Ultimate Business Study Guide - Questions & Answers
Your boss, Sally Maloney, treasurer of Fred Clark Enterprises (FCE), asked you to help her estimate the intrinsic value of the company's stock. FCE just paid a dividend of $1.00, and the stock now sells for $17.50 per share. Sally asked a number of security analysts what they believe FCE's future dividends will be, based on their analysis of the company. The consensus is that the dividend will be increased by 10% during Years 1 to 3, and it will be increased at a rate of 5% per year in Year 4 and thereafter. Sally asked you to use that information to estimate the required rate of return on the stock, rs, and she provided you with the following template for use in the analysis.Estimated rs =10.00%(must be changed to force Calculated Price to equal the Actual Market Price)Actual Market Price, P0:$17.50Rapid growthNormal growthYear012345Dividend growth rate (insert correct values)10%10%10%5%5%Calculated dividends (D0 has been paid)$1.00?????HV3 = D4/(rs - g4). Find using Estimated rs.?Total CFs???PVs of CFs when discounted at Estimated rs???Calculated Price = P0 = Sum of PVs =$0.00A positive number will be here when dividends are estimated.The Calculated Price will equal the Actual Market Price once the correct rs has been found.Sally told you that the growth rates in the template were just put in as a trial, and that you must replace them with the analysts' forecasted rates to get the correct forecasted dividends and then the estimated HV. She also notes that the estimated value for rs, at the top of the template, is also just a guess, and you must replace it with a value that will cause the Calculated Price shown at the bottom to equal the Actual Market Price. She suggests that, after you have put in the correct dividends, you can manually calculate the price, using a series of guesses as to the Estimated rs. The value of rs that causes the calculated price to equal the actual price is the correct one. She notes, though, that this trial-and-error process is quite tedious, and that the correct rs could be found much faster with a simple Excel model, especially if you use Goal Seek. What is the value of rs?a. 9.83%b. 13.97%c. 10.54%d. 12.44%e. 11.84%
There are three factors that can affect the shape of the Treasury yield curve (r*t, IPt, and MRPt) and five factors that can affect the shape of the corporate yield curve (r*e, IPt, MRPt, DRPt, and LPt). The yield curve reflects the aggregation of the impacts from these factors. Suppose the real risk-free rate and inflation rate are expected to remain at their current levels throughout the foreseeable future. Consider all factors that affect the yield curve. Then identify which of the following shapes that the U.S. Treasury yield curve can take. Check all that apply Inverted yield curve Upward-sloping yield curve Downward-sloping yield curve Identify whether each of the following statements is true or false Statements True False If inflation is expected to decrease in the future and the real rate is expected to remain steady, then the Treasury yield curve is downward sloping. (Assume MRP 0.) All else equal, the yield on new bonds issued by a leveraged firm will be less than the yield on the new bonds issued by an unleveraged firm. The yield curve for a BBB-rated corporate bond is expected to be above the U.S Treasury bond yield curve Yield curves of highly liquid assets will be lower than yield curves of relatively illiquid assets A U.S. Treasury yield curve is plotted in the following graph: INTEREST RATE(%) 10 15 20 25 30 YEARS TO MATURITY Based on an upward-sloping normal yield curve as shown, which of the following statements is correct? O There is a positive maturity risk premium O If the pure expectations theory is correct, future short-term rates are expected to be higher than current short-term rates. O Pure expectations theory must be correct. O Inflation must be expected to increase in the future
there are 4 questions please anwser if each question is true or false.Apart from risk components, several macroeconomic factors-such as Federal Reserve (the Fed) policy, federal budget deficit or surplus, international factors, and levels of business activity-influence interest rates. Based on your understanding of the impact of macroeconomic factors, identify which of the following statements are true or false: Statements True False O During the credit crisis of 2008, investors around the world were fearful about the collapse of real estate markets, shaky stock markets, and illiquidity of several securities in the United States and several other nations. The demand for U.S. Treasury bonds increased, which led to a rise in their price and a decline in their yields. The larger the federal deficit, other things held constant, the higher are interest rates If the Fed injects a huge amount of money into the markets, inflation is expected to decline, and long-term interest rates are expected to rise. The Federal Reserve Board has a significant influence over the level of economic activity, inflation, interest rates in the United States.
Expectations and the Phillips curveThe following graph shows an economy in long-run equilibrium at point A (grey star symbol). The vertical line is the long-run Phillips curve (LRPC). The downward-sloping curve labeledSRPC1 is the short-run Phillips curve passing through point A.SRPC LRPC SRPC 2 3 3 UNEMPLOYMENT RATE (Percent)Which of the following is true along SRPC1?A) The expected inflation rate is 5%.B) The natural rate of unemployment is 3%.C) The actual inflation rate is 5%.D) The actual unemployment rate is 6%.Suppose that the Fed suddenly and unexpectedly decreases the money supply in an effort to reduce inflation. As a result of this unanticipated action, actual inflation falls to 3%.On the previous graph, use the black point (plus symbol labeled "B") to illustrate the short-run effects of this policy.Now, suppose thatafter a period of 3% inflationhouseholds and firms begin to expect that the inflation rate will continue to be 3%.On the previous graph, use the purple line (diamond symbol) to draw SRPC2, the short-run Phillips curve that is consistent with these expectations, assuming that it is parallel to SRPC1.Finally, using the orange point (square symbol labeled "C"), indicate on the previous graph the new, long-run equilibrium for this economy.The inflation rate at point C is(lower than, the same as, higher than) the inflation rate at point A, and the unemployment rate at point C is(lower than, the same as, higher than) the unemployment rate at point A.Was the Fed able to achieve its goal of lowering inflation?A) Yes, the Fed's policy successfully reduced inflation in both the short run and the long run.B) Yes, but only in the short run; in the long run, inflation returned to its natural rate.C) No, because the Fed cannot affect the inflation rate through monetary policy.Now, suppose that the public fully anticipates the Fed's decision to decrease the money supply. Assume the public also believes that the Fed is firmly committed to carrying out this policy. According to rational expectations theory, when the economy is in long-run equilibrium, a fully anticipated decrease in the money supply will cause the economy to move (from A to B permanently, from A to B and then back to A, from A to B to C and then back to B, from A to B and then to C, directly from A to C) on the previous Phillips curve graph. In this case, rational expectations theory predicts that the fully anticipated decrease in the money supply will have the immediate effect of (a decrease, no change, an increase) in the inflation rate and (a decrease, no change, an increase) in the unemployment rate.