Q&A Hero

Q: S. Claus & Company is planning a zero coupon bond issue. The bond has a par value of $1,000, matures in 2 years, and will be sold at a price of $826.45. The firm's marginal tax rate is 40 percent. What is the annual after-tax cost of debt to the company on this issue? a. 4.0% b. 6.0% c. 8.0% d. 10.0% e. 12.0%

Q: Martin Corporation's common stock is currently selling for $50 per share. The current dividend is $2.00 per share. If dividends are expected to grow at 6 percent per year and if flotation costs are 10 percent, then what is the firm's cost of retained earnings and what is its cost of new common stock? a. 10.71%; 10.24% b. 10.24%; 10.71% c. 10.24%; 11.38% d. 11.38%; 10.71% e. 9.31%; 9.86%

Q: Allison Engines Corporation has established a target capital structure of 40 percent debt and 60 percent common equity. The firm expects to earn $600 in after-tax income during the coming year, and it will retain 40 percent of those earnings. The current market price of the firm's stock is P0 = $28; its last dividend was D0 = $2.20, and its expected dividend growth rate is 6 percent. Allison can issue new common stock at a 15 percent flotation cost. What will Allison's marginal cost of equity capital (not the WACC) be if it must fund a capital budget requiring $600 in total new capital? a. 15.8% b. 13.9% c. 7.9% d. 14.3% e. 9.7%

Q: Your company's stock sells for $50 per share, its last dividend (D0) was $2.00, its growth rate is a constant 5 percent, and the company would incur a flotation cost of 15 percent if it sold new common stock. Net income for the coming year is expected to be $500,000, the firm's payout ratio is 60 percent, and its common equity ratio is 30 percent. If the firm has a capital budget of $1,000,000, what component cost of common equity will be built into the WACC for the last dollar of capital the company raises? a. 9.20% b. 9.94% c. 10.50% d. 11.75% e. 12.30%

Q: Suppose a new company decides to raise its initial $200 million of capital as $100 million of common equity and $100 million of long-term debt. By an iron-clad provision in its charter, the company can never borrow any more money. Which of the following statements is correct? a. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be absolutely certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures. b. If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be absolutely certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds. c. The higher the percentage of total debt represented by debentures, the greater the risk of, and hence the interest rate on, the debentures. d. The higher the percentage of total debt represented by mortgage bonds, the riskier both types of bonds will be, and, consequently, the higher the firm's total dollar interest charges will be. e. In this situation, we cannot tell for sure how, or whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. Interest rates on the two types of bonds would vary as their percentages were changed, but the result might well be such that the firm's total interest charges would not be affected materially by the mix between the two.

Q: Which of the following statements is most correct? a. If a company's tax rate increases but the yield to maturity of its noncallable bonds remains the same, the company's marginal cost of debt capital used to calculate its weighted average cost of capital will fall. b. All else equal, an increase in a company's stock price will increase the marginal cost of retained earnings. c. All else equal, an increase in a company's stock price will increase the marginal cost of issuing new common equity. d. Answers a and b are both correct. e. Answers b and c are both correct.

Q: Assume that a new law is passed which restricts investors to holding only one asset. A risk-averse investor is considering two possible assets as the asset to be held in isolation. The assets' possible returns and related probabilities (i.e., the probability distributions) are as follows: Asset X Asset Y Pr r Pr r 10 −3% 05 −3% 10 2 10 2 25 5 30 5 25 8 30 8 30 10 25 10 Which asset should be preferred? a. Asset X, since its expected return is higher. b. Asset Y, since its beta is probably lower. c. Either one, since the expected returns are the same. d. Asset X, since its standard deviation is lower. e. Asset Y, since its coefficient of variation is lower and its expected return is higher.

Q: You are an investor in common stock, and you currently hold a well-diversified portfolio which has an expected return of 12 percent, a beta of 1.2, and a total value of $9,000. You plan to increase your portfolio by buying 100 shares of AT&E at $10 a share. AT&E has an expected return of 20 percent with a beta of 2.0. What will be the expected return and the beta of your portfolio after you purchase the new stock? a. = 20.0%; u03b2p = 2.00 b. = 12.8%; u03b2p = 1.28 c. = 12.0%; u03b2p = 1.20 d. = 13.2%; u03b2p = 1.40 e. = 14.0%; u03b2p = 1.32

