Managing Finance and Capital Exam 3

(Chapter 7) T or F: Because short-term interest rates are much more volatile than long-term rates, you would, in the real world, generally be subject to much more price risk if you purchased a 30-day bond than if you bought a 30-year bond.

False

(Chapter 7) T or F: Income bonds pay interest only if the issuing company actually earns the indicated interest. Thus, these securities cannot bankrupt a company, and this makes them safer from an investor's perspective than regular bonds.

False

(Chapter 7) T or F: You are considering 2 bonds that will be issued tomorrow. Both are rated triple B (BBB, the lowest investment-grade rating), both mature in 20 years, both have a 10% coupon, neither can be called except for sinking fund purposes, and both are offered to you at their $1,000 par values. However, Bond SF has a sinking fund while Bond NSF does not. Under the sinking fund, the company must call and pay off 5% of the bonds at par each year. The yield curve at the time is upward sloping. The bond's prices, being equal, are probably not in equilibrium, as Bond SF, which has the sinking fund, would generally be expected to have a higher yield than Bond NSF.

False

(Chapter 8) T or F: A stock's beta measures its diversifiable risk relative to the diversifiable risks of other firms.

False

(Chapter 8) T or F: Managers should under no conditions take actions that increase their firm's risk relative to the market, regardless of how much those actions would increase the firm's expected rate of return.

False

T or F: Two conditions are used to determine whether a stock is in equilibrium: (1) Does the stock's market price equal its intrinsic value as seen by the marginal investor, and (2) does the expected return on the stock as seen by the marginal investor equal his or her required return? If either of these conditions, but not necessarily both, holds, then the stock is said to be in equilibrium.

False

Which of the following statements is CORRECT? a.The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. b.If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, then the stock's dividend yield is also 5%. c.The constant growth model cannot be used for a zero growth stock, wherein the dividend is expected to remain constant over time. d.The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. e.The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

(Chapter 7) T or F: If a firm raises capital by selling new bonds, it could be called the "issuing firm," and the coupon rate is generally set equal to the required rate on bonds of equal risk.

True

(Chapter 7) T or F: The desire for floating-rate bonds, and consequently their increased usage, arose out of the experience of the early 1980s, when inflation pushed interest rates up to very high levels and thus caused sharp declines in the prices of outstanding bonds.

True

(Chapter 7) T or F: The prices of high-coupon bonds tend to be less sensitive to a given change in interest rates than low-coupon bonds, other things held constant.

True

(Chapter 8) T or F: Most corporations earn returns for their stockholders by acquiring and operating tangible and intangible assets. The relevant risk of each asset should be measured in terms of its effect on the risk of the firm's stockholders.

True

(Chapter 8) T or F: According to the Capital Asset Pricing Model, investors are primarily concerned with portfolio risk, not the risks of individual stocks held in isolation. Thus, the relevant risk of a stock is the stock's contribution to the riskiness of a well-diversified portfolio.

True

(Chapter 8) T or F: Market risk refers to the tendency of a stock to move with the general stock market. A stock with above-average market risk will tend to be more volatile than an average stock, and its beta will be greater than 1.0.

True

(Chapter 8) T or F: The slope of the SML is determined by investors' aversion to risk. The greater the average investor's risk aversion, the steeper the SML.

True

T or F: Founders' shares, a type of classified stock owned by the firm's founders, generally have more votes per share than the other classes of common stock.

True

T or F: The constant growth DCF model used to evaluate the prices of common stocks is conceptually similar to the model used to find the price of perpetual preferred stock or other perpetuities.

True

(Chapter 8) You hold a diversified $100,000 portfolio consisting of 20 stocks with $5,000 invested in each. The portfolio's beta is 1.12. You plan to sell a stock with b = 0.90 and use the proceeds to buy a new stock with b = 1.25. What will the portfolio's new beta be? Do not round your intermediate calculations. a. 1.138 b. 0.853 c. 1.285 d. 0.956 e. 1.103

a. 1.138

Sorenson Corp.'s expected year-end dividend is D 1 = $0.70, its required return is r s = 11.00%, its dividend yield is 6.00%, and its growth rate is expected to be constant in the future. What is Sorenson's expected stock price in 7 years, i.e., what is ? Do not round intermediate calculations. a. $16.42 b. $19.37 c. $17.24 d. $17.40 e. $15.27

a. 16.42 Current Price: (.70/.06) = 11.6667 Required Return = (11-6) = 5 11.6667 * (1.05)^7

