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?
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?
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?
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?