Q: Given the following information, determine which beta coefficient for Stock A is consistent with equilibrium: rs = 11.3%; rRF = 5%; rM = 10% a. 0.86 b. 1.26 c. 1.10 d. 0.80 e. 1.35

Q: Given the following probability distributions, what are the expected returns for the Market and for Security J? StateiPr i rMrJ 1 0.3 u221210% 40% 2 0.4 10 u221220 3 0.3 30 30 a. 10.0%; 11.3% b. 9.5%; 13.0% c. 10.0%; 9.5% d. 10.0%; 13.0% e. 13.0%; 10.0%

Q: Here are the expected returns on two stocks: Returns Probability X Y 1 −20% 10% 8 20 15 1 40 20 If you form a 50−50 portfolio of the two stocks, what is the portfolio's standard deviation? a. 8.1% b. 15% c. 13.4% d. 16.5% e. 20%

Q: A financial analyst has been following Fast Start Inc., a new high-growth company. She estimates that the current risk-free rate is 6.25 percent, the market risk premium is 5 percent, and that Fast Start's beta is 1.75. The current earnings per share (EPS0) is $2.50. The company has a 40 percent payout ratio. The analyst estimates that the company's dividend will grow at a rate of 25 percent this year, 20 percent next year, and 15 percent the following year. After three years the dividend is expected to grow at a constant rate of 7 percent a year. The company is expected to maintain its current payout ratio. The analyst believes that the stock is fairly priced. What is the current price of the stock? a. $16.51 b. $17.33 c. $18.53 d. $19.25 e. $19.89

Q: Hard Hat Construction's stock is currently selling at an equilibrium price of $30 per share. The firm has been experiencing a 6 percent annual growth rate. Last year's earnings per share, E0, were $4.00, and the dividend payout ratio is 40 percent. The risk-free rate is 8 percent, and the market risk premium is 5 percent. If systematic risk (beta) increases by 50 percent, and all other factors remain constant, by how much will the stock price change? (Hint: Use four decimal places in your calculations.) a. u2212$7.33 b. +$7.14 c. u2212$15.00 d. u2212$15.22 e. +$22.63

Q: Philadelphia Corporation's stock recently paid a dividend of $2.00 per share (D0 = $2), and the stock is in equilibrium. The company has a constant growth rate of 5 percent and a beta equal to 1.5. The required rate of return on the market is 15 percent, and the risk-free rate is 7 percent. Philadelphia is considering a change in policy which will increase its beta coefficient to 1.75. If market conditions remain unchanged, what new constant growth rate will cause the common stock price of Philadelphia to remain unchanged? a. 8.85% b. 18.53% c. 6.77% d. 5.88% e. 13.52%

Q: You are managing a portfolio of 10 stocks which are held in equal amounts. The current beta of the portfolio is 1.64, and the beta of Stock A is 2.0. If Stock A is sold, what would the beta of the replacement stock have to be to produce a new portfolio beta of 1.55? a. 1.10 b. 1.00 c. 0.90 d. 0.75 e. 0.50

Q: Consider the following information, and then calculate the required rate of return for the Scientific Investment Fund. The total investment in the fund is $2 million. The market required rate of return is 15 percent, and the risk-free rate is 7 percent. Stock Investment Beta A $ 200,000 1.50 B 300,000 u22120.50 C 500,000 1.25 D 1,000,000 0.75 a. 14.3% b. 15.0% c. 13.1% d. 12.7% e. 10.3%

Q: As financial manager of Material Supplies Inc., you have recently participated in an executive committee decision to enter into the plastics business. Much to your surprise, the price of the firm's common stock subsequently declined from $40 per share to $30 per share. While there have been several changes in financial markets during this period, you are anxious to determine how the market perceives the relevant risk of your firm. Assume that the market is in equilibrium. From the following data you find that the beta value associated with your firm has changed from an old beta of ____ to a new beta of ____. (1) The real risk-free rate is 2 percent, but the inflation premium has increased from 4 percent to 6 percent. (2) The expected growth rate has been re-evaluated by security analysts, and a 10.5 percent rate is considered to be more realistic than the previous 5 percent rate. This change had nothing to do with the move into plastics; it would have occurred anyway. (3) The risk aversion attitude of the market has shifted somewhat, and now the market risk premium is 3 percent instead of 2 percent. (4) The next dividend, D1, was expected to be $2 per share, assuming the "old" 5 percent growth rate. a. 2.00; 1.50 b. 1.50; 3.00 c. 2.00; 3.17 d. 1.67; 2.00 e. 1.50; 1.67

