In order to accurately assess the capital structure of a firm

QUESTION 1

1. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation's balance sheet (book values) as of today is as follows: The bonds have a 7.7% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm's debt?

   Long-term debt (bonds, at par)	$23,500,000
   Preferred stock	2,000,000
   Common stock ($10 par)	10,000,000
   Retained earnings	4,000,000
   Total debt and equity	$39,500,000

   $17,734,265

   $23,394,137

   $18,866,239

   $16,602,290

   $19,054,902

5 points

QUESTION 2

1. Niendorf Corporation's 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf's bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) ? 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Niendorf's bonds?

   0.49%

   0.55%

   0.61%

   0.68%

   0.75%

5 points

QUESTION 3

1. Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 13.25%. Using the SML, what is the firm's required rate of return?

   10.20%

   13.03%

   14.50%

   12.29%

   11.18%

5 points

QUESTION 4

1. The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P0?

   $18.62

   $19.08

   $19.56

   $20.05

   $20.55

5 points

QUESTION 5

1. Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 8.90%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?

   4.12%

   3.35%

   3.12%

   3.08%

   2.95%

5 points

QUESTION 6

1. Carter's preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $57.50, what is its nominal (not effective) annual rate of return?

   7.86%

   8.14%

   7.72%

   7.37%

   6.96%

5 points

QUESTION 7

1. Grossnickle Corporation issued 20-year, noncallable, 6.3% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

   $1,136.58

   $950.79

   $1,289.58

   $1,049.15

   $1,092.86

5 points

QUESTION 8

1. Moerdyk Corporation's bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond's price?

   1,063.09

   1,090.35

   1,118.31

   1,146.27

   1,174.93

5 points

QUESTION 9

1. Jill Angel holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.875. If Jill replaces Stock A with another stock, E, which has a beta of 1.85, what will the portfolio's new beta be?

   Stock	Investment	Beta
   A	$50,000	0.50
   B	$50,000	0.80
   C	$50,000	1.00
   D	$50,000	1.20
   Total	$200,000

   0.92

   1.21

   1.30

   1.14

   1.35

5 points

QUESTION 10

1. Kristina Raattama holds a $200,000 portfolio consisting of the following stocks. The portfolio's beta is 0.875. If Kristina replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio's new beta be?

   Stock	Investment	Beta
   A	$50,000	0.50
   B	50,000	0.80
   C	50,000	1.00
   D	50,000	1.20
   Total	$200,000

   1.07

   1.13

   1.18

   1.24

   1.30

5 points

QUESTION 11

1. Grossnickle Corporation issued 20-year, noncallable, 8.1% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?

   $1,132.57

   $1,223.69

   $1,301.80

   $1,353.87

   $1,314.82

5 points

QUESTION 12

1. Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 1.30%. Suppose further that the MRP on a 10-year T-bond is 0.90%, that no MRP is required on a TIPS, and that no liquidity premium is required on any T-bond. Given this information, what is the expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.

   3.45%

   3.33%

   2.85%

   2.82%

   3.51%

5 points

QUESTION 13

1. The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company's beta is 1.35, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company's current stock price, P ?

   $15.83

   $14.02

   $11.61

   $18.84

   $15.07

5 points

QUESTION 14

1. Kay Corporation's 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay's bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay's bonds?

   0.52%

   0.61%

   0.38%

   0.50%

   0.56%

5 points

QUESTION 15

1. In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation's balance sheet as of today is as follows: The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm's debt?

   Long-term debt (bonds, at par)	$10,000,000
   Preferred stock	2,000,000
   Common stock ($10 par)	10,000,000
   Retained earnings	4,000,000
   Total debt and equity	$26,000,000

   $5,276,731

   $5,412,032

   $5,547,332

   $7,706,000

   $7,898,650

5 points

QUESTION 16

1. Crockett Corporation's 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.20%, the default risk premium for Crockett's bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on Crockett's bonds is LP = 0.90% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What inflation premium (IP) is built into 5-year bond yields?

   2.02%

   2.49%

   2.43%

   2.11%

   2.15%

5 points

QUESTION 17

1. Mulherin's stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)

   10.36%

   10.62%

   10.88%

   11.15%

   11.43%

5 points

QUESTION 18

1. Koy Corporation's 5-year bonds yield 9.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy's bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t - 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Koy's bonds?

   2.36%

   3.10%

   2.64%

   2.70%

   3.69%

5 points

QUESTION 19

1. The Francis Company is expected to pay a dividend of D = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company's current stock price?

   $22.83

   $27.99

   $27.17

   $22.01

   $24.18

5 points

QUESTION 20

1. Company A has a beta of 0.70, while Company B's beta is 1.30. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A's and B's required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)

   4.74%

   4.05%

   3.77%

   4.94%

   4.70%