1. Grandma's Applesauce, Inc. has a 0.60 probability of a good year with operating cash flow of $50,000; and 0.40 probability of a bad year with operating cash flow of $30,000. The company has a debt of $35,000 with 8 percent interest due next year. Assuming the company has no means of servicing its debt other than operations, and a 0% tax rate, which of the following is true?
A Shareholders expected claim is $12,200
B Creditors expected claim is $37,800
C Creditors expected claim is $34,680
D None of the above
2. A firm is all equity financed, with 10,000 outstanding shares with a market value of $20 each. Its net income was $30,000, and it decides to pay a cash dividend of $2,000. Calculate the value of each share after the dividend payout.
A $22.8
B $20.0
C $19.8
D Not enough information
3. Which is a commonly used proxy for the "risk-free rate"?
A The average historical interest rate on long-term government bonds
B The current market rate interest rate on a government-insured savings account
C The current yield to maturity on a long-term government bond
D The rate of return on a low volatility stock