer an asset's value from market information about theprices of other assets and market interest rates.(a)fixed model(b)perpetual valuation model(c)valuation model(d)variable modelAnswer: (c)2.________ are examples of fixed-income securities.(a)Common stock and pension funds(b)Mortgages and pension annuities(c)Mutual funds and common stock(d)Preferred stock and common stockAnswer: (b)3.Consider a fixed-income security that promises to pay $150 each year for the next five years. Howmuch is this five-year annuity worth if the appropriate discount rate is 7% per year?(a)$534.74(b)$615.03(c)$802.50(d)$867.96Answer: (b)8-14.Consider a fixed-income security that promises to pay $120 each year for the next four years.Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year.(a)$415.81(b)$508.80(c)$531.85(d)$629.06Answer: (a)5.The price of any existing fixed-income security ________ when market interest rates rise becauseinvestors will only be willing to ________ them if they offer a competitive yield.(a)rises; buy(b)rises; sell(c)falls; buy(d)falls; sellAnswer: (c)6. A fall in interest rates causes a ________ in the market value of a fixed-income security.(a)a rise(b)a fall(c)no change(d)it cannot be determined from the information givenAnswer: (a)7. A change in market interest rates causes ________ in the market values of all existing contractspromising fixed payments in the future.(a)a change in the same direction(b)a change in the opposite direction(c)no change(d)an unpredictable variationAnswer: (b)8-28.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate rises from 5% to 6% per year?(a)A rise of 1% causes a drop of $4.87 in market value.(b)A rise of 1% causes a rise of $4.87 in market value.(c)A rise of 1% causes a drop of $8.09 in market value.(d)A rise of 1% causes a rise of $8.09 in market value.Answer: (c)9.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate falls from 6% to 5% per year?(a)A fall of 1% causes a drop of $4.87 in market value.(b)A fall of 1% causes a rise of $4.87 in market value.(c)A fall of 1% causes a drop of $8.09 in market value.(d)A fall of 1% causes a rise of $8.09 in market value.Answer: (d)10.A zero-coupon bond is also known as ________.(a)a perpetual bond(b)a pure discount bond(c)a market rebate(d)an infinite bondAnswer: (b)11.The promised cash payment on a pure discount bond is called its ________.(a)face value(b)par value(c)fixed interest(d)both a and bAnswer: (d)8-312.What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000?(a)8.50%(b)9.09%(c)15.00%(d)17.65%Answer: (d)13.What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000?(a)5.26%(b)10.00%(c)11.11%(d)15.79%Answer: (c)14.Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850,compute its annualized yield.(a)1.17%(b)4.15%(c)5.57%(d)17.60%Answer: (b)15.Consider a three-year pure discount bond with a face value of $1,000. If its current price is $900,compute its annualized yield.(a)1.036%(b)1.111%(c)3.57%(d)5.41%Answer: (c)8-416.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, whatis its annualized yield?(a)5.09%(b)2.82%(c)1.28%(d)1.05%Answer: (a)17.A ________ obligates the issuer to make periodic payments of interest to the bondholder for the lifeof the bond and then to pay the face value of the bond when the bond matures.(a)pure discount(b)zero-coupon(c)perpetual bond(d)coupon bondAnswer: (d)18.The ________ of the bond is interest rate applied to the ________ of the bond to compute theperiodic payment.(a)coupon rate; face value(b)maturity rate; face value(c)coupon rate; price(d)maturity rate; priceAnswer: (a)19.For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment?(a)$100(b)$110(c)$1,000(d)$1,100Answer: (b)8-520.For a bond with a face value of $1,000 and a coupon rate of 9%, what is the annual coupon payment?(a)$90(b)$99(c)$1,000(d)$1,190Answer: (a)21.If the market price of a coupon bond equals its face value, it is also termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (a)22.If the bond’s market price is higher than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (b)23.If the bond’s market price is lower than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-par bondAnswer: (c)8-624.If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)9.41%(c)17.65%(d)27.05%Answer: (b)25.If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of $1,000, whatis its current yield?(a)8.90%(b)9.82%(c)10.71%(d)11.00%Answer: (b)26.If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)8.89%(c)11.00%(d)20.00%Answer: (b)27.The ________ is the discount rate that makes the present value of the bond’s stream of promised cashpayments equal to its price.(a)compound rate(b)yield to maturity(c)coupon rate(d)current yieldAnswer: (b)8-728.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,020. What is its yield to maturity?(a)8.82%(b)9.00%(c)10.78%(d)11.00%Answer: (a)29.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,050. What is its yield to maturity?(a)4.76%(b)5.71%(c)6.00%(d)10.48%Answer: (b)30.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What is its yield to maturity?(a)5.62%(b)9.63%(c)11.58%(d)12.40%Answer: (d)31.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,100. What is its yield to maturity?(a)3.87%(b)8.47%(c)10.00%(d)13.62%Answer: (b)8-832.Suppose you are considering buying a six-year 10% coupon bond with a face value of $1,000 and acurrent price of $1,100. What are the current yield and yield to maturity of this bond?(a)CY = 11.00%; YTM = 12.23%(b)CY = 12.23%; YTM = 11.00%(c)CY = 7.85%; YTM = 9.09%(d)CY = 9.09%; YTM = 7.85%Answer (d)33.Suppose you are considering buying a seven-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What are the current yield and yield to maturity of this coupon bond?(a)CY = 12.10%; YTM = 11.58%(b)CY = 11.58%; YTM = 12.10%(c)CY = 9.92%; YTM = 10.45%(d)CY = 10.45%; YTM = 9.92%Answer: (b)34.Over time bond prices ________ their face value. Before maturity, bond prices can ________ a greatdeal as a result of changes in market interest rates.(a)diverge from; fluctuate(b)converge toward; flatten out(c)converge toward; fluctuate(d)diverge from; flatten outAnswer: (c)35.When the yield curve is not flat, bonds of the same ________ with different coupon rates have________ yields to maturity.(a)maturity, different(b)maturity, identical(c)callability, different(d)callability, identicalAnswer: (a)8-936.Bonds offering the same future stream of promised payments can differ in a number of ways, but thetwo most important are ________ and ________.(a)taxability, issue origin(b)type of issuer, default risk(c)type of issuer, taxability(d)taxability, default riskAnswer: (d)37.A ________ is one that gives the holder of a bond issued by a corporation the right to convert thebond into a pre-specified number of shares of common stock.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (b)38.A ________ is one that gives the issuer of the bond the right to redeem it before the final maturitydate.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (a)39.Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At the time ofissuance, the yield to maturity was 6 percent and the bonds sold at par. The bonds are currently selling at 110 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?(a)3.77%(b)5.18%(c)5.27%(d)5.46%Answer: (b)8-1040.Potemkin Corporation plans to raise $10,000,000 in funds by issuing zero coupon $1,000 par valuebonds with a 25 year maturity. Potemkin Corporation is able to issue these bonds at an after tax cost of debt of 12%. To the nearest whole number, how many bonds must Potemkin Corporation issue?(a)10,000 bonds(b)42,919 bonds(c)125,837 bonds(d)170,000 bondsAnswer: (d)41.Calculate the years to maturity for a bond based on the following information. The bond trades at$950, it has a par value of $1,000, a coupon rate of 11%, and a required rate of return of 12%.(a)8 years(b)12 years(c)15 years(d)16 yearsAnswer: (a)pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, have 20 years remaining until maturity, a 12 percent coupon rate, anda yield to maturity of 10.5 percent.(a)$858.42(b)$982.47(c)$1,119.52(d)$1,124.41Answer: (d)pute the yield to maturity of Arundel bonds based on the following information. Arundel bondshave a $1,000 par value, 25 years remaining until maturity, an 11% coupon rate, and a current market price of $1,187.(a)4.55%(b)9.08%(c)9.27%(d)13.17%Answer: (b)8-1144.When prices of U.S Treasury strips are listed, principal from a Treasury bond is denoted by the letters________.(a)ci(b)tb(c)bp(d)npAnswer: (c)45.The ________ is the price at which dealers in Treasury bonds are willing to sell.(a)bid price(b)asked yield(c)ask price(d)maturity priceAnswer: (c)46.The ________ is the price at which dealers are willing to buy.(a)bid price(b)ask price(c)asked yield(d)maturity priceAnswer: (a)47.The bid price of a bond is always ________ the ask price.(a)greater than(b)less than(c)identical to(d)it varies from case to caseAnswer: (b)8-1248.The ________ of a bond price measures the sensitivity of the bond price to a change in the yield tomaturity.(a)callability(b)convertibility(c)immutability(d)elasticityAnswer: (d)49.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates drop to 5% and so does the yield on your bond. What is theproportional change in the price of your bond?(a)a decrease of 26.74%(b)a decrease of 21.10%(c)an increase of 26.74(d)an increase of 21.20Answer: (c)50.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates rise to 5% and so does the yield on your bond. What is the elasticityof the bond price to the change in the yield?(a)–0.62%(b)–1.27%(c)–1.60%(d)–2.67%Answer: (c)8-13Short Problems1.Consider a five-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate rises from 5% to 6% per year.Answer:n i PV PMT Result5 5 ? $120 PV = $519.54n i PV PMT Result5 6 ? $120 PV = $505.48The price drops by $14.06.2.Consider a four-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate falls from 7% to 6% per year.Answer:n i PV PMT Result4 7 ? $120 PV = $406.47n i PV PMT Result4 6 ? $120 PV = $415.81The price increases by $9.34.3.Discuss the general principles about the relation between prices and yields of coupon bonds.Answer:Principle #1: Par Bonds.If a bond's price equals its face value, then its yield equals its coupon rate.Principle #2: Premium Bonds.If a coupon bond has a price higher than its face value, its yield to maturity is less than its current yield, which is in turn less than its coupon rate.Principle #3: Discount Bonds.If a coupon bond has a price lower than its face value, its yield to maturity is greater than its current yield, which is in turn greater than its coupon rate.8-144.List some reasons why differences in the prices of fixed-income securities of a given maturity mayarise.Answer:Differences in the prices of fixed-income securities of a given maturity may arise due to differences in coupon rates, default risk, tax treatment, callability and convertibility.5.Explain why it is important to have a method for valuation of fixed-income contracts.Answer:(1) The parties to the contracts need to have an agreed-upon valuation procedure insetting the terms of the contracts at the outset.(2) Since market factors determining the value of fixed-income contracts change overtime, both buyers and sellers have to reevaluate them each time they are traded.6.