Q: The probability distribution for rM for the coming year is as follows: Probability rM 05 7% 30 8 30 9 30 10 05 12 If rRF = 6.05% and Stock X has a beta of 2.0, an expected constant growth rate of 7 percent, and D0 = $2, what market price gives the investor a return consistent with the stock's risk? a. $25.00 b. $37.50 c. $21.72 d. $42.38 e. $56.94

Q: Given the following information, calculate the expected capital gains yield for Chicago Bears Inc.: beta = 0.6; rM = 15%; rRF = 8%; = $2.00; P0 = $25.00. Assume the stock is in equilibrium and exhibits constant growth. a. 3.8% b. 0% c. 8.0% d. 4.2% e. None of the above.

Q: Carlson Products, a constant growth company, has a current market (and equilibrium) stock price of $20.00. Carlson's next dividend, , is forecasted to be $2.00, and Carlson is growing at an annual rate of 6 percent. Carlson has a beta coefficient of 1.2, and the required rate of return on the market is 15 percent. As Carlson's financial manager, you have access to insider information concerning a switch in product lines which would not change the growth rate, but would cut Carlson's beta coefficient in half. If you buy the stock at the current market price, what is your expected percentage capital gain? a. 23% b. 33% c. 43% d. 53% e. There would be a capital loss.

Q: Berg Inc. has just paid a dividend of $2.00. Its stock is now selling for $48 per share. The firm is half as risky as the market. The expected return on the market is 14 percent, and the yield on U.S. Treasury bonds is 11 percent. If the market is in equilibrium, what rate of growth is expected? a. 13% b. 10% c. 4% d. 8% e. u22122%

Q: ABC Company has been growing at a 10% rate, and it just paid a dividend of D0 = $3.00. Due to a new product, ABC expects to achieve a dramatic increase in its short-run growth rate, to 20 percent annually for the next 2 years. After this time, growth is expected to return to the long-run constant rate of 10 percent. The company's beta is 2.0, the required return on an average stock is 11 percent, and the risk-free rate is 7 percent. What should the dividend yield (/P0) be today? a. 3.93% b. 4.60% c. 10.00% d. 7.54% e. 2.33%

Q: You are considering an investment in the common stock of Cowher Corp. The stock is expected to pay a dividend of $2 per share at the end of the year (i.e., = $2.00). The stock has a beta equal to 1.2. The risk-free rate is 6 percent. The market risk premium is 5 percent. The stock's dividend is expected to grow at some constant rate, g. The stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe the stock price will be at the end of three years? (In other words, what is ?) a. $40.00 b. $42.35 c. $45.67 d. $46.31 e. $49.00

Q: You are given the following data: (1) The risk-free rate is 5 percent. (2) The required return on the market is 8 percent. (3) The expected growth rate for the firm is 4 percent. (4) The last dividend paid was $0.80 per share. (5) Beta is 1.3. Now assume the following changes occur: (1) The inflation premium drops by 1 percent. (2) An increased degree of risk aversion causes the required return on the market to go to 10 percent after adjusting for the changed inflation premium. (3) The expected growth rate increases to 6 percent. (4) Beta rises to 1.5. What will be the change in price per share, assuming the stock was in equilibrium before the changes? a. +$12.11 b. u2212$4.87 c. +$6.28 d. u2212$16.97 e. +$2.78

Q: Motor Homes Inc. (MHI) is presently in a stage of abnormally high growth because of a surge in the demand for motor homes. The company expects earnings and dividends to grow at a rate of 20 percent for the next 4 years, after which time there will be no growth (g = 0) in earnings and dividends. The company's last dividend was $1.50. MHI has a beta of 1.6, the return on the market is currently 12.75 percent, and the risk-free rate is 4 percent. What should be the current price per share of common stock? a. $15.17 b. $17.28 c. $22.21 d. $19.10 e. None of the above.

