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?

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%

Stock	Investment	Beta
A	$200,000	1.50
B	$300,000	-0.50
C	$500,000	1.25
D	$1,000,000	0.75

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