if brewer corporation's bonds are currently yielding 8% in the marketplace why is the

firm's cost of debt lower?

-Interest is deductible for tax purposes

dividend growth rate for a stable firm can be estimated as

-Retention ratio * ROE

The after-tax cost of preferred stock of capital is:

-always equal to the before-tax cost

which one of the following characteristics distinguishes income bonds from other
bonds
-Income bonds pay interest

Today is December 31, 2018. The following information applies to Addison Airlines:

· After-tax, operating income for the year 2019 is expected to be P400 million.

· The company’s depreciation expense for the year 2019 is expected to be P80
million.

· The company’s capital expenditures for the year 2019 are expected to be P160
million.

· No change is expected in the company’s net operating working capital.

· The company’s free cash flow is expected to grow at a constant rate of 5

percent per year.

· The company’s cost of equity is 14 percent.

· The company’s WACC is 10 percent.

· The current market value of the company’s debt is P1.4 billion.

· The company currently has 125 million shares of stock outstanding.

Using the free cash flow valuation method, what should be the company’s stock
price today?

- P25

The measure of risk is called

-The market rate of return
Which one of the following statements is true when comparing bond financing
alternatives?
- A call provision…

Serial bonds are attractive to investors because Investors can choose the maturity
that suits thier financial needs
.
Risk free rate represent
the rate provided by long-term government securities

The disadvantage of debt… which of the following

- Inflation will make the debt payments higher (not sure, but most likely correct)

In general, it is more expensive for a company to finance with equity capital than with
debt capital because

-investors are exposed to greater risk with equity capital.

-Common stockholders represent

- Residual interest

Suppose a stock is not currently paying dividend, and its management has
announced that it will not pay a dividend for several years, but that it does not expect
to strat paying dividend sometimes in the future
- The Value of the stock can be found using DCF

which of the following statements is incorrect? SAGOT PLS

UPPPP
a convertible bond allows the bondholder to exchange the bond for a specified
number of shares of common stock.
sinking fund provisions usually require the issuer of a boond to retire a portion of the
bond issue each year
call provisions enable the issuer of a bond to redeem the bond under specified
terms, prior to the normal maturity date.
an original issue discount bond pays no annual interest, is offered at a price
significantly less than the face value, and offers compensation to investors in the
form of capital gains
WHICH OF THE FF CHARACTERISTICS DISTINGUISHES INCOME BONDS
FROM OTHER BONDS?
- INCOME BONDS PAY INTEREST…

Which of the ff statements is not correct abt rights granted to common stockholders?
-dividends….

The market price of a bond issued at a discount is the present value of its principal
amount at the market (effective) rate of interest

-Plus the present value of all future interest payments at the market (effective) rate of
interest.

Debentures are:
- Bonds secured…

Which statement is true?

-Preferred stockholders have priority over bondholders when it comes to the
payment of

A bond that pays no annual interest but is sold at a discount below the par value is
called:
- ZERO COUPON BOND

The market risk premium can be measured by market return less risk free rate

The market risk premium is the

-difference between the rate of return on the market portfolio and the risk-free
rate

The rate of return earned on a bond if it is held until maturity is its:

Yield-to-maturity.

Metrobank’s stock is currently trading at P25 per share. What is the expected stock
price five years from
A long-term contract under which a borrower agrees to make payments of interest
and principal on specific dates is called a: BOND

A bond that pays no annual interest but is sold at a discount below the par value is
called
- a zero coupon bond

Weighted average cost of capital is the combined cost of capital using a capital mix.
The capital mix should be measured in terms of:
-Market value of debt and equity

Debentures are:

-Bonds secured by the full faith and credit of the issuing firm.

Cost of capital is the

-cost the company is charged by investment bankers who handle the issuance
of equity or long-term debt securities.

Since preferred stock dividends are fixed, valuing preferred stock is roughly
equivalent to valuing:

-a zero growth common stock

Preferred stock is similar to a bond because:

-all of these

If a bond's value rises above its par value during its life, interest rates have:

- Gone down.
From the viewpoint of the investor, which of the following securities provides the
least risk
- Mortgage bond

A portfolio will a usually contain

- Two or more assets

when calculating the cost of capital the cost assigned to retained earnings should be
- Lower than

Which of the following statements about cost of capital is incorrect?