Q: You are holding a stock which has a beta of 2.0 and is currently in equilibrium. The required return on the stock is 15 percent, and the return on an average stock is 10 percent. What would be the percentage change in the return on the stock if the return on an average stock increased by 30 percent while the risk-free rate remained unchanged? a. +20% b. +30% c. +40% d. +50% e. +60%

Q: Calculate the standard deviation of the expected dollar returns for Ditto Copier Center, given the following distribution of returns: Probability Return 2 $50 5 $20 3 −$15 a. $36.0 b. $23.0 c. $18.0 d. $13.0 e. $30

Q: Given the following probability distribution, what is the expected return and the standard deviation of returns for Security J? State Pr irJ 1 0.2 10% 2 0.6 15 3 0.2 20 a. 15%; 6.50% b. 12%; 5.18% c. 15%; 3.16% d. 15%; 10.00% e. 20%; 5.00%

Q: You have just noticed in the financial pages of the local newspaper that you can buy a bond ($1,000 par) for $800. If the coupon rate is 10 percent, with annual interest payments, and there are 10 years to maturity, you should make the purchase if your required return on investments of this type is 12 percent. a. True b. False

Q: Assume that you would like to purchase 100 shares of preferred stock that pays an annual dividend of $6 per share. However, you have limited resources now, so you cannot afford the purchase price. In fact, the best that you can do now is to invest your money in a bank account earning a simple interest rate of 6 percent, but where interest is compounded daily (assume a 365-day year). Because the preferred stock is riskier, it has a required annual rate of return of 12 percent (assume that this rate will remain constant over the next 5 years). For you to be able to purchase this stock at the end of 5 years, how much must you deposit in your bank account today, at t = 0? a. $2,985.00 b. $4,291.23 c. $3,138.52 d. $3,704.18 e. $4,831.25

Q: A four-year, zero-coupon Treasury bond sells at a price of $762.8952. A three-year, zero-coupon Treasury bond sells at a price of $827.8491. Assuming the pure expectations theory is correct, what does the market believe the price of one-year, zero-coupon bonds will be in three years? a. $921.66 b. $934.58 c. $938.97 d. $945.26 e. $950.47

Q: A two-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $873.4387. A one-year zero-coupon Treasury bond with a maturity value of $1,000 has a price of $938.9671. If the pure expectations theory is correct, for what price should one-year zero-coupon Treasury bonds sell one year from now? a. $798.89 b. $824.66 c. $852.28 d. $930.23 e. $989.11

Q: Assume that McDonald's and Burger King have similar $1,000 par value bond issues outstanding. The bonds are equally risky. The Burger King bond has interest payments of $80 paid annually and matures 20 years from today. The McDonald's bond has interest payments of $80 paid semiannually, and it also matures in 20 years. If the simple required rate of return, rd, is 12 percent, semiannual basis, for both bonds, what is the difference in current market prices of the two bonds? a. No difference. b. $2.20 c. $3.77 d. $17.53 e. $6.28

Q: Semiannual payment bonds with the same risk (Aaa) and maturity (20 years) as your company's bonds have a simple (not effective annual rate) yield of 9 percent. Your company's treasurer is thinking of issuing at par some $1,000 par value, 20-year, quarterly payment bonds. She has asked you to determine what quarterly interest payment, in dollars, the company would have to set in order to provide the same effective annual rate (EAR) as those on the 20-year, semiannual payment bonds. What would the quarterly interest payment be, in dollars? a. $45.00 b. $25.00 c. $22.25 d. $27.50 e. $23.00

Q: Assume that the average firm in your company's industry is expected to grow at a constant rate of 5 percent, and its dividend yield is 4 percent. Your company is about as risky as the average firm in the industry, but it has just developed a line of innovative new products which leads you to expect that its earnings and dividends will grow at a rate of 40 percent [ = D0(1 + g) = D0(1.40)] this year and 25 percent the following year, after which growth should match the 5 percent industry average rate. The last dividend paid (D0) was $2. What is the value per share of your firm's stock? a. $42.60 b. $82.84 c. $91.88 d. $101.15 e. $110.37

Q: Garcia Inc. has a current dividend of $3.00 per share (D0 = $3.00). Analysts expect that the dividend will grow at a rate of 25 percent a year for the next three years, and thereafter it will grow at a constant rate of 10 percent a year. The company's cost of equity capital is estimated to be 15 percent. What is the current stock price of Garcia Inc.? a. $75.00 b. $88.55 c. $95.42 d. $103.25 e. $110.00

Q: You have just been offered a $1,000 par value bond for $847.88. The coupon rate is 8 percent, payable annually, and interest rates on new issues of the same degree of risk are 10 percent. You want to know how many more interest payments you will receive, but the party selling the bond cannot remember. Can you determine how many interest payments remain? a. 14 b. 15 c. 12 d. 20 e. 10

Q: Your company paid a dividend of $2.00 last year. The growth rate is expected to be 4 percent for 1 year, 5 percent the next year, then 6 percent for the following year, and then the growth rate is expected to be a constant 7 percent thereafter. The required rate of return on equity (rs) is 10 percent. What is the current price of the common stock? a. $53.45 b. $60.98 c. $64.49 d. $67.47 e. $69.21

