QUESTION 1 In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures from historical book values to market values. KJM Corporation’s balance sheet (book values) as of today is as follows: The bonds have a 7.7% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 11%, so the bonds now sell below par. What is the current market value of the firm’s debt?Long-term debt (bonds, at par)$23,500,000Preferred stock2,000,000Common stock ($10 par)10,000,000Retained earnings4,000,000Total debt and equity$39,500,000$17,734,265$23,394,137$18,866,239$16,602,290$19,054,9025 points QUESTION 2Niendorf Corporation’s 5-year bonds yield 6.75%, and 5-year T-bonds yield 4.80%. The real risk-free rate is r* = 2.75%, the inflation premium for 5-year bonds is IP = 1.65%, the default risk premium for Niendorf’s bonds is DRP = 1.20% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) ? 0.1%, where t = number of years to maturity.

What is the liquidity premium (LP) on Niendorf’s bonds?0.49%0.55%0.61%0.68%0.75%5 points QUESTION 3Nagel Equipment has a beta of 0.88 and an expected dividend growth rate of 4.00% per year. The T-bill rate is 4.00%, and the T-bond rate is 5.25%. The annual return on the stock market during the past 4 years was 10.25%. Investors expect the average annual future return on the market to be 13.25%. Using the SML, what is the firm’s required rate of return?10.20%13.03%14.50%12.29%11.18%5 points QUESTION 4The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company’s beta is 1.15, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company’s current stock price, P0?$18.62$19.08$19.56$20.05$20.555 points QUESTION 5Suppose 10-year T-bonds have a yield of 5.30% and 10-year corporate bonds yield 8.90%. Also, corporate bonds have a 0.25% liquidity premium versus a zero liquidity premium for T-bonds, and the maturity risk premium on both Treasury and corporate 10-year bonds is 1.15%. What is the default risk premium on corporate bonds?4.12%3.35%3.12%3.08%2.95%5 points QUESTION 6Carter’s preferred stock pays a dividend of $1.00 per quarter. If the price of the stock is $57.50, what is its nominal (not effective) annual rate of return?7.86%8.14%7.72%7.37%6.96%5 points QUESTION 7Grossnickle Corporation issued 20-year, noncallable, 6.3% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?$1,136.58$950.79$1,289.58$1,049.15$1,092.865 points QUESTION 8Moerdyk Corporation’s bonds have a 10-year maturity, a 6.25% semiannual coupon, and a par value of $1,000. The going interest rate (rd) is 4.75%, based on semiannual compounding. What is the bond’s price?1,063.091,090.351,118.311,146.271,174.935 points QUESTION 9Jill Angel holds a $200,000 portfolio consisting of the following stocks. The portfolio’s beta is 0.875. If Jill replaces Stock A with another stock, E, which has a beta of 1.85, what will the portfolio’s new beta be?StockInvestmentBetaA$50,0000.50B$50,0000.80C$50,0001.00D$50,0001.20Total$200,0000.921.211.301.141.355 points QUESTION 10Kristina Raattama holds a $200,000 portfolio consisting of the following stocks. The portfolio’s beta is 0.875. If Kristina replaces Stock A with another stock, E, which has a beta of 1.50, what will the portfolio’s new beta be?Stock Investment BetaA$50,0000.50B50,0000.80C50,0001.00D50,0001.20Total$200,0001.071.131.181.241.305 points QUESTION 11Grossnickle Corporation issued 20-year, noncallable, 8.1% annual coupon bonds at their par value of $1,000 one year ago. Today, the market interest rate on these bonds is 5.5%. What is the current price of the bonds, given that they now have 19 years to maturity?$1,132.57$1,223.69$1,301.80$1,353.87$1,314.825 points QUESTION 12Suppose the yield on a 10-year T-bond is currently 5.05% and that on a 10-year Treasury Inflation Protected Security (TIPS) is 1.30%. Suppose further that the MRP on a 10-year T-bond is 0.90%, that no MRP is required on a TIPS, and that no liquidity premium is required on any T-bond. Given this information, what is the expected rate of inflation over the next 10 years? Disregard cross-product terms, i.e., if averaging is required, use the arithmetic average.3.45%3.33%2.85%2.82%3.51%5 points QUESTION 13The Isberg Company just paid a dividend of $0.75 per share, and that dividend is expected to grow at a constant rate of 5.50% per year in the future. The company’s beta is 1.35, the market risk premium is 5.00%, and the risk-free rate is 4.00%. What is the company’s current stock price, P ?$15.83$14.02$11.61$18.84$15.075 points QUESTION 14Kay Corporation’s 5-year bonds yield 6.20% and 5-year T-bonds yield 4.40%. The real risk-free rate is r* = 2.5%, the inflation premium for 5-year bonds is IP = 1.50%, the default risk premium for Kay’s bonds is DRP = 1.30% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t = number of years to maturity. What is the liquidity premium (LP) on Kay’s bonds?0.52%0.61%0.38%0.50%0.56%5 points QUESTION 15In order to accurately assess the capital structure of a firm, it is necessary to convert its balance sheet figures to a market value basis. KJM Corporation’s balance sheet as of today is as follows: The bonds have a 4.0% coupon rate, payable semiannually, and a par value of $1,000. They mature exactly 10 years from today. The yield to maturity is 12%, so the bonds now sell below par. What is the current market value of the firm’s debt?Long-term debt (bonds, at par)$10,000,000Preferred stock2,000,000Common stock ($10 par)10,000,000Retained earnings 4,000,000Total debt and equity$26,000,000$5,276,731$5,412,032$5,547,332$7,706,000$7,898,6505 points QUESTION 16Crockett Corporation’s 5-year bonds yield 6.35%, and 5-year T-bonds yield 4.75%. The real risk-free rate is r* = 2.20%, the default risk premium for Crockett’s bonds is DRP = 1.00% versus zero for T-bonds, the liquidity premium on Crockett’s bonds is LP = 0.90% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t = number of years to maturity. What inflation premium (IP) is built into 5-year bond yields?2.02%2.49%2.43%2.11%2.15%5 points QUESTION 17Mulherin’s stock has a beta of 1.23, its required return is 11.75%, and the risk-free rate is 4.30%. What is the required rate of return on the market? (Hint: First find the market risk premium.)10.36%10.62%10.88%11.15%11.43%5 points QUESTION 18Koy Corporation’s 5-year bonds yield 9.00%, and 5-year T-bonds yield 5.15%. The real risk-free rate is r* = 3.0%, the inflation premium for 5-year bonds is IP = 1.75%, the liquidity premium for Koy’s bonds is LP = 0.75% versus zero for T-bonds, and the maturity risk premium for all bonds is found with the formula MRP = (t – 1) 0.1%, where t = number of years to maturity. What is the default risk premium (DRP) on Koy’s bonds?2.36%3.10%2.64%2.70%3.69%5 points QUESTION 19The Francis Company is expected to pay a dividend of D = $1.25 per share at the end of the year, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company’s beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 4.00%. What is the company’s current stock price?$22.83$27.99$27.17$22.01$24.185 points QUESTION 20Company A has a beta of 0.70, while Company B’s beta is 1.30. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A’s and B’s required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)4.74%4.05%3.77%4.94%4.70%5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points 5 points