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $775,compute its annualized yield.Answer:n i PV FV Result5 ? –$775 $1,000 i = 5.23%7. A four-year bond has a coupon rate of 6% per year, a price of $950, and a face value of $1,000.Calculate its current yield and yield to maturity.Answer:Current yield = coupon/price= 60/950= 6.32%To calculate yield to maturity:n i = YTM PV FV PMT Result4 ? –$950 $1,000 $60 YTM = 7.49%8-158.What is the current price of a bond that has a coupon rate of 7%, a return rate of 8%, and a face valueof $1,000? Assume that this bond will mature in five years. Compare the current price of the bond against its face value.Answer:n i = YTM PV FV PMT Result5 8 ? $1,000 $70 PV = $960.07Because the price of the bond is below its face value, it is a discount bond.9. A five-year coupon bond has a coupon rate of 5%, a return rate of 6%, and a face value of $1,000.What is its current price and how does it compare to its face value?Answer:n i = YTM PV FV PMT Result5 6 ? $1,000 $50 PV = $957.88Because the price of the bond is below its face value, it is a discount bond.10.What is the yield to maturity of a five-year coupon bond with a current price of $850, a face value of$1,000, and coupon rate of 7%?Answer:n i = YTM PV FV PMT Result5 ? –$850 $1,000 $70 YTM = 11.07%11.Five years ago, English and Co. issued 30 year coupon bonds with a par value of $1,000. At the timeof issuance, the yield to maturity was 6 percent per year and the bonds sold at par. The bonds are currently selling at 85 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?Answer:Five years ago, the bonds were issued at par, which means at the time yield to maturity equaled coupon rate. So the annual coupon is 0.06 x $1,000 = $60.For the current yield to maturity:n i = YTM PV FV PMT Result25 ? –850 1,000 60 YTM = 7.33%8-1612.Eisenstein Corporation plans to raise $100,000,000 in funds by issuing zero-coupon $1,000 par valuebonds with a 30-year maturity. Assuming that Eisenstein Corporation is able to issue these bonds at an after-tax cost of debt of 11%, how many bonds must Eisenstein Corporation issue?Answer:First, calculate the price of an Eisenstein bond:n i = YTM PV FV PMT Result30 11 ? 1,000 0 PV = $43.68The corporation wants to raise $100,000,000, so it must issue the following number of bonds:$100,000,000/$43.68 = 2,289,377 bonds13.Currently, an Eisenstein bond trades at $1,050 per bond and has a coupon rate of 10%. Assuming thebond matures at a $1,000 value, and the required rate of return is 9.5%, in how many years does an Eisenstein bond mature?Answer:n i = YTM PV FV PMT Result? 9.5 –1,050 1,000 0 n = 33pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, 26 years remaining until maturity, a 13 percent coupon rate, and a current yield to maturity of 11 percent per year.Answer:n i = YTM PV FV PMT Result26 11 ? 1,000 0 PV = $1,169.6915.Health & US Corporation is a major pharmaceutical firm that has recently experienced a marketreevaluation. Currently, the firm has a bond issue outstanding with 18 years to maturity and a coupon rate of 9 percent, with interest paid annually. The required rate of return of this debt issue has risen to15 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 15 ? 1,000 90 PV = $632.328-1716.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays a coupon of $85 annually, matures in 20 years, and has a current price of $985.25.Answer:Coupon rate = 85/1,000= 8.5% per yearCurrent yield = coupon/price= 85/985.25= 8.63%For yield to maturity:n i = YTM PV FV PMT Result20 ? –985.25 1,000 85 YTM = 8.66%17.Suppose you buy a 20-year pure discount bond with a face value of $1,000 and a yield of 7% per year.A day later, market interest rates rise to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result20 7 ? 1,000 0 PV = $258.42n i = YTM PV FV PMT Result20 8 ? 1,000 0 PV = $214.55The price of the bond decreased by $43.87, so the proportional decline in price is $43.87/$258.42 = 16.98%.Elasticity is % change in price over % change in YTM, or –16.98%/14.29% = –1.19.18.As of today, January 1, 2009, Flanders Corporation is holding $10,000,000 in long-term debt at parbonds. The bonds have a par value of $1,000, mature on January 1, 2019, and pay a 5 percent coupon.Calculate the current market value of Flanders’ debt, if the yield to maturity is 7 percent.Answer:Total number of bonds = $10,000,000/$1,000 = 10,000 bondsn i PV FV PMT Result10 7 ? 1,000 50 PV = $859.50The current market value = $859.50 x 10,000= $8,578,8008-18Longer Problems1.Consider the purchase of a 30-year pure discount bond with a face value of $1,000 and a yield of 7%per year. A week later the market interest rate rises to 8% and o does the yield on your bond.Calculate the proportional change in the price of the bond. What basic principle in valuation of known cash flows does this illustrate?Answer:n i PV FV Result30 7 ? $1,000 PV = $131.37n i PV FV Result30 8 ? $1,000 PV = $99.38The price drops by $31.99, so a rise of 1% in market interest rates results in a $31.99/$131.37 =24.35% drop in the price of the bond. The general principle illustrates is that a change in marketinterest rates causes a change in the opposite direction in the market value of the bonds.2.Suppose our want to know the price of a 15-year 8% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) You have been told the yield to maturity is 9%. What is the price? Assume coupons arepaid annually.