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Multiple Choice: Choose the one alternative that best completes the statement or answers the question. 1) The risk-free rate of interest is 5% and the market risk premium is 8%. Constantine Corporation has a beta of 1.8, and last year generated a 15% return with a standard deviation in returns of 34%. The required rate of return on Miller Corporation stock is: 1)_____ 2) Assume that an investment is forecasted to produce the following returns: a 20% probability of a $1,200 return; a 50% probability of a $5,600 return, and a 30% probability of a $9,500 return. What is the expected amount of return this investment will produce? 2)_____ 3) JWS Corporation issued bonds on January 1, 2010. The bonds had a 3)_____ coupon rate of 4.5% with interest paid semiannually. The face value of the bonds is $1,000 and the bonds mature on December 31, 2019. What is the yield to maturity for a JWS Corporation on January 1, 2014 if the market price of the bond on that date is $930? (Using a timeline may help) 4) A $1,000 par value 12-year bond with a 9% coupon rate recently sold for $980. The bond's yield to maturity is: 4)_____ 5) Garrett Corporation preferred stock pays an annual dividend of $5 per share. Which of the following statements is true for an investor with a required rate of return of 8%? A) The value of the preferred stock is $40.00 per share. B) The value of the preferred stock is $62.50 per share. C) The value of the preferred stock is $4.00 per share because of the 8% required return. D) The value of the preferred stock is $5.00 per share because the dividend is fixed at $5 each year. 5)_____ 6) Oldslug Corp. preferred stock pays a $0.50 annual dividend. What is the value of the stock if your required rate of return is 10%> 6)_____ 7) Jordan Ltd has an issue of preferred stock that pays a dividend of $4.00. The preferred stockholders require a rate of return on this stock of 9%. At what price should the preferred sell for? Round to the nearest $0.10. 7)_____ 1 8) Buy-more Co is considering a new inventory system that will cost $450,000 The system is expected to generate positive cash flows over the next four years in the amounts of $250,000 in year 1, $125,000 in year 2, $110,000 in year 3, and $80,000 in year 4. Buy-more's required rate of return is 10%. What is the net present value of this project? 8)_____ 9) The Counter Store is considering the following 3 mutually exclusive 9)_____ projects. If Counters has a 12% cost of capital, what decision should be made regarding the projects if projected cash flows for these is as follows: Plan A Plan B Plan C Initial outlay $3,600,000 $6,000,000 $3,500,000 Annual cash flows Year 1 $ 0 $4,000,000 $2,000,000 Year 2 $ 0 3,000,000 $ 0 Year 3 $ 0 2,000,000 $2,000,000 Year 4 $ 0 $ 0 $2,000,000 Year 5 $7,000,000 $ 0 $2,000,000 (Hint: Do not use the payback method) 10) Program X requires an initial outlay of $350,000 and has a profitability index of 1.5. The project is expected to generate equal annual cash flows over the next 10 years. The required rate of return for the project is 12%. What is program X's internal rate of return? 10)_____ 11) Xavier Publishing is thinking of purchasing a new printing and binding machine. The machine will cost $120,000, plus $7,500 to ship and install the equipment. The new machine will have a 5-year useful life and will be depreciated on a straight-line basis. The machine is expected to generate sales of $25,000 per year and is expected to save $17,000 per year in labor and electrical expenses over the next 5 years. The machine is expected to have a salvage value of $30,000. Xavier uses a 13.5% discount rate for capital budgeting purposes and the firm's income tax rate is 40%. What is the machine's NPV? 11)_____ 12) The market risk premium is 12% and the risk free rate of return is 3%. Kent Construction's marginal tax rate is 40% and its beta is 1.8. Analysts expect Kent's dividends to grow by 5% per year for the foreseeable future. Using the capital asset pricing model, what is Kent's cost of retained earnings? 12)_____ 2 13) Parker Development will issue new common stock to finance and expansion. The existing common stock just paid a $1.50 per share dividend and dividends are expected to grow at a constant rate of 8% for the foreseeable future. Te stock sells for $45 and flotation costs of 5% of the selling price will be incurred on new shares. What is the cost of retained earnings for Parker? 13)_____ 14) Wayne Industries plans to keep its capital structure of 40% debt, 10% preferred stock and 50% common equity. The required rate of return on each of the sources of capital is: debt = 8%; preferred stock = 12%; common equity =16%. Assuming a 40% marginal tax rate, what after tax rate of return must Wayne Industries earn on its investments if the value of the firm is to remain unchanged? 14)_____ 15) Allen Wrenches will manufacture and sell 200,000 units next year. Fixed 15)_____ costs will total $300,000, and variable costs will be 60% of sales. Allen wants to have earnings before interest and taxes of $250,000. What selling price per unit is necessary to achieve this result? 3