Financial Problems

Season’s Republic Inc. has a bond outstanding. This bond has a 9.5% coupon paid semiannually, and is selling in the market for $913.00 with 6 years remaining to maturity. What is the bond’s YTM?

a. 10.92%
b. 11.55%
c. 11.73%
d. 11.80%

YTM = 11.55%

XYZ Promotions Corporation has a bond outstanding with a market price of $1,136.00. The bond has 4.5 years to maturity, pays interest semiannually, and has a yield to maturity of 9.47%. What is the bond’s coupon rate?

a. 13.70%
b. 13.62%
c. 13.25%
d. 13.02%

PMT $66.26
Coupon Rate 13.25%

“Use the following information to answer this question and the next question.
The Bozo Company has an 8% coupon bond outstanding. The bond makes semiannual coupon payments and has 12 years remaining to maturity. Its market price is $846.64. It is issuing a new 20-year bond to finance a factory to make new Bozos. The new bond will make annual coupon payments. ”

What is the yield to maturity of the Bozo Company’s existing bonds?

a. 9.50%
b. 10.00%
c. 10.25%
d. 10.50%

Rate 10.25%

What coupon rate should be set for the new bonds of the Bozo Company for these bonds to sell at par?

a. 9.50%
b. 10.00%
c. 10.25%
d. 10.50%

The XYZ Company bond has a bond outstanding that has 10 years remaining to maturity. The bond has a coupon rate of 10.50 percent, paid quarterly. If the yield to maturity is 12.0 percent, what is the market value of this bond?

a. $915.25
b. $913.32
c. $1.092.18
d. $1.000.00

MV $913.32

Use the following information to answer this question and question 7. Bonds of RAR Foods are selling in the market for $854.66. These bonds carry a 9 percent coupon paid semiannually, and have 15 years remaining to maturity. What is the bond’s yield to maturity?

a. 10.62%
b. 11.00%
c. 9.25%
d. 10.00%

YTM = 11.00%

What is the capital gain yield assuming that the interest rates will remain constant over the year?

a. 0.68%
b. 0.17%
c. 0.00%
d. 0.48%

Price in 1 Yr $858.79
Capital Gain 0.48%

Use the following information to answer this question and question 9. Bonds of Orange Computers and Peach Computers are identical in all respect, including risk class. The only difference is that they have different coupon. Orange Computer bond has a semiannual coupon of $47.50 and Peach Computers bond has a semiannual coupon of $40.00. Both bonds have 8 years to maturity. The Orange Computer bond is selling in the market for $1,151.18.

What is the yield to maturity of Orange Computers bond?

a. 7.50%
b. 9.00%
c. 8.50%
d. 7.00%

YTM = 7.00%

What is the price of Peach Computers bond?

a. $1.060.47
b. $1.052.82
c. $818.59
d. $1.037.86

PV $1.060.47

Desi Inc. has a bond outstanding with 8 percent coupon, paid semiannually, and 15 years to maturity. The market price of the bond is $1,091.96. If due to changes in market condition the market required rate of return suddenly increases by 2%, what will be the percent change in the market price of the bond?

a. 15.88%
b. –18.88%
c. –15.88%
d. 62.48%

Current YTM 7.00%
New Price $918.56
Change -15.88%

Banana Company just paid a dividend of $5 per share. If dividends have a growth rate of 5 percent and you require 12 percent return, what is the value of the stock?

a. 71.42
b. 41.67
c. 43.75
d. 75
e. 105

Value 75

Slow decline Company just paid a dividend of $2.50 per share. If dividends have been declining at a constant rate of 2 percent and you require 10 percent return, what is the value of the stock?

a. 20.42
b. 31.88
c. 34.17
d. 17.5
e. 15

Value 20.41666667

If the dividend yield on Weildone, Inc. common stock is 8 percent and its expected constant growth rate is 5percent, what is the required rate of return?

a. 5.00%
b. 8.00%
c. 3.00%
d. 13.00%
e. Not enough information

Dolce, Deluca, and Benz Inc. will pay a dividend of $6 for each of the next 3 years, $7 for each of the years 4-7, and $9 for the years 8-10. Thereafter, the company will pay no dividends. If you require 16 percent rate of return on investments in this risk class, how much is this stock worth to you?

a. 29.01
b. 33.18
c. 46.21
d. 57
e. 73

Value 33.17602689

Duane Lee Inc. will pay a dividend of $5 each year for the next 10 years. Thereafter, it will pay no dividends. If you require 12 percent rate of return, how much is this stock worth to you?

