Question

1. Central Motors is a no-growth firm and has two million shares outstanding. It is expected to earn a constant $10 million per year on its assets. If all earnings are paid out as dividends and the cost of capital is 5%, calculate the current price per share for the stock A) $200 B) $100 C) $250 D) $2000 E) $1000 I 2. The relationship between interest rates and bond maturity is called: A) Liquidity premium B) Yield to maturity C) Term structure of interest rates D) Maturity risk E) Inflation premium 3. Dizzy Corp. bonds bearing a coupon rate of 99%, pay coupons semiannually, have 4 years remaining to maturity, and are currently priced at $1023 per bond. What is the yield to maturity? A) 4.16% B) 9.00% C) 8.59% D) 9.63% E) 8.319%

Answer 1

Answer:-

Given

Number of shares outstanding = 2 million
The earnings is $ 10 million which is constant and all are paid in dividends

The dividend value per share = $ 10 million / 2 million = $ 5 / share

Cost of capital = 5% (r)

The value of share = D(0) x ( 1+g) / (r-g)

Here g = 0 as the dividends are constant

Therefore Value of share = $ 5 ( 1+g) / (0.05 - g)
= $ 5 ( 1+0) / (0.05 - 0)
= $ 5 / 0.05
= $ 100

Therefore the correct choice is answer B

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