Exam #2

Nathan is buying a $1,000 face value bond at a quoted price of 101.364. The bond carries a coupon rate of 7.75 percent, with interest paid semiannually. The next interest payment is two months from today. What is the dirty price of this bond?

$1,039.47

Western Tech is considering a new project that will require $118,000 of fixed assets and net working capital of $16,000. The fixed assets will be depreciated on a straight-line basis to a zero salvage value over three years. Ignore bonus depreciation. This project is expected to produce an operating cash flow of $45,000 the first year with that amount decreasing by 5 percent annually for two years before the project is shut down. The fixed assets can be sold for $55,000 at the end of the project and all net working capital will be recovered. What is the net present value of this project at a discount rate of 11.5 percent and a tax rate of 23 percent?

$12,136.54

Rosita's announced that its next annual dividend will be $1.65 a share and all future dividends will increase by 2.5 percent annually. What is the maximum amount you should pay to purchase a share of this stock if you require a rate of return of 12 percent?

$17.37

Hu's has 25,000 shares of common stock outstanding with a beta of 1.4, a market price of $32 a share, and a dividend yield of 5.7 percent. Dividends increase by 4.2 percent annually. The firm also has $450,000 of debt outstanding that is selling at 102 percent of par that has a yield to maturity of 6.8 percent. The tax rate is 21 percent and all interest is tax deductible. The firm is considering a project that has the same risk level as the firm's current operations, an initial cost of $328,000 and cash inflows of $52,500, $155,000, and $225,000 for Years 1 to 3, respectively. What is the NPV of the project?

$30,157

Danielsen's has 15,000 shares of stock outstanding and projected annual free cash flows of $48,200, $57,900, $71,300, and $72,500 for the next four years, respectively. After that, the cash flows are expected to increase at a constant annual rate of 1.6 percent. What is the current value per share of stock at a discount rate of 15.4 percent?

$31.57

DC Motors recently paid $1.10 as its annual dividend. Future dividends are projected at $1.06, $1.02, and $1.00 over the next three years, respectively. After that, the dividend is expected to decrease by 2 percent annually. What is one share of this stock worth at a rate of return of 17 percent?

$5.50

Assume a project will increase inventory by $61,000, accounts payable by $28,000, and accounts receivable by $36,000. What is the initial net working capital requirement for this project?

$69,000

Chocolate and More offers a bond with a coupon rate of 6 percent, semiannual payments, and a yield to maturity of 7.73 percent. The bonds mature in 9 years. What is the market price of a $1,000 face value bond?

$889.29

Phil's Carvings wants to have a weighted average cost of capital of 9.5 percent. The firm has an aftertax cost of debt of 6.5 percent and a cost of equity of 12.75 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

1.08

Jack's Construction Co. has 80 bonds outstanding that are selling at their par value of $1,000 each. Bonds with similar characteristics are yielding a pretax 8.6 percent. The firm also has 4,000 shares of common stock outstanding. The stock has a beta of 1.1 and sells for $40 a share. The U.S. T-bill is yielding 4 percent, the market risk premium is 8 percent, and the firm's tax rate is 21 percent. What is the firm's weighted average cost of capital assuming its earnings are sufficient to classify all interest as a tax-deductible expense?

10.80 percent

Suppose Simmons' common stock has a beta of 1.37, the risk-free rate is 3.4 percent, and the market risk premium is 8.2 percent. The yield to maturity on the firm's bonds is 7.6 percent and the debt-equity ratio is .45. What is the WACC if the tax rate is 23 percent and all interest is tax deductible?

11.91 percent

The zero coupon bonds of Mark Enterprises have a market price of $394.47, a face value of $1,000, and a yield to maturity of 6.87 percent based on semiannual compounding. How many years is it until this bond matures?

13.77

The dividend yield on Alpha's common stock is 5.2 percent. The company just paid a $2.10 dividend. The rumour is that the dividend will be $2.30 next year. The dividend growth rate is expected to remain constant at the current level. What is the required rate of return on Alpha's stock?

