Question

QUESTION 7

1. Which of the following are true regarding a stock's intrinsic value?

   		The price the stock buys and sells at
   		Based on perceived information as seen by investors
   		In equilibrium it is greater than the market price
   		Based on trading volume
   		It cannot be measured precisely

10 points   

QUESTION 8

1. Recently, Flowers Food had a Beta of 0.19.  What can you conclude form this information?

   		This stock has higher systematic risk that the average stock
   		This stock has less systematic risk than the average stock in the market
   		This stock yields a 19% required returns
   		The market value of the stock is 19% below the intrinsic value
   		19% of the firm's risk cannot be diversified away

10 points   

QUESTION 9

1. A $1,000 par value 10-year bond with a 9% coupon rate with annual payments recently sold for $870. The yield to maturity

   		is greater than 9%
   		is 9%
   		is less that 9%
   		cannot be determined

10 points   

QUESTION 10

1. Calculate the opportunity cost of capital (WACC) for a firm with the following capital structure: 57% in debt, 18% in preferred stock, and the remaining fraction in equity.The firms has a cost of debt of 7.71%, a cost of preferred stock equal to 10.63% and a 13.4% cost of common stock. The firm has a 29% tax rate. You answer should be entered as a %, for example 15.48%

Answer 1

7)

Which of the following are true regarding a stock's intrinsic value?

It cannot be measured precisely

The intrinsic value of a stock can be measured by different valuation models which are subject to various assumptions and are subjective to the valuer. Hence, the stock's intrinsic value can never be precisely determined.

The trading volume shows the volumes of the trades undertaken daily, weekly, or monthly.

The price the stock buys and sells at the market price,

Value on perceived information as seen by the investor is subjective and varies from investor to investor and depends on what information the investor has and how he/she decides to use it.

At equilibrium, stock's intrinsic value equals its market price

8)

Flowers Food had a Beta of 0.19

This stock has less systematic risk than the average stock in the market

Beta is a measure of systematic risk and signifies how much the stock moves when the market security moves one unit. A beta of 0.19 signifies lower volatility compared to the market and hence lesser systematic risk.

9)

A $1,000 par value 10-year bond with a 9% coupon rate with annual payments recently sold for $870.

The yield to maturity is greater than 9%.

The bond price and its yield to maturity is inversely proportional. In this sense, if the bond price is lesser than its pat value, then the bond is trading at a discount and its YTM is higher than its coupon rate

10)

Calculate the opportunity cost of capital (WACC)

57% in debt

18% in preferred stock

25% in equity

WACC= Cost of equity* equity% + Cost of debt * Debt% * (1-Tax rate) + Cost of preferred stock * % Preferred stock

WACC= 13.4%*25% + 7.71%*57%*(1-0.29) + 10.63%*18%

WACC= 8.38%