Financial Management

April 28, 2011

1)c The value of a corporate bond can be derived by calculating the present value of the interest
payments and the present value of the face value at the bond¶s
a.c Current yield
b.c Coupon rate
c.c Required rate of return
d.c Effective rate
e.c Prime rate
2)c According to the dividend growth model, if a company were to declare that it would be
never pay dividends, its value would be
a.c Based on earnings
b.c Based on expectations regarding
c.c Higher than similar firms since it could reinvest a greater amount in new projects
d.c Zero
e.c Based on the capital asset pricing model
3)c The growth rate of equity earnings without external financing is equal to
a.c Retention rate plus return on equity
b.c Retention rate minus return on equity
c.c Retention rate dividend by return on equity
d.c Retention rate times return on equity
e.c Return on equity dividend by retention rate
4)c Ridgemont Can Company¶s last dividend was $1.55 and the directors expect to maintain the
historic 5 percent annual rate of growth. You plan to purchase the stock today because you feel that
the growth rate will increase to 8 percent for the next three years and the stock will then reach $22.50
per share.
i.c How much should you be willing to pay for the stock if you require a 15 percent
return?
ii.c How much should you be willing to pay for the stock if you feel that the 8 percent
growth rate can be maintained indefinitely and you require a 15 percent return?
iii.c
5)c The beta for the DAK Corporation is 1.25. If the yield on 30 year T-bonds is 5.65%, and the
long term therm average return on S&P 500 is 11%. Calculate the required rate of return for `
DAKcorporation
6)c If two firms have the same current dividend and the same expected growth rate, their stock
must sell at the same current price or else the market will not be in equilibrium.
7)c The prices of high coupon bonds tend to be less sensitive to a given change in interest rates than low-
coupon bonds, other things equal and held constant.
8)c A junk bond is a high risk, high yield debt instrument typically used to finance a leveraged buyout or a
merger, or to provide financing to a company of questionable financial strength.
9)c A bond that is callable has a chance of being retired earlier than its stated term to maturity, therefore,
if the yield curve is upward sloping, an outstanding callable bond should have a lower yield to
maturity than an otherwise identical noncallabe bond.

c
 10)c ·hich of the following statement is most correct?

a.c All else equal, a bond that has a coupon rate of 10 percent will sell at a discount if the required
rate for a bond similar risk is 8 percent
b.c The price of a discount bond will increase over time, assuming that bond¶s yield to maturity
remains constant overtime.
c.c The total return on a bond for a given year consists only of a coupon interest payments
received.
d.c Both b and c are correct.
e.c All of the statements above are correct
11)c ·hich of the following statements is most correct?
a.c A callable 10 years 10% bond should sell at a higher price than an otherwise similar known
callable bond.
b.c Two bonds have the same maturity and the same coupon rate however one is callable and the
other is not. The difference in prices between the bonds will be grater if the current market
interest rate is below the coupon rate than if it is above the coupon rate
c.c Two bonds have the same maturity and the same coupon rate however one is callable and the
other is not. The difference in prices between the binds will be greater if the current market
interest rate is above the coupon rate if it is below the coupon rate.
d.c The actual life of a callable bond will be equal to or less than thee actual life of a noncallabe
bond with the same maturity date there for if the yield curve is upward slopping the required
rate of return will lower on the callable bond.
e.c Corporate treasures dislike issuing callable bonds because these bonds may require the
company to raise additional funds earlier than would be true if non callable bonds with the
same maturity were used.