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##### TAMUC Fin504 exams WEEK 12 EXAM

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Question;Question 1. Question;Rank in ascending order;(lowest to highest) the relative risk associated with holding the preferred;stock, common stock and bonds of a firm;Student Answer: preferred stock, bonds, common stock;bonds, common stock, preferred stock;common stock, preferred stock, bonds;bonds, preferred stock, common stock;Points Received: 3 of 3;Comments;Question 2. Question;The quality of a debenture;depends on the;Student Answer: general credit-worthiness of the issuing;company;value of the assets used as collateral;the coupon rate of the debenture;length of time to maturity;Points Received: 3 of 3;Comments;Question 3. Question;An AT&T 5?05 bond with a;current yield of 6.2% must be selling ____ its face value.;Student Answer: above;at;below;any of the above could be correct;Points Received: 3 of 3;Comments;Question 4. Question;Up in Smoke Tobacco Shops?;bond carries a 9 percent coupon, pays interest semiannually, and has 10 years;to maturity. What is the bond's yield to maturity if the bond is selling for;$937.75 (rounded to the nearest whole percent)?;Student Answer: 8.0%;10.0%;9.0%;7.0%;Question 5. Question;Determine the yield to;maturity to the nearest tenth of 1 percent of a zero coupon bond with 8 years;to maturity that is currently selling for $404.;Student Answer: 11.3%;12.3%;11.7%;12.0%;Question 6. Question;What is the value of a;Northern Pacific bond with an 11 percent coupon, maturing in 15 years? Assume;the market rate for this bond is 14 percent and that the interest is paid;semiannually.;Student Answer: $1,000;$790.74;$813.50;$853.30;3 of 3;Comments;Question 7. Question;What is the required rate of;return to the investor who is willing to purchase a Duke Power preferred stock;with a $8.70 dividend, a par value of $100, and a current market price of $87?;Student Answer: 10.7%;8.7%;9.4%;10.0%;Question 8. Question;ICX Company has an issue of;perpetual bonds (par value to $1,000) that pays 5% annual interest. Determine;the yield (to the nearest tenth of 1 percent) if the bonds are currently;selling for $625.;Student Answer: 5.0%;8.0%;3.1%;6.25%;Question 9. Question;Equipment trust certificates;are used mainly by;Student Answer: equipment manufacturers;oil drilling companies;state governments;trucking companies;Question 10. Question;All of the following types of;bonds are secured except;Student Answer: collateral trust;mortgage;debentures;equipment trust certificates;Points Received: 3 of 3;Comments;Question 11. Question;The call feature is an;advantage to the issuing firm;Student Answer: if the bond has a floating rate;if interest rates decline;if the bond has a low par value;if interest rates increase;Points Received: 3 of 3;Comments;Question 12. Question;Which of the following is not;a characteristic of common stock;Student Answer: has no maturity date;considered a permanent form of long-term;financing;has claims on assets prior to those of;preferred stock;is a residual form of ownership;Points Received: 3 of 3;Comments;Question 13. Question;Common stockholders have a;number of general rights, including all of the following except;Student Answer: voting rights;management rights;asset rights;dividend rights;Points Received: 3 of 3;Comments;Question 14. Question;In a reverse stock split;Student Answer: the number of shares are decreased;the market value is decreased;retained earnings decrease;par value decreases;Points Received: 3 of 3;Comments;Question 15. Question;When a stock is split 2 for 1;then the ____ figure on the firm's balance sheet is cut in half.;Student Answer: value of the common stock;par value;capital surplus;retained earnings;Points Received: 3 of 3;Comments;Question 16. Question;Keeping Pace Enterprises;makers of track and field equipment, has common stock that sells for $29, and;its dividends are expected to grow at a rate of 9 percent annually. If;investors in Pace require a return of 14%, what is the expected dividend next;year?;Student Answer: $1.33;$2.40;$1.45;$1.60;Points Received: 3 of 3;Comments;Question 17. Question;Chill Pill Pharmaceuticals is;expecting a growth rate of 14% for the next two years due to its new drug.;Thereafter it should level to an 8% growth rate. The last dividend paid was;$.65 per share. What price should the stock sell for if investors require 12%;return.;Student Answer: $18.14;$22.75;$19.47;$20.16;Points Received: 3 of 3;Comments;Question 18. Question;Haulin? It Towing Company is;selling a stock for $16. The stock just;paid a dividend of $.60 and this dividend is expected to grow by 15% per year;for three years. After that it will grow;at a constant rate of 4%. The stock?s;beta is 1.7, the risk-free rate of interest is 1.75% and the market risk;premium is 5.25%. Should you buy the stock? (Round to dollars and cents or two decimal;points);Hint: You need to use the CAPM to get cost of equity before;you can solve for the price based on abnormal growth.;Student Answer: No, the stock is not a good value since it is;only worth about $8.;No, the stock is not a good value since it is;only worth about $12.;Yes, the stock is a good value since it;should sell for about $25.;Yes, the stock is a good value since it;should sell for about $18.;Question 19. Question;Beta is defined as;Student Answer: a measure of volatility of a security's;returns relative to the returns of a broad-based market portfolio of;securities.;the ratio of the variance of market returns;to the covariance of returns on a security with the market;the inverse of the slope of the security;regression line;all of the above;Points Received: 3 of 3;Comments;Question 20. Question;Kermit Industries current;common stock dividend is $1.35 per share and the dividend is expected