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Corporate Finance - Corporate Finance Section 2

Avatto > > CFA Level 1 > > PRACTICE QUESTIONS > > Corporate Finance > > Corporate Finance Section 2

31. ACME Minerals has determined that it could issue at $750 a seven-year maturity bond that pays 9.5% coupon semi-annually with a face value of $1000. If the marginal tax rate applicable in the company is 30%, its aftertax cost of debt will most likely be:

  • Option : B
  • Explanation : FV = $1000; PMT = $47.5; N = 14; PV = $750, CPT I/Y I/Y = 7.7361%;
    YTM = 7.7361% * 2 = 15.47220%
    After-tax cost of debt: Rd (1 - t) = 15.47220% (1 – 0.30) = 10.8305%.
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32. Which of the following statements describe matrix pricing most accurately? Matrix pricing:

  • Option : C
  • Explanation : Debt-rating approach which is used to estimate the before-tax cost of debt is an example of the matrix pricing method. Matrix pricing method involves pricing on the basis of valuation-relevant characteristics.
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33. A company’s $100 par value preferred stock with a dividend rate of 15.0% per year is currently priced at $105.85 per share. The company's earnings are expected to grow at an annual rate of 3% for the foreseeable future. The cost of the company’s preferred stock is closest to:

  • Option : C
  • Explanation : Rp = Dp / Pp (or Dividend / Price) = ($100 * 0.15) / $105.85 = 14.17%.
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34. RBS Insurance Limited issued to retail investors a fixed-rate perpetual preferred stock four years ago at par value of $10 per share with a $2.85 dividend. If the company had issued the preferred stock today, the yield would be 8.5 percent. The current value of the stock is:

  • Option : B
  • Explanation : The company can issue preferred stock today at 8.5%. Pp = $2.85 / 0.085 = $33.53.
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35. MTI issued a noncallable, nonconvertible, fixed rate perpetual preferred stock five years ago. The stock was issued at $15 per share with a $1.25 dividend. If the company were to issue preferred stock today, the yield would be 8.75 percent. The stock’s current value is closest to:

  • Option : C
  • Explanation : Value of preferred stock = Pp = Dp / Rp P = 1.25 / 0.0875 = $14.29
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Corporate Finance Section 2