Answer the following questions and put calculations: 16. A $1,000 par value conv

Question

Answer the following questions and put calculations:

16. A $1,000 par value convertible bond has a conversion price of $25. It is currently selling for $1,200, despite the fact that the bond’s coupon rate and the market interest rate are equal. The common stock obtained upon conversion is selling for $27 per share. What is the convertible bond’s conversion ratio?

a.37

b.40

c.48

d.200

17. When interest rates decrease, what happens to the bond prices of seasoned issues (assume the coupon rate is fixed)?

a.the bond prices decrease

b.the bond prices increase

c.the bond prices are unaffected

d.the bonds will be retired and re-issued at higher coupon rates

18. Which of the following best represent the capital gains yield on a stock held for one year?

a.(P1 - P0)/P1

b.(P1 - P0)/P0

c.D1/P0 + (P1 - P0)/P1

d.D1/P0 + (P1 - P0)/P0

e.D1/P1

19. The constant growth model, or Gordon model, is formulated as follows:

The model can be recast to focus on the expected return implied by the constant growth assumption, as follows:

a.g = [P0(k-g)/D0] – 1

b.D1 = P0(k - g)

c.ke = D1/(P0 - g)

d.ke = [D0(1+g)/P0]+ g

20. Common stockholders:

a.have a residual claim on both income and assets

b.are last in line in the event of bankruptcy

c.have a higher claim on assets than preferred stockholders

d.both a & b

e.all of the above

21. The price of a share of stock today is $25.00. If the return on the share is estimated at 18% and the stock generally pays a dividend of $1 per year, what is its projected selling price in one year?

a.$22.30

b.$30.00

c.$28.50

d.$29.50

22. What is the rate of return on a preferred stock that has a par value of $50, a market price of $46.50, and a dividend of $4.10?

a.8.20%

b.11.34%

c.8.82%

d.12.20%

23. George Franks can buy shares of Ace Rocket Launcher (ARL) for $45.00. George expects dividends to be $3.00 in one year and $5.00 in two years, and he expects to sell the stock for $58.00 in two years. Should George buy any shares of ARL? George feels that 18 percent is the appropriate required rate of return.

24. The Rich Company has a dividend growth rate of 14 percent, a current share price of $56.00, and a current dividend of $1.50. What is the required rate of return for Rich Company shares?

25. Because of a lucky breakthrough, Philadelphia Pharmaceutical’s current dividend per share of $2.00 is expected to grow at a very high 32 percent per year for the next three years and then to grow at a more normal 6 percent per year. What is the value of a Philadelphia share if the investors’ expected return is 20 percent?

Explanation / Answer

As per chegg guideline chegg expert need to answer four question

Answer 17 Correct answer is B,Bond price is inversely related to interest rate when market interest rate decrease bond is offering higher coupon than market therefore it become more valuable to investor therefore they its price increases

Answer 18 Correct answer is B, (P1 - P0)/P0 is the capital gain yield since it is change in price divided by beginning price

Answer 19 correct answer is D, using gordon growth model

P0=D0(1+g)/(Ke-g)

Ke-g=D0(1+g)/P0

Ke=[D0(1+g)/P0] + g

Answer 20 Correct answer is D, common shareholder have residual clain on income and asset as income left after paying all expense,tax,interest and dividend payment and in event of Bankruptcy they are paid in last.

option C is incorrect since they dont have priority over prefrence shareholder

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