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# GSU FI 3300 - Exam

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According to the Capital Asset Pricing Model (i.e., CAPM), if Rf = risk free interest rate, Rm = Expected return on the market portfolio, b = beta, and E(Ra) = expected return on stock a:Question 1 options:E(Ra) = Rf + (Rm - Rf)E(Ra) = Rf - b(Rm - Rf)E(Ra) = bRf + (Rm - Rf)E(Ra) = Rf + b(Rm - Rf)None of the above is a correct specification of the CAPM.If the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value?Question 2 options:A 1-year bond with an 8 percent coupon.A 1-year zero-coupon bond.A 10-year zero-coupon bond.A 10-year bond with an 8 percent coupon.A 10-year bond with a 12 percent coupon.All else constant, if the yield to maturity increases, the price of fixed coupon bond will:Question 3 options:increasedecreaseremain unchangedeither increase or decrease depending on the par value of the bondeither increase or decrease depending on the coupon rate of the bondThe government of Mont-Ecar-Low issued a \$1,000 par value bond with a coupon rate of \$150 per year, but this bond would not mature for 1,000,000,000,000 years. If investor's required rate of return on this bond is 15 percent, can you calculate the expected market price of this bond and if yes, what is the expected marketprice?Question 4 options:Yes, an expected market price can be calculated, but the only way is to use a large computer that can add up the present value of 1,000,000,000,000 coupon payments of \$150 each and the present value of the par value of the bond.No, because all of today's investors will be dead before the bond matures.Yes, the current value of the bond is within rounding error of zero because using 15% to discount for 1,000,000,000,000 years reduces almost any dollar amount to zero.No, because a calculator will not accept 1,000,000,000,000 for the number of compounding periods and 1,000,000,000,000 years is not on any chart of discounting factors.Yes, because the coupon rate of 15% is equal to the discount rate of 15%, the bond will trade at par value of \$1,000.Which of the following statements is correct?Question 5 options:If market rates do not change, the price of a bond selling at a premium increases over timeIf interest rates are greater than zero, it is possible for a zero-coupon bond to sell at a premium (i.e. for morethan par value)If a bond's yield to maturity is greater than its coupon rate, the bond will sell at a premiumIf market rates do not change, the price of a bond selling at a discount increases over timeAll of the above statements are falseWhat is the yield to maturity (rounded to the nearest whole percent) of a 20 year, \$100 par value bond, that pays a 10% coupon semi-annually, given that the bond's current market price is \$85?Question 6 options:5%6%10%12%15%ABC Inc. just issued a twenty-year semi-annual coupon bond at a price of \$1,000. The face value of the bond is \$1,000, and the market interest rate is 9%. What is the bond's coupon rate?Question 7 options:8.00%9.00%6.00%8.50%None of the aboveWhich of the following statements is most correct?Question 8 options:If a bond's yield to maturity exceeds its annual coupon rate, then the bond will be trading at a premium.If interest rates increase, the relative price change of a 10-year coupon bond will be greater than the relative price change of a 10-year zero coupon bond.If a coupon bond is selling at par, its current yield equals its yield to maturity. (Hint: a bond's current yield equals annual coupon payment divided by current price).Both a and c are correct.None of the answers above is correct.Assume that a constant growth stock is currently selling at its equilibrium price of \$52.50 per share. All else constant, if the required rate of return of the stock decreases, the price of the stock will:Question 9 options:increasedecreaseremain unchangedeither increase or decrease depending on the dividend paid in year 0.either increase or decrease depending on the stock's required rate of return.Suppose that an unexpected report of a strong economy ignites inflation fears among investors. On the release of this news, bond prices fall but stock prices rise. Assuming that all firms follow a fixed payout ratio and one of the discounted cash flow stock valuation models holds (such as the constant growth model or supernormal growth model), which of the following statements must be true.Question 10 options:Interest rates have increased.Expected future earnings for firms have increased.Expected future earnings for firms have decreased.Both a and b are true.Both a and c are true.The price of a stock in the market is \$75. You know that the firm has just paid a dividend of \$2.50 per share (i.e., D0 = 2.50). The dividend growth rate is expected to be 6 percent forever. What is the investors' required rate of return for this stock?Question 11 options:9.7%9.5%9.3%9.1%8.9%The stock of Takone, Inc. currently sells for \$15.00 per share. The company just paid a dividend of \$2.10 per share and the current market price per share (i.e., \$15.00) is based on investor belief that the dividends of the company will remain constant forever. Unknown to the market, however, is that Takone is about to announce the introduction of a modified product line that will cause the future earnings and therefore dividends of the company to grow at a rate of 4 percent per year forever, starting today. This new growth rate will begin with the dividend to be paid one year from today. The modified product line will not in any wayimpact the required rate of return for the stock of Takone, Incorporated. Assuming that the market reacts rationally, what will be the new stock price of Takone, Incorporated after the announcement?Question 12 options:\$21.00\$15.00\$21.84\$15.76There is not enough information given to answer this question.If two firms have the same current dividend and the same expected growth rate, their stocks must sell at thesame current price or else the market will not be in equilibrium.Question 13 options:TrueFalseThe constant growth model used for evaluating the price of a share of common stock may also be used to find the price of perpetual preferred stock or any other perpetuity.Question 14 options:TrueFalseIf you use the constant dividend growth model to value a stock, which of the following is certain to cause youto DECREASE your estimate of the current value of the stock?Question 15 options:Decreasing the required rate of return for the stock.Decreasing the estimate of the

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