(b) What is the price if coupons are paid semi-annually and the yield to maturity is 9% peryear?Answer:(a) If coupons are paid annually:n i PV FV PMT Result15 9 ? $1,000 $80 PV = $919.39(b) If coupons are paid semi-annually:n i PV FV PMT Result30 4.5 ? $1,000 $40 PV = $918.563. A media report recently stated that prices of 30-year treasury bonds increased substantially becauseinflation was falling and the Federal Reserve was not expected to increase interest rates. How would you describe this interpretation using discounted cash flow techniques?Answer:Inflation is a component of i, the required return on bonds, so when inflation decreases, idecreases and bond prices rise.8-194.Suppose you want to know the price of a 10-year 7% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) What is the price of this bond if the yield to maturity is 8%?(b) What is the current yield of this coupon bond?(c) What is the price of this bond if coupons are paid semi-annually and the yield to maturityis 8%?Answer:a. n i PV FV PMT Result10 8 ? $1,000 $70 PV = $932.90b. Current yield = coupon/price= 70/932.9= 7.5%c. n i PV FV PMT Result20 4 ? $1,000 $35 PV = $932.055.Suppose you buy a 30-year pure discount bond with a face value of $1,000 and a yield of 9% per year.A day later, market interest rates fall to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result30 9 ? 1,000 0 PV = $75.37n i = YTM PV FV PMT Result30 8 ? 1,000 0 PV = $99.38The price of the bond decreased by $24.01, so the proportional increase in price is $24.01/$75.37 = 31.86%.Elasticity is % change in price over % change in YTM, or 31.86%/–11.11% = –2.87.8-206.As part of a reorganization plan, a bankruptcy court has permitted a new indenture on an outstandingbond issue to be put into effect for Leicester Corporation, which recently filed for bankruptcy. It is known that the issue has $1,000 par value per bond, 15 years to maturity, and a coupon rate of 11 percent paid annually. The reorganization plan allows the following arrangement: In years 1 through 7, there will be no coupon paid (that is, coupon = $0). In years 8 through 15, regular couponpayments will resume. At maturity in year 15, the par value plus the sum of all coupon payments that were not paid during years 1 through 7 must be paid. However, no interest will be paid on thedeferred coupon payments. If the required rate of return is 18 percent, calculate the current price the Leicester bonds would sell for in the market.Answer:Coupon = 0.11 x 1000= $110 per yearThe present value of this cash flow stream, using a discount rate of 18%, is $288.62 per bond.8-217.The Dharma Corporation has recently experienced a market reevaluation. Currently, the firm has abond issue outstanding with 18 years to maturity, a face value of $1,000, and a coupon rate of 10 percent paid annually. The required rate of return on this debt issue has risen to 16 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 16 ? 1,000 100 PV = $650.928.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays $95 interest annually, matures in 25 years, and has a current price of $1,087.75.Answer:Coupon rate = 95/1,000= 9.5% per yearCurrent yield = coupon/price= 95/1,087.75= 8.73%To calculate yield to maturity:n i = YTM PV FV PMT Result25 ? –1,087.75 1,000 95 YTM = 8.63%9.As of today, January 1, 2009, Gala Worldwide is holding $1,000,000 in long-term debt at par bonds.The bonds have a par value of $1,000, mature on January 1, 2029, and pay a 7 percent coupon.Cal culate the current market value of Flanders’ debt, if the yield to maturity is 8 percent.Answer:Total number of bonds = $100,000,000/$1,000 = 100,000 bondsn i PV FV PMT Result20 8 ? 1,000 70 PV = $901.85The current market value = $901.85 x 100,000= $90,185,0008-22。
博迪《金融学》第2版课后习题及详解(金融学)【圣才出品】
博迪《金融学》第2版课后习题及详解第1章金融学一、概念题1．金融学（finance）答：金融学是一项针对人们怎样跨期配置稀缺资源的研究。
其主要研究货币领域的理论及货币资本资源的配置与选择、货币与经济的关系及货币对经济的影响、现代银行体系的理论和经营活动的经济学科，是当代经济学的一个相对独立而又极为重要的分支。
金融学所涵盖的内容极为丰富，诸如货币原理、货币信用与利息原理、金融市场与银行体系、储蓄与投资、保险、信托、证券交易、货币理论、货币政策、汇率及国际金融等。
2．金融体系（financial system）答：金融体系是金融市场以及其他金融机构的集合，这些集合被用于金融合同的订立以及资产和风险的交换。
金融体系是由连接资金盈余者和资金短缺者的一系列金融中介机构和金融市场共同构成的一个有机体，包括股票、债券和其他金融工具的市场、金融中介（如银行和保险公司）、金融服务公司（如金融咨询公司）以及监控管理所有这些单位的管理机构等。
研究金融体系如何发展演变是金融学科的重要方面。
3．资产（assets）答：资产是指个人、公司或者组织拥有的具有商业或交换价值的任何物品，它能在未来产生经济利益，资产有三个非常重要的特征：①能在未来产生经济利益；②由实体控制；③由过去发生的事项或交易产生。
在国民账户体系中，资产是指经济资产，即所有者能对其行使所有权，并在持有或使用期间可以从中获得经济利益的资源或实体。
资产可分为金融资产和非金融资产两大类。
金融资产是指以价值形态或以金融工具形式存在的资产，它包括金融债权以及货币黄金和特别提款权。
非金融资产是指非金融性的资产，它包括生产资产和非生产资产。
在企业财务会计中，资产是指由过去的交易和事项所形成的，并由企业拥有或控制，预期会给企业带来经济利益的资源。
按流动性可分为流动资产和非流动资产两大类。
流动资产是指企业可以在一年或超过一年的一个营业周期内变现或者耗用的资产。
非流动资产是指不能在一年或者超过一年的一个营业周期内变现或耗用的资产。
博迪《金融学》第2版课后习题及详解（居民户的储蓄和投资决策）【圣才出品】
博迪《⾦融学》第2版课后习题及详解（居民户的储蓄和投资决策）【圣才出品】博迪《⾦融学》第2版课后习题及详解第5章居民户的储蓄和投资决策⼀、概念题1．⼈⼒资本（human capital）答：⼈⼒资本是指劳动者受到教育、培训、实践经验、迁移、保健等⽅⾯的投资⽽获得的知识和技能的积累，亦称“⾮物⼒资本”。
由于这种知识与技能可以为其所有者带来⼯资等收益，因⽽形成了⼀种特定的资本——⼈⼒资本。
任何使⼈⼒资本增值的活动都是⼈⼒资本投资，包括医疗和保健、在职⼈员培训、正规教育、成⼈教育与培训、迁移者⼯作搜寻等等。
⼈⼒资本投资的决策是⼀种收益与成本的权衡，其成本包括：实际的费⽤或直接的费⽤、放弃的⼯资报酬以及⼼理成本。
投资的预期收益可能是以各种形式表现出来的，⽐如较⾼的未来收⼊、终⾝⼯作满意程度的提⾼、对娱乐活动欣赏⽔平的提⾼以及欣赏兴趣的增长等。
2．永久性收⼊（permanent income）答：永久性收⼊是指消费者可以预期到的长期收⼊，即预期在较长时期中（3年以上）可以维持的稳定的收⼊流量。
永久性收⼊是弗⾥德曼持久收⼊假说中的重要概念，⼤致可以根据所观察到的若⼲年收⼊的数值的加权平均数来计算，估算持久收⼊的计算公式为：YP T=Y T-1＋θ（Y T－Y T-1）=θY T－（1－θ）Y T-1（0＜θ＜1）式中，YP T为现期永久性收⼊，Y T为现期收⼊，Y T-1为前期收⼊，θ为加权数。
该公式说明，现期的永久性收⼊等于前期收⼊和两个时期收⼊变动的⼀定⽐率，或者说等于现期收⼊和前期收⼊的加权平均数。
加权数的⼤⼩取决于⼈们对未来收⼊的预期，这种预期要根据过去的经验进⾏修改，称为适应性预期。
如果⼈们认为前期和后期收⼊变动的时间较长，θ就⼤；反之，前期和后期收⼊变动的时间较短，θ就⼩。
3．跨期预算约束（inter-temporal budget constraint）答：跨期预算约束是指决定⼀⽣消费计划时⾯临的约束条件，即⼀⽣的消费开⽀和遗产的现值等于包括初始财产和未来劳动收⼊在内的⼀⽣资源的现值。
博迪《金融学》第2版课后习题及详解
博迪《金融学》第2版课后习题及详解博迪的《金融学》第2版是一本广泛使用的金融学教材，其中的课后习题对于学生理解和掌握金融学概念和理论具有重要意义。
本文将选取一些具有代表性的课后习题，并提供详细的解答和分析。
答：金融学是一项针对人们怎样跨期配置稀缺资源的研究。
它涉及货币、投资、证券、银行、保险、基金等领域，主要研究如何在不确定的环境下对资源进行跨时期分配，以实现最大化的收益或满足特定的目标。
金融体系（financial system）答：金融体系是金融市场以及其他金融机构的集合，这些集合被用于金融合同的订立以及资产和风险的交换。
