1.

QUESTION 1
Ryngaert Inc. recently issued noncallable bonds that mature in 15 years. They have a
par value of $1,000 and an annual coupon of 5.7%. If the current market interest rate is
7.0%, at what price should the bonds sell?
$817.12
$838.07
$859.56
$881.60
$903.64
2 points

1.

QUESTION 2
Adams Enterprises' noncallable bonds currently sell for $1,120. They have a 15-year
maturity, an annual coupon of $85, and a par value of $1,000. What is their yield to
maturity?
5.84%
6.15%
6.47%
6.81%
7.17%
2 points

1.

QUESTION 3
Malko Enterprises' bonds currently sell for $1,050. They have a 6-year maturity, an
annual coupon of $75, and a par value of $1,000. What is their current yield?
7.14%
7.50%
7.88%
8.27%
8.68%
2 points

1.

QUESTION 4
McCue Inc.'s bonds currently sell for $1,250. They pay a $90 annual coupon, have a
25-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050.

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. What is the difference between this bond's YTM and its
YTC? (Subtract the YTC from the YTM; it is possible to get a negative answer.)
2.62%
2.88%
3.17%
3.48%
3.83%
2 points
1.

QUESTION 5
A 25-year, $1,000 par value bond has an 8.5% annual payment coupon. The bond
currently sells for $925. If the yield to maturity remains at its current rate, what will the price
be 5 years from now?
$884.19
$906.86
$930.11
$953.36
$977.20
2 points

1.

QUESTION 6
Keenan Industries has a bond outstanding with 15 years to maturity, an 8.25%
nominal coupon, semiannual payments, and a $1,000 par value. The bond has a 6.50%
nominal yield to maturity, but it can be called in 6 years at a price of $1,120. What is the
bond's nominal yield to call?
6.20%
6.53%
6.85%
7.20%
7.55%
2 points

QUESTION 7

1.

Kebt Corporation's Class Semi bonds have a 12-year maturity and an 8.75% coupon
paid semiannually (4.375% each 6 months), and those bonds sell at their $1,000 par value.
The firm's Class Ann bonds have the same risk, maturity, nominal interest rate, and par
value, but these bonds pay interest annually. Neither bond is callable. At what price should
the annual payment bond sell?
$ 937.56
$ 961.60
$ 986.25
$1,010.91
$1,036.18
2 points

1.

QUESTION 8
Bad managerial judgments or unforeseen negative events that happen to a firm are
defined as "company-specific," or "unsystematic," events, and their effects on investment
risk can in theory be diversified away.
True
False

3 points
1.

QUESTION 9
We would generally find that the beta of a single security is more stable over time
than the beta of a diversified portfolio.
True
False

3 points
1.

QUESTION 10
We would almost always find that the beta of a diversified portfolio is less stable over
time than the beta of a single security.
True
False

3 points

QUESTION 11

1.

If an investor buys enough stocks, he or she can, through diversification, eliminate all
of the market risk inherent in owning stocks, but as a general rule it will not be possible to
eliminate all diversifiable risk.
True
False

3 points
QUESTION 12
1.
The CAPM is built on historic conditions, although in most cases we use expected
future data in applying it. Because betas used in the CAPM are calculated using expected
future data, they are not subject to changes in future volatility. This is one of the strengths of
the CAPM.
True
False

3 points
1.

QUESTION 13
If you plotted the returns of a company against those of the market and found that
the slope of your line was negative, the CAPM would indicate that the required rate of return
on the stock should be less than the risk-free rate for a well-diversified investor, assuming
that the observed relationship is expected to continue in the future.
True
False

3 points
1.

QUESTION 14
The CAPM is a multi-period model that takes account of differences in securities'
maturities, and it can be used to determine the required rate of return for any given level of
systematic risk.
True
False

3 points

QUESTION 15
1.
You have the following data on three stocks:
Stock
A
B
C

Standard Deviation
20%
10%
12%

Beta
0.59
0.61
1.29

2.
If you are a strict risk minimizer, you would choose Stock ____ if it is to be
held in isolation and Stock ____ if it is to be held as part of a well-diversified
portfolio.
A; A.
A; B.
B; A.
C; A.
C; B.
3 points
1.

QUESTION 16
Which is the best measure of risk for a single asset held in isolation, and which is the
best measure for an asset held in a diversified portfolio?
Variance; correlation coefficient.
Standard deviation; correlation coefficient.
Beta; variance.
Coefficient of variation; beta.
Beta; beta.
3 points

1.

