Bond and Effective Annual Rate

This examination paper must be returned intact. No part may be removed from the examination room.

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AFIN 253 Financial Management
MID-SEMESTER TEST: TUESDAY 10th APRIL 2012 Time allowed: 1 hour 30 minutes plus 10 minutes reading time. Instructions
1. Writing is not permitted in reading time. All pens, pencils and highlighters must be on your desk. 2. Part A - There are 15 multiple choice questions worth 1 mark each. Select the 'one best' answer choice for each question. Answers to these must be recorded on a red-coloured General Purpose Answer Sheet which will be marked by a computer. Please make sure your name and SID is on this sheet. Answers on this test question paper will not be marked. 3. Part B - There are 2 short answer questions. The first is worth 2 marks, the second 3 marks. Show all relevant calculations. Note that only pages 9 and 10 will be marked in this answer booklet. You should not write answers to part B on any other pages. 4. Materials Permitted  A non-programmable calculator without text storage capability is permitted. Financial calculators may be used.  Dictionaries may not be used.  Mobile phones must be turned off and left at the front of the examination room.  Bags must be left at the front of the room.

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Part A (15 marks)
Select the one best answer choice for each question.

Question 1: A stock just paid its annual dividend of $9. The share price is $60. The required return of the stock is 10% pa as an effective annual rate. What is the implied growth rate of the dividend? (a) -0.8565 (b) -0.0500 (c) -0.0435 (d) 0.0000 (e) 0.1500

Question 2: A stock is expected to pay a dividend of $15 in one year (t=1), then $25 for 9 years after that (payments at t=2 ,3,...10), and on the 11th year (t=11) the dividend will be 2% less than at t=10, and will continue to shrink every year after that forever. The required return of the stock is