Corporate Finance Essay

1908 Words Aug 5th, 2013 8 Pages
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
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| d. | The bond's current yield exceeds its yield to maturity. | e. | The bond's coupon rate exceeds its current yield. |

____ 11. The Jones Company plans to issue preferred stock with a perpetual annual dividend of $5 per share and a par value of $30. If the required return on this stock is currently 20%, what should be the stock's market value? a. | $100 | b. | $ 50 | c. | $150 | d. | $ 10 | e. | $ 25 |

____ 12. You plan to buy a share of XYZ stock today and to hold it for 2 years. You do not expect to receive a dividend at the end of Year 1, but you will receive a dividend of $9.25 at the end of Year 2. In addition, you expect to sell the stock for $150 at the end of Year 2. If your expected rate of return is 16%, how much should you be willing to pay for this stock today? a. | $ 75.29 | b. | $164.19 | c. | $107.53 | d. | $118.35 | e. | $131.74 |

____ 13. If D0  $2.00, g (which is constant)  6%, and P0  $40, what is the stock's expected total return for the coming year? a. | 11.3% | b. | 10.8% | c. | 10.3% | d. | 11.8% | e. | 9.8% |

____ 14. Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? a. | Market interest rates decline sharply. | b. | The company's bonds are downgraded. | c. | Market interest rates rise sharply. | d. | Inflation increases significantly. | e. | The company's

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