1. The cost of debt capital to a business is measured by the:

a. Maturity date

b. Interest rate

c. Amount borrowed

d. Cost of equity e. None of the above

Answer:

2. Which of the following statements about debt ratings is most correct?

a. Ratings reflect the probability of default.

b. Ratings on outstanding debt are automatically reviewed and updated annually.

c. Ratings are important to investors, but unimportant to issuers.

d. Ratings are based solely on a quantitative analysis of the issuers financial condition.

e. Ratings run from A (for the best) to F (for the worst).

Answer: 3. The liquidity premium on a US Treasury debt security is normally considered to be:

a. 4% b. 3% c. 2% d. 1% e. 0%

Answer:

4. What is the value of a 10 percent annual coupon, $1,000 par value bond with 20 years to maturity if the required rate of return on the bond is 12 percent?

a. $1,236.48 b. $ 925.42 c. $ 850.61 d. $ 798.79 e. $ 737.55

Answer: 5. What is the yield to maturity on a 30-year, 10 percent annual coupon bond with a $1,000 par value that is currently selling for $1,225.16?

a. 7.2% b. 8.0% c. 8.6% d. 8.9% e. 9.2%

Answer:

6. Which of the following statements regarding corporate bonds is most correct?

a. Debentures are riskier than subordinated debentures because they are paid last in the event of bankruptcy.

b. Mortgage bonds are riskier than debentures because the value of the asset pledged as collateral may not be sufficient to repay the mortgage.

c. The interest rate on subordinated debentures is likely to be higher than the interest rate on debentures.

d. Debentures are secured by the asset purchased with the loaned funds.

e. None of these statements is correct.

Answer: 7. Assume that an outstanding seven-year bond has $1,000 par value, a coupon rate of 10%, and five years remaining to maturity. If the required rate of return on similar bonds of equal risk is 5%, the bond will sell at which of the following?

a. A premium

b. A discount

c. At par value

d. At $500 ($100 annual interest payments 5 years to maturity)

e. The bond cannot be sold again since it is already outstanding

Answer:

8. True or False: The four factors that affect the cost of money are investment opportunities, time preferences for consumption, risk, and inflation.

a. True b. False

Answer: 9. Assume that US Medware is a constant growth company whose last dividend per share (D0) was $1.00. The dividend is expected to grow at a constant rate of 8 percent per year. What is the stocks value if investors require a 15 percent rate of return?

a. $14.53

b. $14.89

c. $15.11

d. $15.43

e. $16.06

Answer:

10. What is the expected rate of return on National Healthcares stock if the next expected dividend (D1) is $3, the stock is currently selling for $30, and it has an expected constant growth rate of 6 percent? a. 15% b. 16% c. 17% d. 18% e. 19%

Answer: 11. Assume that the risk-free rate is 8 percent, the required rate of return on the market (or an average-risk stock) is 13 percent, and the required rate of return on Acme Healthcare stock is 15 percent. What is the implied beta coefficient of the stock?

a. 1.5 b. 1.4 c. 1.2 d. 1.0 e. 0.8

Answer:

12. Gold Coast Health System just paid an annual dividend of $1.50, which is expected to grow at a constant rate of 5 percent per year. If the current required rate of return is 15 percent, what is the value of Gold Coasts stock?

a. $15.75 b. $15.50 c. $15.25 d. $15.00 e. $14.75

Answer: 13. Managed Healthcares current stock price is $25, its next per share dividend (assumed to be paid annually) is forecasted to be $1.00, and analysts expect the company to grow at a constant annual rate of 10 percent. What is the stocks expected rate of return?

a. 15.0% b. 14.0% c. 13.0% d. 12.0% e. 11.0%

Answer:

14. Which of the following methods for raising equity capital is unavailable to not-for-profit corporations?

a. Retained earnings

b. Government grants

c. Private contributions

d. Religious organizations

e. Common stock sales

Answer:

15. Under the constant growth version of the dividend valuation model, the value of a stock is a function of which of the following?

a. The most recent dividend, the expected dividend growth rate, and the required rate of return on the stock

b. The most recent dividend, the expected dividend growth rate, and the expected capital gains yield

c. The expected dividend growth rate, the required rate of return on the stock, and the expected capital gains yield

d. The most recent dividend, the expected dividend growth rate, the required rate of return on the stock, and the expected capital gains yield

e. None of these answers is correct

Answer: