Practice Problems for Midterm 2

University of Rio Grande
Financial Management (Fin 20403/30403) Practice Problems for Midterm 2
1. If a 30-year, $1,000 bond has a 9% coupon and is currently selling for $826, its current yield is:
2. J&J Manufacturing issued a bond with a $1,000 par value. The bond has a coupon rate of 7% and makes
payments semiannually. If the bond has 30 years remaining and the annual market interest rate is 9.4%, what
will the bond sell for today?
3. Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon
rate of 15%. The yield on similar bonds is now 12%. What is its price?
4. Barf Corporation's 10% coupon rate bond was issued for 30 years 25 years ago at a par value of $1000. Today's
interest rate is 10%, what is it selling for today?
5. Addleson Corp. has a $1,000 par value bond outstanding that was issued for 30 years 5 years ago at a coupon
rate of 15%. What is it yielding if it is selling for $938.81?
6. You are considering the purchase of an AT&P bond with a 13% coupon rate. Interest is paid and compounded
semiannually. The bond will mature in 8 years, and has a $1,000 face value. The bond currently sells for $867.
Calculate the ANNUAL yield to maturity for this bond. (Round to nearest percentage)
7. Riordan Inc. has a bond outstanding that has a $1,000 par value, semiannual coupon rate of 4% and a current
yield of 7.9%. What is the price of the bond? (Round to nearest $)
8. If a 30-year bond with a quoted price of $810, pays $40 interest semiannually, its current yield would be about:
9. One year ago a $1,000 face value 6% coupon bond was selling for $918.93. Since then, the market return
decreased by two percentage points. The bond pays interest semiannually and now has four years to maturity.
The bond's price today is:
10. You are interested in a $1,000, 20-year bond that is currently selling for $1,171.59. If you require a 10% return
on your investment, what is the minimum coupon rate you can accept? The bond makes semiannual coupon
payments.
11. You are considering the purchase of Sanders Corp., a constant growth stock. The stock paid a recent dividend of
$3.00. The next dividend is expected to be $3.18. If the stock is returning 15%, calculate its dividend yield.
12. PDQ, Inc. stock is selling for $80 today. You are expecting a dividend of $3 next year and you plan to sell the
stock for $95 one year from now. Calculate the one-year return on PDQ stock.
13. TOYS4U stock is selling for $70 today. Similar stocks return 15%. You have estimated a capital gains yield of
10%. Calculate the next dividend expected on the stock.
14. The price of a share of stock today is $50.00, and the projected selling price in one year is $55.00. The
estimated dividend during the year is $1.00. The expected return on the stock is
15. The price of a share of stock today is $25.00. If the return on the share is estimated at 18% and the stock
generally pays a dividend of $1 per year, what is its projected selling price in one year?

16. Analysts expect a stock to be selling for $22 in one year. It is also expected to pay a $1 dividend during the
year. If you require a 15% return on this kind of investment, what is the most you can pay for the stock today.
17. Assume a dividend today of $2.50 with anticipated growth over the next three years of 10%. The estimated
dividend at the third year is:
18. Sharbaugh Inc.'s most recent dividend was $2.00 per share. The dividend is expected to grow at a rate of 4%
per year for the foreseeable future. If the market return is 13% on investments with comparable risk, what
should the stock sell for today?
19. A stock just paid a $2.00 dividend that is anticipated to grow at 6% indefinitely. Similar stocks are returning
about 13%. The estimated selling price of this stock is:
20. A stock is selling for $20.00 (P 0 ). The projected selling price one year from now (P 1 ) is $22.50, and the
projected dividend payment one year from now (D 1 ) is $1.00. What is the expected return on an investment in
the stock made today?
21. A share of stock is currently selling for $31.80. If the anticipated constant growth rate for dividends is 6% and
investors are seeking a 16% return, what is the dividend just paid?
22. You are considering investing in B & B, Inc.'s stock and your broker has told you that you can purchase it for
$72. You require a return 12% for this type of investment. The last dividend (D 0 ) that B & B paid was $4 and a
6% constant growth rate is anticipated. Should you purchase B & B, Inc.?
23. Fast Wheels, Inc. expects to pay an annual dividend of $0.72 next year. Dividends have been growing at a
compound annual rate of 6 percent and are expected to continue growing at that rate. What is the value of a
share of Fast Wheels if similar stocks return 14 percent?
24. Pace Enterprises' common stock sells for $29, and its dividends are expected to grow at a rate of 9 percent
annually. If investors in Pace require a return of 14%, what is the expected dividend next year?
25. Delta Company has some very exciting prospects in the near future. As a result it is expected to grow at a rate
of 20% for the next year. After that it will grow at 7% indefinitely. The interest rate is currently 14% and Delta
paid a dividend of $2.60 recently. What should Delta sell for today?
26. Genestek Inc. just paid a $5.00 dividend. Due to a new product about to be released, analysts expect the
company to grow at a supernormal rate of 15% for three years. After that it is expected to grow at a normal
rate of 4% indefinitely. Stocks similar to Genestek are currently earning shareholders a return of 12%. The
estimated selling price of the stock is:
27. Static Inc. has had a hard time recently. In order to help the firm survive a downturn in the market for its
products, management has announced that it doesn't plan to pay dividends for the next three years. A modest
dividend of $2.00 is projected for the fourth year after which dividends are expected to grow at 5% indefinitely.
Similar stocks return 10%. How much should Static's stock sell for today?
28. Sudberry Systems Corp. is launching a new product that analysts expect will propel its growth to 18% for about
a year. After that everyone expects the firm to return to a more normal 5% growth rate indefinitely. Sudberry
recently paid an annual dividend of $3.50. Similar stocks are currently returning 9%. What is the most an
investor should be willing to pay for a share of Sudberry?
29. Frazier Inc. paid a dividend of $4 last year (D 0 ). The firm is expecting dividends to grow at 21% in years 1-2
and 10% in Year 3. After that growth will be constant at 8% per year. Similar investments return 14%.
Calculate the value of the stock today.