它是由连接资金盈余者和资金短缺者的一系列金融中介机构和金融市场共同构成的一个有机体，包括股票、债券和其他金融工具的市场、金融中介（如银行和保险公司）、金融服务公司（如金融咨询公司）以及监控管理所有这些单位的管理机构等。
研究金融体系如何发展演变是金融学科的重要方面。
假设某个投资者在2022年购买了一张面值为1000元，年利率为5%的债券，并在2023年以1100元的价格卖出。
请问该投资者的年化收益率是多少？(1100 - 1000) / 1000 × 100% = 10%其中，分子部分为投资者获得的收益，分母部分为投资者的初始投资金额。
答：现代金融学的三个主要理论包括资本资产定价模型（CAPM）、有效市场假说（EMH）和现代投资组合理论（MPT）。
资本资产定价模型（CAPM）是一种用来决定资产合理预期收益的模型，它认为资产的预期收益与该资产的系统性风险有关。
在投资决策中，投资者可以通过比较不同资产的预期收益与其系统性风险来确定最优投资组合。
有效市场假说（EMH）认为市场是有效的，即市场上的价格反映了所有可用信息。
根据这个理论，投资者无法通过分析信息来获取超额收益。
然而，在实践中，许多研究表明市场并非完全有效，投资者可以通过分析和利用信息来获得超额收益。
现代投资组合理论（MPT）是由Harry Markowitz于20世纪50年代提出的，它认为投资者应该通过多元化投资来降低风险。
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Chapter EightValuation of Known Cash Flows: BondsThis chapter contains 50 multiple choice questions, 18 short problems and 9 longer problems.Multiple Choice1. A ________ is a quantitative method used to infer an asset's value from market information about theprices of other assets and market interest rates.(a)fixed model(b)perpetual valuation model(c)valuation model(d)variable modelAnswer: (c)2.________ are examples of fixed-income securities.(a)Common stock and pension funds(b)Mortgages and pension annuities(c)Mutual funds and common stock(d)Preferred stock and common stockAnswer: (b)3.Consider a fixed-income security that promises to pay $150 each year for the next five years. Howmuch is this five-year annuity worth if the appropriate discount rate is 7% per year?(a)$534.74(b)$615.03(c)$802.50(d)$867.96Answer: (b)8-14.Consider a fixed-income security that promises to pay $120 each year for the next four years.Calculate the value of this four-year annuity if the appropriate discount rate is 6% per year.(a)$415.81(b)$508.80(c)$531.85(d)$629.06Answer: (a)5.The price of any existing fixed-income security ________ when market interest rates rise becauseinvestors will only be willing to ________ them if they offer a competitive yield.(a)rises; buy(b)rises; sell(c)falls; buy(d)falls; sellAnswer: (c)6. A fall in interest rates causes a ________ in the market value of a fixed-income security.(a)a rise(b)a fall(c)no change(d)it cannot be determined from the information givenAnswer: (a)7. A change in market interest rates causes ________ in the market values of all existing contractspromising fixed payments in the future.(a)a change in the same direction(b)a change in the opposite direction(c)no change(d)an unpredictable variationAnswer: (b)8-28.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate rises from 5% to 6% per year?(a)A rise of 1% causes a drop of $4.87 in market value.(b)A rise of 1% causes a rise of $4.87 in market value.(c)A rise of 1% causes a drop of $8.09 in market value.(d)A rise of 1% causes a rise of $8.09 in market value.Answer: (c)9.What happens to the value of a four-year fixed-income security promising $100 per year if the marketinterest rate falls from 6% to 5% per year?(a)A fall of 1% causes a drop of $4.87 in market value.(b)A fall of 1% causes a rise of $4.87 in market value.(c)A fall of 1% causes a drop of $8.09 in market value.(d)A fall of 1% causes a rise of $8.09 in market value.Answer: (d)10.A zero-coupon bond is also known as ________.(a)a perpetual bond(b)a pure discount bond(c)a market rebate(d)an infinite bondAnswer: (b)11.The promised cash payment on a pure discount bond is called its ________.(a)face value(b)par value(c)fixed interest(d)both a and bAnswer: (d)8-312.What is the yield of a 1-year pure discount bond with a price of $850 and a face value of $1,000?(a)8.50%(b)9.09%(c)15.00%(d)17.65%Answer: (d)13.What is the yield of a 1-year pure discount bond with a price of $900 and a face value of $1,000?(a)5.26%(b)10.00%(c)11.11%(d)15.79%Answer: (c)14.Consider a four-year pure discount bond with a face value of $1,000. If its current price is $850,compute its annualized yield.(a)1.17%(b)4.15%(c)5.57%(d)17.60%Answer: (b)15.Consider a three-year pure discount bond with a face value of $1,000. If its current price is $900,compute its annualized yield.(a)1.036%(b)1.111%(c)3.57%(d)5.41%Answer: (c)8-416.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $780, whatis its annualized yield?(a)5.09%(b)2.82%(c)1.28%(d)1.05%Answer: (a)17.A ________ obligates the issuer to make periodic payments of interest to the bondholder for the lifeof the bond and then to pay the face value of the bond when the bond matures.(a)pure discount(b)zero-coupon(c)perpetual bond(d)coupon bondAnswer: (d)18.The ________ of the bond is interest rate applied to the ________ of the bond to compute theperiodic payment.(a)coupon rate; face value(b)maturity rate; face value(c)coupon rate; price(d)maturity rate; priceAnswer: (a)19.For a bond with a face value of $1,000 and coupon rate of 11%, what is the annual coupon payment?(a)$100(b)$110(c)$1,000(d)$1,100Answer: (b)8-520.For a bond with a face value of $1,000 and a coupon rate of 9%, what is the annual coupon payment?(a)$90(b)$99(c)$1,000(d)$1,190Answer: (a)21.If the market price of a coupon bond equals its face value, it is also termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (a)22.If the bond’s market price is higher than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-discount bondAnswer: (b)23.If the bond’s market price is lower than its face value, it is termed a ________.(a)par bond(b)premium bond(c)discount bond(d)zero-par bondAnswer: (c)8-624.If a bond selling for $850 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)9.41%(c)17.65%(d)27.05%Answer: (b)25.If a bond selling for $1,120 has an annual coupon payment of $110 and a face value of $1,000, whatis its current yield?