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a. $1,063,968 b. $1,119,966 c. $1,178,912 d. $1,240,960 e. $1,303,008

ANSWER: d

2. Which of the following statements is CORRECT?

1. Your father is about to retire, and he wants to buy an annuity that will provide him with $85,000 of income a year for 25 years, with the first payment coming immediately. The going rate on such annuities is 5.15%. How much would it cost him to buy the annuity today?

a If inflation is expected to increase in the future, and if the maturity risk premium (MRP) is greater than zero, then . the Treasury yield curve will have an upward slope.

b If the maturity risk premium (MRP) is greater than zero, then the yield curve must have an upward slope. .

c Because long-term bonds are riskier than short-term bonds, yields on long-term Treasury bonds will always be . higher than yields on short-term T-bonds.

d If the maturity risk premium (MRP) equals zero, the yield curve must be flat. .

e The yield curve can never be downward sloping.

.

Answer: A

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Name: Class: Date: ID: ____________________________________________

FINA 2201 Final Exam (Total: 100 points) Instructor: John Bai

a. Because of the call premium, the required rate of return would decline.

b. There is no reason to expect a change in the required rate of return.

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.

ANSWER: d

4. 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%.

3. 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?

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.

dThe 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.

ANSWER: c

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Name: Class: Date: ID: ____________________________________________

FINA 2201 Final Exam (Total: 100 points) Instructor: John Bai

5. Which of the following statements is CORRECT?

a. If a company’s beta doubles, then its required rate of return will also double.

b Other things held constant, if investors suddenly become convinced that there will be deflation in the economy, . then the required returns on all stocks should increase.

c. If a company’s beta were cut in half, then its required rate of return would also be halved.

d If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required . rates of return on stocks with betas less than 1.0 will decline while returns on stocks with betas above 1.0 will

increase.

e. If the risk-free rate rises by 0.5% but the market risk premium declines by that same amount, then the required rate of return on an average stock will remain unchanged, but required returns on stocks with betas less than 1.0 will rise.

ANSWER: e

If expected inflation remains constant but the market risk premium (rM − rRF) declines, the required return of

Stock LB will decline but the required return of Stock HB will increase.

If both expected inflation and the market risk premium (rM − rRF) increase, the required return on Stock HB will

6. Stock HB has a beta of 1.5 and Stock LB has a beta of 0.5. The market is in equilibrium, with required returns equaling expected returns. Which of the following statements is CORRECT?

increase by more than that on Stock LB.

c. If both expected inflation and the market risk premium (rM − rRF) increase, the required returns of both stocks

will increase by the same amount.

d Since the market is in equilibrium, the required returns of the two stocks should be the same.

.

e. If expected inflation remains constant but the market risk premium (rM − rRF) declines, the required return of

Stock HB w