1. Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.

a. $177,169

b. $196,854

c. $207,215

d. $217,576

e. $228,455

2. Preissle Company, wants to sell some 20-year, annual interest, $1,000 par value bonds. Its stock sells for $42 per share, and each bond would have 75 warrants attached to it, each exercisable into one share of stock at an exercise price of $47. The firm’s straight bonds yield 10%. Each warrant is expected to have a market value of $2.00 given that the stock sells for $42. What coupon interest rate must the company set on the bonds in order to sell the bonds-with-warrants at par?

a. 7.83%

b. 8.24%

c. 8.65%

d. 9.08%

e. 9.54%

3. You hold a portfolio consisting of a $5,000 investment in each of 20 different stocks. The portfolio beta is equal to 1.12. You have decided to sell a coal mining stock (b = 1.00) at $5,000 net and use the proceeds to buy a like amount of a mineral rights company stock (b = 2.00). What is the new beta of the portfolio?

a. 1.1139

b. 1.1700

c. 1.2311

d. 1.2927

e. 1.3573

4. Consider the information below for Postman Builders Inc. Suppose that the expected inflation rate and thus the inflation premium increase by 2.0 percentage points, and Postman acquires risky assets that increase its beta by the indicated percentage. What is the firm’s new required rate of return?

Beta: 1.50

Required return (rs) 10.20%

RPM: 6.00%

Percentage increase in beta: 20%

a. 14.00%

b. 14.70%

c. 15.44%

d. 16.21%

e. 17.02%

5. A local firm has debt worth $200,000, with a yield of 9%, and equity worth $300,000. It is growing at a 5% rate, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is the value of your firm’s tax shield, i.e., how much value does the use of debt add?

a. $92,571

b. $102,857

c. $113,143

d. $124,457

e. $136,903

6. In its negotiations with its investment bankers, Patton Electronics has reached an agreement whereby the investment bankers receive a smaller fee now (6% of gross proceeds versus their normal 10%) but also receive a 1-year option to purchase an additional 200,000 shares at $5.00 per share. Patton will go public by selling $5,000,000 of new common stock. The investment bankers expect to exercise the option and purchase the 200,000 shares in exactly one year, when the stock price is forecasted to be $6.50 per share. However, there is a chance that the stock price will actually be $12.00 per share one year from now. If the $12 price occurs, what would the present value of the entire underwriting compensation be? Assume that the investment banker’s required return on such arrangements is 15%, and ignore taxes.

a. $1,235,925

b. $1,300,973

c. $1,369,446

d. $1,441,522

e. $1,517,391

7. Convertible debentures for Kulik Corporation were issued at their $1,000 par value in 2012. At any time prior to maturity on February 1, 2032, a debenture holder can exchange a bond for 25 shares of common stock. What is the conversion price, Pc?

a. $40.00

b. $42.00

c. $44.10

d. $46.31

e. $48.62

8. The market value of Firm L’s debt is $200,000 and its yield is 9%. The firm’s equity has a market value of $300,000, its earnings are growing at a rate of 5%, and its tax rate is 40%. A similar firm with no debt has a cost of equity of 12%. Under the MM extension with growth, what is Firm L’s cost of equity?

a. 11.4%

b. 12.0%

c. 12.6%

d. 13.3%

e. 14.0%

9. Suppose the December CBOT Treasury bond futures contract has a quoted price of 80’07. What is the implied annual interest rate inherent in the futures contract?

a. 6.86%

b. 7.22%

c. 7.60%

d. 8.00%

e. 8.40%

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