25. Gotterdammerung Inc. is planning to issue two types of 25-year, non-callable bonds to raise a total of $6 million, $3 million from each type of bond. First, 3,000 bonds with a 10% semiannual coupon will be sold at their $1,000 par value to raise $3,000,000. These are called "par" bonds. Second, Original Issue Discount (OID) bonds, also with a 25-year maturity and a $1,000 par value, will be sold, but these bonds will have a semiannual coupon of only 6.25%. The OID bonds must be offered at below par in order to provide investors with the same effective yield as the par bonds. How many OID bonds must the firm issue to raise $3,000,000? Disregard flotation costs, and round your final answer up to a whole number of bonds.

a. 4,228

b. 4,337

c. 4,448

d. 4,562

e. 4,676

26. Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

	A	B
Price	$25	$40
Expected growth	7%	9%
Expected return	10%	12%

a. The two stocks should have the same expected dividend.

b. The two stocks could not be in equilibrium with the numbers given in the question.

c. A's expected dividend is $0.50.

d. B's expected dividend is $0.75.

e. A's expected dividend is $0.75 and B's expected dividend is $1.20.

27. Recall the Value of the Firm₀ = FCF_t / [1 + WACC]^t with t from 1 to . The owners of Martial Arts Inc. [the owner/operator of a chain of karate dojos] are considering selling their business to a private equity firm. Next years end-of-year free cash flow (FCF₁) is expected to be $1.25 million, lower than recent years due to a major expansion. Free Cash Flow is expected to grow at the rates shown in the table below thereafter. Beginning in year 7 a constant growth rate of 4% is forecast. The company's WACC is 6.50%. What is the estimated intrinsic value of the firm in millions of dollars?

Year	1	2	3	4	5	6	7
Growth Rates		30.00%	25.00%	20.00%	15.00%	10.00%	4.00%

a. $59.37

b. $69.35

c. $71.28

d. $101.60

e. $104.85

28. Refer to the previous question about Martial Arts Inc. The company has $27 million of long-term debt plus preferred stock outstanding and there are 5.0 million shares of common stock outstanding. The $27 million is the market value of the debt and preferred stock. Some believe, with some justification, the book value should be used but that is not consistent with the WACC calculation so theoretically market values should be used. What is the firm's estimated intrinsic value per share of common stock?

a. $15.57

b. $14.92

c. $8.86

d. $8.47

e. $6.47

29. TPP Inc., which owns and operates a chain of tattoo and piercing parlors, was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated it plans to pay a $0.30 dividend 2 years from today, then to increase it at a relatively rapid rate for several years and then to increase it at a constant rate of 3.0% thereafter, as shown in the table below. Managements credibility with investors is high and it is believed the current price of the stock, $19, represents fair value i.e. the market is in equilibrium. What is the expected rate of return on the common stock?

Year	0	1	2	3	4	5	6	7	8
Growth Rates				40.0%	30.0%	20.0%	10.0%	6.5%	3.0%

a. 5.00%

b. 6.16%

c. 6.24%

d. 6.27%

e. 7.54%

30. Weimar Inc. has two divisions of equal size: a computer manufacturing division and a data processing division. Its CFO believes that stand-alone data processor companies typically have a WACC of 8%, while stand-alone computer manufacturers typically have a 12% WACC. He also believes that the data processing and manufacturing divisions have the same risk as their typical peers. Consequently, he estimates that the composite, or corporate, WACC is 10%. A consultant has suggested using an 8% hurdle rate for the data processing division and a 12% hurdle rate for the manufacturing division. However, the CFO disagrees, and he has assigned a 10% WACC to all projects in both divisions. Which of the following statements is CORRECT?

a. While the decision to use just one WACC will result in accepting more projects in the manufacturing division and fewer projects in its data processing division than if it followed the consultant's recommendation, this should not affect the firm's intrinsic value.

b. The decision not to adjust for risk means, in effect, that it is favoring the data processing division. Therefore, that division is likely to become a larger part of the consolidated company over time.

c. The decision not to adjust for risk means that the company will accept too many projects in the manufacturing division and too few in the data processing division. This will lead to a reduction in the firm's intrinsic value over time.

d. The decision not to risk-adjust means that the company will accept too many projects in the data processing business and too few projects in the manufacturing business. This will lead to a reduction in its intrinsic value over time.

e. The decision not to risk-adjust means that the company will accept too many projects in the manufacturing business and too few projects in the data processing business. This may affect the firm's capital structure but it will not affect its intrinsic value.

31. A firm plans to issue a $1,000 par value, 20-year non-callable bond with a 7.00% coupon rate paid semiannually. The firm forecasts its proceeds after discounting the bonds and flotation costs will be 98.795. The company's marginal tax rate is currently 35%, but Congress is considering a change in the corporate tax rate to 15%. By how much would the effective cost of the debt change if the new tax rate is adopted?

a. Decrease of 0.70%

b. Decrease of 0.7114%

c. Increase of 0.7114%

d. Increase of 1.40%

e. Increase of 1.4228%

32. Wettin A.G. is issuing new 20-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry an 11% annual interest rate. However, with the warrants attached the bonds will pay an 8% annual coupon. The bonds will be issued in Europe where coupons are traditionally paid annually. There are 30 warrants attached to each bond, which have a par value of 1000. What is the value of the straight-debt portion of the bonds?

a. 652.55

b. 686.89

c. 723.05

d. 761.10

e. 799.16

33. Playaz.com Inc., a social networking website, just sold a bond with 40 warrants attached. The bonds have a 12-year term to maturity and a semi-annual coupon of 3.35%. The bonds trade at a premium of 101.45. The yield to maturity on similar straight bonds is currently 5.85%. What is the implied value of each warrant?

a. $0.3625

b. $0.625

c. $5.34

d. $5.70

e. $6.25

34. Walkure Corporations 9.10% Subordinated Debentures from Part I of the exam have a call provision. The bonds are callable beginning 5 years from today at a call price of 105, a premium to par value. For an investor, what is the yield to first call of the bonds i.e. what is the investors return if the bonds are purchased today for 107 and called by the issuer at first call?

a. 4.10%

b. 4.95%

c. 7.87%

d. 8.19%

e. 9.90%