Reference no: EM132797398

Questions -

Q1. A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

a. The bond sells at a price below par.

b. The bond has a current yield greater than 8%.

c. The bond sells at a discount.

d. The bond's required rate of return is less than 7.5%.

e. If the yield to maturity remains constant, the price of the bond will decline over time

Q2. Grossnickle Corporation issued 20-year, noncallable, 7.5% annual coupon bonds (i.e., one coupon per year) at their par value of $1,000 one year ago. Today, the required return on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

Q3. Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,120. What is the bond's nominal yield to call?

Q4. Huang Company's last dividend was $1.25. The dividend growth rate is expected to be constant at 15% for 3 years, after which dividends are expected to grow at a rate of 6% forever. If the firm's required return (rs) is 11%, what is its current stock price?

Q5. Dyl Inc.'s bonds currently sell for $1,040 and have a par value of $1,000. The bond pays a $65 annual coupon (i.e., one coupon per year) and has a 15-year maturity, but the bond can be called in 5 years at $1,100. What is the bond's yield to maturity (YTM)?

Q6. Which of the following statements is CORRECT?

a. A zero coupon bond's current yield is equal to its yield to maturity.

b. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at par.

c. All else equal, if a bond's yield to maturity increases, its price will fall.

d. If a bond's yield to maturity exceeds its coupon rate, the bond will sell at a premium over par.

e. All else equal, if a bond's yield to maturity increases, its current yield will fall

Q7. Stock A has a beta of 0.7, whereas Stock B has a beta of 1.3. Portfolio P has 50% invested in both A and B. Which of the following would occur if the market risk premium increased by 1% but the risk-free rate remained constant?

a. The required return on Portfolio P would increase by 1%.

b. The required return on both stocks would increase by 1%.

c. The required return on Portfolio P would remain unchanged.

d. The required return on Stock A would increase by more than 1%, while the return on Stock B would increase by less than 1%.

e. The required return for Stock A would fall, but the required return for Stock B would increase.

Q8. Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the stock sell?

Q9. Schnusenberg Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?

Q10. Suppose Boyson Corporation's projected free cash flow for next year is FCF1 = $150,000, and FCF is expected to grow at a constant rate of 6.5%. If the company's weighted average cost of capital is 11.5%, what is the firm's total corporate value?

Q11. Dothan Inc.'s stock has a 25% chance of producing a 30% return, a 50% chance of producing a 12% return, and a 25% chance of producing a -18% return. What is the firm's expected rate of return?

Q12. Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2, what is the firm's total corporate value, in millions?

Q13. Bae Inc. is considering an investment that has an expected return of 15% and a standard deviation of 10%. What is the investment's coefficient of variation?

Q14. Bill Dukes has $100,000 invested in a 2-stock portfolio. $35,000 is invested in Stock X and the remainder is invested in Stock Y. X's beta is 1.50 and Y's beta is 0.70. What is the portfolio's beta?

Q15. Warr Company is considering a project that has the following cash flow data. What is the project's IRR?

Q16. Anderson Systems is considering a project that has the following cash flows. The firm's WACC is 9%. What is the project's NPV?

Q17. Stern Associates is considering a project that has the following cash flow data. What is the project's payback period?

Q18. Masulis Inc. is considering a project that has the following cash flow. The firm's WACC is 10%. What is the project's discounted payback period?

Q19. Malholtra Inc. is considering a project that has the following cash flow. The firm's WACC is 10%. What is the project's MIRR?

Q20. Teall Development Company hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D1 = $1.45; P0 = $22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of equity?

Q21. You were hired as a consultant to Quigley Company, whose capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on debt is 6.50%, the yield on the preferred is 6.00%, the cost of common equity is 11.25% and the tax rate is 40%. What is Quigley's WACC?

Q22. Which of the following statements is CORRECT?

a. The MIRR and NPV decision criteria can never conflict.

b. The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.

c. One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption.

d. The higher the WACC, the shorter the discounted payback period.

e. The MIRR method assumes that cash flows are reinvested at the IRR rate.

Q23. The discount rate assigned to an individual project should be based on: a. the firm's weighted average cost of capital. b. the actual sources of funding used for the project. c. an average of the firm's overall cost of capital for the past five years. d. the current risk level of the overall firm. e. the risks associated with the use of the funds required by the project.

Q24. Daves Inc. recently hired you as a consultant to estimate the company's WACC. You have obtained the following information. (1) The firm's non-callable bonds mature in 20 years, have an 8.00% annual coupon (coupons are paid annually), a par value of $1,000, and a market price of $1,050.00. (2) The company's tax rate is 40%. (3) The risk-free rate is 4.50%, the market risk premium is 5.50% and the stock's beta is 1.20. (4) The capital structure consists of 35% debt and the balance is common equity. The firm uses the CAPM to estimate the cost of equity. What is the firm's WACC?

Q25. Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75%. The company also has 750,000 shares of 7% preferred stock (par value $100) and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The risk-free rate is yielding 2.8% and the expected return on the market is 11.2%. The corporate tax rate is 38%. The firm's capital structure is 35.6% debt, 17.7% preferred stock and 46.7% common equity. What is the firm's weighted average cost of capital?

Q26. The after-tax cost of debt generally increases when: I. a firm's bond rating increases (i.e., improves). II. the market rate of interest increases. III. tax rates decrease. IV. bond prices rise.

a. I and III only

b. II and III only

c. I, II, and III only

d. II, III, and IV only

e. I, II, III, and IV

Q27. The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.5% to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $62,000 and projected net cash inflows of $17,000 in year one, $28,000 in year two, and $30,000 in year three. The firm uses 25% debt and 75% common equity in its capital structure. The company's after-tax cost of debt is 6.1% while the company's cost of equity is 15.5%. What is the projected net present value of the new project?

Q28. You are on the staff of Camden Inc. The CFO believes project acceptance should be based on the NPV, but Steve Camden, the president, insists that no project should be accepted unless its IRR exceeds the WACC. Now you must make a recommendation on a project that has a cost of $15,000 and two cash flows: +$110,000 at the end of Year 1 and -$100,000 at the end of Year 2. The president and the CFO both agree that the WACC is 10%. At 10%, the NPV is $2,355.37, but you find two IRRs, one at 6.33% and one at 527%, and a MIRR of 11.32%. Which of the following statements best describes your optimal recommendation, i.e., the analysis and recommendation that is best for the company and least likely to get you in trouble with either the CFO or the president?

a. You should recommend that the project be rejected because its NPV is negative and its IRR is less than the WACC.

b. You should recommend that the project be rejected because, although its NPV is positive, it has an IRR that is less than the WACC.

c. You should recommend that the project be accepted because (1) its NPV is positive and (2) although it has two IRRs, in this case it would be better to focus on the MIRR, which exceeds the WACC. You should explain this to the president and tell him that that the firm's value will increase if the project is accepted.

d. You should recommend that the project be rejected because (1) its NPV is positive and (2) it has two IRRs, one of which is less than the WACC, which indicates that the firm's value will decline if the project is accepted.

e. You should recommend that the project be rejected because, although its NPV is positive, its MIRR is less than the WACC, and that indicates that the firm's value will decline if it is accepted.