QUESTION 1

1. Which of the following is the correct relationship between interest rates and bond prices?
2. When bond prices go up interest rates go downWhen interest rates go up bond prices go upWhen bond prices go down interest rates go downWhen interest rates go up bond prices go down

4 points

QUESTION 2

1. You can value any investment by
2. Calculating the present value of all past cash flowCalculating the present value of all future expected cash flowsMultiplying the net income by the discount rateDividing the net income by sales

4 points

QUESTION 3

1. Which of the following is the least expensive capital for the firm?
2. Bond capitalPreferred Stock capitalCommon Stock capital

4 points

QUESTION 4

1. What will happen to your yield when you pay more for an investment, holding all else constant?
2. The yield will go downThe yield will go upThe yield could go up or downThe yield should not be affected

4 points

QUESTION 5

1. Which of the following is a true statement?
2. The cost of bond capital for the firm is not tax deductibleThe cost of common stock capital for the firm is tax deductibleThe cost of preferred stock capital for the firm is tax deductibleThe cost of bond capital for the firm is tax deductible

4 points

QUESTION 6

1. Why would you pay a premium for a bond?
2. The coupon rate is less than the current market rate
3. The coupon rate equals the market rate of return
4. The company's stock has increased substantially over the past year
5. The coupon rate is higher than the current market rate

4 points

QUESTION 7

1. If a firm's growth rate increases, holding all else constant, what will it do to the value of common stock?
2. Increase itDecrease itIncrease or decrease itShould not affect the value

4 points

QUESTION 8

1. Which of the following is a true statement? (hint: look at your cost of capital table)
2. Bonds are the most expensive capital for the firm
3. Preferred Stock is the cheapest capital for the firm
4. Common Stock is the most expensive capital for the firm
5. For a given firm, the bond, preferred stock and common stock capital cost the same

4 points

QUESTION 9

1. The preferred stock dividend
2. Increases as the growth rate of the firm increasesIs fixedCould increase or decrease depending on the growth of the firmCould increase or decrease depending on market interest rates

4 points

QUESTION 10

1. Which of the following projects would you invest in?
2. Project X has an expected return of 14% and a standard deviation of 10%.
3. Project Y has an expected return of 13% and a standard deviation of 11%.
4. Project X because it has a higher return and more risk
5. Project Y because it has a lower return and less risk
6. Project X because it has a higher return and less risk
7. There is not enough information to make this decision

4 points

QUESTION 11

1. How much would you pay for a bond that has a 4% coupon rate, matures in 15 years and market interest rates have risen to 6%? (use semiannual payments)
2. $881$1,196$804$449

6 points

QUESTION 12

1. A share of common stock is expected to pay next period a $1.80 dividend, it has a constant growth rate of 8% and your required return for this investment is 12%? What would you pay for a share?
2. $45$50.50$15$16.20

6 points

QUESTION 13

1. Use the information to answer questions 13 - 15.
2. Security A: Probability 30% of Return 7%; Probability 50% of Return 12%; Probability of 20% of Return 17%.
3. Security B: Probability 35% of Return 6%; Probability 65% of Return 16%
4. What is the expected return for Security A?
5. 3.83%
6. 12%
7. 11.50%
8. 13.67%

6 points

QUESTION 14

1. What is the risk of Security B?
2. 22.75%4.77%5.60%11.0%

6 points

QUESTION 15

1. Which security would you purchase?
2. Security B because it has more expected returnSecurity A because it has less riskIt would depend on your risk tolerance. Security B has more return and more risk. A risk taker would invest in B but someone risk adverse would probably take Security ASecurity A because has more return and less risk

6 points

QUESTION 16

1. How much would you pay for a share of preferred stock that pays a $3.75 dividend and your required return is 5.25%?
2. $71.43
3. $140
4. $19.69
5. Can not determine the price without a growth rate

6 points

QUESTION 17

1. The following information should be used to answer questions 17 - 20.
2. The capital structure for the Pit Bull Corporation is provided below. The company plans to maintain its debt structure in the future.
3. The firm has bonds that pay a 7% coupon rate, mature in 10 years and sell for $1,075 (assume semiannual payments).
4. The preferred stock is selling for $33 and pays a $2.70 dividend.
5. The common stock is selling for $42, just paid a $1.60 dividend and is expected to grow by 5% for the indefinite future.
6. The firm's marginal tax bracket is 34%.
7. CAPITAL STRUCTURE ($000): Bonds $85,000; Preferred Stock $25,000; Common Stock$ 190,000.
8. What is PBC's weight of common stock?
9. 8.33%
10. 28.33%
11. 55.55%
12. 63.33%

6 points

QUESTION 18

1. What is PBC's after-tax cost of debt capital?
2. Between 1% and 2%Between 2% and 3%Between 3% and 4%Between 4% and 5%

6 points

QUESTION 19

1. What is PBC's weighted cost of preferred stock capital?
2. Between 0% and 1%Between 1% and 2%Between 2% and 3%Between 4% and 5%

6 points

QUESTION 20

1. What is PBC's WACC?
2. Between 4% and 5%Between 5% and 6%Between 6% and 7%Between 7% and 8%