A) $1,900
B) $2,000
C) $2,100
D) $2,205
E) $2,315
G) A) and B)
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A) If an asset's beta is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
B) If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
C) If the beta of the asset is greater than the firm's beta prior to the addition of that asset, then the firm's beta after the purchase of the asset will be smaller than the original firm's beta.
D) If the beta of an asset is larger than the firm's beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
E) None of the statements is true.
G) B) and C)
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A) $38,735.52
B) $40,774.23
C) $42,812.94
D) $44,953.59
E) $47,201.27
G) A) and C)
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B) False
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A) 9.17
B) 9.63
C) 10.11
D) 10.62
E) 11.15
G) A) and C)
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A) Reject the project; its return is less than the firm's required rate of return on the project of 16.9%.
B) Accept the project; its return is greater than the firm's required rate of return on the project of 12.05%.
C) Reject the project; its return is only 13%.
D) Accept the project; its return exceeds the risk-free rate and the before-tax cost of debt.
E) Be indifferent between accepting or rejecting; the firm's required rate of return on the project equals its expected return.
G) B) and D)
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B) False
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A) Bond A sells at a discount, while Bond B sells at a premium.
B) If the yield to maturity on each bond falls to 7%, Bond C will have the largest percentage increase in its price.
C) Bond C has the most reinvestment rate risk.
D) Bond C has the most interest rate (price) risk.
E) If the yield to maturity is constant, the price of Bond A will continue to increase over its life until it finally sells at par.
G) B) and E)
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A) Listing is a decision of more significance to a firm than going public.
B) Any firm can be listed on the NYSE as long as it pays the listing fee.
C) Listing provides a company with some "free" advertising, and it may enhance the
firm's prestige and help it do more business.
D) Listing reduces the reporting requirements for firms, because listed firms file reports
with the exchange rather than with the SEC.
E) The OTC is the second largest market for listed stock, and it is exceeded only by the
NYSE.
G) A) and B)
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A) $3,366,714
B) $3,453,040
C) $3,541,580
D) $3,632,390
E) $3,725,528
G) C) and E)
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E
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A) The primary test of feasibility in a reorganization is whether eclaimant agrees with the reorganization plan.
B) The basic doctrine of fairness states that all debt holders must be treated equally.
C) Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern.
D) While the firm is in bankruptcy, the existing management is always allowed to remain in control of the firm, though the court monitors its actions closely.
E) To a large extent, the decision to dissolve a firm through liquidation or to keep it alive through reorganization depends upon the value of the firm if it is rehabilitated versus its value if its assets are sold off individually.
G) C) and D)
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A) 1.3538
B) 1.4250
C) 1.5000
D) 1.5750
E) 1.6538
G) D) and E)
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A) If interest rates increase, a 10-year zero coupon bond's price will drop by a greater percentage than will a 10-year, 8% coupon bond.
B) One nice thing about zero coupon bonds is that individual investors do not have to pay any taxes on a zero coupon bond until it matures, even if they are not holding the bonds as part of a tax-deferred account.
C) If a bond with a sinking fund provision has a yield to maturity greater than its coupon rate, the issuing company would prefer to comply with the sinking fund by calling the bonds in at par rather than buying the bonds back in the open market.
D) Because of the IRS's tax treatment of zero coupon bonds, pension funds and other tax-exempt entities rarely, if ever, invest in zero coupon bonds.
E) Interest must be paid on a zero coupon bond's accrued value, but while the first year's interest is taxable at the ordinary income tax rate, subsequent years are taxed at the long-term capital gains rate (since they are received after more than a year) .
G) D) and E)
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A) $349.49
B) $367.88
C) $386.27
D) $405.59
E) $425.87
G) B) and E)
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B
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A) If the expected rate of return on a given capital project lies above the SML, the project should be accepted even if its beta is above the beta of the firm's average project.
B) If a project's return lies below the SML, it should be rejected if it has a beta greater than the firm's existing beta but accepted if its beta is below the firm's beta.
C) If two mutually exclusive projects' expected returns are both above the SML, the project with the lower risk should be accepted.
D) If a project's expected rate of return is greater than the expected rate of return on an average project, it should be accepted.
E) None of the statements is correct.
G) B) and C)
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A) Yes; the expected return of the asset (7%) exceeds the required return (6.5%) .
B) Yes; the beta of the asset will reduce the risk of the firm.
C) No; the expected return of the asset (7%) is less than the required return (8.5%) .
D) No; the risk of the asset (beta) will increase the firm's beta.
E) No; the expected return of the asset is less than the firm's required return, which is 10.75%.
G) B) and D)
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A) The CAPM is an ex ante model, which means that all of the variables should be historical values that can reasonably be projected into the future.
B) The beta coefficient used in the SML equation should reflect the expected volatility of a given stock's return versus the return on the market during some future period.
C) The general equation: Y = a + bX + e, is the standard form of a simple linear regression where b = beta, and X equals the independent return on an individual security being compared to Y, the return on the market, which is the dependent variable.
D) The rise-over-run method is not a legitimate method of estimating beta because it measures changes in an individual security's return regressed against time.
F) B) and D)
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A) Yes; its expected return is greater than the firm's WACC.
B) Yes; the project's risk-adjusted required return is less than its expected return.
C) No; a 50% increase in beta risk gives a risk-adjusted required return of 24%.
D) No; the project's risk-adjusted required return is 2% above its expected return.
E) No; the project's risk-adjusted required return is 1% above its expected return.
G) A) and E)
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E
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A) 10.74%
B) 11.31%
C) 11.90%
D) 12.50%
E) 13.12%
G) B) and C)
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A) A shift from MACRS to straight-line depreciation.
B) Making the initial investment in the first year rather than spreading it over the first three years.
C) A decrease in the discount rate associated with the project.
D) An increase in required net working capital.
E) The project would decrease sales of another product line.
G) A) and E)
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