- If a company's tax rate increases, then, all else equal, its weighted average
cost of capital will increase.

The pre-tax cost of capital is higher than the after-tax cost of capital because
-interest expense is deductible for tax purposes.

Which of the following statements best describes how a corporation determines its
cost of capital?
The cost is derived from determining the cost of each component in a firm's
capital structure.

The cost of debt:

- Rises as the debt-to-total capital ratio rises

Heavy Metal Corp. is a steel manufacturer that finances its operations with 40
percent debt, 10 percent preferred stock, and 50 percent equity. The interest rate on
the company’s debt is 11 percent. The preferred stock pays an annual dividend of P2
and sells for P20 a share. The company’s common stock trades at P30 a share, and
its current dividend of P2 a share is expected to grow at a constant rate of 8 percent
per year. The flotation cost of external equity is 15 percent of the peso amount
issued, while the flotation cost on preferred stock is 10 percent. The company
estimates that its WACC is 12.30 percent. Assume that the firm will not have enough
retained earnings to fund the equity portion of its capital budget. What is the
company’s tax rate?

- 32.86%
Suppose a stock is not currently paying dividends, and its management has
announced that it will not pay a dividend for several years, but that it does expect to
start paying dividends sometime in the future. Under these conditions, which of the
following statements is most correct?

-The value of the stock can be found using DCF procedures by finding the
present value of expected future dividends accounting for their timing and
amount.

10. The pre-tax cost of capital is higher than the after-tax cost of capital
because

a. interest expense is deductible for tax purposes.

Serial bonds are attractive to investors because

-Investors can choose the maturity that suits their financial needs

From the viewpoint of the investor, which of the following securities provides the
least risk?

Mortgage bond

Optimal capital structure requires selecting the best mix of

-preferred stock, common stock, and long-term debt.

A stock with a beta of zero would be expected to have a rate of return equal to
- risk free rate]

If a bond's value rises above its par value during its life, interest rates have:

Gone down.

The factor affecting a firm’s cost of capital that the firm cannot control is: income tax
rate hehe. <3 Salamat! PENGE PO SAGOT. AKO RIN PO :)
In general, it is more expensive for a company to finance with equity capital than with
debt capital because
- Equity capital…

Capital structure is the:

- Mix of debt & equity the firm uses to finance operations and asset purchases

The theory underlying the cost of capital is primarily concerned with the cost of
- Long-term funds and new funds.

-
Capital structure decisions involve determining the proportions of financing from
- debt or equity. (?)

- 18. The market price of a bond issued at a discount is the present value of its
principal amount at the market (effective) rate of interest a. plus the present
value of all future interest payments at the market (effective) rate of

A general rule in choosing among alternative investments is the greater the risk
taken, the
Group of answer choices

- greater the return required.

Security X has an expected rate of return of 0.11 and a beta of 1.5. The risk-
free rate is 0.05 and the market expected rate of return is 0.09. According to
the Capital Asset Pricing Model, this security is
- Fairly priced

When establishing their optimal capital structure, firms should strive to:
- minimize the weighted average cost of capital

The three elements needed to estimate the cost of equity capital for use in
determining a firm's weighted-average cost of capital are
Current dividends per share, expected growth rate in dividends per share, and
current market price per share of common stock.

Which one of the following characteristics distinguishes income bonds from

other bonds?
-Income bonds pay interest only if the issuing company has earned the
interest.
The value of the stock:
Increases as the dividend growth rate increases and increases as the required
rate of return decreases

Which of the following will increase a company’s retained earnings break point? An

increase in its net income.

Cost of capital is

a. The amount the company must pay for its plant assets.

b. The dividends a company must pay on its equity securities.

c. The cost the company must incur to obtain its capital resources.

d. The cost the company is charged by investment bankers who

handle the issuance of equity or long-term debt securities.

Which one of the following statements is correct when comparing bond

financing alternatives?

A call provision… to the investor

Common stock may be valued using the following, except:

None of these

Which of the following regarding the weighted-average cost of capital is true?