Q: The current market price of Smith Corporation's 10 percent, 10-year bonds is $1,297.58. A 10 percent coupon interest rate is paid semiannually, and the par value is equal to $1,000. What is the YTM (stated on a simple, or annual, basis) if the bonds mature 10 years from today? a. 8% b. 6% c. 4% d. 2% e. 1%

Q: The Florida Boosters Association has decided to build new bleachers for the football field. Total costs are estimated to be $1 million, and financing will be through a bond issue of the same amount. The bond will have a maturity of 20 years, a coupon rate of 8 percent, and has annual payments. In addition, the Association must set up a reserve to pay off the loan by making 20 equal annual payments into an account which pays 8 percent, annual compounding. The interest-accumulated amount in the reserve will be used to retire the entire issue at its maturity 20 years hence. The Association plans to meet the payment requirements by selling season tickets at $10 net profit per ticket. How many tickets must be sold each year to service the debt, i.e., to meet the interest and principal repayment requirements? a. 5,372 b. 10,186 c. 15,000 d. 20,459 e. 25,000

Q: Modular Systems Inc. just paid dividend D0, and it is expecting both earnings and dividends to grow by 0 percent in Year 1 and 2, by 5 percent in Year 3, and at a rate of 10 percent in Year 4 and thereafter. The required return on Modular is 15 percent, and it sells at its equilibrium price, P0 = $49.87. What is the expected value of the next dividend, ? (Hint: Draw a time line and then set up and solve an equation with one unknown, .) a. It cannot be estimated without more data. b. $1.35 c. $1.85 d. $2.35 e. $2.85

Q: Club Auto Parts' last dividend, D0, was $0.50, and the company expects to experience no growth for the next 2 years. However, Club will grow at an annual rate of 5 percent in the third and fourth years, and, beginning with the fifth year, it should attain a 10 percent growth rate which it will sustain thereafter. Club has a required rate of return of 12 percent. What should be the price per share of Club stock at the beginning of the third year, ? a. $19.98 b. $25.06 c. $31.21 d. $19.48 e. $27.55

Q: NYC Company has decided to make a major investment. The investment will require a substantial early cash outflow, and inflows will be relatively late. As a result, it is expected that the impact on the firm's earnings for the first 2 years will cause a negative growth of 5 percent annually. Further, it is anticipated that the firm will then experience 2 years of zero growth, after which it will begin a positive annual sustainable growth of 6 percent. If the firm's required return is 10 percent and its last dividend, D0, was $2 per share, what should be the current price per share? a. $32.66 b. $47.83 c. $53.64 d. $38.47 e. $42.49

Q: The Hart Mountain Company has recently discovered a new type of kitty litter which is extremely absorbent. It is expected that the firm will experience (beginning now) an unusually high growth rate (20 percent) during the period (3 years) it has exclusive rights to the property where the raw material used to make this kitty litter is found. However, beginning with the fourth year the firm's competition will have access to the material, and from that time on the firm will achieve a normal growth rate of 8 percent annually. During the rapid growth period, the firm's dividend payout ratio (percent of EPS paid as dividends) will be relatively low (20 percent) in order to conserve funds for reinvestment. However, the decrease in growth in the fourth year will be accompanied by an increase in dividend payout to 50 percent. Last year's earnings were E0 = $2.00 per share, and the firm's required return is 10 percent. What should be the current price of the common stock? a. $66.50 b. $87.96 c. $71.53 d. $78 e. $93.50

Q: Recently, Ohio Hospitals Inc. filed for bankruptcy. The firm was reorganized as American Hospitals Inc., and the court permitted a new indenture on an outstanding bond issue to be put into effect. The issue has 10 years to maturity and a coupon rate of 10 percent, paid annually. The new agreement allows the firm to pay no interest for 5 years. Then, interest payments will be resumed for the next 5 years. Finally, at maturity (Year 10), the principal plus the interest that was not paid during the first 5 years will be paid. However, no interest will be paid on the deferred interest. If the required return is 20 percent, what should the bonds sell for in the market today? a. $242.26 b. $281.69 c. $578.31 d. $362.44 e. $813.69

