This section consists of NINE (18) multiple-choice questions. Each question is worth one (1) mark. Read the below case study and
indicate which of the answer options provided is the correct answer. From question 10 – 13, all bonds are considered to have a face value of R1 000.00
1. Some projects that a firm accepts will undoubtedly result in zero or negative returns. In light of this fact, it is best if the firm
A. adjusts its hurdle rate (i.e., cost of capital) upward to compensate for this fact.
B. adjusts its hurdle rate (i.e., cost of capital) downward to compensate for this fact.
C. does not adjust its hurdle rate up or down regardless of this fact.
D. raises its prices to compensate for this fact.
2. The STAR Company relies on preferred stock, bonds, and common stock for its long-term financing. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax component costs of the STAR Company’s long-term financing.
A. 1 = bonds; 2 = common stock; 3 = preferred stock
B. 1 = bonds; 2 = preferred stock; 3 = common stock
C. 1 = common stock; 2 = preferred stock; 3 = bonds
D. 1 = preferred stock; 2 = common stock; 3 = bonds.
3. Pep Stores, Inc.'s R100 par value preferred stock just paid its R10 per share annual dividend. The preferred stock has a current market price of R96 a share. The firm's marginal tax rate (combined federal and state) is 40 %, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Pep Stores, Inc would be closest to
A. 6 %
B. 6.25 %
C. 10 %
D. 10.4 %.
4. The greater the beta, the of the security involved.
A. greater the unavoidable risk
B. greater the avoidable risk
C. less the unavoidable risk
D. less the avoidable risk.
5. Plaid Pants, Inc. common stock has a beta of 0.90, while Acme Dynamite Company common stock has a beta of 1.80. The expected return on the market is 10 percent, and the risk-free rate is 6 percent. According to the capital-asset pricing model (CAPM) and making use of the information above, the required return on Plaid Pants' common stock should be , and the required return on Acme's common stock should be .
A. 3.6 % ; 7.2 %
B. 9.6 % ; 13.2 %
C. 9.0 % ; 18.0 %
D. 14.0 % ; 23.0 %.
6. Espinosa Coffee & Trading, Inc.'s common stock measured beta is calculated to be 0.75. The market beta is, of course, 1.00 and the beta of the industry of which the company is a part is 1.10. If Merrill Lych were to calculate an "adjusted beta" for Espinosa's common stock, that adjusted beta would most likely be .
A. less than 0.75
B. more than 0.75, but less than 1.10
C. equal to 1.10
D. equal to 0.95 {i.e., (1/3) x (0.75 + 1.00 + 1.10)}.
7. The time preference for money is generally expressed by …….
A. interest rate
B. discount rate
C. compound rate
D. D future value.
8. Interest rate covers….
A. Risk-free rate
B. Risk premium
C. Risk-free rate + Risk premium
D. inflation rate.
9. A firm has issued bonds at 13.5%, and the firm is subject to a tax rate of 30%. The after-tax cost of debt is equal to …
A. 3,11%
B. 5,75%
C. 9,45%
D. 11,05%
E. 14,92%.
10. Merton Enterprises has bonds on the market making annual payments, with 14 years to maturity, and selling for R870. At this price, the bonds yield 6,8 per cent. What must the coupon rate be on Merton's bonds?
A. R53.31 ; 5.33%
B. R48.60 ; 4.86%
C. R68.00 ; 6.80%
D. R87.00 ; 8.70%.
11. Jane's Pizzeria issued 11-year bonds two years ago at a coupon rate of 8,2 per cent. The bonds make semi-annual payments. If the YTM on these bonds is 7,4 per cent, what is the current bond price?
A. R1 000. 00
B. R1 074. 62
C. R1 051. 89
D. R1 082.00.
12. Angelo's Spaghetti Factory issued 12-year bonds four years ago at a coupon rate of 8,6 per cent. The bonds make semi-annual payments. If these bonds currently sell for 95 per cent of par value, what is their YTM?
A. 9.50%
B. 8.60%
C. 9.70%
D. 17%.
13. Dumisani & Company has bonds on the market with 14,5 years to maturity, a YTM of 7,5 per cent, and a current price of R1145. The bonds make semi-annual payments. What must the coupon rate be on Dumisani's bonds?
A. 7.50%
B. 11.45%
C. 14.50%
D. 10.17%.
14. Makin' Copies Company will pay a R3,15 per share dividend next year. The company pledges to increase its dividend by 4,5 per cent per year indefinitely. If you require a 10 percent return on your investment, how much will you pay for the company's shares today?
A. R57.27
B. R78.00
C. R125.00
D. R45.65.
15. Suppose you know that a company's shares currently sell for R54 per share and the required return on the shares is 12 per cent. You also know that the total return on the shares is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?
A. R4.64
B. R6.24
C. R5.40
D. R3.06.
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