A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, then what is the stock price? a.$17.57 b.$20.03 c.$13.53 d.$17.39 e.$18.27

a.$17.57 1.054/(.114 - .054) = 17.57

Based on the corporate valuation model, Morgan Inc.'s total corporate value is $450 million. The balance sheet shows $90 million of notes payable, $30 million of long-term debt, $40 million of preferred stock, and $100 million of common equity. The company has 10 million shares of stock outstanding. What is the best estimate of the stock's price per share? a.$29.00 b.$25.81 c.$22.62 d.$24.07 e.$33.06

a.$29.00 (450-40-30-90) / 10 29

(Chapter 7) A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond currently sells for $800. If the yield to maturity remains at its current rate, what will the price be 5 years from now? a.$811.11 b.$608.33 c.$721.88 d.$786.77 e.$892.22

a.$811.11

(Chapter 7) Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price? a.A 10-year zero coupon bond. b.A 1-year bond with a 15% coupon. c.A 10-year bond with a 10% coupon. d.An 8-year bond with a 9% coupon. e.A 3-year bond with a 10% coupon.

a.A 10-year zero coupon bond.

(Chapter 7) If its yield to maturity declined by 1%, which of the following bonds would have the largest percentage increase in value? a.A 10-year zero coupon bond. b.A 1-year zero coupon bond. c.A 10-year bond with a 12% coupon. d.A 1-year bond with an 8% coupon.e.A 10-year bond with an 8% coupon.

a.A 10-year zero coupon bond.

(Chapter 7) Which of the following statements is CORRECT? a.Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds. b.Liquidity premiums are generally higher on Treasury than corporate bonds. c.Default risk premiums are generally lower on corporate than on Treasury bonds. d.The maturity premiums embedded in the interest rates on U.S. Treasury securities are due primarily to the fact that the probability of default is higher on long-term bonds than on short-term bonds. e.If the maturity risk premium were zero and interest rates were expected to decrease in the future, then the yield curve for U.S. Treasury securities would, other things held constant, have an upward slope.

a.Reinvestment risk is lower, other things held constant, on long-term than on short-term bonds.

Which of the following statements is CORRECT? a.The constant growth model takes into consideration the capital gains investors expect to earn on a stock. b.It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant. c.The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. d.Two firms with the same expected dividend and growth rate must also have the same stock price. e.If a stock has a required rate of return rs = 12%, and if its dividend is expected to grow at a constant rate of 5%, then the stock's dividend yield is also 5%.

a.The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

(Chapter 7) You are considering two bonds. Bond A has a 9% annual coupon while Bond B has a 6% annual coupon. Both bonds have a 7% yield to maturity, and the YTM is expected to remain constant. Which of the following statements is CORRECT? a.The price of Bond A will decrease over time, but the price of Bond B will increase over time. b.The price of Bond B will decrease over time, but the price of Bond A will increase over time. c.The prices of both bonds will increase by 7% per year. d.The prices of both bonds will increase over time, but the price of Bond A will increase at a faster rate. e.The prices of both bonds will remain unchanged.

a.The price of Bond A will decrease over time, but the price of Bond B will increase over time.

Which of the following statements is CORRECT? a.To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital. b.The corporate valuation model requires the assumption of a constant growth rate in all years. c.To implement the corporate valuation model, we discount projected net income at the weighted average cost of capital. d.To implement the corporate valuation model, we discount net operating profit after taxes (NOPAT) at the weighted average cost of capital. e.To implement the corporate valuation model, we discount projected free cash flows at the cost of equity capital.

a.To implement the corporate valuation model, we discount projected free cash flows at the weighted average cost of capital.