(a)8.90%(b)9.82%(c)10.71%(d)11.00%Answer: (b)26.If a bond selling for $900 has an annual coupon payment of $80 and a face value of $1,000, what isits current yield?(a)8.00%(b)8.89%(c)11.00%(d)20.00%Answer: (b)27.The ________ is the discount rate that makes the present value of the bond’s stream of promised cashpayments equal to its price.(a)compound rate(b)yield to maturity(c)coupon rate(d)current yieldAnswer: (b)8-728.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,020. What is its yield to maturity?(a)8.82%(b)9.00%(c)10.78%(d)11.00%Answer: (a)29.Suppose you are considering buying a one-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,050. What is its yield to maturity?(a)4.76%(b)5.71%(c)6.00%(d)10.48%Answer: (b)30.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What is its yield to maturity?(a)5.62%(b)9.63%(c)11.58%(d)12.40%Answer: (d)31.Suppose you are considering buying a five-year 11% coupon bond with a face value of $1,000 and acurrent price of $1,100. What is its yield to maturity?(a)3.87%(b)8.47%(c)10.00%(d)13.62%Answer: (b)8-832.Suppose you are considering buying a six-year 10% coupon bond with a face value of $1,000 and acurrent price of $1,100. What are the current yield and yield to maturity of this bond?(a)CY = 11.00%; YTM = 12.23%(b)CY = 12.23%; YTM = 11.00%(c)CY = 7.85%; YTM = 9.09%(d)CY = 9.09%; YTM = 7.85%Answer (d)33.Suppose you are considering buying a seven-year 11% coupon bond with a face value of $1,000 and acurrent price of $950. What are the current yield and yield to maturity of this coupon bond?(a)CY = 12.10%; YTM = 11.58%(b)CY = 11.58%; YTM = 12.10%(c)CY = 9.92%; YTM = 10.45%(d)CY = 10.45%; YTM = 9.92%Answer: (b)34.Over time bond prices ________ their face value. Before maturity, bond prices can ________ a greatdeal as a result of changes in market interest rates.(a)diverge from; fluctuate(b)converge toward; flatten out(c)converge toward; fluctuate(d)diverge from; flatten outAnswer: (c)35.When the yield curve is not flat, bonds of the same ________ with different coupon rates have________ yields to maturity.(a)maturity, different(b)maturity, identical(c)callability, different(d)callability, identicalAnswer: (a)8-936.Bonds offering the same future stream of promised payments can differ in a number of ways, but thetwo most important are ________ and ________.(a)taxability, issue origin(b)type of issuer, default risk(c)type of issuer, taxability(d)taxability, default riskAnswer: (d)37.A ________ is one that gives the holder of a bond issued by a corporation the right to convert thebond into a pre-specified number of shares of common stock.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (b)38.A ________ is one that gives the issuer of the bond the right to redeem it before the final maturitydate.(a)callable bond(b)convertible bond(c)stock bond(d)preferred bondAnswer: (a)39.Five years ago, English and Co. issued 25-year coupon bonds with par value $1,000. At the time ofissuance, the yield to maturity was 6 percent and the bonds sold at par. The bonds are currently selling at 110 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?(a)3.77%(b)5.18%(c)5.27%(d)5.46%Answer: (b)8-1040.Potemkin Corporation plans to raise $10,000,000 in funds by issuing zero coupon $1,000 par valuebonds with a 25 year maturity. Potemkin Corporation is able to issue these bonds at an after tax cost of debt of 12%. To the nearest whole number, how many bonds must Potemkin Corporation issue?(a)10,000 bonds(b)42,919 bonds(c)125,837 bonds(d)170,000 bondsAnswer: (d)41.Calculate the years to maturity for a bond based on the following information. The bond trades at$950, it has a par value of $1,000, a coupon rate of 11%, and a required rate of return of 12%.(a)8 years(b)12 years(c)15 years(d)16 yearsAnswer: (a)pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, have 20 years remaining until maturity, a 12 percent coupon rate, anda yield to maturity of 10.5 percent.(a)$858.42(b)$982.47(c)$1,119.52(d)$1,124.41Answer: (d)pute the yield to maturity of Arundel bonds based on the following information. Arundel bondshave a $1,000 par value, 25 years remaining until maturity, an 11% coupon rate, and a current market price of $1,187.(a)4.55%(b)9.08%(c)9.27%(d)13.17%Answer: (b)8-1144.When prices of U.S Treasury strips are listed, principal from a Treasury bond is denoted by the letters________.(a)ci(b)tb(c)bp(d)npAnswer: (c)45.The ________ is the price at which dealers in Treasury bonds are willing to sell.(a)bid price(b)asked yield(c)ask price(d)maturity priceAnswer: (c)46.The ________ is the price at which dealers are willing to buy.(a)bid price(b)ask price(c)asked yield(d)maturity priceAnswer: (a)47.The bid price of a bond is always ________ the ask price.(a)greater than(b)less than(c)identical to(d)it varies from case to caseAnswer: (b)8-1248.The ________ of a bond price measures the sensitivity of the bond price to a change in the yield tomaturity.(a)callability(b)convertibility(c)immutability(d)elasticityAnswer: (d)49.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates drop to 5% and so does the yield on your bond. What is theproportional change in the price of your bond?(a)a decrease of 26.74%(b)a decrease of 21.10%(c)an increase of 26.74(d)an increase of 21.20Answer: (c)50.Suppose you buy a 25-year pure discount bond with a face value of $1,000 and a yield of 6% per year.A day later market interest rates rise to 5% and so does the yield on your bond. What is the elasticityof the bond price to the change in the yield?