Download Midterm Exam Questions - Community Nursing Clinical Laboratory | NU 261 and more Exams Health sciences in PDF only on Docsity! FIFTH MIDTERM EXAM EC26102: MONEY, BANKING AND FINANCIAL MARKETS MAY 5, 2004 This exam has 22 questions on five pages. Before you begin, please check to make sure that your copy has all 22 questions and all five pages. All questions will receive equal weight in determining your exam score. Please answer all questions on the answer sheet provided. 1. Consider a share of stock that sells for price Pt today (time t) and pays a stream of dividends Dt+1, Dt+2, Dt+3,… in future years t+1, t+2, t+3,… out into the possibly infinite future. An investor can replicate the stream of payments made by this share of stock by buying a portfolio of discount bonds that includes: A) A one-year discount bond with face value Dt+1, a two-year discount bond with face value Dt+2, a three-year discount bond with face value Dt+3, and so on, out into the possibly infinite future. B) A one-year discount bond with price Dt+1, a two-year discount bond with price Dt+2, a three-year discount bond with price Dt+3, and so on, out into the possibly infinite future. C) A one-year discount bond with yield to maturity Dt+1, a two-year discount bond with yield to maturity Dt+2, a three-year discount bond with yield to maturity Dt+3, and so on, out into the possibly infinite future. 2. According to the dividend valuation model, the price of a share of stock should equal the present value of all future __________ paid by that share of stock. 3. The dividend valuation model implies that all else equal, when interest rates (including those on discount bonds) rise, stock prices ought to: A) Rise. B) Fall. 2 4. Consider a corporation that has just declared bankruptcy, since the value of its income and assets has become so small that it can no longer make the payments of interest and principal that it owes to holders of its debt. Under such circumstances, the corporation’s stockholders—its residual claimants—cannot expect to receive any future dividend payments, so the dividend valuation model predicts that the price of their shares should: A) Fall to zero. B) Fall to equal the value of the firm’s outstanding debt. C) Fall to equal the sum of whatever interest payments the firm can make on its debt. 5. In the Gordon growth model, the required return on equity refers to: A) The value of today’s dividend payment. B) The constant growth rate of future dividends. C) The constant interest rate used to discount future dividend payments back to the present. D) None of the above. 6. According to the Gordon growth model, a share of stock that pays a smaller dividend today should: A) Sell for a higher price today. B) Sell for a lower price today. 7. According to the Gordon growth model, when the required return on equity k is smaller, the stock should: A) Sell for a higher price today. B) Sell for a lower price today.
