FIN 385 Final Exam

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%. ·Compute the current price of the bond ·Assuming that the bond is sold at its current price, what is the capital gain or loss from the original purchase? ·Now assume that the price of the bond returns to par. What is the percentage capital gain or loss for the new owner? ·Please explain why the percentage gain is different from the percentage loss. (Points : 22) Question 9.9. (TCO 6) What is the interest rate needed on a $1,000 face value, 6% coupon corporate bond to make it equivalent in terms of return to one whose interest rate is tax free? Assume the corporate tax rate is 30%. (Points : 10) 1. (TCO 1) Which of the following is true about fixed-income securities? (Points : 6) 2. (TCO 2) The concept of risk versus return _______. (Points : 6) 3. (TCO 5) Which of the following is true? (Points : 6) 4. (TCO 9) Financial leverage is _______. (Points : 6) 5. (TCO 9) Which of the following is true about a firm's WACC? (Points : 6) 6. (TCO 7) The ideal capital structure of a firm is when ______. (Points : 6) 7. (TCO 3) Which of the following are or could be part of the buying, selling, and trading of corporate bonds? (Points : 6) 8. (TCO 9) What is the premise behind M&M Principle 1 without taxes? (Points : 6) 9. (TCO 6) Which of the following is true about the yield curve? (Points : 6) 10. (TCO 4) Where could you find trend information about the bond market? (Points : 6) 11. (TCO 8) Who would normally be required to create a portfolio investment policy? (Points : 6) 12. (TCOs 1, 8) Corporate bonds, T-bonds, and preferred stock are all examples of which of the following? (Points : 6) 13. (TCO 6) Portfolio diversification is all about which of the following? (Points : 6) 14. (TCO 5) What does the term structure of interest rates refer to? (Points : 6)