Q: You have a chance to purchase a perpetual security that has a stated annual payment (cash flow) of $50. However, this is an unusual security in that the payment will increase at an annual rate of 5 percent per year; this increase is designed to help you keep up with inflation. The next payment to be received (your first payment, due in 1 year) will be $52.50. If your required rate of return is 15 percent, how much should you be willing to pay for this security? a. $350 b. $482 c. $525 d. $556 e. $610

Q: The Textbook Production Company has been hit hard due to increased competition. The company's analysts predict that earnings (and dividends) will decline at a rate of 5 percent annually forever. Assume that rs = 11 percent and D0 = $2.00. What will be the price of the company's stock three years from now? a. $27.17 b. $6.23 c. $28.50 d. $10.18 e. $20.63

Q: DAA's stock is selling for $15 per share. The firm's income, assets, and stock price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years. No dividends have been declared as yet, but the firm intends to declare a dividend of = $2.00 at the end of the last year of its supernormal growth. After that, dividends are expected to grow at the firm's normal growth rate of 6 percent. The firm's required rate of return is 18 percent. The stock is a. Undervalued by $3.03. b. Overvalued by $3.03. c. Correctly valued. d. Overvalued by $2.25. e. Undervalued by $2.25.

Q: You are considering the purchase of a common stock that just paid a dividend of $2.00. You expect this stock to have a growth rate of 30 percent for the next 3 years, then to have a long-run normal growth rate of 10 percent thereafter. If you require a 15 percent rate of return, how much should you be willing to pay for this stock? a. $71.26 b. $97.50 c. $82.46 d. $79.15 e. $62.68

Q: The Satellite Building Company has fallen on hard times. Its management expects to pay no dividends for the next 2 years. However, the dividend for Year 3, , will be $1.00 per share, and the dividend is expected to grow at a rate of 3 percent in Year 4, 6 percent in Year 5, and 10 percent in Year 6 and thereafter. If the required return for Satellite is 20 percent, what is the current equilibrium price of the stock? a. $0 b. $5.26 c. $6.34 d. $12.00 e. $13.09

Q: Due to unfavorable economic conditions, EFB Company's earnings and dividends are expected to remain unchanged for the next 3 years. After 3 years, dividends are expected to grow at a 10 percent annual rate forever. The last dividend was $2.00, and the required rate of return is 20 percent. What should be the current market value of EFB stock? a. $13.46 b. $14.51 c. $15.22 d. $16.03 e. $16.94

Q: Eastern Auto Parts' last dividend was D0 = $0.50, and the company expects to experience no growth for the next 2 years. However, Eastern will grow at an annual rate of 5 percent in the third and fourth years, and, beginning with the fifth year, it should attain a 10 percent growth rate which it should sustain thereafter. Eastern has a required rate of return of 12 percent. What should be the present price per share of Eastern common stock? a. $19.26 b. $31.87 c. $30.30 d. $20.83 e. $19.95

Q: A firm expects to pay dividends at the end of each of the next four years of $2.00, $1.50, $2.50, and $3.50. If growth is then expected to level off at 8 percent, and if you require a 14 percent rate of return, how much should you be willing to pay for this stock? a. $67.81 b. $22.49 c. $58.15 d. $31.00 e. $43.97

Q: Assume that you own a hundred $1,000 par value bonds, with a total face value of $100,000. These bonds have a 4 percent coupon, pay interest semiannually, and have 5 years remaining until they mature. New bonds with the same risk and maturity provide yields to maturity of 14 percent. You are considering selling your bonds and depositing the proceeds in a savings account which pays interest at a rate of 6 percent, annual compounding. If you do make the transaction, you will liquidate the savings account by making 5 equal withdrawals, the first coming 1 year from now. What will be the amount of each annual withdrawal? a. $12,940 b. $15,403 c. $24,860 d. $29,425 e. $64,880

Q: The current price of a 10-year, $1,000 par value bond is $1,158.91. Interest on this bond is paid every six months, and the simple annual yield is 14 percent. Given these facts, what is the annual coupon rate on this bond? a. 10% b. 12% c. 14% d. 17% e. 21%

Q: Cold Boxes Ltd. has 100 bonds outstanding (maturity value = $1,000). The required rate of return on these bonds is currently 10 percent, and interest is paid semiannually. The bonds mature in 5 years, and their current market value is $768 per bond. What is the annual coupon interest rate? a. 8% b. 6% c. 4% d. 2% e. 0%

