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1. (TCO C)
On its 1999 balance sheet, Sherman Books showed a balance of retained earnings equal to $510 million. On its 2000 balance sheet, the balance of retained earnings was also equal to $510 million. Which of the following statements is most correct? Show your calculations. a. The company must have had net income equal to zero in 2000. b. The company had a profit in 2000 but did not pay a dividend in 2000. c. the companys net income in 2000 was $200 million. d. If the company lost money in 2000, they must have paid a dividend. e. None of the statements above is correct.
(Points: 20)
2. (TCO D) After-tax returns
The XYZ Corporation has $1000,000 which it plans to invest in marketable securities. The corporation is choosing between the following three equally risky securities: Greenville County tax-free municipal bonds yielding 7 percent; AB corp. bonds yielding 11.5 percent; XZ corp. preferred stock with a dividend yield of 10 percent. XYZ's corporate tax rate is 35 percent. What is the after-tax return on the best investment alternative? (Assume the company chooses on the basis of after-tax returns.) (Points: 20)
3. (TCO D) Bond value - semiannual payment
Assume that you wish to purchase a 25-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $45. If you require a 7 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? (Points: 25)
4. (TCO E) Constant growth stock
The last dividend paid by XYZ Company was $1.00. XYZs growth rate is expected to be a constant 5 percent. XYZ's required rate of return on equity (ks) is 10 percent. What is the current price of XYZ's common stock?
(Points: 25)
5. (TCO B, F) NPV
As the director of capital budgeting for Denver Corporation, you are evaluating two mutually exclusive projects with the following net cash flows: Cash Flows A B -$100,000 -$125,000 1
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