Question 1.1. A bond pays semiannual coupon payments of $30 each. It matures in 20 years and is selling for $1,200. What is the firm's cost of debt if the bond's par value is $1,000? (Don't forget this is a semiannual coupon.) (Points : 1)
2.23%
4.48%
1.80%
3.60%
Question 2.2. If an investor purchases a share of stock for $300, collects a dividend during the year equal to $35 a share, and sells the stock at the end of the year for $289, what is the investor's return for the year? (Points : 1)
12.11%
8.30%
8.00%
15.33%
Question 3.3. Which of the following is true regarding market risk? (Points : 1)
It is measured by beta.
It is also called nondiversifiable risk.
It is also called systematic risk.
all of the above
Question 4.4. Which of the following statements regarding the cost of debt is true? (Points : 1)
The cost of debt for bonds equals the coupon rate of outstanding bonds.
The cost of debt for bonds is found by dividing the price by the annual coupon.
The cost of debt for bonds is found by calculating their yield to maturity.
The cost of debt equals the flotation costs charged by investment bankers who advise the firm.
Question 5.5. Which of the following statements regarding the cost of equity is true? (Points : 1)
It can be estimated in three different ways.
It is always estimated using the present value of future dividends approach.
It is estimated by solving for the discount rate for a perpetuity.
It is generally lower than the cost of debt because equity holders are paid after taxes are paid.
Question 6.6. Using the Capital Asset Pricing Model, estimate the required rate of return for Caterpillar Incorporated stock if the company's beta is 1.87 (as of February 1, 2013). Use a risk-free rate of 3% and a market risk premium of 6%. (Points : 1)
8.61%
11.22%
14.22%
16.83%
Question 7.7. Which of the following is beta is used for? (Points : 1)
estimating a regression line
estimating a firm's total risk to be used in the WACC
estimating a firm's market risk and used with the CAPM
estimating the amount of leverage used by the firm
Question 8.8. In the Capital Asset Pricing Model, the market risk premium is best approximated by: (Points : 1)
the most recent one-year return on the S&P 500 Index (or another market index).
the long-term historic return on a stock market index such as the S&P 500 (or another market index).
the long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds.
the return of the S&P 500 (or another market index) over the current yield of long-term government bonds.
Question 9.9. Suppose a zero-coupon bond is selling for $614.00 today. It promises to pay $1,000 in exactly 10 years with annual compounding. What is the firm's after-tax cost of debt if this is its sole debt outstanding (assuming the firm is in the 20% tax bracket)? (Points : 1)
4%
5%
6%
7%
Question 10.10. We assume investors are risk averse, and therefore they: (Points : 1)
are equally concerned with upside potential and downside risk.
expect a higher return for bearing more risk.
will pay more for an investment with higher risk.
have very high required rates of return.