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Multiple Choice

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1.Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm`s stock at the end of four years (P4) is
I. D5 / (r-g)
II. P0 x (1+g)4
III. D0 x (1+g)/(r-g)

a. I only
b. II only
c. I and II only
d. I and III only
e. I, II, and III

2. A bond with an annual coupon of $100 originally sold at par for $1000. The current market interest rate on this bond is 9%. Assuming no change in risk, this bond would sell at a _________ in order to compensate ____________.

a. Premiem; the purchaser for the above-market coupon rate
b. Discount; the purchaser for the above-market coupon rate
c. Premiem; the seller for the above-market coupon rate
d. Discount; the seller for the above-market coupon rate
e. Discount; the issuer for the higher cost of borrowing

3. What happens to the value of a 4-year fixed income security promising $100 per year if the market interest rate rises form 5% to 6% per yearÉ

a. A rise of 1% casues a drop of $4.87 in market value.
b. A rise of 1% casues a rise of $4.87 in market value.
c. A rise of 1% casues a drop of $8.08 in market value.
d. A rise of 1% casues a rise of $8.08 in market value.
e. None of the above

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1.Assume the anticipated growth rate in dividends is constant for Fly-By-Nite Airlines. The expected value of the firm`s stock at the end of four years (P4) is
I. D5 / (r-g)
II. P0 x (1+g)4
III. D0 x (1+g)/(r-g)

a. I only
b. II only
c. I and II only
d. I and III only
e. I, II, and III

Using the constant growth model, the price is given as D1/(r-g). The price in year 4 will be the dividend in year 5 and so the formula is D5/(r-g)
The price will also increase at the same rate as the growth rate since ...

Solution Summary

The solution explains some multiple choice questions in finance

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