Posted: November 28th, 2022

1) Assume that the risk-free rate is 4.5% and that the expected return on the market is 12%. What is the required rate of return on a stock that has a beta of 0.4?

2) Needham Pharmaceuticals has a profit margin of 3% and an equity multiplier of 1.5. Its sales are $110 million and it has total assets of $58 million. What is its ROE? Round your answer to two decimal places.

3)Assume you are given the following relationships for the Clayton Corporation:

Sales/total assets |
1.8 |

Return on assets (ROA) |
2% |

Return on equity (ROE) |
5% |

- Calculate Clayton’s profit margin. Round your answer to two decimal places.
- Calculate Clayton’s debt ratio. Round your answer to two decimal places.

4) Pearson Brothers recently reported an EBITDA of $6.5 million and net income of $1.95 million. It had $2.275 million of interest expense, and its corporate tax rate was 35%. What was its charge for depreciation and amortization?

5) Suppose you hold a diversified portfolio consisting of a $7,500 investment in each of 20 different common stocks. The portfolio’s beta is 2.15. Now, suppose you sell one of the stocks with a beta of 1.0 for $7,500 and use the proceeds to buy another stock whose beta is 1.95. Calculate your portfolio’s new beta. Round your answer to two decimal places.

6) What will be the nominal rate of return on a perpetual preferred stock with a $100 par value, a stated dividend of 7% of par, and a current market price of

(a) $52, (b) $87, (c) $100, and (d) $136? Round the answers to two decimal places.

7) Thress Industries just paid a dividend of $4.00 a share (i.e., D_{0} = 4.00). The dividend is expected to grow 5% a year for the next 3 years and then at 14% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to the nearest cent.

8) The Moore Corporation had operating income (EBIT) of $300,000. The company’s depreciation expense is $90,000. Moore is 100% equity financed, and it faces a 40% tax rate.

a) What is the company’s net income?

b) What is its net cash flow?

9) You just purchased a bond that matures in 5 years. The bond has a face value of $1,000 and has an 8% annual coupon. The bond has a current yield of 8.21%. What is the bond’s yield to maturity? Round your answer to two decimal places.

10) While Mary Corens was a student at the University of Tennessee, she borrowed $12,000 in student loans at an annual interest rate of 8.30%. If Mary repays $1,500 per year, how long (to the nearest year) will it take her to repay the loan?

11) Assume that the average firm in your company’s industry is expected to grow at a constant rate of 7% and that its dividend yield is 8%. Your company is about as risky as the average firm in the industry, but it has just successfully completed some R&D work that leads you to expect that its earnings and dividends will grow at a rate of 50% [D_{1} = D_{0}(1 + g) = D_{0}(1.50)] this year and 30% the following year, after which growth should return to the 7% industry average. If the last dividend paid (D_{0}) was $2.25, what is the value per share of your firm’s stock? Round your answer to the nearest cent. Do not round your intermediate computations.

12) Wilson Wonders’s bonds have 10 years remaining to maturity. Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 7%. The bonds sell at a price of $985. What is their yield to maturity? Round your answer to two decimal places.

13) What is the present value of a security that will pay $20,000 in 20 years if securities of equal risk pay 5.2% annually? Round your answer to the nearest cent.

14) You have a $2 million portfolio consisting of a $100,000 investment in each of 20 different stocks. The portfolio has a beta of 1.15. You are considering selling $100,000 worth of one stock with a beta of 1.10 and using the proceeds to purchase another stock with a beta of 1.45. What will the portfolio’s new beta be after these transactions? Round your answer to two decimal places.

15) The current price of a stock is $34, and the annual risk-free rate is 4%. A call option with a strike price of $32 and 1 year until expiration has a current value of $5.80. What is the value of a put option written on the stock with the same exercise price and expiration date as the call option? Round your answer to the nearest cent.

16) Find the present value of $400 due in the future under each of the following conditions. Round your answers to the nearest cent.

A) 4% nominal rate, semiannual compounding, discounted back 5 years

B) 4% nominal rate, quarterly compounding, discounted back 5 years

C) 4% nominal rate, monthly compounding, discounted back 5 years

17) Washington-Pacific invests $2 million to buy a tract of land and plant some young pine trees. The trees can be harvested in 13 years, at which time W-P plans to sell the forest at an expected price of $4 million. What is W-P’s expected rate of return? Round your answer to two decimal places.

18) A Treasury bond that matures in 10 years has a yield of 4%. A 10-year corporate bond has a yield of 10%. Assume that the liquidity premium on the corporate bond is 0.3%. What is the default risk premium on the corporate bond? Round your answer to two decimal places.

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