# Finance Questions: Cost of equity, DCF, put option, investment rate risk, expected ROE

Question 12: LePage Co. has an expected D1 of \$1.375, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for \$22.50 per share. New stock can be sold to the public at the current price, but a flotation cost of 5% would be incurred. What would be the cost of equity from new common stock?

A 11.81%

B 12.43%

C 13.05%

D 13.71%

E 14.39%

Question 13: Assume that you are a consultant to Broske Inc., and you have been provided with the following data: D1 = \$1.30; P0 = \$42.50; and g = 7.00% (constant). What is the cost of equity from retained earnings based on the DCF approach?

A 9.08%

B 9.56%

C 10.06%

D 10.56%

E 11.09%

Question 14: The current price of a stock is \$50, the annual risk-free rate is 6%, and a 1-year call option with a strike price of \$55 sells for \$7.20. What is the value of a put option, assuming the same strike price and expiration date as for the call option?

A \$7.33

B \$7.71

C \$8.12

D \$8.55

E \$9.00

Question 15: Which of the following statements is CORRECT, holding other things constant?

A Firms whose assets are relatively liquid tend to have relatively low bankruptcy costs, hence they tend to use relatively little debt.

B An increase in the personal tax rate is likely to increase the debt ratio of the average corporation.

C If changes in the bankruptcy code make bankruptcy less costly to corporations, then this would likely reduce the debt ratio of the average corporation.

D An increase in the company's degree of operating leverage is likely to encourage a company to use more debt in its capital structure.

E An increase in the corporate tax rate is likely to encourage a company to use more debt in its capital structure.

Question 16: Which of the following statements about interest rate and reinvestment rate risk is CORRECT?

A Variable (or floating) rate securities have more interest rate (price) risk than fixed rate securities.

B Interest rate price risk exists because fixed-rate debt securities lose value when interest rates rise, while reinvestment rate risk is the risk of earning less than expected when interest payments or debt principal are reinvested.

C Interest rate price risk can be eliminated by holding zero coupon bonds.

D Reinvestment rate risk can be eliminated by holding variable (or floating) rate bonds.

E All of the statements above are correct.

Question 17: Vu Enterprises expects to have the following data during the coming year. What is Vu's expected ROE?

A 12.51%

B 13.14%

C 13.80%

D 14.49%

E 15.21%