1. (TCOs 1, 8, 9) Using the security market line formula rather than the dividend discount formula, determine the expected return on a firm's common stock when:
(a) beta = 1.2;
(b) the risk-free rate is 8%; and
(c) marketplace interest rates have hovered around 13%. (Points : 20)
Question 2.2. (TCOs 1, 5, 6) Calculate the appropriate selling price of a 30-year 5% coupon, $1,000 corporate 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
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%.
Question 5.5. (TCO 9) As percentage of equity on the balance sheet increases, financial leverage decreases, which makes EPS decrease. If this is the case, why don't all firms try to end up with 99.9% 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 8.5%, 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) Explain what M&M Proposition I with and without taxes is all about. 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 eight years remaining to maturity and similar debt obligations are yielding 12%.