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Finance 201 > Midterm 2 Part VI > Flashcards

Midterm 2 Part VI Flashcards

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1
Q

If the bond currently sells at a premium, what is the relationship between YTM,
current yield and the coupon rate?

A

YTM < Current Yield < Coupon Rate

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2
Q

If the investors’ required rate of return is constant all the time, then the shorter the
time to maturity,:

A

The lower the price of the bond if the bond is sold at premium.

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3
Q

Currently a bond is sold at the price of $1,302.68 or the yield to maturity of 6.78%.
If the default risk of this bond increases, then you would expect:

A

The bond price to decrease and the YTM to increase.

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4
Q

A junk bond refers to:

A

A bond that is speculative

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5
Q

Some Co. is planning to pay a dividend of $5.60 in the next year and expects to grow the dividend at a constant rate of 4% per year, indefinitely. If the required rate of return by shareholders is 13%, then the price of this stock should be:

A

$62.22

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6
Q

UHFD has just paid a dividend of $2.56 and is expected to increase the future dividends at a rate of 5% per year indefinitely. If you, as a share holder, require 15% per year, what is the current price per share?

A

$26.88

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7
Q

BlackHawk.com anticipates paying a dividend of $4.25 next year and is expected to grow the dividend at a constant rate of 7% per year, indefinitely. If the required rate of return by shares holders is 13%, then, according to the Gordon Model, what should the price of the stock be today?

A

$70.83

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8
Q

Liquid Systems Inc. has a unique dividend policy. This recent start up is expecting to pay a dividend of $2.00 in the next year, a dividend of $2.50 in year 2, and a dividend of $3.00 in the third year. After year 3, the company is anticipating increasing its dividend by 2.5% per year indefinitely. If the required return by shareholders is currently 12%, what is the price of the stock?

A

$28.96

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9
Q

How do you find the dividend if it’s not provided?

A

D= Previous year n ( 1+g)
For example, if I was trying to find the dividends in year 4, I would make n=3, then multiply it by (1+g)

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10
Q

Yukat Inc. is expecting to pay a dividend of $4.50 next year and then retain all of earnings thereafter. The expected price of the Yukat’s common stock is $45.60 next year. If the return required by share holders is 17%, what is the price of Yukat’s stock today?

A

$42.82

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11
Q

Another Co. just paid a dividend of $1.75. The company is expected to grow their dividend at a rate equal to their sustainable growth rate. The company recently reported a Return on Equity of 15% and paid out 25% of their net income in dividends. If the required rate of return by shareholders is 20% and the annual growth rate is 11.25%, what is the price of the stock today?

A

$22.25

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12
Q

(Common shareholder expected return) Kiwi Pro’s common stock currently sells for $8.78 per share. The company executives anticipate a growth rate of 4% forever and a dividend of $1.05 next year. If you require a 15% rate of return, should you purchase the stock?

A

You should buy because it’s undervalued

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13
Q

Some Co. is planning to pay a dividend of $5.60 in the next year and expects to grow the dividend at a constant rate of 4% per year, indefinitely. If the required rate of return by shareholders is 13%, then the price of this stock should be:

A

$62.22

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14
Q

YTR has just paid a dividend of $3.20 and is expected to increase the future dividends at a rate of 4% per year indefinitely. If the current share price is $34.50, what is the return required by share holders?

A

13.65%

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15
Q

ORcell Co. has the following dividend policy. Next year, the company will pay a dividend of $3. In year 2 the company will pay a dividend of $2.75. After year 2, the company expects to increase its dividend at a constant rate of 3% per year indefinitely. If the return required by share holders is 13%, what is the price of the stock today?

A

$26.99

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16
Q

Rate of Return equation

A

r = (p1 - p0 +D) / p0

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17
Q

Stock QWE plans to pay dividends of $3.00, $3.50, and $4.00 in each of the next three years. If the price of this stock will be $50.00 at the end of three years and the required rate of return by shareholders is 15%, then what is the value of the stock today?

A

$40.76

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18
Q

TYKU Enterprises has recently paid a dividend of $5.00 and anticipates growing the dividends at a constant rate of 6% per year, indefinitely. What will be the dividend next year?

A

$5.3

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19
Q

TYKU Enterprises has recently paid a dividend of $5.00 and anticipates growing the dividends at a constant rate of 6% per year, indefinitely. What will be the dividend 5 years from now?

A

$6.69

20
Q

The current share price for Reality Inc. is $40.56. The company recently paid a dividend of $2.25 and is expected to increase the dividend at a constant rate of 5% per year, indefinitely. Given this information, what is the required rate of return by shareholders?

