| | | 30 basis points Question 8 A bond has a $1,000 par value, makes annual interest payments of $100, has 5 years to maturity, cannot be called, and is not expected to default. The bond should sell at a premium if market interest rates are below 10% and at a discount if interest rates are greater than 10%. True False Question 10 The yield to maturity on the bond with the cusip 855244AD1 is less than the coupon on the bond. True False A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and an aftertax cost of debt of 6 percent. Given this, which one of the following will increase the firm's weighted average cost of capital? | | | Increasing the firm's tax rate | | | | Issuing new bonds at par | | | | Redeeming shares of common stock | | | | Increasing the firm's beta | | | | Increasing the debt-equity ratio Question 12 A bond has a coupon of 6%. It has a face value of $100. It pays interest semiannually. The bond was issued on March 18th, 2013. The settlement date is March 21st, 2013. The maturity date is 3/23/2023. The first interest payment is June 18th, 2013. The redemption of the bond is $100. The bond is currently selling for 80% of face value. The yield to maturity of the bond is: | | | 6.5% | | | | 7.89% | | | | 9.08% | | | | 10.01% Question 14 Managers are going to borrow to finance 50% of the value of new assets. The rest will be financed with equity. They have decided that the correct discount rate to value the project is the average of the firm's estimated 15% cost of equity and the after tax cost of debt. The pre-tax cost of the firm's debt is the yield to maturity of bonds the firm is going to issue. The terms of the bonds are: settlement 5/5/2014 maturity 5/5/2024 rate 10% pr 100 redemption 100 frequency 2 basis 0 These terms are from the EXCEL function "Yield". The firm's marginal tax rate is 25%. The discount rate the firm uses should be: | | | 10.25% | | | | 11.25% | | | | 10.75% | | | | 7.5% 3.7037 points Question 16 Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 13.5 years. What is the current price of these bonds if the yield to maturity is 6.82 percent? | | | $989.50 | | | | $994.56 | | | | $1,015.72 | | | | $1,018.27 | | | | $1,020.00 | Question 16 Red Mountain, Inc. bonds have a face value of $1,000. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 13.5 years. What is the current price of these bonds if the yield to maturity is 6.82 percent? | | | $989.50 | | | | $994.56 | | | | $1,015.72 | | | | $1,018.27 | | | | $1,020.00 | | | | |
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