Alpha Bonds have a coupon rate of 6% with semiannual interest payments, a face value of $1,000, and 11 years to go until maturity. Beta Bonds have a coupon rate of 9% with semiannual interest payments, a face value of $1,000, and 7 years to go until maturity. However, they can be called in 3 years for a call premium of $1,040. Gamma Bonds have a coupon rate of 12% with semiannual interest payments, a face value of $1,000,and 20 years to go until maturity. However, they can be called in 8 years for a call premium of $1,020.
1. If the Beta bonds have a price of $1,080, then what is the expected return (there is both a Yield to Maturity and a Yield to Call)? a) 6.8% b) 7.2% c) 7.5% d) 7.9%
2. If the Alpha bonds have a current yield of 7%, then how much are they worth? a) $778 b) $857 c) $927 d) $1,015
3. If the Gamma bonds have a yield to call of 11%, then how much are they worth? a) $952 b) $1,025 c) $1,060 d) $1,133
4. Six years ago you bought a bond for $975. The bond had a coupon rate of 7% with semiannual payments and a face value of $1000. If your return on this investment has been 9% so far, how much is the bond worth today? a) $923 b) $1,033 c) $1,085 d) $1,112
5. Several years ago you bought a bond for $975. The bond had a coupon rate of 7% with semiannual payments and a face value of $1000. Since then, the bond’s price has risen to $1,055 and your return on this investment has been 9% so far, then _____________.
a) Interest rates have risen from below 7% to above 9% b) Interest rates have fallen from above 9% to below 7% c) Interest rates have risen from below 9% to above 9% d) Interest rates have fallen from above 7% to below 7%
6. The correlation between Stock A and the market is .7. Stock A has an expected return of 10% and a standard deviation of 23%. The market has an expected return of 12% and a standard deviation of 18%. What is Stock A’s Beta?
a) .62 b) .89 c) 1.05 d) 1.29
7. The correlation between Stock A and the market is .7. Stock A has an expected return of 10% and a standard deviation of 23%. What is the probability that Stock A will have a negative return next year?
a).15 b) .3 c) .5 d) .67
8. What is the cost of equity on a new issue of stock if the firm pays a $2 dividend with and expected growth rate of 6%. The current stock price is $30, but flotation costs on new issues are 10%.
a) 10.4% b) 12.33% c) 12.9% d) 13.85%
9. A stock with a beta of .75 has a required return of 11%. If the expected (required) return on the market is 14%, then what is the risk free rate?
a) 1% b) 2% c) 3% d) 4%
10. A stock expects to pay a dividend of $2 in year one and $3 in year two. From that point onward, dividends are expected to grow by 8% per year forever. What is the fair price for this stock today if it has a required return of 16%?
a) $34.05 b) $36.33 c) $38.75 d) $40.5
11-17 A corporations has 10,000,000 shares of stock outstanding at a price of $60 per share. They just paid a dividend of $3 and the dividend is expected to grow by 6% per year forever. The stock has a beta of 1.2, the current risk free rate is 3%, and the market risk premium is 5%. The corporation also has 500,000 bonds outstanding with a price of $1,100 per bond. The bond has a coupon rate of 9% with semiannual interest payments, a face value of $1,000, and 13 years to go until maturity. The company plans on paying off their debt until they reach their target debt ratio of 30%. They expect their cost of debt to be 6% and their cost of equity to be 9% under this new capital structure. The tax rate is 40%
11. What is the required return on the corporation’s stock?
a) 9% b) 10.6% c) 11.3% d) 12.2%
12. What is the expected return on the corporation’s stock?
a) 9% b) 10.6% c) 11.3% d) 12.2%
13. What is the yield to maturity on the company’s debt?
a) 7.25% b) 7.75% c) 8.25% d) 8.75%
14. What percent of their current market value capital structure is made up of equity?
a) 35% b) 42% c) 52% d) 60%
15. What is their WACC using their target capital structure and expected costs of debt and equity?
a) 7.4% b) 8.5% c) 9.1% d) 9.8%
16. Given the new cost of debt, what should be the new price of the bond?
a) $920 b) $1,060 c) $1,172 d) $1,268
17. Given the new cost of equity, what should be the new price of the stock?
a) $71 b) $82 c) 91 d) $106
18. A firm had Net Income of $1,000,000 and a payout ratio of 60%. If they are 40% equity financed, how much can they spend on capital expenditures before needing external equity?
a) $400,000 b) $1,000,000 c) $1,600,000 d) $2,000,000