Multiple choice

1) The Random Corporation is setting its terms on a new issue with warrants. The bonds have a 30-year maturity and semiannual coupon. Each bond will have 20 warrants attached that give the holder the right to purchase one share of Random stock per warrant. Random’s investment banker estimates that each warrant has a value of $14.20. A similar straight-debt issue would require a 10 percent coupon. What coupon rate must be set on the bonds so that the package will sell for $1,000? 

a. 6.00% 

b. 7.00% 

c. 8.00% 

d. 9.00% 

e. 10.00% 

2) Northeast Company has 200,000 shares of common stock and 50,000 warrants outstanding. Each warrant entitles its owner to buy one share at a price of $20 before 2010. The firm’s basic earnings per share is $2.50. What is the firm’s diluted earnings per share? 

a. $2.50 

b. $2.25 

c. $1.50 

d. $3.00 

e. $2.00

3) Texas Products Inc. has a division that makes burlap bags for the citrus industry. The division has fixed costs of $10,000 per month, and it expects to sell 42,000 bags per month. If the variable cost per bag is $2.00, what price must the division charge in order to break even? 

a. $2.24 

b. $2.47 

c. $2.82 

d. $3.15 

e. $2.00 

 4) McKenna Motors is expected to pay a $1.00 per-share dividend at the end of the year 

(D1 = $1.00). The stock sells for $20 per share and its required rate of return is 11 percent. The dividend is expected to grow at a constant rate, g, forever. What is the growth rate, g, for this stock? 

a. 5% 

b. 6% 

c. 7% 

d. 8% 

e. 9%