Yield to maturity

Beranek Corp. has $410,000 of assets, and it uses no debt–it is financed only with common equity. The new CFO wants to employ enough debt to bring the debt/assets ratio to 40%, using the proceeds from the borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio?

It would be 40% of total assets that is 40% *410000= 164000

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Hence option B= Answer

A. $155,800

B. $164,000

C. $172,200

D. $180,810

E. $189,851

Question 16
Bonner Corp.’s sales last year were $415,000, and its year-end total assets were $355,000. The average firm in the industry has a total assets turnover ratio (TATO) of 2.4. Bonner’s new CFO believes the firm has excess assets that can be sold so as to bring the TATO down to the industry average without affecting sales. By how much must the assets be reduced to bring the TATO to the industry average, holding sales constant?

Reduced Assets = Sales/Total Assets turnover
=415000/2.4
=172917

Hence it has to reduced from 415000 to 172917, which means the reduction has to be by $182083.
Hence C is the answer.

A. $164,330

B. $172,979

C. $182,083

D. $191,188

E. $200,747

Question 17
Last year Urbana Corp. had $197,500 of assets, $307,500 of sales, $19,575 of net income, and a debt-to-total-assets ratio of 37.5%. The new CFO believes a new computer program will enable it to reduce costs and thus raise net income to $33,000. Assets, sales, and the debt ratio would not be affected. By how much would the cost reduction improve the ROE?

ROE would improve by Difference in net income/Equity
=(33000-19575)/(62.5%*197500)
=10.88%
Hence D is the answer

A. 9.32%

B. 9.82%

C. 10.33%

D. 10.88%

E. 11.42%

Question 18
D. J. Masson Inc. recently issued noncallable bonds that mature in 10 years. They have a par value of $1,000 and an annual coupon of 5.5%. If the current market interest rate is 7.0%, at what price should the bonds sell?
894.65 is the answer ( Please see the excel file for calculations). Hence D is the answer

A. $829.21

B. $850.47

C. $872.28

D. $894.65

E. $917.01

Question 19
Ezzell Enterprises’ noncallable bonds currently sell for $1,165. They have a 15-year maturity, an annual coupon of $95, and a par value of $1,000. What is their yield to maturity?

YTM= 7.62% ( See excel file attached)
Hence E is the answer

A. 6.20%

B. 6.53%

C. 6.87%

D. 7.24%

E. 7.62%

Question 20
5-year Treasury bonds yield 5.5%. The inflation premium (IP) is 1.9%, and the maturity risk premium (MRP) on 5-year bonds is 0.4%. What is the real risk-free rate, r*?

Real risk free rate= Bond yield-IP-MRP
=5.5%-1.9%-.4%
=3.2%
Hence C is the answer

A. 2.59%

B. 2.88%

C. 3.20%

D. 3.52%

E. 3.87%

Question 21
A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%). If the company’s expected and required rate of return is 15%, which of the following statements is CORRECT?
Stock price = D1/(Ke-g)
=2/ (15%+5%)
=$10
Hence E is the answer

A. The company’s current stock price is $20.

B. The company’s dividend yield 5 years from now is expected to be 10%.

C. The constant growth model cannot be used because the growth rate is negative.

D. The company’s expected capital gains yield is 5%.

E. The company’s stock price next year is expected to be $9.50.

Question 22
If D1 = $1.75, g (which is constant) = 4.5%, and P0 = $46, what is the stock’s expected dividend yield for the coming year?
Expected dividend yield= D1/P0
=1.75/46
=3.8%
Hence D is the answer

A. 3.26%

B. 3.43%

C. 3.61%

D. 3.80%

E. 3.99%

Question 23
If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected …

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