What rate of return are investors requiring

Question

1. Interest rates are given as annual rates. If semiannual (twice a year) compounding is being used, then you would make the following adjustments:

• Double the rate and double the number of years.
• Double the rate and halve the number of years.
• Halve the rate and halve the number of years.
• Halve the rate and double the number of years.

2. $10,000 will be received exactly 10 years from today. The following statement is true:

• If the interest rate increases, so does the present value of the $10,000.
• If the interest rate increases, the present value of the $10,000 decreases.
• It is worth $10,000 today.
• It will have a present value greater than $10,000.

 

3. Suppose a zero-coupon bond is selling for $614.00 today. It promises to pay $1,000 in exactly 10 years with annual compounding. Its annual rate of return would be about ____.

• 4%
• 5%
• 6%
• 7%

4. the effective annual percentage rate may be different that the stated APR (annual percentage rate) because:

• compounding occurs more often than once a year.
• extra fees are added to most loans.
• banks are allowed to hide the real cost of borrowing.
• the APR assumes semiannual compounding.

5. If we make the assumption that a company's dividends grow at some constant rate, then we can value the stock as:

• a growing perpetuity.
• a growing annuity.
• a perpetuity.
• an annuity.

6. Common stock that pays cash dividends can be viewed as:

• an annuity-regularly spaced payments of the same dollar amount for a fixed number of periods.
• a perpetuity-regularly spaced payments of the same dollar amount that continue indefinitely.
• similar to a perpetuity but with irregular spacing of the dividends.
• similar to a perpetuity but with dividends that change amount.

7. E.I. du Pont de Nemours & Co. has an issue of $4.50 preferred stock outstanding. It is currently selling for $108. What rate of return are investors requiring?

• 4.17%
• 4.5%
• 9%
• 24%.

 

8. An ordinary annuity has its first payment ______, but an annuity due has its first payment _________.

• at the beginning of the period; at the beginning of the period.
• at the beginning of the period; at the end of the period.
• at the end of the period; at the end of the period.
• at the end of the period; at the beginning of the period.

9. Zeta Corporation just paid a $2.00 dividend. Analysts believe that Zeta Corporation's dividend will grow by 20% next year, and then settle into a constant growth regime at 5% per year into the future. If investors assign a required rate of return of 12% to Zeta's stock, what should the stock sell for today?

• $30.00
• $32.14
• $34.29
• $36.00

10. Simple interest means that:

• the interest rate is the same every period.
• the dollar amount of interest is the same every period.
• interest is only paid once a year.
• the compounding periods are annual.