Question

In: Finance

1.Investors require a 13% rate of return on the Levine Company’s stock. If the dividend increase...

1.Investors require a 13% rate of return on the Levine Company’s stock. If the dividend increase at a constant rate of 6%, what is the capital gain yield?

A. 6%

B. 13%

C. 7%

D. 19%

E. None of the above

2.Negative growth rate stocks have negative values.

A. True B. False

3. If a zero growth rate shock with an annual dividend of $5 sells for $50, what is the stock’s expected return?

A. 5%

B. 10%

C. 15%

D. 20%

E. Can not be determined

4.A six-year, semiannual coupon bond is selling for $991.38. The bond has a face value of $1,000 and a yield to maturity of 9.19 percent. What is the coupon rate? [Match time period and interest rate]

A. 4.50 percent

B. 4.60 percent

C. 6.00 percent

D. 9.00 percent

E. 9.20 percent

5. Which of following information is not required to calculate WACC?

A. Weight of debt

B. Weight of common equity

C. Tax rate

D. Cost of preferred stock

E. All of above are required

6. If tax rate increases, WACC will decrease.

A. True B. False

7. If a firm can borrow at an interest rate of 8% and its tax rate is 40%, its after-tax cost of debt is

A. 3.2%

B. 4%

C. 4.8%

D. 6%

E. 8%

8. If a firm pays out $5 preferred dividend per share, and the stock is priced at $40 per share. The component cost of preferred stock is

A. 8%

B. 10%

C. 12.5%

D. 17.5%

E. 25%

9. The cost of preferred stock to a firm must be adjusted to an after-tax figure

. A. True. B. False.

Solutions

Expert Solution

1.00 Required rate of return 13%
Dividend growth rate 6%
Capital gain yield 7% Required rate of return - Dividend growth rate
2 False, negetive growth rate never means negetive values for stock price
3.00 Annual Dividend 5.00
Stock price 50.00
Dividend growth rate 0.00
Expected return 10% Annual dividend*(1+div growth rate)/Price
4 Price 991.38
Face value 1,000.00
Yield to maturity 9.19%
Time to maturity 6.00 years
Coupon rate 9.00%
Price from goal seek 991.38 Price function is used to find price and using goal seek to make it equal to the bond price to find coupon price
Asnwer is 9%
5 All the above information is required
6 True, this will happen because the after tax cost of debt will decrease
7 Cost of debt 8%
Tax rate 40%
After tax cost of debt 4.80%
8 Preferred dividend 5.00
Stock price 40.00
Cost of preferred dividend 12.50%
9.00 False, as preferred stock is paid after debt interest, so not required to adjust for tax

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