1. The World Tobacco Company is expected to pay a dividend of $5 per share at the end of year 1(D1) and the dividends are expected to grow at a constant rate of 8% forever. If the current price of the stock is $25 per share, calculate the expected return or the cost of equity capital for the firm.
a. 20%.
b. 28%.
c. 25%.
d. 32%.
2. What is the price of a Verismo Company’s bond that has a 7.50 percent coupon and a face value of $1,000, pays interest semiannually, and has 15 years to maturity, if the required rate of return is 5 percent?
a. $1051.87.
b. $1,134.21.
c. $1,261.63.
d. $997.25.
e. $950.08.
3. Which of the following statement is false?
a. If a firm passes a preferred dividend, the arrearage (missed dividend payment) accumulates and must be paid in full before the company can resume common dividend payments.
b. Junk bonds, aka speculative or high-yield bonds, are below investment grade and have been used to finance mergers and acquisitions.
c. When the investor's required rate of return is smaller than the coupon rate of a bond, the bond will sell at a premium.
d. The higher the investor's required rate of return on a bond, the higher will be the value (i.e., price) of the bond to the investor.
4. P&G Corporation’s bond carries a 8.75 percent coupon, pays interest annually, and has 17 years to maturity. What is the bond's yield to maturity to the investor if the investor purchases the bond at the price quoted at 106.25 in the financial press? (NOTE: It's discussed in class that the bond price is quoted as % of the face value of the bond. The typical face value of a corporate bond is $1000.)
a. 8.06%.
b. 9.98%.
c. 6.77%.
d. 7.29%.
5. A firm has a sustainable growth rate of 10.83 percent, and an 85 percent retention ratio. The asset turnover ratio is 1.6 and the assets-to-equity ratio (using beginning-of-period equity) is 1.77. What is its profit margin?
a. 25.49%.
b. 4.98%.
c. 24.92%.
d. 4.50%.
6. What can a company with unbalanced growth do to move its unbalanced growth toward the balanced growth line?
a. Change its growth rate.
b. Change its return on assets (ROA).
c. Change its financial policy.
d. All of the above.
e. None of the above.
7. Which of the following statements related to market efficiency tends to be supported by current evidence?
I. Markets tend to respond quickly to new information.
II. It is fairly easy for the typical investor to earn above-average returns without taking above-average risks.
III. Short-run prices are able to predict accurately based on public information.
IV. Markets are most likely semi-strong-form efficient.
a. I and III only
b. II and IV only
c. I and IV only
d. I, III and IV only
e. I, II and III only