# Exam Chapter 5-6

Topics: Preferred stock, Bond, Bonds Pages: 6 (2078 words) Published: March 14, 2013
1. The major disadvantages of long-term debt include: (Points : 3.71) owners are able to maintain controlrelatively high, explicit after-tax costdecreased earnings per share through using financial leveragenone of the aboveall of the above

2. The ____ the investor's required rate of return on a bond, the ____ will be the value of the bond to the investor. (Points : 3.71) higher, lowerhigher, highernone of the above

3. George is 45 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 15 years so that he can retire at age 60. He expects to live to the maximum age of 85 and wants to be able to withdraw \$35,000 per year from the account on his 61st through 85th birthdays. The account is expected to earn 9% per annum for the entire period of time. Determine the size of the annual deposits that must be made by George. (Points : 3.71) \$28,413.52\$4,058.87\$42,650.24\$11,709.11\$35,000

4. (Bonus Question) George is 45 years old today and is beginning to plan for his retirement. He wants to set aside an equal amount at the end of each of the next 15 years so that he can retire at age 60. He expects to live to the maximum age of 85 and wants to be able to withdraw \$35,000 per year from the account on his 61st through 85th birthdays. If George expects to earn 4% per annum until he turns age 55, and 9% per annum thereafter. Determine the size of the annual deposits that must be made by George.(Points : 5) \$12,159.19\$10,332.22\$14,056.59\$18,733.20

5. A U.S. Government bond was quoted at 98:01 "bid" and 98:10 "asked". How much would you have to pay for one of these \$1,000.00 face value bonds?(Points : 3.71) \$983.13\$983.75\$985.00\$986.25

6.
Marc Jacobs International LLC has issued preferred stock (\$15 par value) that pays an annual dividend of \$2.25. The preferred stock matures in 10 years. At that time, holders of the stock will receive, at their option, either \$15 or one share of common stock with a value up to \$35. If the common stock is trading at a price above \$35, the preferred stockholders will receive a fractional share of common stock worth \$35. The current common stock pays a 10 cent per share dividend. This dividend is expected to grow at a 10 percent rate per year for the next 10 years. If the market requires a 10% rate of return on a stock of this risk and maturity, what is the maximum value for which the share can be expected to trade?

(Points : 3.71)
\$27.32\$13.66\$19.89\$33.75

7. Which of the following is/are true?I. When a loan is amortized over a five year term, the amount of principal repaid is decreased each year.II. The effective annual rate of interest will always be equal to or greater than the nominal annual rate of interest.III. In reading price quotes on U.S. Treasury bills, the bid and asked prices indicate the annualized percentage discount form the maturity value.IV. If the present value of a given sum is equal to its future value, then the discount rate must be zero.

(Points : 3.71)
IV only

III & IV II, III & IVI, III & IV

8. Which of the following is/are true? I. When the coupon rate is smaller than the required rate of return, the bond will sell at a discount. II. The call feature is an advantage to the issuing firm if interest rates increase.III. The basic relationship in bond valuation is for a given percentage change in required rate of return, the longer the time to maturity, the larger the change in bond value. IV. The value of a perpetual bond is equal to the annual interest payment divided by the investor’s required rate of return.

(Points : 3.71)
I, III & IVII, III, & IVIII & IVI, II, & IIIII & IV

9. Which of the following statements concerning preferred stocks is true? (Points : 3.71) Preferred stockholders have a prior claim on the income and assets of the firm as compared to the claims of lenders.Preferred stock dividends per share are normally not increased as the earnings of the firm...