20. When a corporation wants to raise funds by issuing new stocks or bonds,

a.

an investment banker.

b.

a commercial lender.

c.

the Securities and Exchange Commission (SEC).

d.

the New York Stock Exchange (NYSE).

e.

None of the above.

a.

The yield on the 10-year bond is less than the yield on a 1-year bond.

b.

The yield on a 10-year bond will always be higher than the yield on a 1-year bond because of maturity premiums.

c.

It is impossible to tell without knowing the coupon rates of the bonds.

d.

The yields on the two bonds are equal.

e.

It is impossible to tell without knowing the relative risks of the two bonds.

a.

Short-term interest rates are more volatile than long-term rates.

b.

Inflation is expected to subside in the future.

c.

The economy is at the peak of a business cycle.

d.

Long-term bonds are a better buy than short-term bonds.

e.

None of the above statements is necessarily implied by the yield curve given.

a.

Lower flotation costs.

b.

Speed, or how long it takes to bring the issue to market.

c.

Flexibility, or the ability to adjust the bond's terms after it has been issued.

d.

All of the above.

e.

Only answers b and c above.

a.

Debenture.

b.

Mortgage bond.

c.

Subordinated debt.

d.

All of the above.

e.

None of the above.

a.

ADRs

b.

Yankee stock

c.

Euro stock

d.

Class A stock

e.

Preferred stock

a.

$67.81

b.

$22.49

c.

$58.15

d.

$31.00

e.

$43.97

a.

Variance; correlation coefficient.

b.

Standard deviation; correlation coefficient.

c.

Beta; variance.

d.

Coefficient of variation; beta.

e.

Beta; beta.

Problems:
31. The Amer Company has the following characteristics:

Sales: $1,000
Total Assets: $1,000
Total Debt/Total Assets: 35%
EBIT: $ 200
Tax rate: 40%
Interest rate on total debt: 4.57%

What is Amer's ROE? (5 points)

32. The Meryl Corporation's common stock currently is selling at $100 per share, which represents a P/E ratio of 10. If the firm has 100 shares of common stock outstanding, a return on equity of 20 percent, and a debt ratio of 60 percent, what is its return on total assets (ROA)? (5 points)
33. You deposited $1,000 in a savings account that pays 8 percent interest, compounded quarterly, planning to use it to finish your last year in college. Eighteen months later, you decide to go to the Rocky Mountains to become a ski instructor rather than continue in school, so you close out your account. How much money will you receive? (5 points)

34. Assume that you can invest to earn a stated annual rate of return of 12 percent, but where interest is compounded semiannually. If you make 20 consecutive semiannual deposits of $500 each, with the first deposit being made today, what will your balance be at the end of Year 20? (5 points)

35. In its first year of operations, 1999, the Gourmet Cheese Shoppe had earnings per share (EPS) of $0.26. Four years later, in 2003, EPS was up to $0.38, and 7 years after that, in 2010, EPS was up to $0.535. It appears that the first 4 years represented a supernormal growth situation and since then a more normal growth rate has been sustained. What are the rates of growth for the earlier period and for the later period? (5 points)

36. Treasury securities that mature in 6 years currently have an interest rate of 8.5%. Inflation is expected to be 5% each of the next three years and 6% each year after the third year. The maturity risk premium is estimated to be 0.1%(t - 1), where t is equal to the maturity of the bond (i.e., the maturity risk premium of a one-year bond is zero). The real risk-free rate is assumed to be constant over time. What is the real risk-free rate of interest? (5 points)

37. Assume that you wish to purchase a 20-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $40. If you require a 10 percent simple yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? (5 points)
38. Blow Glass Corporation has 100,000 shares of stock outstanding, each with a par value of $2.50 per share. Blow Glass also has another 400,000 shares of stock that are shelf registered. Blow Glass has retained earnings of $9,000,000 and additional paid-in capital of $1,000,000. What is Blow Glass's book value per share? (5 points)