QUESTION 17
You have the following data on (1) the average annual returns of the market for the
past 5 years and (2) similar information on Stocks A and B. Which of the possible answers
best describes the historical betas for A and B?
Years
1
2
3
4
5

Market
Stock A
0.03
0.16
0.05
0.20
0.01
0.18
0.10
0.25
0.06
0.14
bA > 0; bB = 1.

Stock B
0.05
0.05
0.05
0.05
0.05

bA > +1; bB = 0.
bA = 0; bB = 1.
bA < 0; bB = 0.
bA < 1; bB = 1.
3 points

1.

QUESTION 18
Goode Inc.'s stock has a required rate of return of 11.50%, and it sells for $25.00 per
share. Goode's dividend is expected to grow at a constant rate of 7.00%. What was
the last dividend, D0?
$0.95
$1.05
$1.16
$1.27
$1.40

3 points
QUESTION 19
1.
Gupta Corporation is undergoing a restructuring, and its free cash flows are expected
to vary considerably during the next few years. However, the FCF is expected to be $65.00
million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that
point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing)
value (in millions) at t = 5?
$1,025
$1,079
$1,136
$1,196
$1,259
3 points
QUESTION 20
1.
You must estimate the intrinsic value of Noe Technologies' stock. The end-of-year free
cash flow (FCF1) is expected to be $27.50 million, and it is expected to grow at a constant
rate of 7.0% a year thereafter. The company's WACC is 10.0%, it has $125.0 million of longterm debt plus preferred stock outstanding, and there are 15.0 million shares of common
stock outstanding. What is the firm's estimated intrinsic value per share of common stock?
$48.64
$50.67
$52.78
$54.89
$57.08

3 points
1.

QUESTION 21
Kale Inc. forecasts the free cash flows (in millions) shown below. If the weighted
average cost of capital is 11.0% and FCF is expected to grow at a rate of 5.0% after Year 2,
what is the firm's total corporate value, in millions?
Year
Free cash flow
$1,456

1
$50

2
$100

$1,529
$1,606
$1,686
$1,770
3 points
QUESTION 22
1.
Ryan Enterprises forecasts the free cash flows (in millions) shown below. The
weighted average cost of capital is 13.0%, and the FCFs are expected to continue growing at
a 5.0% rate after Year 3. What is the firm's total corporate value, in millions?
Year
FCF

1
$15.0

2
$10.0

3
$40.0

$314.51
$331.06
$348.48
$366.82
$386.13
3 points
QUESTION 23
1.
Based on the corporate valuation model, Gay Entertainment's total corporate value is
$1,200 million. The company's balance sheet shows $120 million of notes payable, $300
million of long-term debt, $50 million of preferred stock, $180 million of retained earnings,
and $800 million of total common equity. If the company has 30 million shares of stock
outstanding, what is the best estimate of its price per share?
$21.90
$24.33
$26.77
$29.44

$32.39
3 points
1.

QUESTION 24
Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock
is $45.00, what is its nominal (not effective) annual rate of return?
8.03%
8.24%
8.45%
8.67%
8.89%
3 points

1.

QUESTION 25
Rebello's preferred stock pays a dividend of $1.00 per quarter, and it sells for $55.00
per share. What is its effective annual (not nominal) rate of return?
6.62%
6.82%
7.03%
7.25%
7.47%
3 points

1.

QUESTION 26
Nachman Industries just paid a dividend of D0 = $1.32. Analysts expect the
company's dividend to grow by 30% this year, by 10% in Year 2, and at a constant rate of
5% in Year 3 and thereafter. The required return on this low-risk stock is 9.00%. What is the
best estimate of the stock's current market value?
$41.59
$42.65
$43.75
$44.87
$45.99

3 points

QUESTION 27
1.
"Capital" is sometimes defined as funds supplied to a firm by investors.
True
False

3 points
1.

QUESTION 28
The before-tax cost of debt, which is lower than the after-tax cost, is used as the
component cost of debt for purposes of developing the firm's WACC.
True
False

3 points
QUESTION 29
1.
You were hired as a consultant to Quigley Company, whose target capital structure is
35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%,
the yield on the preferred is 6.00%, the cost of retained earnings is 11.25%, and the tax rate
is 40%. The firm will not be issuing any new stock. What is Quigley's WACC?
8.15%
8.48%
8.82%
9.17%
9.54%
3 points
QUESTION 30
1.
Exhibit 10.1
Assume that you have been hired as a consultant by CGT, a major producer of chemicals
and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the
firm's weighted average cost of capital. The balance sheet and some other information are
provided below.
Assets
Current assets
Net plant, property, and equipment
Total assets