14.72 percent

L&R's stock is currently valued at $32.70 a share. The firm had earnings per share of $1.88 last year and projects earnings of $2.10 a share for next year. What is the forward price-earnings ratio?

15.57

The nominal rate of return on a bond is 7.28 percent while the real rate is 3.09 percent. What is the rate of inflation?

4.06 percent

High Road Tours has an aftertax cost of debt of 5.1 percent at its current tax rate of 34 percent. What will its aftertax cost of debt be if the tax rate drops to 21 percent? Assume all interest is tax deductible.

6.10 percent

A corporate bond has a coupon of 7.5 percent and pays interest annually. The face value is $1,000 and the current market price is $1,108.15. The bond matures in 14 years. What is the yield to maturity?

6.31 percent

Which one of these statements is correct?

Dealers buy at the bid price.

For a profitable firm, an increase in which one of the following will increase the operating cash flow?

Depreciation

Bruno's is analyzing two machines to determine which one it should purchase. The company requires a rate of return of 14.6 percent and uses straight-line depreciation to a zero book value over a machine's life. Ignore bonus depreciation and taxes. Machine A has a cost of $318,000, annual operating costs of $8,700, and a life of 3 years. Machine B costs $247,000, has annual operating costs of $9,300, and a life of 2 years. Whichever machine is purchased will be replaced at the end of its useful life. Which machine should Bruno's purchase and why?

Machine A; because it will save the company about $13,406 a year

For a firm with a constant payout ratio, the dividend growth rate can be estimated as:

Return on retained earnings × Retention ratio.

Which one of these applies to the dividend growth model of stock valuation?

The growth rate must be less than the discount rate.

Three years ago, you purchased some 5-year MACRS equipment at a cost of $135,000. The MACRS rates are 20 percent, 32 percent, 19.2 percent, 11.52 percent, 11.52 percent, and 5.76 percent for Years 1 to 6, respectively. You sold the equipment today for $82,500. Which of these statements is correct if your tax rate is 23 percent and you ignore bonus depreciation?

The tax due on the sale is $10,032.60.

The book value of an asset is primarily used to compute the:

amount of tax due on the sale of that asset.

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:

depreciation tax shield.

The issuance of stock to fund a project tends to:

dilute the capital gains that would have been earned by the previous shareholders.

The interest paid on any municipal bond is:

exempt from federal income taxation and may or may not be exempt from state taxation.

The principal amount of a bond that is repaid at the end of the loan term is called the bond's:

face value.

Comparing two otherwise equivalent firms, the beta of the common stock of the levered firm is _____ the beta of the common stock of the unlevered firm.

greater than

Companies will generally have a ____ beta if their:

high; sales are highly dependent on the market cycle.

The cash flows of a project should:

include all incremental and opportunity costs.

The weighted average cost of capital for a firm is the:

overall rate which the firm must earn on its existing assets to maintain the value of its stock.

If a stock pays a constant annual dividend then the stock can be valued using the:

perpetuity present value formula.

The dirty price of a bond is defined as the:

quoted price plus the accrued interest.

A firm with cyclical earnings is characterized by:

revenue patterns that vary with the business cycle.

A cost that has already been paid, or a liability to pay that has already been incurred, is classified as a(n):

sunk cost

If the issuer of a stock receives the proceeds from a sale of that issuer's stock, then the sale:

was conducted in the primary market.

A bond that makes no coupon payments and is initially priced at a deep discount is called a _____ bond.

zero coupon

If Lew's Steel Forms purchases $618,000 of new equipment, they can lower annual operating costs by $265,000. The equipment will be depreciated straight-line to a zero book value over its 3-year life. Ignore bonus depreciation. At the end of the three years, the equipment will be sold for an estimated $60,000. The equipment will require the company to hold an extra $23,000 of inventory over the 3-year period. What is the NPV if the discount rate is 14 percent and the tax rate is 21 percent?

−$7,014.54

A $1,000 face value coupon bond will pay 5 percent interest annually for 12 years. What is the percentage change in the price of this bond if the market yield rises to 6 percent from the current level of 5.5 percent?

−4.26 percent