Devry FIn385 final exam

Question 2. 2.(TCOs 1, 5, 6) Calculate the appropriate selling price of a 30-year 5% coupon, $10,000 Treasury bond that was purchased five years ago. Marketplace interest rates are averaging 8%. (Points : 20)

Question 3. 3.(TCO 6) Calculate the five ratios for the following company info.

Income Statement Balance Sheet

Revenue 10,000 Assets Liab. + OE

EBIT $2,000 cash $1,000 a/p $2,000

Interest $500 A/R $10,000 Bonds payable $50,000

Earnings B4 Tax $1,500 Equip $25,000 equity $84,000

EAT (at 30%) $1,050 Bldg $100,000

Total $136,000 $136,000

- return on sales
- ROA
- ROE
- fixed asset turnover
- times interest earned

(Points : 20)

Question 4. 4.(TCO 2) Given the data below, calculate the expected return, variance, and standard deviation of the following company.

In a recessionary economy, which is expected to occur with a 30% probability, the expected returns would be -5%.

In an expanding economy with an expected probability of occurrence of 20%, the expected return would be 10%.

In a normal economy expected to occur 50% of the time, the expected return would be 5%.

(Points : 20)

Question 5. 5.(TCO 9) As percentage of debt on the balance sheet increases, financial leverage increases, which makes EPS increase. If this is the case, why don't all firms try to end up with very high debt? (Points : 20)

Question 6. 6.(TCO 7) What would be the expected change to a 30-year bond's market price or value if its YTM increases to 9.4%? Its YTM is now 9%, it has an 8% annual coupon, $1,000 face value, it is currently priced at $897.26, and its duration is eight years. (Points : 20)

Question 7. 7.(TCO 9) M&M Proposition I comes in both tax free and world with taxes formats. Explain what these concepts mean. You must use your own words to earn credit here. (Points : 20)

Question 8. 8.(TCO 6) A $1,000 face value bond was issued at par 20 years ago with a 6% coupon paid semiannually. The bond now has nine years remaining to maturity and similar debt obligations are yielding 12%.

• Compute the current price of the bond.
• Assuming that the bond is sold at its current price, what is the capital gain or loss from the original purchase?
• Now assume that the price of the bond returns to par. What is the percentage capital gain or loss for the new owner?
• Please explain why the percentage gain is different from the percentage loss.

(Points : 22)

Question 9. 9.(TCO 6) What is the coupon rate needed on a $1,000 face value, 6% coupon corporate bond to make it equivalent in terms of return to one whose interest rate is tax free? Assume the corporate tax rate is 40%. (Points : 10)