Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

a. $923.22

b. $946.30

c. $969.96

d. $994.21

e. $1,019.06

____ 2. Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

a. 7.39%

b. 7.76%

c. 8.15%

d. 8.56%

e. 8.98%

____ 3. McCue Inc.'s bonds currently sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

a. 2.11%

b. 2.32%

c. 2.55%

d. 2.80%

e. 3.09%

____ 4. Taussig Corp.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, but they can be called in 6 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

a. 3.92%

b. 4.12%

c. 4.34%

d. 4.57%

e. 4.81%

____ 5. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today 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

The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

a. $5,276,731

b. $5,412,032

c. $5,547,332

d. $7,706,000

e. $7,898,650

____ 6. Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?

a. 0.49%

b. 0.55%

c. 0.61%

d. 0.68%

e. 0.75%

____ 7. Zumwalt Corporation's Class S bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. Zumwalt's Class A bonds have the same risk, maturity, and par value, but the A bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?

a. $943.98

b. $968.18

c. $993.01

d. $1,017.83

e. $1,043.28

____ 8. Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

a. 4,228

b. 4,337

c. 4,448

d. 4,562

e. 4,676

____ 9. J. Harper Inc.'s stock has a 50% chance of producing a 35% return, a 30% chance of producing a 10% return, and a 20% chance of producing a 28% return. What is Harper's expected return?

a. 14.16%

b. 14.53%

c. 14.90%

d. 15.27%

e. 15.65%

____ 10. Keith Johnson has $100,000 invested in a 2-stock portfolio. $30,000 is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts' beta is 1.60 and Stohs' beta is 0.60. What is the portfolio's beta?

a. 0.60

b. 0.66

c. 0.74

d. 0.82

e. 0.90

____ 11. Ripken Iron Works believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

State of the Probability of Stock's

Economy State Occurring Expected Return

Boom 0.25 25%

Normal 0.50 15%

Recession 0.25 5%

a. 0.4360

b. 0.4714

c. 0.5068

d. 0.5448

e. 0.5856

____ 12. Yonan Corporation's stock had a required return of 11.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2%. The risk-free rate and Yonan's beta remain unchanged. What is Yonan's new required return? (Hint: First calculate the beta, then find the required return.)

a. 14.03%

b. 14.38%

c. 14.74%

d. 15.10%

e. 15.48%

____ 13. Vera Paper's stock has a beta of 1.40, and its required return is 12.00%. Dell Dairy's stock has a beta of 0.80. If the risk-free rate is 4.75%, what is the required rate of return on Dell's stock? (Hint: First find the market risk premium.)

a. 8.45%

b. 8.67%

c. 8.89%

d. 9.12%

e. 9.34%

____ 14. Millar Motors has a beta of 1.30 and an expected dividend growth rate of 5.00% per year. The T-bill rate is 3.00%, and the T-bond rate is 6.00%. The annual return on the stock market during the past 3 years was 15.00%. Investors expect the annual future stock market return to be 12.00%. Using the SML, what is Millar's required return?

a. 12.5%

b. 12.8%

c. 13.1%

d. 13.5%

e. 13.8%

____ 15. Assume that you are the portfolio manager of the Coastal Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 14.00% and the risk-free rate is 6.00%. What rate of return should investors expect (and require) on this fund?

Amount Beta

Stock A $1,075,000 1.20

Stock B 675,000 0.50

Stock C 750,000 1.40

Stock D 500,000 0.75

$3,000,000

a. 13.44%

b. 13.79%

c. 14.14%

d. 14.49%

e. 14.86%

____ 16. Assume that you manage a $10.75 million mutual fund that has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. You now receive another $5.25 million, which you invest in stocks with an average beta of 0.65. What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)

a. 9.07%

b. 9.30%

c. 9.53%

d. 9.77%

e. 10.01%

____ 17. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 12.5%, and the expected constant growth rate is g = 8.5%. What is the current stock price?

a. $17.82

b. $18.28

c. $18.75

d. $19.22

e. $19.70

____ 18. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 5.0%, and if investors' required rate of return is 10.5%, what is the stock price?

a. $35.39

b. $36.30

c. $37.23

d. $38.18

e. $39.14

____ 19. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

a. 4.42%

b. 4.66%

c. 4.89%

d. 5.13%

e. 5.39%

____ 20. Ewert Enterprises' stock currently sells for $30.50 per share. The stock's dividend is projected to increase at a constant rate of 4.50% per year. The required rate of return on the stock, rs, is 10.00%. What is Ewert's expected price 3 years from today?

a. $31.61

b. $32.43

c. $33.26

d. $34.11

e. $34.81

____ 21. The Zumwalt Company is expected to pay a dividend of $2.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

a. $42.25

b. $43.31

c. $44.39

d. $45.50

e. $46.64

____ 22. You have been assigned the task of using the free cash flow model to estimate Petry Corporation's intrinsic value. Petry's WACC is 10.00%, its end-of-year free cash flow (FCF) is expected to be $150.0 million, the FCFs are expected to grow at a constant rate of 6.00% a year in the future, the company has $200 million of long-term debt plus preferred stock, and it has 50 million shares of common stock outstanding. What is Petry's estimated intrinsic value per share of common stock?

a. $66.12

b. $68.52

c. $71.00

d. $73.49

e. $76.06

____ 23. Rentz RVs Inc. (RRV) is presently enjoying relatively high growth because of a surge in the demand for recreational vehicles. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which high gas prices will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25. RRV's beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

a. $26.77

b. $27.89

c. $29.05

d. $30.21

e. $31.42

____ 24. The Upton Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 18.00% for 2 years, after which dividends are expected to grow at a rate of 6.00% forever. Upton's required return (rs) is 12.00%. What is Upton's current stock price?

a. $37.15

b. $38.10

c. $39.06

d. $40.03

e. $41.03

Identify the choice that best completes the statement or answers the question.

____ 1. The Morrissey Company's bonds mature in 7 years, have a par value of $1,000, and make an annual coupon payment of $70. The market interest rate for the bonds is 8.5%. What is the bond's price?

a. $923.22

b. $946.30

c. $969.96

d. $994.21

e. $1,019.06

____ 2. Garvin Enterprises' bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. What is their current yield?

a. 7.39%

b. 7.76%

c. 8.15%

d. 8.56%

e. 8.98%

____ 3. McCue Inc.'s bonds currently sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond's YTM and its YTC? (Subtract the YTC from the YTM.)

a. 2.11%

b. 2.32%

c. 2.55%

d. 2.80%

e. 3.09%

____ 4. Taussig Corp.'s bonds currently sell for $1,150. They have a 6.75% annual coupon rate and a 15-year maturity, but they can be called in 6 years at $1,067.50. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds, the YTC or the YTM?

a. 3.92%

b. 4.12%

c. 4.34%

d. 4.57%

e. 4.81%

____ 5. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today 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

The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

a. $5,276,731

b. $5,412,032

c. $5,547,332

d. $7,706,000

e. $7,898,650

____ 6. Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?

a. 0.49%

b. 0.55%

c. 0.61%

d. 0.68%

e. 0.75%

____ 7. Zumwalt Corporation's Class S bonds have a 12-year maturity, $1,000 par value, and a 5.75% coupon paid semiannually (2.875% each 6 months), and those bonds sell at their par value. Zumwalt's Class A bonds have the same risk, maturity, and par value, but the A bonds pay a 5.75% annual coupon. Neither bond is callable. At what price should the annual payment bond sell?

a. $943.98

b. $968.18

c. $993.01

d. $1,017.83

e. $1,043.28

____ 8. Cosmic Communications Inc. is planning two new issues of 25-year bonds. Bond Par will be sold at its $1,000 par value, and it will have a 10% semiannual coupon. Bond OID will be an Original Issue Discount bond, and it will also have a 25-year maturity and a $1,000 par value, but its semiannual coupon will be only 6.25%. If both bonds are to provide investors with the same effective yield, how many of the OID bonds must Cosmic issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

a. 4,228

b. 4,337

c. 4,448

d. 4,562

e. 4,676

____ 9. J. Harper Inc.'s stock has a 50% chance of producing a 35% return, a 30% chance of producing a 10% return, and a 20% chance of producing a 28% return. What is Harper's expected return?

a. 14.16%

b. 14.53%

c. 14.90%

d. 15.27%

e. 15.65%

____ 10. Keith Johnson has $100,000 invested in a 2-stock portfolio. $30,000 is invested in Potts Manufacturing and the remainder is invested in Stohs Corporation. Potts' beta is 1.60 and Stohs' beta is 0.60. What is the portfolio's beta?