(a)–0.62%(b)–1.27%(c)–1.60%(d)–2.67%Answer: (c)8-13Short Problems1.Consider a five-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate rises from 5% to 6% per year.Answer:n i PV PMT Result5 5 ? $120 PV = $519.54n i PV PMT Result5 6 ? $120 PV = $505.48The price drops by $14.06.2.Consider a four-year fixed-income security which promises $120 per year. Calculate the value of thesecurity if the market interest rate falls from 7% to 6% per year.Answer:n i PV PMT Result4 7 ? $120 PV = $406.47n i PV PMT Result4 6 ? $120 PV = $415.81The price increases by $9.34.3.Discuss the general principles about the relation between prices and yields of coupon bonds.Answer:Principle #1: Par Bonds.If a bond's price equals its face value, then its yield equals its coupon rate.Principle #2: Premium Bonds.If a coupon bond has a price higher than its face value, its yield to maturity is less than its current yield, which is in turn less than its coupon rate.Principle #3: Discount Bonds.If a coupon bond has a price lower than its face value, its yield to maturity is greater than its current yield, which is in turn greater than its coupon rate.8-144.List some reasons why differences in the prices of fixed-income securities of a given maturity mayarise.Answer:Differences in the prices of fixed-income securities of a given maturity may arise due to differences in coupon rates, default risk, tax treatment, callability and convertibility.5.Explain why it is important to have a method for valuation of fixed-income contracts.Answer:(1) The parties to the contracts need to have an agreed-upon valuation procedure insetting the terms of the contracts at the outset.(2) Since market factors determining the value of fixed-income contracts change overtime, both buyers and sellers have to reevaluate them each time they are traded.6.Consider a five-year pure discount bond with a face value of $1,000. If its current price is $775,compute its annualized yield.Answer:n i PV FV Result5 ? –$775 $1,000 i = 5.23%7. A four-year bond has a coupon rate of 6% per year, a price of $950, and a face value of $1,000.Calculate its current yield and yield to maturity.Answer:Current yield = coupon/price= 60/950= 6.32%To calculate yield to maturity:n i = YTM PV FV PMT Result4 ? –$950 $1,000 $60 YTM = 7.49%8-158.What is the current price of a bond that has a coupon rate of 7%, a return rate of 8%, and a face valueof $1,000? Assume that this bond will mature in five years. Compare the current price of the bond against its face value.Answer:n i = YTM PV FV PMT Result5 8 ? $1,000 $70 PV = $960.07Because the price of the bond is below its face value, it is a discount bond.9. A five-year coupon bond has a coupon rate of 5%, a return rate of 6%, and a face value of $1,000.What is its current price and how does it compare to its face value?Answer:n i = YTM PV FV PMT Result5 6 ? $1,000 $50 PV = $957.88Because the price of the bond is below its face value, it is a discount bond.10.What is the yield to maturity of a five-year coupon bond with a current price of $850, a face value of$1,000, and coupon rate of 7%?Answer:n i = YTM PV FV PMT Result5 ? –$850 $1,000 $70 YTM = 11.07%11.Five years ago, English and Co. issued 30 year coupon bonds with a par value of $1,000. At the timeof issuance, the yield to maturity was 6 percent per year and the bonds sold at par. The bonds are currently selling at 85 percent of their par value. Assuming that the coupon is paid annually, what is the current yield to maturity?Answer:Five years ago, the bonds were issued at par, which means at the time yield to maturity equaled coupon rate. So the annual coupon is 0.06 x $1,000 = $60.For the current yield to maturity:n i = YTM PV FV PMT Result25 ? –850 1,000 60 YTM = 7.33%8-1612.Eisenstein Corporation plans to raise $100,000,000 in funds by issuing zero-coupon $1,000 par valuebonds with a 30-year maturity. Assuming that Eisenstein Corporation is able to issue these bonds at an after-tax cost of debt of 11%, how many bonds must Eisenstein Corporation issue?Answer:First, calculate the price of an Eisenstein bond:n i = YTM PV FV PMT Result30 11 ? 1,000 0 PV = $43.68The corporation wants to raise $100,000,000, so it must issue the following number of bonds:$100,000,000/$43.68 = 2,289,377 bonds13.Currently, an Eisenstein bond trades at $1,050 per bond and has a coupon rate of 10%. Assuming thebond matures at a $1,000 value, and the required rate of return is 9.5%, in how many years does an Eisenstein bond mature?Answer:n i = YTM PV FV PMT Result? 9.5 –1,050 1,000 0 n = 33pute the current price of Walsingham bonds based on the following information. Walsinghambonds have a $1,000 par value, 26 years remaining until maturity, a 13 percent coupon rate, and a current yield to maturity of 11 percent per year.Answer:n i = YTM PV FV PMT Result26 11 ? 1,000 0 PV = $1,169.6915.Health & US Corporation is a major pharmaceutical firm that has recently experienced a marketreevaluation. Currently, the firm has a bond issue outstanding with 18 years to maturity and a coupon rate of 9 percent, with interest paid annually. The required rate of return of this debt issue has risen to15 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 15 ? 1,000 90 PV = $632.328-1716.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays a coupon of $85 annually, matures in 20 years, and has a current price of $985.25.Answer:Coupon rate = 85/1,000= 8.5% per yearCurrent yield = coupon/price= 85/985.25= 8.63%For yield to maturity:n i = YTM PV FV PMT Result20 ? –985.25 1,000 85 YTM = 8.66%17.Suppose you buy a 20-year pure discount bond with a face value of $1,000 and a yield of 7% per year.A day later, market interest rates rise to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result20 7 ? 