UNIVERSITY OF MINDANAO TAGUM COLLEGE

THIRD EXAMINATION
FINANCE 33
MARIA TERESA A. OZOA, CPA, MBA
TEST I:
Instruction: Write TRUE if the statement is correct and FALSE if it is incorrect.

1. Debentures are commonly issued by small companies. F

2. If a company has promised to pay interest on debt, it must pay the interest even if it shows no profit for the year,
or else it may go bankrupt. T
3. The fact that interest payments on debt are fixed is both an advantage and a drawback. T
4. Bonds may be recalled only if there is a specific call provision in the bond. T
5. Preferred stock dividends are a deductible expense for a corporation. F
6. If a company has preferred stock, it must pay the dividends on the preferred even if it shows no profit for the
year. F
7. Preferred stock dividends are a deductible expense for a corporation. F
8. Preferred stock generally carries a higher interest rate than debt. T
9. The capital structure that balances risk and return to maximize the value of the firm is the optimal capital
structure. T
10. EBIT EPS analysis is used to evaluate various capital structures in order to select that one that maximizes a
firms earnings per share. T

TEST II:
Instruction: Write the letter that corresponds to your answer.

1. The term debenture refers to

A. long-term, secured debt.
B. long-term, unsecured debt.
C. the after-acquired property clause.
D. a 100-page document covering the specific terms of the offering.

2. Which of the following bonds offers the most security to the bondholder?
A. First mortgage bonds C. Second mortgage bonds
C. Debenture bond D. Income bond

3. A debenture represents:
A. unsecured debt.
B. secured debt.
C. a long document covering every detail of a bond issue.
D. debt that is subordinate to preferred stock.

4. A serial bond repayment plan involves a

A. lump-sum payment at maturity.
B. conversion of debt to common stock.
C. an early redemption of all debt.
D. series of installments to retire the debt over the life of the issue.

5. A "subordinated debenture"
A. must be transferred with the bond to which it is attached.
B. is used mainly by railroad companies and usually specifies equipment as collateral.
C. entitles the bondholder to purchase shares of common stock at a specific price.
D. is an unsecured bond with an inferior claim on assets in the event of liquidation.

6. A call provision, which allows the corporation to force an early maturity on a bond issue, usually contains all but
which of the following characteristics?
A. Most bonds must be outstanding at least 5 years before being called.
B. After the call date, the call premium tends to decline over time.
C. The provision typically calls for debt conversion into common stock.
D. The corporation will pay a premium over par for the bonds
 7. A bond which has a yield to maturity greater than its coupon interest rate will sell for a price
A. below par.
B. at par.
C. above par.
D. what is equal to the face value of the bond plus the value of all interest payments.

8. Which is a characteristic of the price of preferred stock?

A. Since preferred stock dividends are fixed, they are tax deductible.
B. Because preferred stock has no maturity, the price analysis is similar to that of debt.
C. Preferred stock is valued as a perpetuity.
D. None of these.

9. Preferred stock has all but which of the following characteristics?

A. no stated maturity
B. a fixed dividend payment that carries a higher precedence than common stock dividends
C. the same binding contractual obligation as debt
D. preferred lacks the ownership privilege of common stock

10. The price of preferred stock may react strongly to a change in k p because
A. preferred stock may be cumulative.
B. preferred stock dividends have to be paid before common stock dividends.
C. there is no maturity date.
D. corporate recipients of preferred stock dividends may receive a partial tax exemption.

TEST III: PROBLEM

1. A ten-year bond pays 11% interest on a $1000 face value annually. If it currently sells for $1,195, what is its
approximate yield to maturity?
A. 9.33% B. 7.94% C. 12.66% D. 8.10%

2. What is the approximate yield to maturity for a seven-year bond that pays 11% interest on a $1000 face value
annually if the bond sells for $952
A. 10.5% B. 10.6% C. 11.5% D. 12.1%

3. A ten-year bond, with par value equals $1000, pays 10% annually. If similar bonds are currently yielding 6%
annually, what is the market value of the bond? Use semi-annual analysis.
A. $1000.00 B. $1127.50 C. $1297.85 D. $2549.85

4. An issue of preferred stock is paying an annual dividend of $5. The growth rate for the firm's common stock is
14%. What is the preferred stock price if the required rate of return is 11%?
A. $45.45 B. $41.67 C. $35.71 D. $ 30.50

5. The growth rate for the firm's common stock is 7%. The firm's preferred stock is paying an annual dividend of $5.
What is the preferred stock price if the required rate of return is 8%?
A. $5 B. $62.5 C. $500 D. $550

PART II:

Problem 1:
Gwyneth Corporation has expected earnings before interest and taxes (EBIT) of P 800,000 and interest costs of
P200,000. The firms equity and debt capitalization rates are 12.5% and 8%, respectively. Assume no corporate
income taxes.
1. What is the market value of the debt?
2. What is the market value of the equity?
3. What is the total market value of the firm?
4. What is the weighted average cost of capital?
Problem 2:
Gray House is issuing bonds paying $105 annually that will mature fifteen years from today. The bond is currently selling
for $980.
Calculate:
a) Coupon Rate = 10.5%
b) Current Yield = 10.71%
c) Yield To Maturity = 10.76%