Questions on Finance
FIN 3403 SAMPLE MIDTERM EXAM II
1. A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14 percent rate of return, what is the current dividend on this stock?
a.
$3.00
b.
$3.81
c.
$4.29
d.
$4.75
e.
$6.13
ANS: A =
$4.40 = D0 (1.10)
D0 = $3.00.
DIF: Easy OBJ: TYPE: Problem TOP: Constant growth stock
2. The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (ks) is 12 percent. What is the current price of Klein's common stock?
a.
$21.00
b.
$33.33
c.
$42.25
d.
$50.16
e.
$58.75
ANS: D
Enter in CFLO register = 0, = 1.05, and = 61.74.
Then enter I = 12, and press NPV to get NPV = P0 = $50.16.
DIF: Easy OBJ: TYPE: Problem TOP: Nonconstant growth stock
3. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a simple annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? (Hint: The PVIFA and PVIF for 3 percent, 60 periods are 27.6748 and 0.1697, respectively.)
a.
$821.92
b.
$1,207.57
c.
$986.43
d.
$1,120.71
e.
$1,358.24
ANS: B
Tabular solution: (PVIFA and PVIF are given in the problem.)
Vd
= $37.50 (PVIFA3%, 60) + $1,000 (PVIF3%, 60)
= $37.50 (27.6748) + $1,000 (0.1697) = $1,207.51.
Financial calculator solution:
Inputs: N = 60; I = 3; PMT = 37.50; FV = 1,000
Output: PV = -$1,207.57; Vd = $1,207.57.
Note: Tabular solution differs from calculator solution due to interest factor rounding.
DIF: Medium OBJ: TYPE: Problem TOP: Bond value—quarterly payment
4. Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years to go before it matures. If you buy this bond, you expect to hold it for 5 years and then to sell it in the
1. A share of common stock has a current price of $82.50 and is expected to grow at a constant rate of 10 percent. If you require a 14 percent rate of return, what is the current dividend on this stock?
a.
$3.00
b.
$3.81
c.
$4.29
d.
$4.75
e.
$6.13
ANS: A =
$4.40 = D0 (1.10)
D0 = $3.00.
DIF: Easy OBJ: TYPE: Problem TOP: Constant growth stock
2. The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (ks) is 12 percent. What is the current price of Klein's common stock?
a.
$21.00
b.
$33.33
c.
$42.25
d.
$50.16
e.
$58.75
ANS: D
Enter in CFLO register = 0, = 1.05, and = 61.74.
Then enter I = 12, and press NPV to get NPV = P0 = $50.16.
DIF: Easy OBJ: TYPE: Problem TOP: Nonconstant growth stock
3. Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a simple annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? (Hint: The PVIFA and PVIF for 3 percent, 60 periods are 27.6748 and 0.1697, respectively.)
a.
$821.92
b.
$1,207.57
c.
$986.43
d.
$1,120.71
e.
$1,358.24
ANS: B
Tabular solution: (PVIFA and PVIF are given in the problem.)
Vd
= $37.50 (PVIFA3%, 60) + $1,000 (PVIF3%, 60)
= $37.50 (27.6748) + $1,000 (0.1697) = $1,207.51.
Financial calculator solution:
Inputs: N = 60; I = 3; PMT = 37.50; FV = 1,000
Output: PV = -$1,207.57; Vd = $1,207.57.
Note: Tabular solution differs from calculator solution due to interest factor rounding.
DIF: Medium OBJ: TYPE: Problem TOP: Bond value—quarterly payment
4. Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years to go before it matures. If you buy this bond, you expect to hold it for 5 years and then to sell it in the