Consider the following zero-coupon yields on default free securities: 2345 5.50%
ID: 2698409 • Letter: C
Question
Consider the following zero-coupon yields on default free securities:
2345
5.50% 5.20% 5.00% 4.80%
The forward rate for year 3 is closest to: A) 4.5%
B) 5.0%
C) 5.2%
D) 4.6%
Von Bora Corporation (VBC) is expected to pay a $2.00 dividend at the end of this year. If you expect VBCʹs dividend to grow by 5% per year forever and VBCʹs equity cost of capital is 13%, then the value of a share of VBS stock is closest to:
A) $25.00
B) $40.00 C) $15.40 D) $11.10
Von Bora Corporation is expected pay a dividend of $1.40 per share at the end of this year and a $1.50 per share at the end of the second year. You expect Von Boraʹs stock price to be $25.00 at the end of two years. Von Boraʹs equity cost of capital is 10%. The price you would be willing to pay today for a share of Von Bora stock, if you plan to hold the stock for two years is closest to:
A) $23.15 B) $20.65 C) $21.95 D) $21.90
Suppose that Texas Trucking (TT) has earnings per share of $3.45 and EBITDA of $45 million. TT also has 5 million shares outstanding and debt o $150 million (net of cash). You believe that Oklahoma Logistics and Transport (OLT) is comparable to TT in terms of its underlying business, but OLT has no debt. OLT has a P/E of 12.5 and an enterprise value to EBITDA multiple of 7. Based upon the price earnings multiple, the value of a share of Texas Trucking is closest to:
A) $49.30 B) $43.10 C) $24.15 D) $27.60
Maturity (years)
1
Zero-Coupon YTM
5.80%
Dr.Zeng 3
Hamilton Company has 20-year, 8% quarterly coupon bonds that currently sell for $686.86. The company’s tax rate is 40%. What is the firm’s nominal component cost of debt?
A) 3.05%
B)7.32%
C)7.36% D) 12.20%
Grateway Inc. has a WACC of 11.5%. Its target capital structure is 55% equity and 45% debt. The company has sufficient retained earnings to fund the equity portion of its capital budget. The before-tax cost of debt is 9%, and the company’s tax rate is 30%. If the expected dividend next period (D1) is $5 and the current stock price is $45, what is the company’s growth rate?
A) 2.68% B) 3.44% C) 4.64% D) 6.75%.
Maturity (years)
1
Zero-Coupon YTM
5.80%
Explanation / Answer
1. C 5.2% (1.055*1.05*1.05)^(1/3) 2. A 25.00 (2/(.13-.08) 3. $23.15 (1.40/1.10 +1.50/1.10^2 +25/1.10^2) 4. C) 5 B). 7.32% 6. C) 4.64%