Bus330 finance fall 2014 –
Chapter 7-9
Chapter 7 The Valuation and Characteristics of Bonds
1) If a corporation
were to choose between issuing a debenture, a mortgage bond, or a subordinated debenture, which would
have the highest yield to maturity, everything else equal?
A) the debenture
B) the mortgage bond
C) the subordinated debenture
D) all of the above
2) Put the following in order of
their claim on assets of a firm, starting with the LAST to have a claim:
A. Subordinated debentures B. Debentures (unsubordinated)
C. Common Stock D. Preferred stock
A) C, B, A, D
B) C, D, A, B
C) B, A, C, D
D) D, C, B, A
3) Which of the following
statements concerning bonds and risk is true?
A) Because the interest payments
and maturing value are known, the only risk associated with investing in bonds
is default risk.
B) Zero coupon bonds are always
more risky than bonds with high coupon rates because of the time value of
money.
C) Bonds are generally less risky
than common stock because of the preference for debt over equity in the event
of bankruptcy and liquidation.
D) B-rated bonds are above
average for risk, i.e., less risky than the average bond.
4) Finance theory suggests that
the current market value of a bond is based upon which of the following?
A) the future value of interest
paid on a bond
B) the sum total of principal and
interest paid on a bond
C) the sum of the present value
of the bond's interest payments and the present value of the principal
D) the present value of a bond's
par value plus the future value of the bond's present value
5) Which type of value is shown
on the firm's balance sheet?
A) book value
B) liquidation value
C) market value
D) intrinsic value
6) What is the value of a bond
that matures in 5 years, has an annual coupon payment of $110, and a par value
of $2,000? Assume a required rate of return of 8.69%.
A) $938.50
B) $1,876.99
C) $1,891.36
D) $1,749.83
Chapter 8 The Valuation and Characteristics of Stock
7) Preferred stock is similar to
a bond in the following way
A) preferred stock always
contains a maturity date.
B) both investments provide a
stated income stream.
C) both contain a growth factor
similar to common stock.
D) both provide interest
payments.
8) Stimpson Inc. preferred stock
pays a $.50 annual dividend. What is the value of the stock if your required
rate of return is 10%?
A) $.05
B) $.50
C) $5.00
D) $50.00
9) Whistle Corp. has a preferred
stock that pays a dividend of $2.40. If you are willing to purchase the stock
at $11, what is your required rate of return (round your answer to the nearest
.1% and assume that there are no transaction costs)?
A) 21.8%
B) 11.0%
C) 9.1%
D) 20.1%
10) How is preferred stock
similar to common stock?
A) Preferred dividend payments
usually have unlimited growth potential.
B) Investors cannot sue a
corporation for the non-payment of dividends.
C) Both preferred and common
stockholders have voting control of a firm.
D) Preferred stock dividends and
common stock dividends are fixed.
11) ACME, Inc. expects its
current annual $2.50 per share common stock dividend to remain the same for the
foreseeable future. Therefore, the value of the stock to an investor with a
required return of 12% is
A) $3.00.
B) $18.33.
C) $20.83.
D) $30.00.
12) Perrine Industrial Inc. just
paid a dividend of $5 per share. Future dividends are expected to grow at a
constant rate of 7% per year. What is the value of the stock if the required
return is 16%?
A) $33.44
B) $55.56
C) $59.44
D) $65.87
13) Beaver Corp preferred stock
has a market price of $14.50. If it has a yearly dividend of $3.50, what is
your expected rate of return if you purchase the stock at its market price?
A) 41.43%
B) 19.45%
C) 22.36%
D) 24.14%
Chapter 9 The Cost of Capital
14) In general, which of the
following rankings, from highest to lowest cost, is most accurate?
A) cost of new common stock, cost
of preferred stock, cost of debt, cost of retained earnings
B) cost of debt, cost of
preferred stock, cost of new common stock, cost of retained earnings
C) cost of new common stock, cost
of retained earnings, cost of preferred stock, cost of debt
D) cost of preferred stock, cost
of new common stock, cost of retained earnings, cost of debt
15) The risk free rate of return
is 3% and the expected return on the market portfolio is 14%. Oklahoma Oilco
has a beta of 2.0 and a standard deviation of returns of 26%. Oilco's marginal
tax rate is 35%. Analysts expect Oilco's net income to grow by 12% per year for
the next 5 years. Using the capital asset pricing model, what is Oklahoma
Oilco's cost of retained earnings?
A) 18.6%
B) 21.2%
C) 22.8%
D) 25.0%
16) The average cost associated
with each additional dollar of financing for investment projects is
A) the incremental return.
B) the marginal cost of capital.
C) CAPM required return.
D) the component cost of capital.
17) GPS Inc. wishes to estimate
its cost of retained earnings. The firm's beta is 1.3. The rate on 6-month
T-bills is 2%, and the return on the S&P 500 index is 15%. What is the
appropriate cost for retained earnings in determining the firm's cost of capital?
A) 17.0%
B) 19.5%
C) 18.9%
D) 22.1%
18) Baxter Inc. has a target
capital structure of 30% debt, 15% preferred stock, and 55% common equity. The
company's after-tax cost of debt is 7%, its cost of preferred stock is 11%, its
cost of retained earnings is 15%, and its cost of new common stock is 16%. The
company stock has a beta of 1.5 and the company's marginal tax rate is 35%.
What is the company's weighted average cost of capital if retained earnings are
used to fund the common equity portion?
A) 11.20%
B) 12.00%
C) 13.80%
D) 14.45%
19) Texas Transport has five
possible investment projects for the coming year. Each project is indivisible.
They are:
Project Investment (million) IRR
A $ 6 18%
B $10 15%
C $ 9 20%
D $ 4 12%
E $ 3 24%
The firm's weighted marginal cost
of capital schedule is 12 percent for up to $6 million of investment; 16
percent for between $6 million and $18 million of investment; and above $18
million the weighted cost of capital is 18 percent. The optimal capital budget
is
A) $12 million.
B) $18 million.
C) $23 million.
D) $28 million.
20) The DEF Company is planning a
$64 million expansion. The expansion is to be financed by selling $25.6 million
in new debt and $38.4 million in new common stock. The before-tax required rate
of return on debt is 9 percent and the required rate of return on equity is 14
percent. If the company is in the 35 percent tax bracket, what is the firm's
cost of capital?
A) 8.92%
B) 9.89%
C) 11.50%
D) 10.74%
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