Busi 408 Final Review Questions & Answers
A 12-year, 5% copuon bond =12.38% decrease
pays interest annually. The
bond has a face value of N = 12, I/Y = 4.5, PV = ???, PMT = 50, FV = 1,000
$1,000. What is the change in
the price of this bond if the N = 12, I/Y = 6, PV = ???, PMT = 50, FV = 1,000
market yield rises to 6% from
the current yield of 4.5%?
Small company stocks: Have tended to outperform other
securities over the long-term, based on a period of 1926
through 2008.
U.S. Treasury Bills: Have tended to produce the lowest real
rate of return for the period 1926 through 2008.
1926 through 2008: On average, the risk premium on long-term corporate
bonds has exceeded the risk premium on long-term
government bonds.
Ranking of securities based on their volatility over the
period:
Small company stocks, Large company stocks, Long-term
corporate bonds
, Busi 408 Final Review Questions & Answers
American Fortunes is I. The initial selling price of each bond will be $1,000.
preparing a bond offering
with an 8% coupon rate. The III. Each interest payment per bond will be $40.
bonds will be repaid in 10
years. The company plans to IV. The yield to maturity when the bonds are first issued is
issue the bonds at par value 8%.
and pay interest semiannually.
Given this, which of the
following statements are
correct?
Anderson's Furniture Outlet VU = [EBIT × (1 - Tc)] ÷ RU = [$1,600 × (1- .34)] ÷ .10 = $10,560
has an unlevered cost of VL = VU + (Tc × D) = $10,560 + (.34 × $3,000) = $11,580
capital of 10%, a tax rate of VL - VD = VE = $11,580 - $3,000 = $8,580
34%, and expected earnings RE = RU + (RU - RD) × D/E × (1 - TC) = .10 + [(.10 - .08) ×
before interest and taxes of ($3,000 ÷ $8,580) × (1 - .34)] = .10 + .00462 = .10462 = 10.46%
$1,600. The company has
$3,000 in bonds outstanding
that have an 8% coupon and
pay interest annually. The
bonds are selling at par value.
What is the cost of equity?
Estimates using the arithmetic average will probably tend to
Arithmetic average
OVERESTIMATE values over the long-term
, Busi 408 Final Review Questions & Answers
The return earned in an average year over a multi-year
Arithmetic Return
period.
The ASSET BETA of a levered firm is generally:
= different from the equity beta
= different from the debt beta
ASSET BETA:
For the levered firm the equity beta is GREATER THAN the
asset beta.
, Busi 408 Final Review Questions & Answers
measures Systematic Risk
Measures how an asset covaries with the market.
Useful in the calculation of the company's discount rate.
For a multi-product firm, if a project's beta is different from
that of the overall firm, then the:
Project should be discounted at a rate commensurate with
its own beta.
Comparing two otherwise equal firms, the beta of the
common stock of a levered firm is GREATER THAN the beta
of the common stock of an unlevered firm.
The beta of a firm is determined by the following firm
Beta
characteristics:
= Cycles in revenue
= Operating leverage
= Financial leverage
The beta of a firm is likely to be high under two conditions:
= High cyclical business activity
= High operating leverage
A 12-year, 5% copuon bond =12.38% decrease
pays interest annually. The
bond has a face value of N = 12, I/Y = 4.5, PV = ???, PMT = 50, FV = 1,000
$1,000. What is the change in
the price of this bond if the N = 12, I/Y = 6, PV = ???, PMT = 50, FV = 1,000
market yield rises to 6% from
the current yield of 4.5%?
Small company stocks: Have tended to outperform other
securities over the long-term, based on a period of 1926
through 2008.
U.S. Treasury Bills: Have tended to produce the lowest real
rate of return for the period 1926 through 2008.
1926 through 2008: On average, the risk premium on long-term corporate
bonds has exceeded the risk premium on long-term
government bonds.
Ranking of securities based on their volatility over the
period:
Small company stocks, Large company stocks, Long-term
corporate bonds
, Busi 408 Final Review Questions & Answers
American Fortunes is I. The initial selling price of each bond will be $1,000.
preparing a bond offering
with an 8% coupon rate. The III. Each interest payment per bond will be $40.
bonds will be repaid in 10
years. The company plans to IV. The yield to maturity when the bonds are first issued is
issue the bonds at par value 8%.
and pay interest semiannually.
Given this, which of the
following statements are
correct?
Anderson's Furniture Outlet VU = [EBIT × (1 - Tc)] ÷ RU = [$1,600 × (1- .34)] ÷ .10 = $10,560
has an unlevered cost of VL = VU + (Tc × D) = $10,560 + (.34 × $3,000) = $11,580
capital of 10%, a tax rate of VL - VD = VE = $11,580 - $3,000 = $8,580
34%, and expected earnings RE = RU + (RU - RD) × D/E × (1 - TC) = .10 + [(.10 - .08) ×
before interest and taxes of ($3,000 ÷ $8,580) × (1 - .34)] = .10 + .00462 = .10462 = 10.46%
$1,600. The company has
$3,000 in bonds outstanding
that have an 8% coupon and
pay interest annually. The
bonds are selling at par value.
What is the cost of equity?
Estimates using the arithmetic average will probably tend to
Arithmetic average
OVERESTIMATE values over the long-term
, Busi 408 Final Review Questions & Answers
The return earned in an average year over a multi-year
Arithmetic Return
period.
The ASSET BETA of a levered firm is generally:
= different from the equity beta
= different from the debt beta
ASSET BETA:
For the levered firm the equity beta is GREATER THAN the
asset beta.
, Busi 408 Final Review Questions & Answers
measures Systematic Risk
Measures how an asset covaries with the market.
Useful in the calculation of the company's discount rate.
For a multi-product firm, if a project's beta is different from
that of the overall firm, then the:
Project should be discounted at a rate commensurate with
its own beta.
Comparing two otherwise equal firms, the beta of the
common stock of a levered firm is GREATER THAN the beta
of the common stock of an unlevered firm.
The beta of a firm is determined by the following firm
Beta
characteristics:
= Cycles in revenue
= Operating leverage
= Financial leverage
The beta of a firm is likely to be high under two conditions:
= High cyclical business activity
= High operating leverage
