QUESTION 1

The expected yield on junk bonds is higher than the yield on AAA-rated bonds because of the higher default risk associated with junk bonds.

True

False

QUESTION 2

The A Company will pay a dividend of 2.25 SAR per share. The company's stock is currently selling for 60 SAR per share, and the required rate of return on its stock is 16%. What is the growth rate expected for the company dividends assuming constant growth?

9.47%

9.89%

11.81%

12.25%

QUESTION 3

A firm paid a dividend of 5.25 SAR on its common stock yesterday. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. The required rate of return on this stock is 16%. You observe a market price of 79.50 SAR for the stock. Should you purchase this stock?

No, the market price is above the intrinsic value of the stock.

Yes, the market price is below the intrinsic value of the stock.

No, the growth rate in dividends is too far below the required return.

Yes, but only if you can keep the stock for at least 5 years.

QUESTION 4

Put the following in order of their claim on the assets of a firm, starting with the first to have a claim:

A. Subordinated debentures

B. Debentures (unsubordinated)

C. Common Stock

D. Preferred stock

C, B, A, D

C, D, A, B

B, A, D, C

D, C, B, A

QUESTION 5

How is preferred stock similar to bonds?

Dividend payments to preferred shareholders (much like bond interest payments to bondholders) are tax deductible.

Investors can sue the firm if preferred dividend payments are not paid (much like bondholders can sue for non-payment of interest payments).

Preferred stockholders receive a dividend payment (much like interest payments to bondholders) that is usually fixed.

Preferred stock is not like bonds in any way.

QUESTION 6

A firm issued a bond 10 years ago that has a coupon rate of 9% and a face value of 1,000 SAR. The bond will mature in 20 years. What is the value to an investor with a required return of 11.5%?

800.45 SAR

807.25 SAR

658.94 SAR

701.52 SAR

QUESTION 7

A firm just paid a dividend of 5.45 SAR per share. Future dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock if the required return is 14%?

83.31 SAR

85.39 SAR

89.44 SAR

95.87 SAR

QUESTION 8

A preferred stock that pays an annual dividend of 8 SAR, has a par value of 100 SAR, and has a required return of 5% will be valued at 200 SAR.

True

False

QUESTION 9

A firm sold an issue of 10-year 1,000 SAR par bonds to build new ships. The bonds pay 5% interest semiannually. Today's required rate of return is 8.7%. How much should these bonds sell for today?

771.86 SAR

732.93 SAR

756.19 SAR

598.33 SAR

QUESTION 10

The A Corporation issued bonds on January 1, 2006. The bonds had a coupon rate of 6%, with interest paid semiannually. The face value of the bonds is 1,000 SAR and the bonds mature on January 1, 2021. What is the yield to maturity for this corporate bond on January 1, 2015 if the market price of the bond on that date is 850 SAR?

5.50%

6.23%

7.43%

8.10%