1. A corporate bond has a coupon rate of 12%, a yield to maturity of 10.55%, a face value of $1,000, and a market price of $850. Therefore, the annual interest payment is:
Answer is A) 101.75 B) 102 C) 105.50 D) 120.00
2. Johnstown Supply Corporation stock is currently selling for $58.00. It is expected to pay a dividend of $5.00 at the end of the year. Dividends are expected to grow at a constant rate of 7.5% indefinitely. Compute the required rate of return on Johnstown Supply Corporation stock.
Answer A) 12.48% B) 15.65% C) 13.64% D) 16,12%
3. Burns and Nuble is considering an investment in a project which would require an initial outlay of $350,000 and produce expected cash flows in years 1-5 of $95,450 per year. You have determined that the current after-tax cost of the firm's capital (required rate of return) for each source of financing is as follows: Cost of long term debt is 7%, Cost of preferred stock is 11% and cost of common stock is 15%. Long term debt currently makes up 25% of the capital structure, preferred stock 15%, and common stock 60%. What is the net present value of this project?
Answer A) -9,306 B)2,149 C 5,983 D) 11,568
1 - Annual interest payment is based on coupon rate.
Annual Interest = 12% of 1000 = ...
The solution computes annual interest payment, required rate of return, NPV of project