Question

Question 201 pts

When valuing a stock using the constant-growth model, D1 represents the:

Group of answer choices

A. expected difference in the stock price over the next year.

B. expected stock price in one year.

C. last annual dividend paid.

D. the next expected annual dividend.

E. discount rate.

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Question 211 pts

The yield to maturity on a discount bond is:

Group of answer choices

A. equal to both the coupon rate and the current yield.

B. equal to the current yield but greater than the coupon rate.

C. greater than both the current yield and the coupon rate.

D. less than the current yield but greater than the coupon rate.

E. less than both the current yield and the coupon rate.

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Question 221 pts

You are considering an investment that will pay $3,000 a year for 6 years, starting one year from today. Your required rate of return is 8.5 percent. What is the maximum amount you should pay for this investment?

Group of answer choices

A. $13,660.76

B. $14,223.23

C. $15,060.55

D. $15,355.54

E. $17,450.20

Answer 1

Q201

As per Constant growth model, the price of stock today is computed as follows:

Price of stock (Po) = D1 / (Ke -g)

where, D1 represents the dividend expected in next year

Ke represents expected rate of return or dicount rate

g reprensts growth rate

Hence, Option D is correct i.e. D1 represents the next expected annual dividend.

Q211

Relationship between YTM and current yield is as follows:

Premium bonds - the YTM is greater than the current yield. Discount bonds - the YTM is less than the current yield. Bonds selling at par value - the YTM is same or equal to the current yield.

Relationship between YTM and coupon rate is as follows:

Discount bonds- Bond's coupon rate is less than its YTM. Premium bonds- Bond's coupon rate is more than its YTM. Par value bonds- Bond's coupon rate is equal to its YTM.

Looking at the above relationships, it is concluded that "The yield to maturity on a discount bond is less than the current yield but greater than the coupon rate".

Hence, Option D is correct.

Q221

Maxiumum amount to be paid for the investment can be computed as follows:

Present value = Future value / (1 + r)n

= $3000/1.0851 + $3000/1.0852 + $3000/1.0853 + $ 3000/1.0854 + $3000/1.0855 + $3000/1.0856

= $13,660.76

Hence, Option A is correct.