Question

1. Explain the Difference Between Business Risk and Financial Risk

2. What are the three important elements of asset valuation?

3. Miller's preferred stock is selling at $54 on the market and pays an annual dividend of $4.20 per share.

a. What is the expected rate of return on the stock?

b. If an investor's required rate of return is 9%, what is the value of the stock to

that investor?

c. Considering the investor's required rate of return, does this stock seem to be a

desirable investment?

4. Bart's Moving Company bonds have a 11% coupon rate. Interest is paid semiannually. The bonds have a par value of $1,000 and will mature 8 years from now. Compute the value of Bart's Moving Company bonds if investors' required rate of return is 9.5%.

5. Master Craft Control Inc. has bonds that mature in 6 1/2 years with a par value of $1,000. They pay a coupon rate of 9% with semiannual payments. If the required rate of return on these bonds is 11% what is the bond's value?

6. Jenny and Esther are both considering buying a corporate bond with a coupon rate of 8%, a face value of $1,000, and a maturity date of January 1, 2025. Which of the following statements is MOST correct?

A) Because both Jenny and Esther will receive the same cash flows if they each buy a bond, they both must assign the same value to the bond.

B) If Jenny decides to buy the bond, then Esther will also decide to buy the bond, if markets are efficient.

C) Jenny and Esther will only buy the bonds if the bonds are rated BBB or above.

D) Jenny may determine a different value for a bond than Esther because each investor may have a different level of risk aversion, and hence a different required return.

Answer 1

1.

Business Risk	Financial Risk
It is the risk of failure to make operations of the business profitable.	It is the risk of failure to pay off the debt liability that entity has taken.
This risk is not avoidable.	This risk is avoidable by not taking debt.
This risk can be controlled by making the processes and operations of the business smoother and functional.	This can be controlled by reducing debt financing and increasing equity financing.
It is related to the operations and procedures of the business.	It is related to the liability of debt of the entity.
This risk remains with the business always as it is linked with business' operations.	This risk remain as long as debt is there in financing.

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