a. 28.25
b. 33.18
c. 46.21
d. 57
e. 73

Value 28.25111514

Two companies, A and B, are in the same risk class. Company A pays a constant dividend of $4 per year and is selling in the market for $35 per share. Company B just paid a dividend of $3.25 per share. If its dividends are growing at a constant rate of 8 percent per year, what is the market price of B?

a. 35
b. 33.18
c. 57.21
d. 94.79
e. 102.37

Required Ret 11.43%
Price 102.375

Hatstand and Bandstand Inc. stock is selling for $38. Th company has been maintaining a constant growth rate of dividends of 5 percent. If the required rate of return for this company is 14 percent, what was the most recent dividend paid by the company?

a. 2.9
b. 3.06
c. 3.26
d. 3.42
e. 4.11

Dividend = 3.257142857

Sanding and Bending Inc. will pay no dividends for the next seven years. In the Year 8, it will pay a dividend of $6 and maintain a constant growth of 6 percent thereafter. If the required rate of return is 12 percent, what is the value of the stock?

a. 100
b. 97.18
c. 57.21
d. 45.23
e. 40.39

Price at Yr 7 = 100
Value 45.23492153

“Use the following information to answer this and the next question.
Dividends of Super Drug, Inc. will grow at 25 percent a year for the next 3 years, 18 percent a year for years 4-6, and at a constant rate of 5 percent thereafter. The company just paid a dividend of $1.50 and you require a 15% rate of return from stocks with this risk level. ”

What is the dividend at the end of year 5?

a. 2.34
b. 2.93
c. 3.46
d. 4.08

Dividend = 4.079296875

How much is this stock worth to you?

a. 21.85
b. 33.27
c. 50.54
d. 11.41
e. 16.45

Use the following information for this and the next question. Bean Pharmaceuticals has 1,000,000 shares of common stock with a market price of $35 per share, 225,000 shares of preferred stock with a market price of $98 per share, and 10,000 bonds outstanding which are selling in the market at 97.25 percent of par. The company needs new capital of $12 million to expand its asset base. It has calculated that the after-tax cost of new equity is 12.50% and the cost of new preferred stock is 9.4%. The company’s bonds are yielding 8% in the market. Corporate tax rate is 34%.

What percent of the new expansion funds must be in the form of equity?

a. 14.50%
b. 33.00%
c. 52.40%
d. 100.00%

What is the weighted average cost of capital?

a. 11.30%
b. 10.80%
c. 10.40%
d. 9.70%

Hi-Octane Oil Company has a debt-equity ratio of 0.25. The company uses no preferred stock in its capital structure. If the cost of equity is 14.4% and the after-tax cost of debt is 6.2%, what is the company’s weighted average cost of capital?

a. 6.2
b. 8.25%
c. 12.35%
d. 12.76%
e. 14.40%

Use the following information answer questions 4 to 10. The Golden Baked Goods (GBG) is expecting a jump in sales and needs to add $2 million in assets. Its current balance sheet is:

Its current operations are expected to add $500,000 to retained earnings during the coming year. Its current debt, originally issued at par, has a 6% coupon rate, maturity of 10 years, market price of $864.10, and pays interest semiannually. The current preferred stock (30,000 shares outstanding) carries a dividend of $6.00 per share and is selling in the market at $81.50 per share. GB’s common stock (220,000 shares outstanding) is selling in the market at $45 per share. The company just paid a common stock dividend of $2.50 per share. The dividends are expected to grow at 4% per year for the foreseeable future. GBG’s overall tax rate is 35%. GBG can sell new common stock at current market price with a flotation cost of 5%, new preferred stock with a dividend of $6/share to net $80 per share, and new semiannual coupon bonds (Par value $1,000) with 20 year maturity and a 9.5% coupon to net $957.10. Assume that the current market-based capital structure is optimal.

What percent of new financing must come from equity funds?

a. 29.58%
b. 13.95%
c. 56.48%
d. 100.00%

What is the after-tax cost of debt?

a. 4.87%
b. 6.50%
c. 7.50%
d. 9.78%
e. 10.00%

What is the after-tax cost of preferred stock?

a. 4.87%
b. 6.50%
c. 7.50%
d. 9.78%
e. 10.00%

What is the after-tax cost of retained earnings?

a. 6.50%
b. 8.58%
c. 9.78%
d. 9.95%
e. 10.08%

What is the after-tax cost of new equity?

a. 6.50%
b. 8.58%
c. 9.78%
d. 9.95%
e. 10.08%

What is the average after-tax cost of all equity funds?

a. 6.50%
b. 8.58%
c. 9.78%
d. 9.95%
e. 10.08%

What is GBG’s weighted average cost of capital?

a. 6.50%
b. 8.58%
c. 9.78%
d. 9.95%
e. 10.08%