12. Fred and Ethel are both considering buying a corporate bond with a coupon rate of 8%, a face
value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is
a. Fred and Ethel will only buy the bonds if the bonds are rated BBB or above.
b. Because both Fred and Ethel will receive the same cash flows if they each buy a bond,
they both must assign the same value to the bond.
c. If Fred decides to buy the bond, then Ethel will also decide to buy the bond if markets are
d. Fred may determine a different value for a bond than Ethel because each investor may
have a different level of risk aversion, and hence a different required return.
13. Which of the following statements is true?
a. Short-term bonds have greater interest rate risk than do long-term bonds.
b. Long-term bonds have greater interest rate risk than do short-term bonds.
c. Interest rate risk is highest during periods of high interest rates.
d. All bonds have equal interest rate risk.
14. Crandle’s common stock is currently selling for $79.00. It just paid a dividend of $4.60 and
dividends are expected to grow at a rate of 5% indefinitely. What is the required rate of return
on Crandle’s stock?
15. An example of the growth factor in common stock is:
a. retaining profits in order to reinvest into the firm
b. two strong companies merging together to increase their economies of scale
c. acquiring a loan to fund an investment in Asia
d. issuing new stock to provide capital for future growth
16. Waterfront Solutions, Inc. paid a dividend of $5.00 per share on its common stock yesterday.
Dividends are expected to grow at a constant rate of 4% for the next two years, at which point
the stock is expected to sell for $56.00. If investors require a rate of return on Waterfront’s
common stock of 18%, what should the stock sell for today?
17. Andre’s parents established a college savings plan for him when he was born. They deposited
$50 into the account on the last day of each month. The account has earned 10.9%
compounded monthly, tax-free. How much can they withdraw on his 18th birthday to spend on
18. Charlie wants to retire in 15 years, and he wants to have an annuity of $50,000 a year for
20 years after retirement. Charlie wants to receive the first annuity payment the day he
retires. Using an interest rate of 8%, how much must Charlie invest today in order to have his
retirement annuity (round to nearest $10).
An investor currently holds the following portfolio:
4,000 shares of Stock H $8,000 Beta = 1.3
7,500 shares of Stock I $24,000 Beta = 1.8
12,500 shares of Stock J $48,000 Beta = 2.2
19. The beta for the portfolio is:
20. Which of the following will cause the value of a bond to increase, if other things held the
a. interest rates decrease
b. the company’s debt rating drops from AAA to BBB
c. investors’ required rate of return increases
d. the bond is callable
21. A small biotechnology research corporation has been experiencing losses for the first three
years of its existence, and thus has a negative balance in retained earnings. The corporation’s
stock price, however, is $1 per share. Which of the following statements is MOST correct?
a. The required return on the stock will be small because the company has very few assets.
b. Investors believe the stock is worth $1 per share because future earnings (and cash flows)
are expected to be positive.
c. The corporation’s accountants must have made a mistake because retained earnings may
not be negative.
d. Investors are irrational to pay $1 per share when earnings per share have been negative for
22. How much money must be put into a bank account yielding 6.42% (compounded annually) in
order to have $1,671 at the end of 11 years? (round to nearest $1)
23. Wendy purchased 800 shares of Robotics Stock at $3 per share on 1/1/09. Wendy sold the
shares on 12/31/09 for $3.45. Genetics stock has a beta of 1.3, the risk-free rate of return is
3%, and the market risk premium is 8%. The required return on Genetics Stock is:
24. Bart’s Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The
bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of
Bart’s Moving Company bonds if investors’ required rate of return is 9.5%.
25. Jackson Corp. common stock paid $2.50 in dividends last year (D0). Dividends are expected to
grow at a 12-percent annual rate forever. If Jackson’s current market price is $40.00, what is
the stock’s expected rate of return? (nearest .01 percent)