Q: Assume that you can purchase a 15-year, $1,000 face value bond which pays interest on a semiannual basis, for $1,324.23. If the market's effective annual required rate of return is 8.16 percent (or 4 percent semi-annually), how much interest does this bond pay each year? a. $64.81 b. $56.37 c. $117.50 d. $132.19 e. $126.48

Q: You are willing to pay $15,625 to purchase a perpetuity which will pay you and your heirs $1,250 each year, forever. If your required rate of return does not change, how much would you be willing to pay if this were a 20-year, annual payment, ordinary annuity instead of a perpetuity? a. $10,342 b. $11,931 c. $12,273 d. $13,922 e. $17,157

Q: Vogril Company issued 20-year, zero coupon bonds with an expected yield to maturity of 9 percent. The bonds have a par value of $1,000 and were sold for $178.43 each. What is the expected interest expense on these bonds for Year 8? a. $29.35 b. $32.00 c. $90.00 d. $26.12 e. $25.79

Q: Assume that you are considering the purchase of a $1,000 par value bond that pays interest of $70 each six months and has 10 years to go before it matures. If you buy this bond, you expect to hold it for 5 years and then to sell it in the market. You (and other investors) currently require a simple annual rate of 16 percent, but you expect the market to require a rate of only 12 percent when you sell the bond due to a general decline in interest rates. How much should you be willing to pay for this bond? a. $800 b. $1,115.81 c. $1,359.26 d. $966.99 e. $731.85

Q: JRJ Corporation recently issued 10-year bonds at a price of $1,000. These bonds pay $60 in interest each six months. Their price has remained stable since they were issued, i.e., they still sell for $1,000. Due to additional financing needs, the firm wishes to issue new bonds that would have a maturity of 10 years, a par value of $1,000, and pay $40 in interest every six months. If both bonds have the same yield, how many new bonds must JRJ issue to raise $2,000,000 cash? a. 2,400 b. 2,596 c. 3,000 d. 5,000 e. 4,275

Q: You are contemplating the purchase of a 20-year bond that pays $50 in interest each six months. You plan to hold this bond for only 10 years, at which time you will sell it in the marketplace. You require a 12 percent annual return, but you believe the market will require only an 8 percent return when you sell the bond 10 years hence. Assuming you are a rational investor, how much should you be willing to pay for the bond today? a. $1,126.85 b. $1,081.43 c. $737.50 d. $927.68 e. $856.91

Q: Marie Snell recently inherited some bonds (face value $100,000) from her father, and soon thereafter she became engaged to Sam Spade, a University of Florida marketing graduate. Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo. The 2 percent annual coupon bonds mature on January 1, 2030, and it is now January 1, 2010. Interest on these bonds is paid annually on December 31 of each year, and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent. If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually, what would be the largest equal annual amounts she could withdraw for two years, beginning today (i.e., two payments, the first payment today and the second payment one year from today)? a. $13,255 b. $29,708 c. $12,654 d. $25,305 e. $14,580

Q: You are the owner of 100 bonds issued by Euler, Ltd. These bonds have 8 years remaining to maturity, an annual coupon payment of $80, and a par value of $1,000. Unfortunately, Euler is on the brink of bankruptcy. The creditors, including yourself, have agreed to a postponement of the next 4 interest payments (otherwise, the next interest payment would have been due in 1 year). The remaining interest payments, for Years 5 through 8, will be made as scheduled. The postponed payments will accrue interest at an annual rate of 6 percent, and they will then be paid as a lump sum at maturity 8 years hence. The required rate of return on these bonds, considering their substantial risk, is now 28 percent. What is the present value of each bond? a. $521 b. $426.73 c. $384.84 d. $266.88 e. $249.98

Q: In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of January 1, 2010 is as follows: Long-term debt (bonds, at par) $10,000,000 Preferred stock 2,000,000 Common stock ($10 par) 10,000,000 Retained earnings 4,000,000 Total debt and equity $26,000,000 The bonds have a 4 percent coupon rate, payable semiannually, and a par value of $1,000. They mature on January 1, 2020. The yield to maturity is 12 percent, so the bonds now sell below par. What is the current market value of the firm's debt? a. $5,412,000 b. $5,480,000 c. $2,531,000 d. $7,706,000 e. $7,056,000

Q: Due to a number of lawsuits related to toxic wastes, a major chemical manufacturer has recently experienced a market reevaluation. The firm has a bond issue outstanding with 15 years to maturity and a coupon rate of 8 percent, with interest being paid semiannually. The required simple rate on this debt has now risen to 16 percent. What is the current value of this bond? a. $1,273 b. $1,000 c. $7,783 d. $550 e. $450

