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mellisa
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anniekavitha
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Preview: ... 5.30% <br> 5.40% <br> 5.50% <br>Please see excel attachment.<br><br>13. Which of the following statements is NOT CORRECT? (Points: 5)<br> If a bond is selling at its par value, its current yield equals its yield to maturity. <br> If a bond is selling at a discount to par, its current yield will be less than its yield to maturity. <br> All else equal, bonds with longer maturities have more interest rate (price) risk than do bonds with shorter maturities. <br> All else equal, bonds with larger coupons have greater interest rate (price) risk than do bonds with smaller coupons. <br> If a bond is selling at a premium, its current yield will be greater than its yield to maturity. <br><br>14. Over the past 75 years, we have observed that investments with the highest average annual returns also tend to have the highest standard deviations of their annual returns. This observation supports the notion that there is a positive correlation between risk and return. Which of the following lists correctly ranks investments from highest to lowest returns and risk (thus, the highest risk security should be shown first, the lowest risk securities shown last)? (Points: 5)<br> small-company stocks, large-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills <br> small-company stocks, long-term corporate bonds, large-company stocks, long-term government bonds, U.S. Treasury bills <br> large-company stocks, small-company stocks, long-term corporate bonds, U.S. Treasury bills, long-term government bonds <br> U.S. Treasury bills, long-term government bonds, long-term corporate bonds, small-company stocks, large-company stocks <br> large-company stocks, small-company stocks, long-term corporate bonds, long-term government bonds, U.S. Treasury bills <br><br>15. Apex Roofing's stock has a beta of 1.50, its required return is 14.00%, and the risk-free rate is 5.00%. What is the required rate of return on the stock market? (Hint: First find the market risk premium.) (Points: 5)<br> 10.50% <br> 11.00% <br> 11.50% <br> 12.00% <br> 12.50% <br>Rate of return = risk free rate + beta x Market risk premium<br>14% = 5% + 1.5 x Market risk premium<br>Market risk premium = 9%/1.5<br>= 6%<br>Market risk premium = Market return – risk free rate<br>6% = Market return – 5%<br>Market return = 5% + 6%<br>= 11%<br><br>16. The Connors Company's last dividend was $1.00. Its dividend growth rate is expected to be constant at 15% for 2 years, after which dividends are expected to grow at a rate of 10% forever. Connors' required return (rs) is 12%. What is Connors' current stock price? (Points: 5)<br> $54.91 <br> $56.82 <br> $58.15 <br> $60.07 <br> $62.87 <br><br>D0 = $1<br>D1 = $1 × (1.15) = $1.15<br>D2 = $1.15 × (1.15) = $1.3225<br>D3 = $1.3225 × (1.10) = $1.45475<br><br>P2 = $1.45475<br> 0.12 – 0.10<br>= $72.7375<br>P0 = $1.15 + $1.3225 + $72.7375<br> (1.12)1 (1.12)2 (1.12)3<br><br>= $60.07 <br><br>17. Assume that Mary Brown Inc. hired you as a consultant to help it estimate the cost of capital. You have been provided with the following data: D0 = $1.20; P0 = $40.00; and g = 7% (constant). Based on the DCF approach, what is Brown's cost of equity from retained earnings? (Points: 5)<br> 10.06% <br> 10.21% <br> 10.37% <br> 10.54% <br> 10.68% <br>Cost of equity = D1 + g<br> P0<br>D1 = 1.20 (1 + 0.07)<br> = 1.28<br><br>Cost of equity = 1.28 + 0.07<br> 40<br>= 0.0321 + 0.07<br>= 0.1021 or 10.21%<br><br>18. You were hired as a consultant to Locke Company, and you were provided with the following data: Target capital structure: 40% debt, 10% preferred, and 50% common equity. The interest rate on new debt is 7.5%, the yield on the preferred is 7.0%, the cost of retained earnings is 11.50%, and the ta ...

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