$ 38,000,000
101,000,000
$139,000,000

Liabilities and Equity

Accounts payable
Accruals
Current liabilities
Long-term debt (40,000 bonds, $1,000 par value)
Total liabilities
Common stock (10,000,000 shares)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity

$ 10,000,000
9,000,000
$ 19,000,000
40,000,000
$ 59,000,000
30,000,000
50,000,000
80,000,000
$139,000,000

2.
The stock is currently selling for $15.25 per share, and its noncallable $1,000
par value, 20-year, 7.25% bonds with semiannual payments are selling for
$875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and
the yield on a 20-year Treasury bond is 5.50%. The required return on the
stock market is 11.50%, but the market has had an average annual return of
14.50% during the past 5 years. The firm's tax rate is 40%.
Refer to Exhibit 10.1. What is the best estimate of the after-tax cost of debt?
4.64%
4.88%
5.14%
5.40%
5.67%
5 points
QUESTION 31
1.
Exhibit 10.1
Assume that you have been hired as a consultant by CGT, a major producer of chemicals
and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the
firm's weighted average cost of capital. The balance sheet and some other information are
provided below.
Assets
Current assets
Net plant, property, and equipment
Total assets

$ 38,000,000
101,000,000
$139,000,000

Liabilities and Equity

Accounts payable
Accruals
Current liabilities
Long-term debt (40,000 bonds, $1,000 par value)
Total liabilities
Common stock (10,000,000 shares)
Retained earnings

$ 10,000,000
9,000,000
$ 19,000,000
40,000,000
$ 59,000,000
30,000,000
50,000,000

Total shareholders' equity

Total liabilities and shareholders' equity

80,000,000
$139,000,000

2.
The stock is currently selling for $15.25 per share, and its noncallable $1,000
par value, 20-year, 7.25% bonds with semiannual payments are selling for
$875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and
the yield on a 20-year Treasury bond is 5.50%. The required return on the
stock market is 11.50%, but the market has had an average annual return of
14.50% during the past 5 years. The firm's tax rate is 40%.
Refer to Exhibit 10.1. Based on the CAPM, what is the firm's cost of equity?
11.15%
11.73%
12.35%
13.00%
13.65%
5 points
QUESTION 32
1.
Exhibit 10.1
Assume that you have been hired as a consultant by CGT, a major producer of chemicals
and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the
firm's weighted average cost of capital. The balance sheet and some other information are
provided below.
Assets
Current assets
Net plant, property, and equipment
Total assets

$ 38,000,000
101,000,000
$139,000,000

Liabilities and Equity

Accounts payable
Accruals
Current liabilities
Long-term debt (40,000 bonds, $1,000 par value)
Total liabilities
Common stock (10,000,000 shares)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity

$ 10,000,000
9,000,000
$ 19,000,000
40,000,000
$ 59,000,000
30,000,000
50,000,000
80,000,000
$139,000,000

2.
The stock is currently selling for $15.25 per share, and its noncallable $1,000
par value, 20-year, 7.25% bonds with semiannual payments are selling for
$875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and
the yield on a 20-year Treasury bond is 5.50%. The required return on the
stock market is 11.50%, but the market has had an average annual return of

14.50% during the past 5 years. The firm's tax rate is 40%.
Refer to Exhibit 10.1. Which of the following is the best estimate for the
weight of debt for use in calculating the WACC?
18.67%
19.60%
20.58%
21.61%
22.69%
5 points
1.

QUESTION 33
Exhibit 10.1
Assume that you have been hired as a consultant by CGT, a major producer of chemicals
and plastics, including plastic grocery bags, styrofoam cups, and fertilizers, to estimate the
firm's weighted average cost of capital. The balance sheet and some other information are
provided below.
Assets
Current assets
Net plant, property, and equipment
Total assets

$ 38,000,000
101,000,000
$139,000,000

Liabilities and Equity

Accounts payable
Accruals
Current liabilities
Long-term debt (40,000 bonds, $1,000 par value)
Total liabilities
Common stock (10,000,000 shares)
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity

$ 10,000,000
9,000,000
$ 19,000,000
40,000,000
$ 59,000,000
30,000,000
50,000,000
80,000,000
$139,000,000

2.
The stock is currently selling for $15.25 per share, and its noncallable $1,000
par value, 20-year, 7.25% bonds with semiannual payments are selling for
$875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%, and
the yield on a 20-year Treasury bond is 5.50%. The required return on the
stock market is 11.50%, but the market has had an average annual return of
14.50% during the past 5 years. The firm's tax rate is 40%.
Refer to Exhibit 10.1. What is the best estimate of the firm's WACC?
10.85%
11.19%

11.53%
11.88%
12.24%
5 points