FIN 323

Quiz #3
___________________________

Name

1. Todds Turtles is expected to increase dividends by 20% in one year and by 15%
in two years. After that, dividends will increase at a rate of 5% per year indefinitely.
The last dividend was $1, the required return is 20%, what is the current price of the
stock? (Hint: current price will be from an NPV calculation)
A. $6.90
B. $8.67
C. $9.66
D. $10.10
E. $12.30
D1 = 1(1.2) = $1.20
D2 = 1.20(1.15) = $1.38
D3 = 1.38(1.05) = $1.449
1.449 / (.2 - .05) = 9.66
CF0 = 0; C01 = 1.20; F01 = 1; C02 = ( 1.38 + 9.66)=11.04; F02 = 1; NPV; I = 20;
CPT NPV = 8.67
2. The preferred stock of Rail Lines, Inc., has a dividend yield of 14.25% per year
and sells for $59.80 a share. What is the amount of each quarterly dividend
payment?
A. $1.82
B. $2.13
C. $5.27
D. $8.52
E. $10.21
Div. Yield = 0.1425 * $59.80 = $8.5215
$8.5215/4 = $2.130375
3. Sessler Manufacturers made two announcements concerning its common stock
today. First, the company announced that the next annual dividend will be $1.75 a
share. Secondly, all dividends after that will DECREASE by 2.5 percent annually.
What is the maximum amount you should pay to purchase a share of this stock
today if you require a 15 percent rate of return?
A. $10.00
B. $11.29
C. $13.27

D. $14.00
E. $14.21

P 0=

$ 1.75
=$ 10
.15(0.025)

4. Green Roof Inn is preparing a new bond offering with a 6 percent, semiannual
coupon and a face value of $1,000. The bonds will be repaid in 10 years and will be
sold at par. Which of the following statements is correct?
A. The final payment will be in the amount of $1,060.
B. The bonds will pay 10 interest payments of $60 each.
C. The bonds will become premium bonds if the market rate of interest declines
D. The bonds will initially sell for $1,030 each.
E. The bonds will sell at a discount if the market rate is 5.5 percent.
Refer to section 7.1
5. Roadside Markets has a 6.75 percent coupon bond outstanding that matures in
10.5 years. The bond pays interest semiannually. What is the market price per bond
if the face value is $1,000 and the yield to maturity is 6.69 percent?
A. $999.80
B. $999.85
C. $1,004.47
D. $1,005.82
E. $1,007.52

6. If I sell a Bank of America (BAC) $10 November Call Option, what is my obligation
or right?
A. Right to buy
B. Obligation to sell
C. Obligation to buy
D. Right to sell
E. Force to buy

7. A taxable bond has a yield of 12% and a municipal bond has a yield of 6%.
a. If you are in the 40% tax bracket, which bond do you prefer?
b. At what tax rate would you be indifferent between the 2 bonds? 5

Solution: - a. AT return of a taxable bond:-12(1-0.4) = 7.2%, where T is the tax

rate. Since it is greater than 6%, we choose the taxable bond.
b. The after tax bond yield would be 12(1-T). To get the tax rate which would make
owning the two types of bonds indifferent, we make the 12(1-T) =6, making
T=50%.