Question 15 pts

Grossnickle Corporation issued 20-year, noncallable, 7.1% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

Group of answer choices

$1,114.58

$1,007.86

$1,090.86

$1,185.72

$1,102.72

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Question 25 pts

A Treasury bond has an 8% annual coupon and a 7.5% yield to maturity. Which of the following statements is CORRECT?

Group of answer choices

The bond sells at a price below par.

The bond has a current yield greater than 8%.

The bond sells at a discount.

The bonds required rate of return is less than 7.5%.

If the yield to maturity remains constant, the price of the bond will decline over time.

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Question 35 pts

O'Brien Ltd.'s outstanding bonds have a $1,000 par value, and they mature in 25 years. Their nominal annual, not semiannual yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $700. What is the bond's nominal coupon interest rate?

Group of answer choices

4.86%

7.01%

6.15%

5.72%

6.58%

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Question 45 pts

Tucker Corporation is planning to issue new 20-year bonds. The current plan is to make the bonds non-callable, but this may be changed. If the bonds are made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

Group of answer choices

Because of the call premium, the required rate of return would decline.

There is no reason to expect a change in the required rate of return.

The required rate of return would decline because the bond would then be less risky to a bondholder.

The required rate of return would increase because the bond would then be more risky to a bondholder.

It is impossible to say without more information.

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Question 55 pts

Morin Company's bonds mature in 8 years, have a par value of $1,000, and make an annual coupon interest payment of $65. The market requires an interest rate of 6.7% on these bonds. What is the bond's price?

Group of answer choices

$987.92

$1,155.86

$770.58

$1,215.14

$1,047.19

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Question 65 pts

If investors become less averse to risk, the slope of the Security Market Line (SML) will increase.

Group of answer choices

True

False

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Question 75 pts

Stock A's beta is 1.5 and Stock B's beta is 0.5. Which of the following statements must be true, assuming the CAPM is correct.

Group of answer choices

Stock A would be a more desirable addition to a portfolio then Stock B.

In equilibrium, the expected return on Stock B will be greater than that on Stock A.

When held in isolation, Stock A has more risk than Stock B.

Stock B would be a more desirable addition to a portfolio than A.

In equilibrium, the expected return on Stock A will be greater than that on B.

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Question 85 pts

Tom Noel holds the following portfolio:

Stock		Investment		Beta
A		$150,000		1.40
B		$50,000		0.80
C		$100,000		1.00
D		$75,000		1.20
Total		$375,000

Tom plans to sell Stock A and replace it with Stock E, which has a beta of 0.83. By how much will the portfolio beta change? Do not round your intermediate calculations.

Group of answer choices

0.228

0.219

0.251

0.205

0.280

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Question 95 pts

Porter Inc's stock has an expected return of 13.25%, a beta of 1.25, and is in equilibrium. If the risk-free rate is 2.00%, what is the market risk premium? Do not round your intermediate calculations.

Group of answer choices

7.11%

8.91%

10.17%

9.00%

7.29%

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Question 105 pts

Kollo Enterprises has a beta of 1.02, the real risk-free rate is 2.00%, investors expect a 3.00% future inflation rate, and the market risk premium is 4.70%. What is Kollo's required rate of return? Do not round your intermediate calculations.

Group of answer choices

9.11%

12.24%

8.91%

9.40%

9.79%

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Question 115 pts

Gray Manufacturing is expected to pay a dividend of $1.25 per share at the end of the year (D₁ = $1.25). The stock sells for $22.50 per share, and its required rate of return is 10.5%. The dividend is expected to grow at some constant rate, g, forever. What is the equilibrium expected growth rate?

Group of answer choices

5.88%

4.25%

4.30%

4.90%

4.94%

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Question 125 pts

If D₁ = $1.25, g (which is constant) = 4.7%, and P₀ = $30.00, then what is the stocks expected dividend yield for the coming year?

Group of answer choices

4.13%

3.17%

4.17%

3.25%

3.38%

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Question 135 pts

The Francis Company is expected to pay a dividend of D₁ = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 0.85, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price? Do not round intermediate calculations.

Group of answer choices

$49.53

$54.21

$46.73

$47.66

$51.40

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Question 145 pts

Stock X has the following data. Assuming the stock market is efficient and the stock is in equilibrium, which of the following statements is CORRECT?

Expected dividend, D1	$3.00
Current Price, P0	$50
Expected constant growth rate	6.0%

Group of answer choices

The stocks required return is 10%.

The stocks expected dividend yield and growth rate are equal.

The stocks expected dividend yield is 5%.

The stocks expected capital gains yield is 5%.

The stocks expected price 10 years from now is $100.00.

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Question 155 pts

Molen Inc. has an outstanding issue of perpetual preferred stock with an annual dividend of $4.00 per share. If the required return on this preferred stock is 6.5%, then at what price should the stock sell?

Group of answer choices

$61.54

$64.62

$48.00

$52.92

$63.38

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Question 165 pts

If a typical U.S. company correctly estimates its WACC at a given point in time and then uses that same cost of capital to evaluate all projects for the next 10 years, then the firm will most likely

Group of answer choices

become riskier over time, but its intrinsic value will be maximized.

become less risky over time, and this will maximize its intrinsic value.

accept too many low-risk projects and too few high-risk projects.

become more risky and also have an increasing WACC. Its intrinsic value will not be maximized.

continue as before, because there is no reason to expect its risk position or value to change over time as a result of its use of a single cost of capital.

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Question 175 pts

Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost of capital. You have been provided with the following data: r_RF = 4.10%; RP_M = 5.25%; and b = 1.70. Based on the CAPM approach, what is the cost of equity from retained earnings?

Group of answer choices

15.24%

12.63%

10.03%

13.94%

13.03%

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Question 185 pts

Norris Enterprises, an all-equity firm, has a beta of 2.0. The chief financial officer is evaluating a project with an expected return of 14%, before any risk adjustment. The risk-free rate is 5%, and the market risk premium is 4%. The project being evaluated is riskier than the firms average project, in terms of both its beta risk and its total risk. Which of the following statements is CORRECT?

Group of answer choices

The project should definitely be accepted because its expected return (before any risk adjustments) is greater than its required return.

The project should definitely be rejected because its expected return (before risk adjustment) is less than its required return.

Riskier-than-average projects should have their expected returns increased to reflect their higher risk. Clearly, this would make the project acceptable regardless of the amount of the adjustment.

The accept/reject decision depends on the firm's risk-adjustment policy. If Norris' policy is to increase the required return on a riskier-than-average project to 3% over r_s, then it should reject the project.

Capital budgeting projects should be evaluated solely on the basis of their total risk. Thus, insufficient information has been provided to make the accept/reject decision.

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Question 195 pts

The text identifies three methods for estimating the cost of common stock from retained earnings: the CAPM method, the DCF method, and the bond-yield-plus-risk-premium method. However, only the CAPM method always provides an accurate and reliable estimate.

Group of answer choices

True

False

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Question 205 pts

Teall Development Company hired you as a consultant to help them estimate its cost of capital. You have been provided with the following data: D₁ = $1.45; P₀ = $28.00; and g = 6.50% (constant). Based on the DCF approach, what is the cost of equity from retained earnings?

Group of answer choices

9.34%

12.15%

10.16%

10.51%

11.68%

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Question 21

Compared to an annual bond, what adjustments are necessary to calculate a semi-annual bond?

Based on Chapter 8 of our text, what is CAPM?

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Question 2310 pts

What is the difference between common stock and preferred stock?

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Question 24 10 pts

Write the formula to calculate WACC. Clearly state three critical components of the WACC formula.