(Chapter 8) Assume that you hold a well-diversified portfolio that has an expected return of 11.0% and a beta of 1.20. You are in the process of buying 1,000 shares of Alpha Corp at $10 a share and adding it to your portfolio. Alpha has an expected return of 17.0% and a beta of 1.60. The total value of your current portfolio is $90,000. What will the expected return and beta on the portfolio be after the purchase of the Alpha stock? Do not round your intermediate calculations. a. 12.88%; 1.02 b. 11.60%; 1.24 c. 11.72%; 1.14 d. 13.22%; 1.15 e. 13.57%; 0.99

b. 11.60%; 1.24

(Chapter 7) Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25% nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50% nominal yield to maturity, but it can be called in 6 years at a price of $1,135. What is the bond's nominal yield to call? a. 7.85% b. 6.71% c. 6.37% d. 5.57% e. 5.83%

b. 6.71%

(Chapter 8) Which of the following statements is CORRECT? a.The CAPM has been thoroughly tested, and the theory has been confirmed beyond any reasonable doubt. b.An increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required returns on a riskless asset and on an average stock, other things held constant. c.A graph of the SML as applied to individual stocks would show required rates of return on the vertical axis and standard deviations of returns on the horizontal axis. d.If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the portfolio's expected return would be a weighted average of the stocks' expected returns, but the portfolio's standard deviation would probably be greater than the average of the stocks' standard deviations. e.If investors become more risk averse, then (1) the slope of the SML would increase and (2) the required rate of return on low-beta stocks would increase by more than the required return on high-beta stocks.

b.An increase in expected inflation, combined with a constant real risk-free rate and a constant market risk premium, would lead to identical increases in the required returns on a riskless asset and on an average stock, other things held constant.

(Chapter 7) Three $1,000 face value, 10-year, noncallable, bonds have the same amount of risk, hence their YTMs are equal. Bond 8 has an 8% annual coupon, Bond 10 has a 10% annual coupon, and Bond 12 has a 12% annual coupon. Bond 10 sells at par. Assuming that interest rates remain constant for the next 10 years, which of the following statements is CORRECT? a.Bond 8's current yield will increase each year. b.Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year. c.Since the bonds have the same YTM, they should all have the same price, and since interest rates are not expected to change, their prices should all remain at their current levels until maturity. d.Bond 12 sells at a premium (its price is greater than par), and its price is expected to increase over the next year. e.Over the next year, Bond 8's price is expected to decrease, Bond 10's price is expected to stay the same, and Bond 12's price is expected to increase.

b.Bond 8 sells at a discount (its price is less than par), and its price is expected to increase over the next year.

(Chapter 7) Which of the following statements is CORRECT? a.If their maturities and other characteristics were the same, a 5% coupon bond would have less price risk than a 10% coupon bond. b.If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond. c.A 10-year coupon bond would have more price risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of price risk. d.A zero coupon bond of any maturity will have more price risk than any coupon bond, even a perpetuity. e.A 10-year coupon bond would have more reinvestment risk than a 5-year coupon bond, but all 10-year coupon bonds have the same amount of reinvestment risk.

b.If their maturities and other characteristics were the same, a 5% coupon bond would have more price risk than a 10% coupon bond.

(Chapter 8) Stocks A and B each have an expected return of 15%, a standard deviation of 20%, and a beta of 1.2. The returns on the two stocks have a correlation coefficient of +0.6. You have a portfolio that consists of 50% A and 50% B. Which of the following statements is CORRECT? a.The portfolio's beta is greater than 1.2. b.The portfolio's expected return is 15%. c.The portfolio's standard deviation is 20%. d.The portfolio's standard deviation is greater than 20%. e.The portfolio's beta is less than 1.2.

b.The portfolio's expected return is 15%.

The expected return on Natter Corporation's stock is 14%. The stock's dividend is expected to grow at a constant rate of 8%, and it currently sells for $50 a share. Which of the following statements is CORRECT? a.The stock's dividend yield is 7%. b.The stock price is expected to be $54 a share one year from now. c.The current dividend per share is $4.00. d.The stock's dividend yield is 8%. e.The stock price is expected to be $57 a share one year from now.

b.The stock price is expected to be $54 a share one year from now.

If a stock's dividend is expected to grow at a constant rate of 5% a year, then which of the following statements is CORRECT? The stock is in equilibrium. a.The stock's required return must be equal to or less than 5%. b.The stock's price one year from now is expected to be 5% above the current price. c.The expected return on the stock is 5% a year. d.The price of the stock is expected to decline in the future.e.The stock's dividend yield is 5%.

b.The stock's price one year from now is expected to be 5% above the current price.

