Corporate Finance

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