to grow;at 6% per year into the foreseeable future. Currently the risk-free rate is;4.5% and the estimated market risk premium is 8.5%. Merrill Lynch has estimated;KI's beta to be 1.10. Compute the expected price for KI's common stock.;Student Answer: $17.20;$10.33;$18.23;$49.35;Question 21. Question;Phoenix Company common stock;is currently selling for $20 per share. Security analysts at Smith Blarney have;assigned the following probability distribution to the rate of return on;Phoenix stock one year from now;Rate of;Return Probability;-20% 0.25;0% 0.30;+20% 0.25;+40% 0.20;Assuming that Phoenix is not expected to pay any dividends;during the coming year, determine the expected rate of return on Phoenix Stock.;Student Answer: 8%;0%;10%;40%;Question 22. Question;Phoenix Company common stock;is currently selling for $20 per share. Security analysts at Smith Blarney have;assigned the following probability distribution to the rate of return on Phoenix stock one year from;now;Rate of;Return Probability;-20% 0.25;0% 0.30;+20% 0.25;+40% 0.20;Assuming that Phoenix is not expected to pay any dividends;during the coming year, determine the coefficient of variation for the rate of;return on Phoenix stock.;Student Answer: 0.0;2.68;2.61;0.275;Question 23. Question;Quick Start, Inc. is expected;to pay a dividend of $1.05 next year and dividends are expected to continue;their 7 percent annual growth rate. The SML has been estimated as follows;kj = 0.08 + 0.064?j;If Quick Start has a beta of 1.1, what would happen to its;stock price if inflation expectations went from the current 5 percent to 8;percent?;Hint: You need to compute two different values for Ke and;that leads to two different values in the stock. Remember changes in inflationary expectations;in chapter 8 and combine that with the equity valuation from chapter 7.;Student Answer: decrease $8.14;decrease $3.55;decrease $3.18;stock price will not change;Points Received: 3 of 3;Comments;Question 24. Question;An investor, who believes the;economy is slowing down, wishes to reduce the risk of her portfolio. She;currently owns 12 securities, each with a market value of $3,000. The current;beta of the portfolio is 1.21 and the beta of the riskiest security is 1.62.;What will the portfolio beta be if the riskiest security is replaced with a;security of equal market value but a beta of 0.80?;Student Answer: 1.14;1.18;1.05;1.10;Question 25. Question;Determine the (after-tax);percentage cost of a $50 million debt issue that the Mattingly Corporation is;planning to place privately with a large insurance company. Assume that the;company has a 40% marginal tax rate. This long-term debt issue will yield 12%;to the insurance company.;Student Answer: 4.8%;7.2%;12.0%;10.6%;Question 26. Question;Calculate the after-tax cost;of preferred stock for Ohio Valley Power Company, which is planning to sell;$100 million of $3.25 cumulative preferred stock to the public at a price of;$25 per share. Flotation costs are $1.00 per share. Ohio Valley has a marginal;income tax rate of 40%.;Student Answer: 13.0%;7.8%;8.12%;13.54%;Question 27. Question;The Allegheny Valley Power;Company common stock has a beta of 0.80. If the current risk-free rate is 6.5%;and the expected return on the stock market as a whole is 16%, determine the;cost of equity capital for the firm (using the CAPM).;Student Answer: 14.1%;7.6%;6.5%;13.0%;Question 28. Question;The following financial;information is available on Rawls Manufacturing Company;Current per share market price $48.00;Current (t = 0) per share dividend $3.50;Expected long-term growth rate 5.0%;Rawls can issue new common stock to net the company $44 per;share. Determine the cost of internal equity capital using the dividend;capitalization model approach. (Compute answer to the nearest 0.1%).;Student Answer: 12.3%;13.4%;13.0%;12.7%;Question 29. Question;Rank in ascending order;(lowest to highest) investors' required rates of return on the various types of;corporate securities.;Student Answer: preferred stock, corporate debt, common stock;common stock, preferred stock, corporate debt;preferred stock, common stock, corporate debt;corporate debt, preferred stock, common stock;Question 30. Question;A firm with a 40 percent;marginal tax rate has a capital structure of $60,000,000 in debt and;$140,000,000 in equity. What is the firm's weighted cost of capital if the;marginal pretax cost of debt is 12 percent, the firm's average pretax cost of;debt outstanding is 8%, and the cost of equity is 14.5 percent?;Student Answer: 13.75%;11.59%;12.31%;10.45%;Question 31. Question;Easy Slider Inc. sold a 15;year $1,000 face value bond with a 10 percent coupon rate. Interest is paid;annually. After flotation costs, Easy Slider received $928 per bond. Compute;the after-tax cost of debt for these bonds if the firm's marginal tax rate is;40 percent.;Student Answer: 6.0%;7.2%;7.8%;6.6%;Question 32. Question;Wright Express(WE) has a;capital structure of 30% debt and 70% equity. WE is considering a project that;requires an investment of $2.6 million. To finance this project, WE plans to;issue 10-year bonds with a coupon interest rate of 12%. Each of these bonds has;a $1,000 face value and will be sold to net WE $980. If the current risk-free;rate is 7% and the expected market return is 14.5%, what is the weighted cost;of capital for WE? Assume WE has a beta of 1.20 and a marginal tax rate of 40%.;Student Answer: 14.9%;12.4%;13.4%;16.0%;Question 33. Question;Due to Flotation costs;Student Answer: debt is the costliest source for a firm among;all the components of cost of capital.;Cost of external common equity exceeds cost;of retained earnings.;companies do not normally float any issues;dividends are paid on a monthly basis

Paper#47643 | Written in 18-Jul-2015

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