-????

Which of the following expresses the relationship between risk and

return?

Direct relationship

Hart Mountain Company has recently discovered a new type of kitty litter that is
extremely absorbent. It is expected that the firm will experience (beginning now) an
unusually high growth rate (20 percent) during the period (3 years) it has exclusive
rights to the property where the raw material used to make this kitty litter is found.
How-ever, beginning with the fourth year the firm’s competition will have access to
the material, and from that time on the firm will achieve a normal growth rate of 8
percent annually. During the rapid growth period, the firm’s dividend payout ratio will
be relatively low (20 percent) in order to conserve funds for reinvestment. However,
the decrease in growth in the fourth year will be accompanied by an increase in the
dividend payout to 50 percent. Last year’s earnings were D0 = P2.00 per share, and
the firm’s required return is 10 percent. What should be the current price of the
common stock?

- P71.54

The market risk premium is measured by:

Market return less risk-free rate

The difference between the required rate of return on a given risky

investment and that on a riskless investment with the same expected
return is the

Risk premium

Arizona Rock, an all-equity firm, currently has a beta of 1.25. The risk-free
rate, kRF, is 7 percent and kM is 14 percent. Suppose the firm sells 10
percent of its assets with beta equal to 1.25 and purchases the same
proportion of new assets with a beta of 1.1. What will be the firm’s new overall
required rate of return, and what rate of return must the new assets produce
in order to leave the stock price unchanged? 15.645%; 14.700%

World Wide Interlink Corp. has decided to undertake a large project.

Consequently, there is a need for additional funds. The financial manager
plans to issue preferred stock with an annual dividend of $5 per share. The
stock will have a par value of $30. If investors' required rate of return on this
investment is currently 20%, what should the preferred stock's market value
be?
-P25
 The Dumaguete Co. has an equity cost of capital of 17%. The debt to equity
ratio is 1.5 and a cost of debt is 11%. What is the weighted average cost of
capital of the firm? (Assume a tax rate of 33%)

- 13.40%

The component of the risk-adjusted discount rate that compensates the

investor for holding risky assets is the:
-risk-premium

An analyst is trying to estimate the intrinsic value of the stock of ATR Kim Eng. The
analyst estimates that ATR Kim Eng’s free cash flow during the next year will be P25
million. The analyst also estimates that the company’s free cash flow will increase at
a constant rate of 7% a year and that the company’s WACC is 10%. ATR Kim Eng
has P200 million of long-term debt and preferred stock and 30 million outstanding
shares of common stock. In the Philippine Stock Exchange, ATR Kim Eng’s common
stock is traded at P30.00. What can be said of the stock price’s condition?

- 21.11 (undervalued)

The rate of return earned on a bond if it is held until maturity is its:

- yield-to-maturity.

An investor is contemplating the purchase of common stock at the beginning of this year and
to hold the stock for one year. The investor expects the year-end dividend to be $2.00 and
expects a year-end price for the stock of $40. If this investor's required rate of return is 10%,
then the value of the stock to this investor is
-P38.18

if an individual stock's beta is higher than 1.0 that stock is

-riskier than the market

When calculating the cost of capital, the cost assigned to retained earnings should
be

- Lower than the cost of external common equity

World Wide Interlink Corp. has decided to undertake a large project. Consequently,
there is a need for additional funds. The financial manager plans to issue preferred
stock with an annual dividend of P5 per share. The stock will have a par value of
P30. If investors’ required rate of return on this investment is currently 20%, what
should the preferred stock’s market value be?
-20

Dry Seal plans to issue bonds to expand operations. The bonds will have a par value
of P1,000, a 10-year maturity, and a coupon interest rate of 9%, paid semiannually.
Current market conditions are such that the bonds will be sold to net P937.79. What
is the yield-to-maturity of these bonds? 8%

You are considering buying common stock in Grow On, Inc. The firm yesterday paid a dividend of
P7.80. You have projected that dividends will grow at a rate of 9.0% per year indefinitely. If you want
an annual return of 24.0%, what is the most you should pay for the stock now?

- P56.68