past paper
THE UNIVERSITY OF HULL
The Business School
HKU SPACE
Level 6 Examination
1 August 2010
Current Issues in Finance
Date : 1 August 2010
Time Allowed : 2 hours
Answer THREE questions –
At least ONE question from each section.
Standard calculators (non-programmable) may be used.
Tables are attached.
Do not open or turn over this exam paper, or start to write anything until told to by the Invigilator. Starting to write before permitted to do so may be seen as an attempt to use
Unfair Means.
26143
1
SECTION A
Answer at least ONE question from this section
Question 1
You are considering three investments. The first one is a bond that is currently selling in the bond market at $1,200. The bond has a $1,000 par value, pays interest at 14 percent, and is scheduled to mature in 12 years. For bonds of this risk class, you believe that a 12 percent rate of return should be required.
The second investment that you are considering is a preferred stock ($100 par value) that sells for $80 and pays an annual dividend of $12. Your required rate of return for this stock is 14 percent. The last investment is a common stock ($35 par value) that recently paid a $3 dividend. For this stock, the firm’s earnings per share have increased steadily from $4 to $8 in 10 years, which also reflects the expected growth in dividends per share for the indefinite future. The stock is selling for $25, and you think a reasonable required rate of return for the stock is 20 percent.
Required:
(1) Calculate the value of each security based on your required rate of return.
(12 marks)
(2) Which investment(s) should you accept? Why?
(3 marks)
(3) If your required rates of return changed to 14 percent for the bond, 16 percent for the preferred stock, and 18 percent for the common stock, how would your answers to parts (1) and (2) change?
(9 marks)
(4) In the bond market, we can observe that a bond’s price is significantly influenced by the
The Business School
HKU SPACE
Level 6 Examination
1 August 2010
Current Issues in Finance
Date : 1 August 2010
Time Allowed : 2 hours
Answer THREE questions –
At least ONE question from each section.
Standard calculators (non-programmable) may be used.
Tables are attached.
Do not open or turn over this exam paper, or start to write anything until told to by the Invigilator. Starting to write before permitted to do so may be seen as an attempt to use
Unfair Means.
26143
1
SECTION A
Answer at least ONE question from this section
Question 1
You are considering three investments. The first one is a bond that is currently selling in the bond market at $1,200. The bond has a $1,000 par value, pays interest at 14 percent, and is scheduled to mature in 12 years. For bonds of this risk class, you believe that a 12 percent rate of return should be required.
The second investment that you are considering is a preferred stock ($100 par value) that sells for $80 and pays an annual dividend of $12. Your required rate of return for this stock is 14 percent. The last investment is a common stock ($35 par value) that recently paid a $3 dividend. For this stock, the firm’s earnings per share have increased steadily from $4 to $8 in 10 years, which also reflects the expected growth in dividends per share for the indefinite future. The stock is selling for $25, and you think a reasonable required rate of return for the stock is 20 percent.
Required:
(1) Calculate the value of each security based on your required rate of return.
(12 marks)
(2) Which investment(s) should you accept? Why?
(3 marks)
(3) If your required rates of return changed to 14 percent for the bond, 16 percent for the preferred stock, and 18 percent for the common stock, how would your answers to parts (1) and (2) change?
(9 marks)
(4) In the bond market, we can observe that a bond’s price is significantly influenced by the