Question

14. Which of the following statements is CORRECT?

a.	A bond is likely to be called if it sells at a discount below par.
b.	A bond is likely to be called if it sells at a premium above par
c.	A bond is likely to be called if its market price is equal to its par value.
d.	A bond is likely to be called if its market price is below its par value.

23. Alcraft Inc is a maker of keychains. It has $2 million in assets and total equity of $250,000. What is the company’s debt ratio?

24. If D₀ = $2.00, g (which is constant) = 6%, and P₀ = $40, assuming you own the stock, what is the stock's expected dividend yield for the coming year?

a.	5.0%
b.	5.1%
c.	5.3%
d.	5.6%
e.	5.8%

Answer 1

14) A bond gets called when interest rate in market is below the coupon rate of the bond. It means that bond is offering higher rate than market. So interest rate in market is low, so bond trades at premium above par. Correct answer is option "B"

15) We know that

Asset - Liability = Equity

2,000,000 - Liability = 250,000

Liability = 1,750,000

Debt Ratio = Liability / Total Asset

= 1,750,000 / 2,000,000 * 100

= 87.5%

16) Expected Dividend Yield = Next year's dividend / Current Stock Price

Next Year's Dividend = Current Dividend (1 + Constant dividend rate)

= 2 (1 + 6%)

=2.12

Expected Dividend Yield = Next year's dividend / Current Stock Price * 100

= 2.12 / 40 * 100

= 5.3%

The correct option is "C"