Place answer in decimal form.

A

10.82%

21
Q

(Common stock valuation) Calculate the current price of common stock that recently paid a $1.20 dividend and has a 3.75% growth rate. Your required rate of return is 13%.

A

$13.46

22
Q

(Common shareholder expected return) Kiwi Pro’s common stock currently sells for $8.78 per share. The company executives anticipate a growth rate of 4% forever and a dividend of $1.05 next year. What is your expected rate of return if you buy the stock at the current price?

A

15.96%

23
Q

(Measuring growth) Awesome Inc. has common stock that is selling for $230.77. It expects its next year’s dividend to be $7.80. What is Awesome’s expected growth rate if the discount rate is 11%?

A

7.62%

24
Q

(Common stock valuation) You are looking to purchase BA Plastics common stock at its current price per share, which is $1.75, hold it 1 year, and sell after a dividend of $.50 is paid. At what price would you have to purchase the stock if you had a required rate of return of 20% and growth is expected to be 7% per year, indefinitely? Should you buy the stock at its current price?

A

The stock should be $3.85, so you should buy

25
Q

(Common shareholder expected return) Enrique Co. common stock is selling for $35.36 per share. It expects to pay a $3.78 dollar dividend next year and grow at 3%. What is the expected rate of return?

A

13.69%

26
Q

(Multistage common stock valuation) You just got hired at an investment management firm, where you will be performing equity research. You are told to prepare a buy recommendation for a company of your choice to be presented to the partners for evaluation. Tool Mania catches your attention as a possible buy. The company just paid an annual dividend of $3.75 per share. You project dividend growth of 10% for the next 5 years in par with revenue growth. After that you project the company will grow at the equivalent of GDP at 3% forever. The company uses a fixed required rate of return of 15%. At which stock price will you issue a buy recommendation for this company?

A

$42.21

27
Q

52 Week High

A

The highest value the stock has attained in the past 52 weeks

28
Q

52 Week Low

A

The lowest value the stock has had in the past 52 weeks

29
Q

Ticker Symbol (sym)

A

A unique symbol/3-4 characters representing the stock

30
Q

Stock Quotes: Dividend

A

This column lists the most recent quarterly dividend (annualized by multiplying it by 4).

This is not necessarily what was paid. It’s more like an estimate of what will be paid in the following year.

31
Q

Dividend Yield Percent (YLD %)

A

Divide the dividend by the closing price of the stock (column 10).

This is the Return on Investment that investors will receive through dividends paid.

32
Q

Two types of returns available to stock investors.

A
  1. Capital gains (money made by price of stock going up)
  2. Dividends - less important
33
Q

PE Ratio

A

Price to earnings ratio.

It compares the stock price to company earnings. Calculated as price/per share divided by earnings/per share.

34
Q

Round Lots Traded (Vol 100s)

A

Values that show the amount of trading activity in that company’s stock. Expressed in round lots.
Each round lot is equal to 100 shares.

35
Q

Day’s High

A

The highest value at which the stock was sold or purchased during the current day’s trading.

36
Q

Day’s low

A

The lowest value that the stock was traded for during the current day’s trading.

37
Q

Day’s Closing Price (Close)

A

The last price at which the stock was bought/sold before the market closed for the day.

38
Q

Net Day’s Change (Net chg)

A

The difference between the closing price and closing price of the previous day.

39
Q

How do you find the price per share of preferred stock?

A

V = D/k

40
Q

How do you find rate of return for preferred stock?

A

k = D/V

41
Q

If a question asks you to find the perpetuity of a constant rate, which model will you use?

A

Gordon growth

42
Q

If the question gives you V1 and D1, and talks about a specific period of years, which model will you use?

A

Single/Basic model. Can do by hand or use TVM

43
Q

What type of value is the Two-Stage growth model trying to find?

A

the PV of stage one plus the PV of stage 2

44
Q

How do you find the PV of Stage 1?

A

You find the PV of each dividend and add them together.

45
Q

How do you find the PV of stage 2?

A

Gordon growth model

46
Q

When solving PV for stage 1, do you include D0?

A

NO

47
Q

What are the steps to completing Two-stage growth model?

A
  1. Forecast FV dividend cash flows for each year of supernormal rate.
  2. Find the PV of those rates using TVM
  3. Add them together
  4. Find the first normal growth dividend (with the normal rate)
  5. Use the Gordon growth model to find FV
  6. Find PV, but make sure you’re using the right number of periods/years (it’s one less)
  7. Add the PV from this step to PV from previous steps.

Finance 201 (18 decks)

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