Posted: July 30th, 2022

Finance Questions

 

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 1.

 

 

 

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 7.4 percent paid annually.

 

If the yield to maturity is 8.5 percent, what is the current price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

  Bond price

 


 


 

Even though most corporate bonds in the United States make coupon payments semiannually, bonds issued elsewhere often have annual coupon payments. Suppose a German company issues a bond with a par value of €1,000, 20 years to maturity, and a coupon rate of 7.4 percent paid annually.

 

If the yield to maturity is 8.5 percent, what is the current price of the bond? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

  Bond price

 [removed]  


 


 

 2.

 

 

 

Assuming semiannual compounding, what is the price of a zero coupon bond with 19 years to maturity paying $1,000 at maturity if the YTM is (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

 

 

 

Price of the Bond

a.

4 percent

 

b.

7 percent

 

c.

10 percent

 


 

References

WorksheetSection: 8.1 Bonds and Bond Valuation


 

Assuming semiannual compounding, what is the price of a zero coupon bond with 19 years to maturity paying $1,000 at maturity if the YTM is (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

 

 

 

Price of the Bond

a.

4 percent

$ [removed]  

b.

7 percent

$ [removed]  

c.

10 percent

$ [removed]  



 

 3.

 

 

 

 

A Japanese company has a bond outstanding that sells for 95 percent of its ¥100,000 par value. The bond has a coupon rate of 5.4 percent paid annually and matures in 16 years.

  

What is the yield to maturity of this bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Yield to maturity

 %  


 

References

WorksheetSection: 8.1 Bonds and Bond Valuation


 

A Japanese company has a bond outstanding that sells for 95 percent of its ¥100,000 par value. The bond has a coupon rate of 5.4 percent paid annually and matures in 16 years.

  

What is the yield to maturity of this bond? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Yield to maturity

[removed] %  


 
 

 4.

 

 

 

 

The next dividend payment by ECY, Inc., will be $1.76 per share. The dividends are anticipated to maintain a growth rate of 7 percent, forever. The stock currently sells for $34 per share.

   

What is the dividend yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Dividend yield

 

 

What is the expected capital gains yield?  (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Capital gains yield

 


 

References

WorksheetSection: 9.2 Estimates of Parameters in the Dividend Discount Model


 

The next dividend payment by ECY, Inc., will be $1.76 per share. The dividends are anticipated to maintain a growth rate of 7 percent, forever. The stock currently sells for $34 per share.

   

What is the dividend yield? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Dividend yield

[removed] %  

 

What is the expected capital gains yield?  (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Capital gains yield

[removed] %  


 


 

 5.

 

 

 

 

The next dividend payment by ECY, Inc., will be $1.60 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. The stock currently sells for $30 per share.

  

What is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Required return

 


 

References

WorksheetSection: 9.2 Estimates of Parameters in the Dividend Discount Model


 

The next dividend payment by ECY, Inc., will be $1.60 per share. The dividends are anticipated to maintain a growth rate of 6 percent, forever. The stock currently sells for $30 per share.

  

What is the required return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Required return

[removed] %  


 

 

 6.

 

 

 

 

Schiller Corporation will pay a $2.98 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 14 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

  Stock price

 


 

References

WorksheetSection: 9.2 Estimates of Parameters in the Dividend Discount Model


 

Schiller Corporation will pay a $2.98 per share dividend next year. The company pledges to increase its dividend by 5 percent per year, indefinitely. If you require a return of 14 percent on your investment, how much will you pay for the company’s stock today? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

 

  Stock price

$ [removed]  


 


 

 7.

 

 

 

Zoom stock has a beta of 1.46. The risk-free rate of return is 3.07 percent and the market rate of return is 11.81 percent. What is the amount of the risk premium on Zoom stock?

8.09%

12.76%

9.59%

10.25%

17.24%

References

Multiple ChoiceSection: 11.9 Relationship between Risk and Expected Return (CAPM)

 8.

 

 

 

The risk premium for an individual security is computed by:

multiplying the security’s beta by the market risk premium.

multiplying the security’s beta by the risk-free rate of return.

adding the risk-free rate to the security’s expected return.

dividing the market risk premium by the quantity (1 + Beta).

dividing the market risk premium by the beta of the security.

