Answered: rizona Rock, an all-equity firm,…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter12: The Cost Of Capital

Section: Chapter Questions

Problem 22P

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Question

1. Arizona Rock, an all-equity firm, currently has a beta of 1.25. The risk-free rate, kRF, is 7 percent and kM is 14 percent. Suppose the firm sells 10 percent of its assets with beta equal to 1.25 and purchases the same proportion of new assets with a beta of 1.1. What will be the firm’s new overall required rate of return, and what rate of return must the new assets produce in order to leave the stock price unchanged?

a. 15.645%; 15.645%

b. 15.750%; 15.645%

c. 14.750%; 15.750%

d. 15.645%; 14.700%

e. 15.750%; 14.700%

2. Dry Seal plans to issue bonds to expand operations. The bonds will have a par value of P1,000, a 10-year maturity, and a coupon interest rate of 9%, paid semiannually. Current market conditions are such that the bonds will be sold to net P937.79. What is the yield-to-maturity of these bonds?

a. 10%

b. 9%

c. 11%

d. 8%

3. You have just purchased a 15-year, P1,000 par value bond. The coupon rate on this bond is nine percent (9%) annually, with interest being paid each six months. If you expect to earn a 12 percent market rate of return on this bond, how much did you pay for it?

a. P793.53

b. P642.76

c. P950.75

d. P875.38

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