Q: Your client has been offered a 5-year, $1,000 par value bond with a 10 percent coupon. Interest on this bond is paid quarterly. If your client is to earn a simple rate of return of 12 percent, compounded quarterly, how much should she pay for the bond? a. $800 b. $926 c. $1,025 d. $1,216 e. $981

Q: Assume that a 15-year, $1,000 face value bond pays interest of $37.50 every 3 months. If you require a simple annual rate of return of 12 percent, with quarterly compounding, how much should you be willing to pay for this bond? a. $821.92 b. $1,207.57 c. $986.43 d. $1,120.71 e. $1,358.24

Q: Gourmet Cheese Shoppe opened at the end of 2001. In its first full year of operations, 2002, earnings per share (EPS) was $0.26. Four years later, in 2005, EPS was up to $0.38, and 7 years after that, in 2012, EPS was up to $0.535. It appears that the first 4 years represented a supernormal growth situation and since then a more normal growth rate has been sustained. What are the rates of growth for the earlier period and for the later period? a. 6%; 5% b. 6%; 3% c. 10%; 8% d. 10%; 5% e. 12%; 7%

Q: The last dividend paid by Klein Company was $1.00. Klein's growth rate is expected to be a constant 5 percent for 2 years, after which dividends are expected to grow at a rate of 10 percent forever. Klein's required rate of return on equity (rs) is 12 percent. What is the current price of Klein's common stock? a. $21.00 b. $33.33 c. $42.25 d. $50.16 e. $58.75

Q: You are trying to determine the appropriate price to pay for a share of common stock. If you purchase this stock, you plan to hold it for 1 year. At the end of the year you expect to receive a dividend of $5.50 and to sell the stock for $154. The appropriate rate of return for this stock is 16 percent. What should be the current price of this stock? a. $137.50 b. $150.22 c. $162.18 d. $98.25 e. $175.83

Q: Assume that you plan to buy a share of XYZ stock today and to hold it for 2 years. Your expectations are that you will not receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16 percent, how much should you be willing to pay for this stock today? a. $164.19 b. $75.29 c. $107.53 d. $118.35 e. $131.74

Q: A $1,000 par value bond pays interest of $35 each quarter and will mature in 10 years. If your simple annual required rate of return is 12 percent with quarterly compounding, how much should you be willing to pay for this bond? a. $941.36 b. $1,051.25 c. $1,115.57 d. $1,391.00 e. $825.49

Q: Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent simple yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? a. $619 b. $674 c. $761 d. $828 e. $902

Q: You intend to purchase a 10-year, $1,000 face value bond that pays interest of $60 every 6 months. If your simple annual required rate of return is 10 percent with semiannual compounding, how much should you be willing to pay for this bond? a. $826.31 b. $1,086.15 c. $957.50 d. $1,431.49 e. $1,124.62

Q: You have just purchased a 10-year, $1,000 par value bond. The coupon rate on this bond is 8 percent annually, with interest being paid each 6 months. If you expect to earn a 10 percent simple rate of return on this bond, how much did you pay for it? a. $1,122.87 b. $1,003.42 c. $875.38 d. $950.75 e. $812.15

Q: Which of the following statements is most correct? a. If a bond's yield to maturity exceeds its coupon rate, the bond's current yield must also exceed its coupon rate. b. If a bond's yield to maturity exceeds its coupon rate, the bond's price must be less than its maturity value. c. If two bonds have the same maturity, the same yield to maturity, and the same level of risk, the bonds should sell for the same price regardless of the bond's coupon rate. d. Answers b and c are both correct. e. None of the above answers is correct.

Q: If you buy a factory for $250,000 and the terms are 20 percent down, the balance to be paid off over 30 years at a 12 percent rate of interest on the unpaid balance, what are the 30 equal annual payments? a. $20,593 b. $31,036 c. $24,829 d. $50,212 e. $6,667

Q: The present value (t = 0) of the following cash flow stream is $5,979.04 when discounted at 12 percent annually. What is the value of the missing (t = 2) cash flow? a. $2,000 b. $2,391 c. $3,000 d. $3,391 e. $4,237

Q: 15 900 Using an interest rate of 8 percent, find the expected present value of these uncertain cash flows. (Hint: Find the expected cash flow in each year, then evaluate those cash flows.) a. $1,204.95 b. $835.42 c. $1,519.21 d. $1,5800 e. $1,347.61