1. Lakeside Corporation has some money to invest, and its treasurer is choosing between City of Chicago municipal bonds and U.S. Treasury bonds. Both have the same maturity, and they are equally risky and liquid. If Treasury bonds yield 6 percent, and Lakeside's marginal income tax rate is 40 percent, what yield on the Chicago municipal bonds would make Lakeside's treasurer indifferent between the two?
2. A 12-year bond that has a 12 percent coupon rate is currently selling for $1,000, which equals the bond's face value. If interest is paid semiannually, the bond's yield to maturity is
a. equal to 12 percent.
b. greater than 12 percent.
c. less than 12 percent.
d. More information is needed to answer this question.
e. None of the above is correct.
3. Thames Glass Corporation has 100,000 shares of stock outstanding, each with a par value of $2.50 per share. Thames Glass also has another 400,000 shares of stock that are shelf registered. Thames Glass has retained earnings of $9,000,000 and additional paid-in capital of $1,000,000. What is Thames Glass's book value per share?
4. Greenwood Corporation currently has 500,000 shares outstanding and plans to issue 200,000 more shares in a seasoned equity offering. The current shareholders have preemptive rights on any new issue of stock by Greenwood Corporation. An investor with 20,000 shares who exercises his preemptive rights on the new stock issue will have the right to buy how many stocks?
a. 200,000 shares
b. 120,000 shares
c. 80,000 shares
d. 12,000 shares
e. 8,000 shares
5. The last dividend on Goat Island Corporation's common stock was $4.00, and the expected growth rate is 10 percent. If you require a rate of return of 20 percent, what is the highest price you should be willing to pay for this stock?
6. According to the following information, which of the stocks would be considered riskiest in a diversified portfolio of investments?
Stock σ β
ABC 12.5% 1.0
FGH 8.0% 0.5
MNO 20.2% 2.4
TUV 15.3% 3.0
a. Stock MNO, because it has the highest standard deviation.
b. Stock TUV, because it has the highest beta.
c. Stock FGH, because it has the highest s/b ratio
d. Stock ABC, because its beta is the same as the market beta (1.0) and the market is always very, very risky.
7. SRU Corporation has a beta of 2.0, while NEU Corporation's beta is 0.5. The risk-free rate is 10%, and the required rate of return on an average stock is 15%. Now the expected rate of inflation built into kRF falls by 3 percentage points, the real risk-free rate remains constant, the required return on the market falls to 11%, and the betas remain constant. When all of these changes are made, what will be the difference in required returns on SRU's and NEU's stocks?
8. The Newport Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year10. This investment will cost the firm $150,000 today, and the firm's required rate of return is 10 percent. Assume cash flows occur evenly during the year, 1/365th each day. What is the payback period for this investment?
a. 5.23 years
b. 4.86 years
c. 4.00 years
d. 6.12 years
e. 4.35 years
9. The capital budgeting director of Elm Corporation is evaluating a project which costs $200,000, is expected to last for 10 years and produce after-tax cash flows, including depreciation, of $44,503 per year. If the firm's required rate of return is 14 percent and its tax rate is 40 percent, what is the project's IRR?
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