References

Multiple ChoiceSection: 11.9 Relationship between Risk and Expected Return (CAPM)

 9.

 

 

 

The risk-free rate of return is 3.68 percent and the market risk premium is 7.84 percent. What is the expected rate of return on a stock with a beta of 1.32?

9.17%

9.24%

13.12%

14.03%

14.36%

E(r) = .0368 + (1.32 ×.0784) = .1403, or 14.03%

References

Multiple ChoiceSection: 11.9 Relationship between Risk and Expected Return (CAPM)

 10.

 

 

 

Miller Manufacturing has a target debt–equity ratio of .70. Its cost of equity is 14 percent, and its cost of debt is 7 percent. If the tax rate is 38 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  WACC

 


 

References

WorksheetSection: 13.08 The Weighted Average Cost of Capital


 

Miller Manufacturing has a target debt–equity ratio of .70. Its cost of equity is 14 percent, and its cost of debt is 7 percent. If the tax rate is 38 percent, what is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  WACC

[removed] %  


 


 

 11.

 

 

 

Mullineaux Corporation has a target capital structure of 60 percent common stock and 40 percent debt. Its cost of equity is 12 percent, and the cost of debt is 6 percent. The relevant tax rate is 30 percent.

 

What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  WACC

 


 

References

WorksheetSection: 13.11 Flotation Costs and the Weighted Average Cost of Capital


 

Mullineaux Corporation has a target capital structure of 60 percent common stock and 40 percent debt. Its cost of equity is 12 percent, and the cost of debt is 6 percent. The relevant tax rate is 30 percent.

 

What is the company’s WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

  

  WACC

[removed] %  


 


 

 12.

 

 

 

Filer Manufacturing has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value $60 million, a coupon of 5 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 years.

 

a.

What are the company’s capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

 

  

 

  Equity / Value

 

  Debt / Value

 

 

b.

What are the company’s capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

 

    

  

  Equity / Value

 

  Debt / Value

 

 

c.

Which are more relevant?

 

 

 

 


 

References

WorksheetSection: 13.08 The Weighted Average Cost of Capital


 

Filer Manufacturing has 4 million shares of common stock outstanding. The current share price is $70, and the book value per share is $5. The company also has two bond issues outstanding. The first bond issue has a face value $60 million, a coupon of 5 percent, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon of 6 percent, and sells for 104 percent of par. The first issue matures in 20 years, the second in 4 years.

 

a.

What are the company’s capital structure weights on a book value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

 

  

 

  Equity / Value

[removed]  

  Debt / Value

[removed]  


 

b.

What are the company’s capital structure weights on a market value basis? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

 

    

  

  Equity / Value

[removed]  

  Debt / Value

[removed]  


 

c.

Which are more relevant?

 

 

 

 


 

 

 13.

 

 

 

 

Titan Mining Corporation has 8.6 million shares of common stock outstanding and 300,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.3, and the bonds have 15 years to maturity and sell for 115 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3 percent, and the company’s tax rate is 40 percent.

  

a.

What is the firm’s market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

 

 

Weight

  Debt

 

  Equity

 

  

b.

If the company is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Discount rate

 

 %  


 

References

WorksheetSection: 13.08 The Weighted Average Cost of Capital


 

Titan Mining Corporation has 8.6 million shares of common stock outstanding and 300,000 5 percent semiannual bonds outstanding, par value $1,000 each. The common stock currently sells for $34 per share and has a beta of 1.3, and the bonds have 15 years to maturity and sell for 115 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3 percent, and the company’s tax rate is 40 percent.

  

a.

What is the firm’s market value capital structure? (Do not round intermediate calculations and round your answers to 4 decimal places, e.g., 32.1616.)

 

 

Weight

  Debt

[removed]  

  Equity

[removed]  


  

b.

If the company is evaluating a new investment project that has the same risk as the firm’s typical project, what rate should the firm use to discount the project’s cash flows? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

 

  Discount rate

[removed]

 %  


 

 

 

 

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