Valuation of Securities 1

1. A 10-year Treasury bond has an 8% coupon, and an 8-year Treasury bond has a 10% coupon. Neither
is callable, and both have the same yield to maturity. If the yield to maturity of both bonds increases
by the same amount, which of the following statements would be CORRECT?
A. The prices of both bonds will decrease by the same amount.
B. Both bonds would decline in price, but the 10-year bond would have the greater percentage
decline in price.
C. The prices of both bonds would increase by the same amount.
D. One bond's price would increase, while the other bond’s price would decrease.
E. The prices of the two bonds would remain constant.

2. Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds
non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call
premium, how would this affect their required rate of return? this would be detrimental to the
A. Because of the call premium, the required rate of return would decline. lender kasi wala na silang mae-
B. There is no reason to expect a change in the required rate of return. earn na interest.
C. The required rate of return would decline because the bond would then be less risky to a
bondholder.
D. The required rate of return would increase because the bond would then be more risky to a
bondholder.
E. It is impossible to say without more information.

3. Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a par value of
$1,000 and an annual coupon of 5.7%. If the current market interest rate is 7.0%, at what price
should the bonds sell?
A. $817.12 C. $859.56 E. $903.64
B. $838.07 D. $881.60

4. Assume that you are considering the purchase of a 20-year, noncallable bond with an annual coupon
rate of 9.5%. The bond has a face value of $1,000, and it makes semiannual interest payments. If
you require an 8.4% nominal yield to maturity on this investment, what is the maximum price you
should be willing to pay for the bond?
A. $1,105.69 C. $1,161.67 E. $1,220.48
B. $1,133.34 D. $1,190.71

5. Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds at their par value of
$1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current
price of the bonds, given that they now have 19 years to maturity?
A. $1,113.48 C. $1,171.32 E. $1,232.15
B. $1,142.03 D. $1,201.35

6. Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50
per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?
A. $104.27 C. $109.69 E. $115.38
B. $106.95 D. $112.50
7. The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at
a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium
is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?
A. $18.62 C. $19.56 E. $20.55
B. $19.08 D. $20.05

8. Two constant growth stocks are in equilibrium, have the same price, and have the same required
rate of return. Which of the following statements is CORRECT?
A. The two stocks must have the same dividend per share.
B. If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
C. If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
D. The two stocks must have the same dividend growth rate. expected return: captial yield and
dividend yield. the total of capital yield
E. The two stocks must have the same dividend yield. and dividend should be the same for the
stocks.
9. Which of the following statements is CORRECT?
A. The constant growth model is often appropriate for evaluating start-up companies that do not
have a stable history of growth but are expected to reach stable growth within the next few
years.
B. If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant
rate of 5%, this implies that the stock’s dividend yield is also 5%.
C. The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are
expected to decline at a constant rate, i.e., to grow at a negative rate.
D. The price of a stock is the present value of all expected future dividends, discounted at the
dividend growth rate.
E. The constant growth model cannot be used for a zero growth stock, where the dividend is
expected to remain constant over time.

10. Ackert Company's last dividend was $1.55. The dividend growth rate is expected to be constant at
1.5% for 2 years, after which dividends are expected to grow at a rate of 8.0% forever. The firm's
required return (rs) is 12.0%. What is the best estimate of the current stock price?
A. $37.05 C. $39.30 E. $41.70
B. $38.16 D. $40.48

FOR NUMBER 9: invalid lang ang gordon growth model if ang growth rate ay
mas malaki kesa sa rs

valid pa rin ang gordon growth model if may negative growth

rate