BUS 401 Week 2 Questions

| March 14, 2016

1. Preferred stock is similar to a bond in the following

way (Points : 1)

preferred stock always contains a maturity

date.

both investments provide a stated income

stream.

both contain a growth factor similar to common

stock.

both provide interest

payments.

2. Positive Tronics Industries preferred stock has a par

value of $100 and pays a dividend of $6.00 per share. It presently sells for $87

per share. What do investors require as a rate of return on this stock? Round

off to the nearest .10%. (Points : 1)

14.5%

9.3%

6.9%

6.0%

3. Assume that Brady Corp. has an issue of 18-year $1,000

par value bonds that pay 7% interest, annually. Further assume that today’s

required rate of return on these bonds is 5%. How much would these bonds sell

for today? Round off to the nearest $1. (Points : 1)

$1,233.79

$1,201.32

$1,134.88

$1,032.56

4. You decide you want your child to be a millionaire. You

have a son today and you deposit $15,000 in an investment account that earns 9%

per year. The money in the account will be distributed to your son whenever the

total reaches $1,000,000. How old will your son be when he gets the money

(rounded to the nearest year)? (Points : 1)

82 years

74 years

60 years

49 years

5. Lily Co. paid a dividend of $5.25 on its common stock

yesterday. The company’s dividends are expected to grow at a constant rate of

8.5% indefinitely. If the required rate of return on this stock is 15.5%,

compute the current value per share of Lily Co. stock. (Points : 1)

$81.38

$76.43

$56.23

$43.90

6. Halverson, Inc. just issued $1,000 par 20-year bonds.

The bonds sold for $936 and pay interest semi-annually. Investors require a rate

of 7.00% on the bonds. What is the amount of the semi-annual interest payment on

the bonds? (Points : 1)

$64.50

$55.00

$32.00

$21.75

7. What is the value of a preferred stock that pays a $4.50

dividend to an investor with a required rate of return of 10%? (Points : 1)

$22.22

$27.83

$45

$55.50

8. What is the value of a bond that matures in 17 years,

makes an annual coupon payment of $50, and has a par value of $1,000? Assume a

required rate of return of 6%. (Points : 1)

$822.90

$856.29

$895.23

$904.87

9. If two firms have the same current dividend and the same

expected growth rate, their stocks must sell at the same current price or else

the market will not be in equilibrium. (Points : 1)

False, because the required return could be

different

True, because we are using a dividend valuation

model

True if markets are semi-strong form

efficient

True if investors are

risk-averse

10. Butler Corp paid a dividend today of $5 per share. The

dividend is expected to grow at a constant rate of 6.5% per year. If Butler Corp

stock is selling for $50.00 per share, the stockholders’ expected rate of return

is (Points : 1)

11.50%.

13.56%.

15.49%.

16.50%.

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