B.3.1.One reason that a financial manager may prefer to issue preferred stock rather than debt is because:
A.The cost of fixed debt is less expensive since it is tax-deductible even if a sinking fund is required to retire the debt
B.The preferred dividend is often cumulative,whereas interest payments are not
C.Payments to preferred stockholders are not considered fixed payments
D.In a legal sense,preferred stock is equity;therefore,dividend payments are not legal obligations
B.3.2.A company has recently purchased some stock of a competitor as part of a long-term plan to acquire the competitor.However,it is somewhat concerned that the market price of this stock could decrease over the short run.The company could hedge against the possible decline in the stock’s market price by
A.Purchasing a call option on that stock
B.Purchasing a put option on that stock
C.Selling a put option on that stock
D.Obtaining a warrant option on that stock
B.3.3.Which one of the following statements concerning debt instruments is correct?
A.The coupon rate and yield of an outstanding long-term bond will change over time as economic factors change.
B.A 25-year bond with a coupon rate of 9%and one year to maturity has more interest rate risk than a 10-year bond with a 9%coupon issued by the same firm with one year to maturity.
C.For long-term bonds,price sensitivity to a given change in interest rates is greater the longer the maturity of the bond.
D.A bond with one year to maturity would have more interest rate risk than a bond with 15 years to maturity.
B.3.4.Frasier Products has been growing at a rate of 10%per year and expects this growth to continue and produce earnings per share of$4.00 next year.The firm has a dividend payout ratio of 35%and a beta value of 1.25.If the risk-free rate is 7%and the return on the market is 15%,what is the expected current market value of Frasier’s common stock?
A.$14.00.
B.$16.00.
C.$20.00.
D.$28.00.
