Beranek Corp. has $410,000 of assets, and it uses no debt Answer
Question 3.3. (TCO G) Beranek Corp. has $410,000 of assets, and it uses no debt—it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt to assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?
Question 4.4. (TCO B) Suppose a State of New York bond will pay $1,000 10 years from now. If the going interest rate on these 10-year bonds is 5.5%, how much is the bond worth today?
Question 5.5. (TCO B) You sold a car and accepted a note with the following cash flow stream as your payment. Which was the effective price you received for the car, assuming an interest rate of 6.0%?
Years: 0 1 2 3 4
CFs: $0 $1,000 $2,000 $2,000 $2,000 (Points : 10)
Question 6.6. (TCO B) Suppose you borrowed $12,000 at a rate of 9.0% and must repay it in four equal installments at the end of each of the next 4 years. How large would your payments be?
Question 7.7. (TCO D) A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is correct? (
The bond’s coupon rate exceeds its current yield.
The bond’s current yield exceeds its yield to maturity.
The bond’s yield to maturity is greater than its coupon rate.
The bond’s current yield is equal to its coupon rate.
If the yield to maturity stays constant until the bond matures, the bond’s price will remain at $850.
Question 8.8. (TCO D) Garvin Enterprises’ bonds currently sell for $1,150. They have a 6-year maturity, an annual coupon of $85, and a par value of $1,000. Which is their current yield?
Question 9.9. (TCO C) Keys Corporation’s 5-year bonds yield 7.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Keys’ bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) × 0.1%, where t = number of years to maturity. Which is the default risk premium (DRP) on Keys’ bonds?
Question 10.10. (TCO C) Assume that the risk-free rate remains constant but the market risk premium declines. Which of the following is most likely to occur?
The required return on a stock with beta = 1.0 will not change.
The required return on a stock with beta > 1.0 will increase.
The return on the market will remain constant.
The return on the market will increase.
The required return on a stock with beta < 1.0 will decline.
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