Question

1.     Tennessee Water has $1,000 par value bonds outstanding at 5% interest. The bonds will  mature in 20 years. Compute the current price of the bonds if the present yield to maturity is 7%

2.    Exodus Company has $1,000 par value bonds outstanding at 6% interest. The bonds will mature in 15 years. Compute the current price of the bonds if the current interest rate is 4%.

3.     The preferred stock of Ultra Corporation pays an annual dividend of $7.00. It has a required rate of return of 10 percent. Compute the price of the preferred stock.

                        

4.     Venus Sportswear Corporation has preferred stock outstanding that pays an annual dividend of $14. It has a price of $110. What is the required rate of return (yield) on the preferred stock?

5.   Static Electric Co. currently pays a $2.10 annual cash dividend (D₀). It plans to maintain the dividend at this level for the foreseeable future as no future growth is anticipated. If the required rate of return by common stockholders (K_e) is 12 percent, what is the price of the common stock?

      

6.   The coupon rate on a debt issue is 6%. If the yield to maturity on the debt is 9%, what is the after-tax cost of debt if the firm's tax rate is 34%?

7.   The coupon rate on an issue of debt is 8%. The yield to maturity on this issue is 10%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds?

8.   Star Corp. issued bonds 2 years ago with a 7% coupon rate. Their bonds are currently trading for $928 in the market. Which of the following most likely has occurred since the time of issue?
A. Interest rates decreased
B. Interest rates increased
C. Risk decreased
D. Real rates of return decreased

9.   A firm is paying an annual dividend of $2.65 for its preferred stock which is selling for $57.00. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 33%?

10.       Why is the cost of debt normally lower than the cost of preferred stock?
A. Preferred stock dividends are tax deductions.
B. Interest is tax deductible.
C. Preferred stock dividends must be paid before common stock dividends.
D. Common stock dividends are not tax deductible.

11.    A firm's preferred stock pays an annual dividend of $2, and the stock sells for $65. Flotation costs for new issuances of preferred stock are 5% of the stock value. What is the after-tax cost of preferred stock if the firm's tax rate is 30%?

12.    A firm's stock is selling for $62. The next annual dividend is expected to be $3.00. The growth rate is 9%. The flotation cost is $5.00. What is the cost of retained earnings?

13.    A firm's stock is selling for $65. The dividend yield is 6%. A 7% growth rate is expected for the common stock. The firm's tax rate is 40%. What is the firm's cost of retained earnings?

14.    Although debt financing is usually the cheapest component of capital, it cannot be used in excess because
A. interest rates may change.
B. the firm's stock price will increase and raise the cost of equity financing.
C. the financial risk of the firm may increase and thus drive up the cost of all sources of financing.
D. underwriting costs may change.

15.       Oak Enterprises has a beta of 1.5, the market return is 8%, and the T-bill rate is 4%. What is their expected required return of common equity?

Answer 1

1.
FV = 1000
PMT = 1000 * 5% = 50
Nper = 20
Rate = 7%

Current price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(7%,20,-50,-1000)
= $788.12

Current price of the bond = $788.12

2.
FV = 1000
PMT = 1000 * 6% = 60
Nper = 15
Rate = 4%

Current price of the bond can be calculated by using the following excel formula:
=PV(rate,nper,pmt,fv)
=PV(4%,15,-60,-1000)
= $1,222.37

Current price of the bond = $1,222.37

3.
Price of preferred stock = Annual dividend / Required rate of return
= $7 / 10%
= $70

Price of preferred stock = $70

4.
Required rate of return on preferred stock = Annual dividend / current price
= $14 / $110
= 12.73%

Required rate of return on preferred stock = 12.73%

Note: Post the rest of the questions separately.