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    Preferred Stock of Required Return

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    Question 1
    The preferred stock of Gapers Inc. pays an annual dividend of $6.50. What is the price of the preferred stock if the required return is:

    (a) 6%
    (b) 8%
    (c) 10%

    Question 2
    Marcia Stubern is planning for her golden years. She will retire in 20 years, at which time she plans to begin withdrawing $60,000 annually. She is expected to live for 20 years following her retirement. Her financial advisor thinks she can earn 9% annually. How much does she need to invest each year to prepare for her financial needs after her retirement?

    Question 3
    Which of the following financial assets is likely to have the highest required rate of return based on risk?

    a.corporate bond.
    b.Treasury bill.
    c.Certificate of Deposit.
    d.common stock.

    Question 4
    Ali Shah sets aside 2,000 each year for 5 years. He then withdraws the funds on an equal annual basis for the next 4 years. If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use following two tables in this order:

    a.present value of an annuity of $1; future value of an annuity of $1
    b.future value of an annuity of $1; present value of an annuity of $1
    c.future value of an annuity of $1; present value of a $1
    d.future value of an annuity of $1; future value of a $1

    Question 5
    Joe Nautilus has $120,000 and wants to retire. What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years.

    a.12%
    b.Between 12% and 13%
    c.14%
    d.Greater than 15%

    Question 6
    As the discount rate becomes higher and higher, the present value of inflows approaches

    a.0
    b.minus infinity
    c.plus infinity
    d.need more information

    Question 7
    A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently yielding 8%, what is the market value of the bond? Use annual analysis.

    a.Over $1,000
    b.Under $1,000
    c.Over $1,200
    d.Not enough information to tell.

    Question 8
    As the compounding rate becomes lower and lower, the future value of inflows approaches

    a.0
    b.the present value of the inflows
    c.infinity
    d.need more information

    Question 9
    You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

    a.Present value of an annuity of $1
    b.Future value of an annuity
    c.Present value of $1
    d.Future value of $1

    Question 10
    The dividend on preferred stock is most similar to:

    a.common stock with no growth in dividends.
    b.common stock with constant growth in dividends.
    c.common stock with variable growth in dividends.
    d.Certificate of Deposit.

    Question 11
    A 30-year zero-coupon bond that yields 12% percent is issued with a $1000 par value. What is the issuance price of the bond (round to the nearest dollar)?

    a.$33
    b.$83
    c.$8333
    d.$none of the above

    Question 12
    The risk premium is likely to be highest for

    a.U.S. government bonds.
    b.corporate bonds.
    c.gold mining expedition.
    d.either b or c

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    Solution Preview

    Fin 3

    Question 1
    The preferred stock of Gapers Inc. pays an annual dividend of $6.50. What is the price of the preferred stock if the required return is:

    (a) 6%
    (b) 8%
    (c) 10%

    Answer:
    Assuming the par value of the preference share is $100,
    (a) 6% - $ 108.33 ($100*6.5/6)
    (b) 8% - $ 81.25 ($100*6.5/8)
    (c) 10% - $ 65.00 ($100*6.5/10)

    Question 2
    Marcia Stubern is planning for her golden years. She will retire in 20 years, at which time she plans to begin withdrawing $60,000 annually. She is expected to live for 20 years following her retirement. Her financial advisor thinks she can earn 9% annually. How much does she need to invest each year to prepare for her financial needs after her retirement?

    Answer: $10,706, assuming the withdrawal from the 21st year will be made at the beginning of the year.

    Question 3
    Which of the following financial assets is likely to have the highest required rate of return based on risk?

    a.corporate ...

    Solution Summary

    Question 1
    The preferred stock of Gapers Inc. pays an annual dividend of $6.50. What is the price of the preferred stock if the required return is:

    (a) 6%
    (b) 8%
    (c) 10%

    Answer:
    Assuming the par value of the preference share is $100,
    (a) 6% - $ 108.33 ($100*6.5/6)
    (b) 8% - $ 81.25 ($100*6.5/8)
    (c) 10% - $ 65.00 ($100*6.5/10)

    Question 2
    Marcia Stubern is planning for her golden years. She will retire in 20 years, at which time she plans to begin withdrawing $60,000 annually. She is expected to live for 20 years following her retirement. Her financial advisor thinks she can earn 9% annually. How much does she need to invest each year to prepare for her financial needs after her retirement?

    Answer: $10,706, assuming the withdrawal from the 21st year will be made at the beginning of the year.

    Question 3
    Which of the following financial assets is likely to have the highest required rate of return based on risk?

    a.corporate bond.
    b.Treasury bill.
    c.Certificate of Deposit.
    d.common stock.

    Answer: d.common stock

    Question 4
    Ali Shah sets aside 2,000 each year for 5 years. He then withdraws the funds on an equal annual basis for the next 4 years. If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use following two tables in this order:

    a.present value of an annuity of $1; future value of an annuity of $1
    b.future value of an annuity of $1; present value of an annuity of $1
    c.future value of an annuity of $1; present value of a $1
    d.future value of an annuity of $1; future value of a $1

    Answer: b.future value of an annuity of $1; present value of an annuity of $1

    Question 5
    Joe Nautilus has $120,000 and wants to retire. What return must his money earn so he may receive annual benefits of $20,000 for the next 14 years.

    a.12%
    b.Between 12% and 13%
    c.14%
    d.Greater than 15%

    Answer: c.14%

    Question 6
    As the discount rate becomes higher and higher, the present value of inflows approaches

    a.0
    b.minus infinity
    c.plus infinity
    d.need more information

    Answer: a.0

    Question 7
    A 15-year bond pays 11% on a face value of $1,000. If similar bonds are currently yielding 8%, what is the market value of the bond? Use annual analysis.

    a.Over $1,000
    b.Under $1,000
    c.Over $1,200
    d.Not enough information to tell.

    Answer: c.Over $1,200

    Question 8
    As the compounding rate becomes lower and lower, the future value of inflows approaches

    a.0
    b.the present value of the inflows
    c.infinity
    d.need more information

    Answer: b.the present value of the inflows

    Question 9
    You are to receive $12,000 at the end of 5 years. The available yield on investments is 6%. Which table would you use to determine the value of that sum today?

    a.Present value of an annuity of $1
    b.Future value of an annuity
    c.Present value of $1
    d.Future value of $1

    Answer: c.Present value of $1

    Question 10
    The dividend on preferred stock is most similar to:

    a.common stock with no growth in dividends.
    b.common stock with constant growth in dividends.
    c.common stock with variable growth in dividends.
    d.Certificate of Deposit.

    Answer: d.Certificate of Deposit.

    Question 11
    A 30-year zero-coupon bond that yields 12% percent is issued with a $1000 par value. What is the issuance price of the bond (round to the nearest dollar)?

    a.$33
    b.$83
    c.$8333
    d.$none of the above

    Answer: a.$33

    Question 12
    The risk premium is likely to be highest for

    a.U.S. government bonds.
    b.corporate bonds.
    c.gold mining expedition.
    d.either b or c

    Answer: d.either b or c

    $2.19