30. Find the value of a share of preferred stock that pays $6.00 per year given a return of 16%.
31. What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a
dividend of $4.10?
32. If a share of preferred stock pays a quarterly dividend of $1.50, has a $40 par value, and is currently selling for
$50.00, it is earning an annual return of:
33. A share of Jones Inc. preferred stock pays a dividend of $1.25 each quarter. You are willing to pay $37.50 for
this stock. Your annual return on the investment is:
34. You have invested in a project that has the following payoff schedule:
Payoff Probability of Occurrence
$40 .15
$50 .20
$60 .30
$70 .30
$80 .05
What is the expected value of the investment's payoff? (Round to the nearest $1)
35. Which of the following investments is clearly preferred to the others?
Investment
A 18% 20%
B 20% 20%
C 20% 18%
k
F
36. Sibling Incorporated has a beta of 1.0. If the expected return on the market is 14%, what is the expected
return on Sibling Incorporated's stock?
37. PDQ Company's common stock has a beta of 1.2. If the expected risk free return is 4% and the market offers a
risk premium of 7% over the risk free rate, what is the expected return on PDQ's common stock?
38. Car Buff, Inc. common stock has a beta of 1.3. If the expected risk free return is 4% and the expected market
risk premium is 12%, what is the expected return on Car Buff’s stock?
39. If there is a 20% chance we will get a 16% return, a 30% chance of getting a 14% return, a 40% chance of
getting a 12% return, and a 10% chance of getting an 8% return, what is the expected rate of return?
40. According to the capital asset pricing model, if the risk free rate is 5.5%, and the market return is 14%, a
security with a beta of 1.4 should return what?
41. You are considering investing in a project with the following possible outcomes:
States Probability of Occurrence Investment Returns
State 1: Economic boom 15% 16%
State 2: Economic growth 45% 12%
State 3: Economic decline 25% 5%
State 4: Depression 15% -5%
Calculate the expected rate of return and standard deviation of returns for this investment, respectively.
42. If you hold a portfolio made up of the following stocks:
Investment Value Beta
Stock A $2,000 1.5
Stock B $5,000 1.2
Stock C $3,000 .8
What is the beta of the portfolio?

43. If you hold a $1.3 million portfolio made up of the following stocks:
Market value Beta
Stock A .2 million 1.5
Stock B .5 million 1.2
Stock C .6 million .8
What is the beta of the portfolio?
44. If you hold a portfolio made up of the following stocks:
Investment Value Beta
Stock A $2,000 1.5
Stock B $5,000 1.2
Stock C $3,000 .8
if the market’s expected return is 15%, and the risk free rate of return is 4%, what is the expected return of the
portfolio?
45. The Elvisalive Corporation, makers of Elvis memorabilia, has a beta of 2.75. The return on the market portfolio
is 14% and the risk free rate is 4%. According to CAPM, what is the risk premium on a stock with a beta of 1?
46. Assume that an investment is forecasted to produce the following returns: a 20% probability of a $1,200 return;
a 50% probability of a $5,600 return; and a 30% probability of a $9,500 return. What is the expected amount
of return this investment will produce?
Answers
1 10.90% 8 9.90% 15 $28.50 22 No, stock overpriced 29 $78.27 36 14% 43 1.06
2 $760.91 9 1000 16 $20 23 $9.00 30 $37.50 37 12.40% 44 16.54%
3 1236.44 10 12% 17 $3.33 24 $1.45 31 8.82% 38 19.60% 45 10%
4 1000 11 9% 18 $23.11 25 $42.86 32 12.00% 39 13% 46 $5,890
5 16% 12 22.50% 19 $30.29 26 $70.36 33 13.30% 40 17.40%
6 16% 13 $3.50 20 17.50% 27 $28.69 34 $59 41 8.3%, 6.7%
7 1013 14 12% 21 $3.00 28 $103.25 35 C 42 1.14%