# Preferred Stock of Required Return

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 If Ali wishes to determine the amount of the annuity to be withdrawn each year, he should use following two tables in this order: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