# Bond and Numerical Examples

Instructions: This examination is open book and open notes. Time limit is exactly 3 hours, no extensions. Return this question sheet with your answers.

1. (10 marks) Consider two firms that are identical other than their share prices, their dividend growth rate, and their rates of return on equity. Which of these two firms has the greater dividend yield? Explain. Use no numerical examples in your answer.

2. (10 marks) A public firm is considering a general cash offer of new common shares. Describe and explain how this firm’s “primary market” share price and its “secondary market” share price are related to one another. Explain. Use no numerical examples in your answer.

3. (10 marks) What are the primary factors that influence a firm’s rate of return on equity? What are the primary factors that influence a firm’s market capitalization rate for equity? Explain. Use no numerical examples in your answer.

4. This question is composed of 3 independent multiple choice questions. To be awarded marks for these questions you must give a brief explanation of why your choice is correct. Use no numerical examples in your answer.

A. (4 marks) The yield to maturity on a bond is:

(a) based on the assumption that any payments received are reinvested at the coupon rate of return. (b) based on the assumption that any payments received are reinvested at the current yield. (c) below the coupon rate when the bond sells at a discount, and above the coupon rate when the bond sells at a premium. (d) none of the above.

B. (2 marks) In which one of the following cases is the bond selling at a premium?

(a) Coupon rate is greater than current yield which is greater than yield to maturity. (b) Coupon rate, current yield and yield to maturity are all the same. (c) Coupon rate is less than current yield which is less than yield to maturity. (d) Coupon rate...

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