(Chapter 8) Assume that you are the portfolio manager of the SF Fund, a $3 million hedge fund that contains the following stocks. The required rate of return on the market is 11.00% and the risk-free rate is 2.00%. What rate of return should investors expect (and require) on this fund? Do not round your intermediate calculations. a.9.39% b.11.76% c.11.31% d.10.86%e .8.59%

c. 11.31%

(Chapter 8) Returns for the Dayton Company over the last 3 years are shown below. What's the standard deviation of the firm's returns? (Hint: This is a sample, not a complete population, so the sample standard deviation formula should be used.) Do not round your intermediate calculations. a. 19.33% b. 16.37% c. 17.41% d. 21.59% e. 15.85%

c. 17.41%

If D 0 = $1.75, g (which is constant) = 3.6%, and P 0 = $29.00, then what is the stock's expected total return for the coming year? a.7.49% b.11.23% c.9.85% d.11.53% e.8.47%

c. 9.85 Next dividend = 1.75 (1 + 3.6%) = 1.813 Total return = (Next dividend / pirce) + growth rate Total return = (1.813 / 29) + 0.036 Total return = 0.0985 or 9.85%

Based on the corporate valuation model, Wang Inc.'s total corporate value is $425 million. Its balance sheet shows $100 million notes payable, $200 million of long-term debt, $40 million of common stock (par plus paid-in-capital), and $160 million of retained earnings. What is the best estimate for the firm's value of equity (in millions)? a.$124 b.$118 c.$125 d.$95 e.$148

c.$125 425-100-200 = 125

A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is r s = 10.5%, and the expected constant growth rate is g = 8.3%. What is the stock's current price? a.$29.66 b.$30.68 c.$34.09 d.$41.93 e.$40.91

c.$34.09 P = D1/(r-g) P = .75/(.105-.083)

(Chapter 7) Which of the following statements is CORRECT? a.If a bond sells for less than par, then its yield to maturity is less than its coupon rate. b.If a bond sells at par, then its current yield will be less than its yield to maturity. c.A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate. d.A discount bond's price declines each year until it matures, when its value equals its par value. e.Assume that two bonds have equal maturities and are of equal risk, but one bond sells at par while the other sells at a premium above par. The premium bond must have a lower current yield and a higher capital gains yield than the par bond.

c.A bond's current yield must always be either equal to its yield to maturity or between its yield to maturity and its coupon rate.

(Chapter 7) Suppose a new company decides to raise a total of $200 million, with $100 million as common equity and $100 million as long-term debt. The debt can be mortgage bonds or debentures, but by an iron-clad provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is CORRECT? a.If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of debentures. b.The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be. c.In this situation, we cannot tell for sure how, or even whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each type of bond would increase as the percentage of mortgage bonds used was increased, but the average cost might well be such that the firm's total interest charges would not be affected materially by the mix between the two. d.The higher the percentage of debentures, the greater the risk borne by each debenture, and thus the higher the required rate of return on the debentures. e.If the debt were raised by issuing $50 million of debentures and $50 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing $100 million of first mortgage bonds.

c.In this situation, we cannot tell for sure how, or even whether, the firm's total interest expense on the $100 million of debt would be affected by the mix of debentures versus first mortgage bonds. The interest rate on each type of bond would increase as the percentage of mortgage bonds used was increased, but the average cost might well be such that the firm's total interest charges would not be affected materially by the mix between the two.

A stock is expected to pay a year-end dividend of $2.00, i.e., D 1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, then which of the following statements is CORRECT? a.The company's current stock price is $20. b.The company's expected capital gains yield is 5%. c.The company's expected stock price at the beginning of next year is $9.50. d.The constant growth model cannot be used because the growth rate is negative. e.The company's dividend yield 5 years from now is expected to be 10%.

c.The company's expected stock price at the beginning of next year is $9.50.

(Chapter 8) Other things held constant, if the expected inflation rate decreases and investors also become more risk averse, the Security Market Line would be affected as follows: a.The SML would be affected only if betas changed. b.The x-axis intercept would decline, and the slope would increase. c.The y-axis intercept would decline, and the slope would increase. d.Both the y-axis intercept and the slope would increase, leading to higher required returns. e.The y-axis intercept would increase, and the slope would decline.

c.The y-axis intercept would decline, and the slope would increase.

