# 1) Due to a series of lawsuits regarding toxic waste, a large chemical company recently experienced a...

## Question:

1) Due to a series of lawsuits regarding toxic waste, a large chemical company recently experienced a market revaluation. The firm has outstanding bonds issued 10 years ago with a face value of $1,000. The maturity of these bonds is 15 years, the coupon rate is 8 percent, and the interest is paid every six months. The required yield on these bonds rose to 16 percent. What is the current value of one of these bonds?

2) A bond with a face value of $1,000 and an annual coupon of 9 percent pays annual interest. Bonds mature in 12 years.

a) Determine the value of a friend's bond with a required rate of return of 11%.

b) A zero coupon bond with similar risk is sold at $300. The bond has a face value of $1,000 and a maturity of 12 years. Your friend asks you which bond to invest in, a zero coupon bond or part (a) bond. Which link would you recommend and why? Suppose the market price of the bond in Section (a) is $720.

3) What is your expected rate of return if you are willing to pay $1,077 for a 15-year $1,000 par value bond that pays 9 percent interest every six months?

4) If the expected growth rate for dividends is zero, the value of common stock will be equal to the current dividend.

real

b) wrong

5) Diana Ltd. It paid a dividend of $4.50 per share yesterday. The dividend is expected to grow at a rate of 9 percent per year for the foreseeable future. Diana Ltd. has a beta of 1.4, a standard deviation of returns of 28 percent, and a required return of 16 percent. Diana Ltd. What is the value of one share of common stock?

6) You bought a share of Googling Enterprises for $40 today. If the stock pays a dividend of $6.50 a year and then sells for $50, what would be the dividend yield, growth rate, and overall rate of return for that year?

7) Two projects are mutually exclusive if the acceptance/rejection decision for one project has no effect on the acceptance/rejection decision for the other project.

real

b) wrong

8) Rent-to-Own Equipment Co. is considering a new inventory system that will cost $450,000. The system is expected to generate positive cash flows of $250,000 in year one, $125,000 in year two, $110,000 in year three, and $80,000 in year four over the next four years. Rent-to-Own's required rate of return is 10%. What is the internal rate of return for this project?

A)%10.07

b)%11.89

%12.26

d)%12.69

9)

**Consider projects X and Y that are mutually exclusive** with an initial expenditure of $500,000 and a useful life of 5 years . Project X is expected to generate $150,000 in after-tax cash flows each year. Project Y is expected to generate a single after-tax net cash flow of $1,015,000 in year 5. The discount rate is 15 percent.

a) Calculate the net present value for each project.

b) Calculate the IRR for each project.

c) What should you decide about these projects?

10)

If a firm's tax rate increases, so does the weighted average cost of capital.

real

b) False

**Related Book For**

## Financial Reporting Financial Statement Analysis and Valuation a strategic perspective

ISBN: 978-1337614689

9th edition

Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw