Finance 301 Final

Travis & Sons has a capital structure that is based on 45 percent debt, 5 percent preferred stock, and 50 percent common stock. The pretax cost of debt is 8.3 percent, the cost of preferred is 9.2 percent, and the cost of common stock is 15.4 percent. The tax rate is 21 percent. A project is being considered that is equally as risky as the overall company. This project has initial costs of $287,000 and annual cash inflows of $91,000, $248,000, and $145,000 over the next three years, respectively. What is the projected net present value of this project? $116,667 $121,802 $99,011 $104,308 $101,488

$101,488

KNJ Companies is preparing to pay annual dividends of $1.48, $1.60, and $1.75 a share over the next three years, respectively. After that, the annual dividend will be $1.90 per share indefinitely. What is this stock worth to you per share if you require a return of 14.6 percent? $11.22 $12.21 $12.32 $11.47 $12.03

$12.32

How much are you willing to pay for one share of LBM stock if the company just paid an annual dividend of $2.24, the dividends increase by 2.3 percent annually, and you require a return of 14.8 percent? $19.29 $19.33 $18.33 $18.21 $17.59

$18.33

Flo's Flowers pays an annual dividend that increases by 1.8 percent per year, commands a market rate of return of 13.8 percent, and sells for $19.08 a share. What is the expected amount of the next dividend? $2.24 $2.29 $2.37 $2.32 $2.17

$2.29

Over the next three years, Distant Groves will pay annual dividends of $.65, $.70, and $.75 a share, respectively. After that, dividends are projected to increase by 2 percent per year. What is one share of this stock worth today at a required return of 14.5 percent? $5.49 $5.94 $5.68 $5.55 $5.86

$5.68

If the economy is normal, Charleston Freight stock is expected to return 14.3 percent. If the economy falls into a recession, the stock's return is projected at a negative 8.7 percent. The probability of a normal economy is 80 percent. What is the variance of the returns on this stock? .100346 .008464 .007420 .073927 .094315

.008464

You own a stock portfolio invested 20 percent in Stock Q, 30 percent in Stock R, 35 percent in Stock S, and 15 percent in Stock T. The betas for these four stocks are .79, 1.23, 1.13, and 1.36, respectively. What is the portfolio beta?

1.13

Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the aftertax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent? 9.89 percent 10.43 percent 11.02 percent 11.38 percent 12.17 percent

11.02 percent

You recently purchased a stock that is expected to earn 19 percent in a booming economy, 12 percent in a normal economy, and lose 8 percent in a recessionary economy. The probability of a boom economy is 16 percent while the probability of a normal economy is 78 percent. What is your expected rate of return on this stock? 12.40 percent 10.25 percent 11.92 percent 12.54 percent 13.50 percent

11.92 percent

World Travel has 7 percent, semiannual, coupon bonds outstanding with a current market price of $1,023.46, a par value of $1,000, and a yield to maturity of 6.72 percent. How many years is it until these bonds mature? 12.26 years 12.53 years 18.49 years 24.37 years 25.05 years

12.53 years

Street Corporation's common stock has a beta of 1.33. The risk-free rate is 3.4 percent and the expected return on the market is 10.97 percent. What is the cost of equity? 12.49 percent 12.84 percent 13.47 percent 14.07 percent 13.33 percent

13.47 percent

The returns on the common stock of New Image Products are quite cyclical. In a boom economy, the stock is expected to return 23 percent in comparison to 14 percent in a normal economy and a negative 18 percent in a recessionary period. The probability of a recession is 18 percent while the probability of a boom is 22 percent. What is the standard deviation of the returns on this stock? 13.71 percent 11.56 percent 15.83 percent 12.08 percent 14.77 percent

13.71 percent

Jiminy's Cricket Farm issued a 20-year, 7 percent, semiannual bond four years ago. The bond currently sells for 108 percent of its face value. What is the aftertax cost of debt if the company's combined tax rate is 23 percent? 4.96 percent 4.78 percent 4.15 percent 4.12 percent 3.86 percent

4.78 percent

Florida Groves has a $380,000 bond issue outstanding that is selling at 97.4 percent of face value. The firm also has 2,600 shares of preferred stock valued at $61 a share and 37,500 shares of common stock valued at $19 a share. What weight should be assigned to the common stock when computing the weighted average cost of capital? 55.75 percent 62.20 percent 58.75 percent 61.03 percent 57.40 percent

57.40 percent

The common stock of Dayton Repair sells for $47.92 a share. The stock is expected to pay $2.28 per share next year when the annual dividend is distributed. The company increases its dividends by 1.65 percent annually. What is the market rate of return on this stock? 4.84 percent 6.41 percent 9.92 percent 6.14 percent 7.28 percent

6.41

The 7 percent bonds issued by Modern Kitchens pay interest semiannually, mature in eight years, and have a $1,000 face value. Currently, the bonds sell for $987. What is the yield to maturity? 6.97 percent 6.92 percent 6.88 percent 7.22 percent

7.22

Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.2 percent annually and are expected to continue doing the same. What is the cost of equity? 9.41 percent 9.51 percent 8.47 percent 8.27 percent 8.82 percent

8.27 percent

Oil Wells offers 5.65 percent coupon bonds with semiannual payments and a yield to maturity of 6.94 percent. The bonds mature in seven years. What is the market price per bond if the face value is $1,000? $949.70 $929.42 $936.48 $902.60 $913.48

929.42

Is the yield to maturity on a bond the same thing as the required return? Is YTM the same thing as the coupon rate? Suppose today a 10 percent coupon bond sells at par. Two years from now, the required return on the same bond is 8 percent. What is the coupon rate on the bond? What is the YTM on the bond?

Coupon Rate: 10% YTM: 8%

maturity date

The date on which an investment becomes due for payment.

Suppose you buy a 7 percent coupon, 20-year bond today when it's first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond? The price of the bond will fall. The price of the bond will rise.

The price of the bond will fall

Market Price (PV)

current price of the bond in the market

Par Value (FV)

face value or principal amount, repaid at maturity, stated in values of $100, $1,000, $10,000, $100,000, etc.

Total coupon payments (N)

frequency of coupon payments each year times the number of years to bond maturity

Yield or Yield to maturity (I/Y)

internal rate of return required in the market for the bond. Rate required for the present value of all the future cash flows of the bond

Bond Value

present value of the coupons + present value of the par

As interest rates increase

present values decrease

Coupon (PMT)

stated interest payment

Coupon rate

the annual coupon divided by the face value of a bond

If YTM < coupon rate

then par value < bond price

If YTM = coupon rate

then par value = bond price

If YTM > coupon rate

then par value > bond price