1. A Treasury bond's price is quoted as 119:27. What is the price of one bond that has a par value of $1,000?
a. $1,192.70
b. $1,190.00
c. $1,198.44
d. $1,000.00
2. Aloro would like to borrow $11m for 1 year(s). They will pay off the loan, in full, with probability 95.0%. However, if they enter financial distress, which has a likelihood of 5.0%, their assets will be sold for $10m and they will incur bankruptcy costs of $1.8m. Assume that bonds like these are priced to yield an expected return of 7.0%, on average. The rate that investors will charge Aloro for the loan is closest to:
a. 8.71%
b. 7.00%
c. 7.85%
d. 7.37%
Answer:
3. Aloro is an all-equity financed firm, with a cost of capital of 10.0%. Its current market value is $360k, and it has 21.8k shares outstanding. It plans to issue $170k of perpetual debt at an interest rate of 8.0% per year. It will use the proceeds of the issue to repurchase shares of its own stock. Assume that there are no frictions in the economy (i.e., no taxes, transaction costs, etc.). The market value of the firm (debt + equity) after the repurchase should be closest to:
a. 385.0k
b. 360.0k
c. 170.0k
d. 190.0k
Answer:
4. BMI Corp is currently all-equity financed, and has a required return of 13.0%. Suppose it repurchases 50.0% of its stock by issuing debt of equal value that yields 9.0%. Assume that there are no frictions in the economy (i.e., no taxes, transaction costs, etc.). BMI Corp's return on equity (Re) after the repurchase is closest to:
a. 17.0%
b. 13.0%
c. 13.0%
d. 9.0%
Answer:
5. Morphius Corp is currently all-equity financed, and has a required return of 13.0%. Suppose it repurchases 20.0% of its stock by issuing debt of equal value that yields 10.0%. Assume that there are no frictions in the economy (i.e., no taxes, transaction costs, etc.). Morphius Corp's overall cost of capital (COC or WACC) after the repurchase is closest to:
a. 13.8%
b. 12.0%
c. 10.0%
d. 13.0%
Answer:
6. Matrix Corp is currently all-equity financed, and has a required return of 16.0%. Suppose it repurchases 60.0% of its stock by issuing debt of equal value that yields 13.0%. Assume that there are no frictions in the economy (i.e., no taxes, transaction costs, etc.). Matrix Corp's return on equity (Re) and overall cost of capital (COC or WACC) after the repurchase is closest to:
a. 16.0%; 14.2%
b. 16.0%; 16.0%
c. 20.5%; 16.0%
d. 16.0%; 20.5%
Answer:
7. Assume that the corporate tax rate is 39%, and that taxes are the only friction in the economy. Morphius Corp is an all-equity financed firm, with a cost of capital of 12.0%. Its current market value is $340m, and it has 12.1m shares outstanding. It plans to issue $60m of perpetual debt at an interest rate of 8.0% per year. It will use the proceeds of the issue to repurchase shares of its own stock. The number of shares outstanding after the repurchase is closest to:
a. 2.0m
b. 10.1m
c. 2.1m
d. 10.0m
Answer:
8. Music Maker Corp is an all-equity financed firm, with a cost of capital of 19.0%. Its current market value is $250k, and it has 13.9k shares outstanding. It plans to issue $120k of perpetual debt at an interest rate of 16.0% per year. It will use the proceeds of the issue to repurchase shares of its own stock. Assume that the corporate tax rate is 44%, and that taxes are the only friction in the economy. The market value of the firm (debt + equity) after the repurchase should be closest to:
a. 182.8k
b. 250.0k
c. 302.8k
d. 120.0k
Answer:
9. Matrix Corp is currently all-equity financed, and has a required return of 19.0%. Suppose it repurchases 50.0% of its stock by issuing perpetual debt of equal value that yields 15.0%. Assume the tax rate is 30.0%. Its required return on equity after the repurchase is closest to:
a. 23.3%
b. 21.8%
c. 16.2%
d. 15.0%
Answer:
10. Huntington is currently all-equity financed, and has a required return of 10.0%. Suppose it repurchases 30.0% of its stock by issuing debt of equal value that yields 6.0%. Assume the tax rate is 40.0%. Its weighted average cost of capital (WACC) after the repurchase is closest to:
a. 8.8%
b. 11.0%
c. 6.0%
d. 9.8%
Answer:
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