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# Test 2 - consideration It uses the internal rate of return...

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FINA 503 – MAGT FINANCE Second Test Date: June 12, 2010 Prof. Carlos M. Santos 1. A General Motors bond carries a coupon rate of 8%, has 9 years until maturity, and sells at a yield to maturity of 7%. a. What interest payments do bondholders receive each year? b. At what price does the bond sell? (Assume annual interest payments) c. What will happen to the bond price if the yield to maturity falls to 6%? 2. More, Inc. will pay a year-end dividend of \$4.00 a share. Investors expect the dividend to grow at a rate of 4% indefinitely. a. If the stock currently sells for \$40 per share, what is the expected rate of return on the stock? b. If the expected rate of return on the stock is 16.0%, what is the stock price? 3. Marielle Machinery Works forecasts the following cash flows on a project under
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Unformatted text preview: consideration. It uses the internal rate of return rule to accept or reject projects. Should this project be accepted if the required rate of return is 12%? C o C 1 C 2 C 3 (10,000.00) \$ -\$ 7,500.00 \$ 8,500.00 \$ 4. A proposed project will cost \$500 M to build and then will produce cash flows of \$70 M a year for 15 yrs. After that (in yr. 15), it is estimated that the project will have to be sold for \$200 M. What is project NPV if the discount rate is 5 %? What if it is 18%? 5. Reactive Industries has the following capital structure. Its corporate tax rate is 35%. What is its WACC? Security Market Value (million) Required Rate of Return Debt \$20 6% Preferred stock \$10 8% Common stock \$50 12%...
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