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I.
Listed below is the current data for ABC Company:  
ABC Company Balance Sheet  
December 31, 20xx  
Assets  Liabilities and Equity  
Cash  $10,000,000  Accounts Payable  $20,000,000  
Accounts Receivable  250,000,000  Longterm debt  400,000,000  
Inventory  120,000,000  Common Stock ($10 par, 1,000,000 outstanding)  10,000,000  
Plant and Equipment  325,000,000  Paidin capital  90,000,000  
Retained Earnings  185,000,000  
Total  $705,000,000  Total  $705,000,000  
Construct a balance sheet after a $3 per share cash dividend. What is the total cash dividend? 
II.
What is the value of a common stock if:  
a. the firm’s earnings and dividends are growing annually at 10 percent, the current dividend is $1.32, and investors require a 15 percent return on investments in common stock? What is the rate of return if the price of the market price of the stock is $35? in common stock? What is the rate of return if the price of the market price of the stock is $35?  
b. you add risk to the analysis in Part a. and the firm’s beta coefficient is 0.8, the riskfree rate is 9 percent, and the return on the market is 15 percent?  
What is the riskadjusted return? Should the investor acquire the stock? Why or why not 
III.
A firm has the following preferred stocks outstanding: 
PFD A: $40 annual dividend; $1,000 par value; no maturity 
PFD B: $95 annual dividend; $1,000 par value; maturity after twentyfive years 
If comparable yields are 9 percent, what should be the price of each preferred stock? 
IV
A bond has the following terms:  
Principal amount  $1,000  
Semiannual interest  $50  
Maturity  10 years  
(When asked for a % yield, round yields to nearest tenth of a percent, such as 10.1 %.)  
a. What is the bond’s price if comparable debt yields 12%?  
b. What would be the price if comparable debt yields 12% and the bond matures after 5 years?  
c. What are the current yields and yields to maturity if a. and b.?  
d. What would be the bond’s price in a. if interest rates declined to 8%? What if the bond matures after 5 years?  
e. What are the current yields and yields to maturity in d.?  
f. What two generalizations may be drawn from the above price changes?  
V

VI
Given the information below, answer the following questions.  
A convertible bond has the following features:  
Principal  $1,000  
Maturity date  20 years  
Interest  $80 (8% coupon) paid yearly  
Call price  $1,050  
Exercise price  $65 a share  
a. The bond may be converted into how many shares?  
b. If comparable nonconvertible debt offered an annual yield of 12 percent, what would be the value of this bond as debt?  
c. If the stock were selling for $52, what is the value of the bond in terms of stock?  
d. Would you expect the bond to sell for its value as debt (i.e., the value determined in b) if the price of the stock were $52?  
e. If the price of the stock were $35, what would be the minimum price of the bond?  
f. What is the probability that the bond will be called when the price of the stock is $52?  
g. If the price of the stock rose to $73, what would happen to the price of the bond?  
h. If the price of the stock were $73, what would the investor receive if the bond were called? 