(Chapter 8) Which of the following statements is CORRECT? ​ a.​If a company increases its use of debt, this is likely to cause the slope of its SML to increase, indicating a higher required return on the stock. b.​The SML shows the relationship between companies' required returns and their diversifiable risks. The slope and intercept of this line cannot be influenced by a firm's managers, but the position of the company on the line can be influenced by its managers. c.​Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well diversified investor, assuming investors expect the observed relationship to continue on into the future. d.​If investors become less risk averse, the slope of the Security Market Line will increase. e.​The slope of the SML is determined by the value of beta.

c.​Suppose you plotted the returns of a given stock against those of the market, and you found that the slope of the regression line was negative. The CAPM would indicate that the required rate of return on the stock should be less than the risk-free rate for a well diversified investor, assuming investors expect the observed relationship to continue on into the future.

Whited Inc.'s stock currently sells for $35.25 per share. The dividend is projected to increase at a constant rate of 7.75% per year. The required rate of return on the stock, r s, is 11.50%. What is the stock's expected price 5 years from now? a. $64.00 b. $40.45 c. $60.92 d. $51.20 e. $48.13

d. $51.20

(Chapter 8) You have the following data on (1) the average annual returns of the market for the past 5 years and (2) similar information on Stocks A and B. Which of the possible answers best describes the historical betas for A and B? a. bA > +1; bB = 0. b. bA = 0; bB = -1. c. bA > 0; bB = 1. d. bA < 0; bB = 0. e. bA < -1; bB = 1.

d. bA < 0; bB = 0.

(Chapter 8) Stock A has a beta of 0.8, Stock B has a beta of 1.0, and Stock C has a beta of 1.2. Portfolio P has 1/3 of its value invested in each stock. Each stock has a standard deviation of 25%, and their returns are independent of one another, i.e., the correlation coefficients between each pair of stocks is zero. Assuming the market is in equilibrium, which of the following statements is CORRECT? a. Portfolio P's expected return is greater than the expected return on Stock C. b. Portfolio P's expected return is equal to the expected return on Stock A. c. Portfolio P's expected return is greater than the expected return on Stock B. d. Portfolio P's expected return is equal to the expected return on Stock B. e. Portfolio P's expected return is less than the expected return on Stock B.

d. Portfolio P's expected return is equal to the expected return on Stock B.

(Chapter 8) A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b = 1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and B both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with r = 0.75. However, Stock A's standard deviation of returns is 12% versus 8% for Stock B. Which stock should this investor add to his or her portfolio, or does the choice not matter? a.Neither A nor B, as neither has a return sufficient to compensate for risk. b.Add A, since its beta must be lower. c.Either A or B, i.e., the investor should be indifferent between the two. d.Stock B. e.Stock A.

d. Stock B

(Chapter 7) Which of the following statements is CORRECT? a.A bond is likely to be called if it sells at a discount below par. b.A bond is likely to be called if its market price is below its par value. c.A bond is likely to be called if its market price is equal to its par value. d.Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called. e.A bond is likely to be called if its coupon rate is below its YTM.

d.Even if a bond's YTC exceeds its YTM, an investor with an investment horizon longer than the bond's maturity would be worse off if the bond were called.

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? a.Stock B must have a higher dividend yield than Stock A. b.Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B. c.If Stock A has a higher dividend yield than Stock B, then its expected capital gains yield must be lower than Stock B's. d.If Stock A has a lower dividend yield than Stock B, then its expected capital gains yield must be higher than Stock B's. e.Stock A must have a higher dividend yield than Stock B.

d.If Stock A has a lower dividend yield than Stock B, then its expected capital gains yield must be higher than Stock B's.

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% a.The stock's required return is 10%. b.The stock's expected capital gains yield is 5%. c.The stock's expected price 10 years from now is $100.00. d.The stock's expected dividend yield and growth rate are equal. e.The stock's expected dividend yield is 5%.

d.The stock's expected dividend yield and growth rate are equal.

(Chapter 8) Inflation, recession, and high interest rates are economic events that are best characterized as being: a.systematic risk factors that can be diversified away. b.risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. c.irrelevant except to governmental authorities like the Federal Reserve. d.among the factors that are responsible for market risk. e.company-specific risk factors that can be diversified away.

d.among the factors that are responsible for market risk.

