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FIN EXAM 2.1 - FIN 221 Spring 2009 Exam 2 Multiple Choice...

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FIN 221 Spring 2009 Exam 2 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. KJM Corporation's balance sheet as of January 1, 2006 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 These semiannual coupon bonds have a 4% annual coupon rate and a par value of $1,000. They mature on January 1, 2016. If the yield to maturity is 12% APR, what is the current market value of the firm's debt? A. $7,706,000 B. $2,531,000 C. $5,412,000 D. $5,480,000 E. $7,056,000 2. A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT? 3. 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 an annual coupon rate of 10%. 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 annual return is 20%, what should the bonds sell for in the market today? 4. Which of the following statements is CORRECT?
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