Create successful ePaper yourself
Turn your PDF publications into a flip-book with our unique Google optimized e-Paper software.
d. 20,000 decks<br />
e. 25,000 decks<br />
4. Question : (TCO B) Firm L has debt with a market value of $200,000 and a yield of nine percent. The firm's<br />
equity has a market value of $300,000, its earnings are growing at a rate of five percent, and its tax rate is 40 percent.<br />
A similar firm with no debt has a cost of equity of 12 percent. Under the MM extension with growth, what is Firm L's<br />
cost of equity?<br />
a. 11.4%<br />
b. 12.0%<br />
c. 12.6%<br />
d. 13.3%<br />
e. 14.0%<br />
5. Question : (TCO A) Which of the following statements is CORRECT?<br />
a. If the underlying stock does not pay a dividend, it makes good economic sense to exercise a call option as<br />
soon as the stock’s price exceeds the strike price by about 10%, because this permits the option holder to<br />
lock in an immediate profit.<br />
b. Call options generally sell at a price less than their exercise value.<br />
c. If a stock becomes riskier (more volatile), call options on the stock are likely to decline in value.<br />
d. Call options generally sell at prices above their exercise value, but for an inthe-money option, the greater the<br />
exercise value in relation to the strike price, the lower the premium on the option is likely to be.<br />
e. Because of the put-call parity relationship, under equilibrium conditions a put option on a stock must sell at<br />
exactly the same price as a call option on the stock.<br />
6. Question : (TCO F) Suppose the December CBOT Treasury bond futures contract has a quoted price of 80-07.<br />
What is the implied annual interest rate inherent in the futures contract? Assume this contract is based on a 20 year<br />
Treasury bond with semi-annual interest payments. The face value of the bond is $1000, and the semi-annual coupon<br />
payments are $30. The annual coupon rate on the bonds is $60 per bond (or 6%). The futures contract has 100 bonds.<br />
a. 6.86%<br />
b. 7.22%<br />
c. 7.60%<br />
d. 8.00%<br />
e. 8.40%