Finance Problems Set with Solution

s”Question 1. 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 4%; and(c) marketplace interest rates have hovered around 9%. (Points :
20)”
Question 2. 2. (TCOs 1, 5, 6) Calculate the appropriate
selling price of a 30-year 5% COUPON, $10,000 TREASURY 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 $10,000 a/p $2,000
Interest $500 A/R $1,000 Bonds payable $50,000
Earnings B4 Tax $1,500 Equip $25,000 equity $84,000
EAT (at 40%) $900 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%.In an expanding economy with
an expected probability of occurrence of 20%, the expected return would be
20%.In a normal economy expected to occur 50% of the time, the expected return
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 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 seven years remaining to maturity and similar debt obligations
are yielding 12%. •Compute
the current price of the bond.
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)

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