Corporate Finance

Topics: Bond, Bonds, Stock Pages: 10 (1919 words) Published: July 23, 2013
Sample Test_MT2_FINA 3101_summer_2013

____1.Travis Corp.'s bonds currently sell for $1,050. They have an 8% annual coupon rate and a 20-year maturity, but they can be called in 5 years at $1,120. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. Under these conditions, what rate of return should an investor expect to earn if he or she purchases these bonds? a.| 7.51%|

b.| 7.71%|
c.| 8.74%|
d.| 8.47%|
e.| 8.04%|

____2.Skylab Technologies issued 10-year bonds yesterday at their par value of $1,000. These bonds pay $60 in interest every six months, and their price has remained at the $1,000 issue price. Skylab's CFO has determined that the firm needs an additional $2,000,000, and has decided to issue 10-year, $1,000 par value bonds that pay only $40 in interest every six months. If both bonds are to provide investors with the same yield, how many new bonds must Skylab issue to raise $2,000,000? (Ignore the day or two difference between the bonds' issue dates and any bond flotation costs.) a.| 2,596 bonds|

b.| 2,625 bonds|
c.| 2,535 bonds|
d.| 2,571 bonds|
e.| 2,496 bonds|

____3.Motor Homes Inc. (MHI) is presently enjoying abnormally high growth because of a surge in the demand for motor homes. The company expects earnings and dividends to grow at a rate of 20% for the next 4 years, after which there will be no growth (g  0) in earnings and dividends. The company's last dividend, D0, was $1.50. MHI's beta is 1.5, the market risk premium is 6%, and the risk-free rate is 4%. What is the current price of the common stock? a.| $21.66|

b.| $19.63|
c.| $23.57|
d.| $25.87|
e.| $17.51|

____4.Leggio Corporation issued 20-year, 7% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds has dropped to 6%. What is the new price of the bonds, given that they now have 19 years to maturity? a.| $1,133.40|

b.| $1,189.04|
c.| $1,177.78|
d.| $1,111.58|
e.| $1,046.59|

____5.Yest Corporation's bonds have a 15-year maturity, a 7% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 6%, based on semiannual compounding. What is the bond's price? a.| $1,008.65|

b.| $1,105.78|
c.| $1,098.00|
d.| $1,024.67|
e.| $1,051.34|

____6.The Connors Company's last dividend was $1.00. Its dividend growth rate is expected to be constant at 15% for 2 years, after which dividends are expected to grow at a rate of 10% forever. Connors' required return (rs) is 12%. What is Connors' current stock price? a.| $60.07|

b.| $58.15|
c.| $56.82|
d.| $54.91|
e.| $62.87|

____7.Mark Walker Inc plans to issue preferred stock with a perpetual annual dividend of $2 per share and a par value of $25. If the required return on this stock is currently 8%, what should be the stock's market value? a.| $25.00|

b.| $22.00|
c.| $24.00|
d.| $26.00|
e.| $23.00|

____8.The Carter Company's bonds mature in 10 years have a par value of $1,000 and an annual coupon payment of $80. The market interest rate for the bonds is 9%. What is the price of these bonds? a.| $958.15|

b.| $941.51|
c.| $935.82|
d.| $964.41|
e.| $979.53|

____9.Highfield Inc's bonds currently sell for $1,275 and have a par value of $1,000. They pay a $120 annual coupon and have a 20-year maturity, but they can be called in 5 years at $1,120. What is their yield to call (YTC)? a.| 7.31%|

b.| 7.42%|
c.| 7.28%|
d.| 7.13%|
e.| 7.00%|

____10.A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT? a.| The bond's yield to maturity is greater than its coupon rate.| b.| If the yield to maturity...
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