# QUESTION 1 A 25-year, \$1,000 par value bond has an 8.5% annual *

June 10, 2016

Question
QUESTION 1
A 25-year, \$1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for \$900. If the yield to maturity remains at its current rate, what will the price be 5 years from now?
\$1,069.75
\$698.06
\$1,096.95
\$906.57
\$688.99
5 points

QUESTION 2
The Isberg Company just paid a dividend of \$0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company’s beta is 1.25, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company’s current stock price, P ?
\$15.49
\$16.66
\$14.66
\$19.32
\$19.49
5 points

QUESTION 3
Mulherin’s stock has a beta of 1.23, its required return is 8.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)
5.94%
8.63%
7.92%
7.21%
6.26%
5 points

QUESTION 4
Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 8.90%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?
4.12%
3.35%
3.12%
3.08%
2.95%
5 points

QUESTION 5
Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market’s required rate of return is 16.25%, the risk-free rate is 7.00%, and the Fund’s assets are as follows:
Stock Investment Beta
A \$200,000 1.50
B \$300,000 -0.50
C \$500,000 1.25
D \$1,000,000 0.75
15.88%
15.18%
10.68%
14.05%
16.44%
5 points

QUESTION 6
Mikkelson Corporation’s stock had a required return of 11.75% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Then an increase in investor risk aversion caused the market risk premium to rise by 2%. The risk-free rate and the firm’s beta remain unchanged. What is the company’s new required rate of return? (Hint: First calculate the beta, then find the required return.)
14.38%
14.74%
15.11%
15.49%
15.87%
5 points

QUESTION 7
Consider the following information and then calculate the required rate of return for the Global Investment Fund, which holds 4 stocks. The market’s required rate of return is 11.50%, the risk-free rate is 7.00%, and the Fund’s assets are as follows:
Stock Investment Beta
A \$200,000 1.50
B \$300,000 -0.50
C \$500,000 1.25
D \$1,000,000 0.75
10.22%
12.20%
10.64%
7.93%
10.43%
5 points

QUESTION 8
The Isberg Company just paid a dividend of \$0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company’s beta is 1.35, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company’s current stock price, P ?
\$15.83
\$14.02
\$11.61
\$18.84
\$15.07
5 points

QUESTION 9
Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 8.90%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?
4.12%
3.35%
3.12%
3.08%
2.95%
5 points

QUESTION 10
Kern Corporation’s 5-year bonds yield 6.80% and 5-year T-bonds yield 3.60%. The real risk-free rate is r* = 2.5%, the default risk premium for Kern’s bonds is DRP = 1.90% versus zero for T-bonds, the liquidity premium on Kern’s bonds is LP = 1.3%, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on all 5-year bonds?
0.70%
0.60%
0.81%
0.86%
0.85%
5 points

QUESTION 11
Mulherin’s stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)
10.36%
10.62%
10.88%
11.15%
11.43%
5 points

QUESTION 12
Kelly Inc’s 5-year bonds yield 7.50% and 5-year T-bonds yield 4.50%. The real risk-free rate is r* = 2.5%, the default risk premium for Kelly’s bonds is DRP = 0.40%, the liquidity premium on Kelly’s bonds is LP = 2.6% versus zero on T-bonds, and the inflation premium (IP) is 1.5%. What is the maturity risk premium (MRP) on all 5-year bonds?
0.38%
0.50%
0.40%
0.59%
0.56%
5 points

QUESTION 13
Crockett Corporation’s 5-year bonds yield 6.85%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.80%, the default risk premium for Crockett’s bonds is DRP = 0.85% versus zero for T-bonds, the liquidity premium on Crockett’s bonds is LP = 1.25%, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) ? 0.1%, where t = number of years to maturity. What is the inflation premium (IP) on 5-year bonds?
1.40%
1.55%
1.71%
1.88%
2.06%
5 points

QUESTION 14
5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?
2.59%
2.88%
3.20%
3.52%
3.87%
5 points

QUESTION 15
Company A has a beta of 0.70, while Company B’s beta is 0.80. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A’s and B’s required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
0.57%
0.77%
0.68%
0.67%
0.80%
5 points

QUESTION 16
Schnusenberg Corporation just paid a dividend of D = \$0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company’s beta is 0.85, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company’s current stock price?
\$22.16
\$26.54
\$25.77
\$29.37
\$27.83
5 points

QUESTION 17
The Francis Company is expected to pay a dividend of D = \$1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company’s beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price?
\$22.83
\$27.99
\$27.17
\$22.01
\$24.18
5 points

QUESTION 18
Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 14.00%. Using the SML, what is the firm’s required rate of return?
13.08%
13.34%
12.95%
10.88%
11.40%
5 points

QUESTION 19
Suppose you hold a portfolio consisting of a \$10,000 investment in each of 8 different common stocks. The portfolio’s beta is 1.25. Now suppose you decided to sell one of your stocks that has a beta of 1.00 and to use the proceeds to buy a replacement stock with a beta of 1.65. What would the portfolio’s new beta be?
1.48
1.33
1.53
1.32
1.03
5 points

QUESTION 20
Kay Corporation’s 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay’s bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay’s bonds?
0.52%
0.61%
0.38%
0.50%
0.56%