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Chapter 4 The Valuation of Long-Term Securities 1. What is the market value of a $1,000 face-value bond with a 10 percent coupon wander when the markets rate of go is 9 percent? AnswerMore than its face value. 2. If an investor may start out to sell a bond prior to maturity and interest judge have risen since the bond was purchased, the investor is exposed to __________. Answerinterest rate risk 3. Beta Budget Brooms will pay a big $2 dividend next year on its joint stock, which is currently selling at $50 per share. What is the markets required return on this investment if the dividend is pass judgment to grow at 5% forever? Answer9% 4.If a coupon bond sells at a large discount from par, then which of the following relationships holds true? (P0 represents the harm of a bond and YTM is the bonds yield to maturity. ) AnswerP0 par and YTM the coupon rate. 5. Market interest rates and the prices of bonds in the secondary market Answergenerally head for the hills in opposite d irections. 6. A $250 face value share of preferred stock pays a $20 annual dividend and investors require a 7% return on this investment. If the security is currently selling for $276, what is the difference ( all overvaluation) between its intrinsic and market value (rounded to the nearest whole dollar)?AnswerApproximately $10. 7. Which of the following accurately describes the behavior of bond prices? AnswerIf interest rates rise so that the market required rate of return increases, the bonds price will fall. Chapter 5 happen and Return 8. The firm of Sun and Moon purchased a share of Acme. com common stock exactly one year ago for $45. During the past year the common stock paid an annual dividend of $2. 40. The firm sold the security today for $85. What is the rate of return the firm has earned? Answer 94. 2%. Return is over the two-year period and includes both dividends and capital gains. Return = ($2. 0) + ($85 $45) / $45 = 94. 2% 9. The ratio of the standard deviation of a dispersion to the mean of that distribution is referred to as __________. Answercoefficient of variation 10. Clive Rodney Megabucks offers friend, Melanie, an interesting gamble involving giving her the choice of the contents in one of two sealed, identical-looking boxes. One box has $20,000 in cash and the second has nothing inside. There is an equal probability that the chosen box contains cash versus nothing. Melanie states that she would not call off the gamble if you offered her a trustworthy $10,999 instead of her choice of box.However, she would be indifferent if $11,000 was offered in place of the risky gamble and she would definitely take $11,001 to call off the gamble. We would describe Melanie as __________ in this instance. Answer having a risk preference 11. Which of the following portfolio statistics statements is correct? AnswerA portfolios expected return is a simple weighted average of expected returns of the individual securities comprising the portfolio. 12. ___ _______ is the variability of return on stocks or portfolios not explained by general market movements. It is avoidable through diversification. AnswerUnsystematic risk 3. What is the genus Beta for an average risk security? What is the beta for a Treasury bill? Answer1 0. Chapter 20 Long-Term Debt, Preferred Stock, and Common Stock 14. The drop fund retirement of a bond issue takes __________. Answer two forms (1) the corporation purchases bonds in the open market and delivers a given number of bonds to the regent or (2) the corporation pays cash to the trustee, who in turn calls the bonds for redemption. By Memory 15. A proposed ramble has normal cash flows. In other words, there is an up-front constitute followed over time by a series of positive cash flows.The projects internal rate of return is 12 percent and its WACC is 10 percent. Which of the following statements is most correct? AnswerThe projects MIRR is greater than 10 percent but less than 12 percent. (In actual exam question, you have to solve and get the answer. ) 16. Project S costs $15,000 and is expected to maturate cash flows of $4,500 per year for 5 years. Project L costs $37,500 and is expected to produce cash flows of $11,100 per year for 5 years. Calculate the two projects NPVs, IRRs and MIRR assuming a cost of capital of 14%. 3 questions. NPV IRR MIRR 17. AnswerStep 1 curb the PMT 2% 0 1 10 -1,000 PMT PMT With a financial calculator, input N = 10, I = 12, PV = -1000, and FV = 0 to obtain PMT = $176. 98. Step 2Calculate the projects MIRR 10% 012910 1. 10 -1,000176. 98176. 98176. 98176. 98 194. 68 . (1. 10)8 . (1. 10)9 . 379. 37 417. 31 1,00010. 93% = MIRRTV = 2,820. 61 FV of inflows With a financial calculator, input N = 10, I = 10, PV = 0, and PMT = -176. 98 to obtain FV = $2,820. 61. Then input N = 10, PV = -1000, PMT = 0, and FV = 2820. 61 to obtain I = MIRR = 10. 93%.