____ 16. Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds.

____ 16. Suppose the U.S. Treasury announces plans to issue $50 billion of new bonds. Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?

a. Prices and interest rates would both rise.

b. Prices would rise and interest rates would decline.

c. Prices and interest rates would both decline.

d. There would be no changes in either prices or interest rates.

e. Prices would decline and interest rates would rise.

____ 17. Last year Toto Corporation’s sales were $225 million. If sales grow at 6% per year, how large (in millions) will they be 5 years later?

a. $271.74

b. $286.05

c. $301.10

d. $316.16

e. $331.96

____ 18. You want to go to Europe 5 years from now, and you can save $3,100 per year, beginning immediately. You plan to deposit the funds in a mutual fund which you expect to return 8.5% per year. Under these conditions, how much will you have just after you make the 5th deposit, 5 years from now?

a. $17,986.82

b. $18,933.49

c. $19,929.99

d. $20,926.49

e. $21,972.82

____ 19. Below is the common equity section (in millions) of Teweles Technology’s last two year-end balance sheets:

	2006		2005
Common stock	$2,000		$1,000
Retained earnings		2,000		2,340
Total common equity	$4,000		$3,340

 

Teweles has never paid a dividend to its common stockholders. Which of the following statements is CORRECT?

a. The company’s net income in 2006 was higher than in 2005.

b. Teweles issued common stock in 2006.

c. The market price of Teweles’ stock doubled in 2006.

d. Teweles had positive net income in both 2005 and 2006, but the company’s net income in 2006 was lower than it was in 2005.

e. The company has more equity than debt on its balance sheet.

____ 20. Companies generate income from their “regular” operations and from other sources like interest earned on the securities they hold, which is called non-operating income. Lindley Textiles recently reported $12,500 of sales, $7,250 of operating costs other than depreciation, and $1,000 of depreciation. The company had no amortization charges and no non-operating income. It had $8,000 of bonds outstanding that carry a 7.5% interest rate, and its federal-plus-state income tax rate was 40%. How much was Lindley’s operating income, or EBIT?

a. $3,462

b. $3,644

c. $3,836

d. $4,038

e. $4,250

____ 21. An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can provide a 13.5% return on the invested capital, which means that the firm must have an ROE of 13.5%. How much net income must be expected to warrant starting the business?

a. $52,230

b. $54,979

c. $57,873

d. $60,919

e. $64,125

____ 22. D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?

a. $829.21

b. $850.47

c. $872.28

d. $894.65

e. $917.01

____ 23. McCue Inc.’s bonds currently sell for $1,250. They pay a $120 annual coupon, have a 15-year maturity, and a $1,000 par value, but they can be called in 5 years at $1,050. Assume that no costs other than the call premium would be incurred to call and refund the bonds, and also assume that the yield curve is horizontal, with rates expected to remain at current levels on into the future. What is the difference between this bond’s YTM and its YTC? (Subtract the YTC from the YTM.)

a. 2.11%

b. 2.32%

c. 2.55%

d. 2.80%

e. 3.09%

____ 24. Moerdyk Corporation’s bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (r_d) is 4.75%, based on semiannual compounding. What is the bond’s price?

a. 1,063.09

b. 1,090.35

 

c. 1,118.31

d. 1,146.27

e. 1,174.93

____ 25. Rick Kish has a $100,000 stock portfolio. $32,000 is invested in a stock with a beta of 0.75 and the remainder is invested in a stock with a beta of 1.38. These are the only two investments in his portfolio. What is his portfolio’s beta?

a. 1.18

b. 1.24

c. 1.30

d. 1.36

e. 1.43

____ 26. Yonan Corporation’s stock had a required return of 11.50% last year, when the risk-free rate was 5.50% and the market risk premium was 4.75%. Now suppose there is a shift in investor risk aversion, and the market risk premium increases by 2%. The risk-free rate and Yonan’s beta remain unchanged. What is Yonan’s new required return? (Hint: First calculate the beta, then find the required return.)

a. 14.03%

b. 14.38%

c. 14.74%

d. 15.10%

e. 15.48%