1. A firm’s weighted average cost of capital will always remain constant unless a firm retires some of its debt. Is this true or false? Explain why.
2. The real risk-free rate of interest, r*, is 4%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next three years, after which time inflation is expected to remain at a constant rate of 5% per year. The maturity risk premium is equal to 0.1(t – 1)%, where t is the bond’s maturity. The liquidity and default risk premia on 10-year corporate bonds are 2.0% and 2.5%, respectively. What is the yield to maturity on a 10-year corporate bond?
8.1%
8.9%
9.0%
12.1%
13.5%
3. Swanson Company’s long-run constant dividend growth is expected to be 10%. If the required return (rs) for Swanson is 15%, and the most recent dividend paid (D0) was $2.00, what is the most likely stock price one year from now?
$48.40
$40.00
$38.60
$35.00
None of the answers are correct.