1,000 0 PV = $258.42n i = YTM PV FV PMT Result20 8 ? 1,000 0 PV = $214.55The price of the bond decreased by $43.87, so the proportional decline in price is $43.87/$258.42 = 16.98%.Elasticity is % change in price over % change in YTM, or –16.98%/14.29% = –1.19.18.As of today, January 1, 2009, Flanders Corporation is holding $10,000,000 in long-term debt at parbonds. The bonds have a par value of $1,000, mature on January 1, 2019, and pay a 5 percent coupon.Calculate the current market value of Flanders’ debt, if the yield to maturity is 7 percent.Answer:Total number of bonds = $10,000,000/$1,000 = 10,000 bondsn i PV FV PMT Result10 7 ? 1,000 50 PV = $859.50The current market value = $859.50 x 10,000= $8,578,8008-18Longer Problems1.Consider the purchase of a 30-year pure discount bond with a face value of $1,000 and a yield of 7%per year. A week later the market interest rate rises to 8% and o does the yield on your bond.Calculate the proportional change in the price of the bond. What basic principle in valuation of known cash flows does this illustrate?Answer:n i PV FV Result30 7 ? $1,000 PV = $131.37n i PV FV Result30 8 ? $1,000 PV = $99.38The price drops by $31.99, so a rise of 1% in market interest rates results in a $31.99/$131.37 =24.35% drop in the price of the bond. The general principle illustrates is that a change in marketinterest rates causes a change in the opposite direction in the market value of the bonds.2.Suppose our want to know the price of a 15-year 8% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) You have been told the yield to maturity is 9%. What is the price? Assume coupons arepaid annually.(b) What is the price if coupons are paid semi-annually and the yield to maturity is 9% peryear?Answer:(a) If coupons are paid annually:n i PV FV PMT Result15 9 ? $1,000 $80 PV = $919.39(b) If coupons are paid semi-annually:n i PV FV PMT Result30 4.5 ? $1,000 $40 PV = $918.563. A media report recently stated that prices of 30-year treasury bonds increased substantially becauseinflation was falling and the Federal Reserve was not expected to increase interest rates. How would you describe this interpretation using discounted cash flow techniques?Answer:Inflation is a component of i, the required return on bonds, so when inflation decreases, idecreases and bond prices rise.8-194.Suppose you want to know the price of a 10-year 7% coupon bond which pays interest annually. Theface value of the bond is $1,000.(a) What is the price of this bond if the yield to maturity is 8%?(b) What is the current yield of this coupon bond?(c) What is the price of this bond if coupons are paid semi-annually and the yield to maturityis 8%?Answer:a. n i PV FV PMT Result10 8 ? $1,000 $70 PV = $932.90b. Current yield = coupon/price= 70/932.9= 7.5%c. n i PV FV PMT Result20 4 ? $1,000 $35 PV = $932.055.Suppose you buy a 30-year pure discount bond with a face value of $1,000 and a yield of 9% per year.A day later, market interest rates fall to 8% and so does the yield of your bond. What is theproportional change in the price of your bond? What is the elasticity of the bond price to the change in the yield?Answer:n i = YTM PV FV PMT Result30 9 ? 1,000 0 PV = $75.37n i = YTM PV FV PMT Result30 8 ? 1,000 0 PV = $99.38The price of the bond decreased by $24.01, so the proportional increase in price is $24.01/$75.37 = 31.86%.Elasticity is % change in price over % change in YTM, or 31.86%/–11.11% = –2.87.8-206.As part of a reorganization plan, a bankruptcy court has permitted a new indenture on an outstandingbond issue to be put into effect for Leicester Corporation, which recently filed for bankruptcy. It is known that the issue has $1,000 par value per bond, 15 years to maturity, and a coupon rate of 11 percent paid annually. The reorganization plan allows the following arrangement: In years 1 through 7, there will be no coupon paid (that is, coupon = $0). In years 8 through 15, regular couponpayments will resume. At maturity in year 15, the par value plus the sum of all coupon payments that were not paid during years 1 through 7 must be paid. However, no interest will be paid on thedeferred coupon payments. If the required rate of return is 18 percent, calculate the current price the Leicester bonds would sell for in the market.Answer:Coupon = 0.11 x 1000= $110 per yearThe present value of this cash flow stream, using a discount rate of 18%, is $288.62 per bond.8-217.The Dharma Corporation has recently experienced a market reevaluation. Currently, the firm has abond issue outstanding with 18 years to maturity, a face value of $1,000, and a coupon rate of 10 percent paid annually. The required rate of return on this debt issue has risen to 16 percent. Calculate the current price of this bond.Answer:n i = YTM PV FV PMT Result18 16 ? 1,000 100 PV = $650.928.Calculate the coupon rate, current yield, and the yield to maturity for a bond that has $1,000 par value,pays $95 interest annually, matures in 25 years, and has a current price of $1,087.75.Answer:Coupon rate = 95/1,000= 9.5% per yearCurrent yield = coupon/price= 95/1,087.75= 8.73%To calculate yield to maturity:n i = YTM PV FV PMT Result25 ? –1,087.75 1,000 95 YTM = 8.63%9.As of today, January 1, 2009, Gala Worldwide is holding $1,000,000 in long-term debt at par bonds.The bonds have a par value of $1,000, mature on January 1, 2029, and pay a 7 percent coupon.Cal culate the current market value of Flanders’ debt, if the yield to maturity is 8 percent.Answer:Total number of bonds = $100,000,000/$1,000 = 100,000 bondsn i PV FV PMT Result20 8 ? 1,000 70 PV = $901.85The current market value = $901.85 x 100,000= $90,185,0008-22。