TAMUC Fin504 Exams WEEK 12 EXAM 35742

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

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

Question 3. Question : An AT&T 5½05 bond with a current yield of 6.2% must be selling ____ its face value.

at

below

any of the above could be correct

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)?

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.

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.

\$790.74

\$813.50

\$853.30

3 of 3

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?

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.

8.0%

3.1%

6.25%

Question 9. Question : Equipment trust certificates are used mainly by

oil drilling companies

state governments

trucking companies

Question 10. Question : All of the following types of bonds are secured except

mortgage

debentures

equipment trust certificates

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

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

Question 13. Question : Common stockholders have a number of general rights, including all of the following except:

management rights

asset rights

dividend rights

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

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

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?

\$2.40

\$1.45

\$1.60

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.

\$22.75

\$19.47

\$20.16

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

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.

\$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.

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.

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.

decrease \$3.55

decrease \$3.18

stock price will not change

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?

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.

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%.

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).

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…

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