(Chapter 8) CCC Corp has a beta of 1.5 and is currently in equilibrium. The required rate of return on the stock is 12.00% versus a required return on an average stock of 10.00%. Now the required return on an average stock increases by 40.0% (not percentage points). Neither betas nor the risk-free rate change. What would CCC's new required return be? Do not round your intermediate calculations. a. 13.50% b. 20.34% c. 20.70% d. 20.52% e. 18.00%

e. 18.00%

You have been assigned the task of using the corporate, or free cash flow, model to estimate Petry Corporation's intrinsic value. The firm's WACC is 10.00%, its end-of-year free cash flow (FCF 1) is expected to be $50.0 million, the FCFs are expected to grow at a constant rate of 5.00% a year in the future, the company has $200 million of long-term debt and preferred stock, and it has 30 million shares of common stock outstanding. Assume the firm has zero non-operating assets. What is the firm's estimated intrinsic value per share of common stock? Do not round intermediate calculations. a.$29.33 b.$28.00 c.$25.07 d.$32.80 e.$26.67

e.$26.67 50/(.10-.05) = 1000 1000 - 200 = 800 800/30 = 26.67

(Chapter 7) Assuming all else is constant, which of the following statements is CORRECT? a.Other things held constant, a 20-year zero coupon bond has more reinvestment risk than a 20-year coupon bond. b.Other things held constant, for any given maturity, a 1.0 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate. c.Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases. d.From a corporate borrower's point of view, interest paid on bonds is not tax-deductible. e.For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.

e.For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gain stemming from a 1.0 percentage point decrease in the interest rate.

(Chapter 7) Which of the following statements is CORRECT? a.If a 10-year, $1,000 par, zero coupon bond were issued at a price that gave investors a 10% yield to maturity, and if interest rates then dropped to the point where rd = YTM = 5%, the bond would sell at a premium over its $1,000 par value. b.Bonds are exposed to both reinvestment risk and price risk. Longer-term low-coupon bonds, relative to shorter-term high-coupon bonds, are generally more exposed to reinvestment risk than price risk. c.Other things held constant, a callable bond would have a lower required rate of return than a noncallable bond because it would have a shorter expected life. d.Other things held constant, including the coupon rate, a corporation would rather issue noncallable bonds than callable bonds. e.If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.

e.If a 10-year, $1,000 par, 10% coupon bond were issued at par, and if interest rates then dropped to the point where rd = YTM = 5%, we could be sure that the bond would sell at a premium above its $1,000 par value.

(Chapter 7) Bonds A, B, and C all have a maturity of 10 years and a yield to maturity of 7%. Bond A's price exceeds its par value, Bond B's price equals its par value, and Bond C's price is less than its par value. None of the bonds can be called. Which of the following statements is CORRECT? a.If the yield to maturity on the three bonds remains constant, the prices of the three bonds will remain the same over the next year. b.If the yield to maturity on each bond decreases to 6%, Bond A will have the largest percentage increase in its price. c.Bond A has the most price risk. d.Bond C sells at a premium over its par value. e.If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.

e.If the yield to maturity on each bond increases to 8%, the prices of all three bonds will decline.

Which of the following statements is NOT CORRECT? a.The corporate valuation model can be used to find the value of a division. b.The corporate valuation model can be used both for companies that pay dividends and those that do not pay dividends. c.Free cash flows are assumed to grow at a constant rate beyond a specified date in order to find the horizon, or continuing, value. d.An important step in applying the corporate valuation model is forecasting the firm's pro forma financial statements. e.The corporate valuation model discounts free cash flows by the required return on equity.

e.The corporate valuation model discounts free cash flows by the required return on equity.

(Chapter 8) Assume that to cool off the economy and decrease expectations for inflation, the Federal Reserve tightened the money supply, causing an increase in the risk-free rate, r RF. Investors also became concerned that the Fed's actions would lead to a recession, and that led to an increase in the market risk premium, (r M - r RF). Under these conditions, with other things held constant, which of the following statements is most correct? a.Stocks' required returns would change, but so would expected returns, and the result would be no change in stocks' prices. b.The prices of all stocks would increase, but the increase would be greatest for high-beta stocks. c.The required return on all stocks would increase by the same amount. d.The required return on all stocks would increase, but the increase would be greatest for stocks with betas of less than 1.0. e.The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.

e.The prices of all stocks would decline, but the decline would be greatest for high-beta stocks.