a. 0.60

b. 0.66

c. 0.74

d. 0.82

e. 0.90

____ 11. Ripken Iron Works believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock?

State of the Probability of Stock's

Economy State Occurring Expected Return

Boom 0.25 25%

Normal 0.50 15%

Recession 0.25 5%

a. 0.4360

b. 0.4714

c. 0.5068

d. 0.5448

e. 0.5856

____ 12. Yonan Corporation's stock had a required return of 11.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2%. The risk-free rate and Yonan's beta remain unchanged. What is Yonan's new required return? (Hint: First calculate the beta, then find the required return.)

a. 14.03%

b. 14.38%

c. 14.74%

d. 15.10%

e. 15.48%

____ 13. Vera Paper's stock has a beta of 1.40, and its required return is 12.00%. Dell Dairy's stock has a beta of 0.80. If the risk-free rate is 4.75%, what is the required rate of return on Dell's stock? (Hint: First find the market risk premium.)

a. 8.45%

b. 8.67%

c. 8.89%

d. 9.12%

e. 9.34%

____ 14. Millar Motors has a beta of 1.30 and an expected dividend growth rate of 5.00% per year. The T-bill rate is 3.00%, and the T-bond rate is 6.00%. The annual return on the stock market during the past 3 years was 15.00%. Investors expect the annual future stock market return to be 12.00%. Using the SML, what is Millar's required return?

a. 12.5%

b. 12.8%

c. 13.1%

d. 13.5%

e. 13.8%

____ 15. Assume that you are the portfolio manager of the Coastal Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 14.00% and the risk-free rate is 6.00%. What rate of return should investors expect (and require) on this fund?

Amount Beta

Stock A $1,075,000 1.20

Stock B 675,000 0.50

Stock C 750,000 1.40

Stock D 500,000 0.75

$3,000,000

a. 13.44%

b. 13.79%

c. 14.14%

d. 14.49%

e. 14.86%

____ 16. Assume that you manage a $10.75 million mutual fund that has a beta of 1.05 and a 9.50% required return. The risk-free rate is 4.20%. You now receive another $5.25 million, which you invest in stocks with an average beta of 0.65. What is the required rate of return on the new portfolio? (Hint: You must first find the market risk premium, then find the new portfolio beta.)

a. 9.07%

b. 9.30%

c. 9.53%

d. 9.77%

e. 10.01%

____ 17. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 12.5%, and the expected constant growth rate is g = 8.5%. What is the current stock price?

a. $17.82

b. $18.28

c. $18.75

d. $19.22

e. $19.70

____ 18. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 5.0%, and if investors' required rate of return is 10.5%, what is the stock price?

a. $35.39

b. $36.30

c. $37.23

d. $38.18

e. $39.14

____ 19. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock's expected dividend yield for the coming year?

a. 4.42%

b. 4.66%

c. 4.89%

d. 5.13%

e. 5.39%

____ 20. Ewert Enterprises' stock currently sells for $30.50 per share. The stock's dividend is projected to increase at a constant rate of 4.50% per year. The required rate of return on the stock, rs, is 10.00%. What is Ewert's expected price 3 years from today?

a. $31.61

b. $32.43

c. $33.26

d. $34.11

e. $34.81

____ 21. The Zumwalt Company is expected to pay a dividend of $2.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5.00% per year in the future. The company's beta is 1.15, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

a. $42.25

b. $43.31

c. $44.39

d. $45.50

e. $46.64

____ 22. You have been assigned the task of using the free cash flow model to estimate Petry Corporation's intrinsic value. Petry's WACC is 10.00%, its end-of-year free cash flow (FCF) is expected to be $150.0 million, the FCFs are expected to grow at a constant rate of 6.00% a year in the future, the company has $200 million of long-term debt plus preferred stock, and it has 50 million shares of common stock outstanding. What is Petry's estimated intrinsic value per share of common stock?

a. $66.12

b. $68.52

c. $71.00

d. $73.49

e. $76.06

____ 23. Rentz RVs Inc. (RRV) is presently enjoying relatively high growth because of a surge in the demand for recreational vehicles. Management expects earnings and dividends to grow at a rate of 25% for the next 4 years, after which high gas prices will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company's last dividend, D0, was $1.25. RRV's beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?

a. $26.77

b. $27.89

c. $29.05

d. $30.21

e. $31.42

____ 24. The Upton Company's last dividend was $1.75. Its dividend growth rate is expected to be constant at 18.00% for 2 years, after which dividends are expected to grow at a rate of 6.00% forever. Upton's required return (rs) is 12.00%. What is Upton's current stock price?

a. $37.15

b. $38.10

c. $39.06

d. $40.03

e. $41.03

#### Top Answer

Dear Student,... View the full answer