1FINA2222Practice Questions for Final ExamSemester 2 2023Chapter 12Use the following information to answer the question(s) below.Consider the following information regarding corporate bonds:Rating AAA AA A BBB BB B CCCAverage Default Rate 0.0% 0.1% 0.2% 0.45% 2.2% 5.5% 12.2%Recession Default Rate 0.0% 1.0% 3.0% 3.0% 8.0% 16.0% 48.0%Average Beta 0.05 0.05 0.05 0.10 0.17 0.26 0.31CompanyMarketCapitalization($mm)TotalEnterpriseValue ($mm)EquityBetaDebtRatingTaggart Transcontinental $4500 8000 1.1 BBBRearden Metal $3800 7200 1.3 AAAWyatt Oil $2400 3800 0.9 ANielson Motors $1500 4400 1.75 BB1. Your estimate of the debt beta for Taggart Transcontinental would be:A) 0.05B) 0.10C) 0.17D) 1.00

Consider the following information regarding corporate bonds:Rating AAA AA A BBB BB B CCCAverage Default Rate 0.0% 0.1% 0.2% 0.45% 2.2% 5.5% 12.2%Recession Default Rate 0.0% 1.0% 3.0% 3.0% 8.0% 16.0% 48.0%Average Beta 0.05 0.05 0.05 0.10 0.17 0.26 0.31CompanyMarketCapitalization($mm)TotalEnterpriseValue ($mm)EquityBetaDebtRatingTaggart Transcontinental $4500 8000 1.1 BBBRearden Metal $3800 7200 1.3 AAAWyatt Oil $2400 3800 0.9 ANielson Motors $1500 4400 1.75 BB1. Your estimate of the debt beta for Taggart Transcontinental would be:A) 0.05B) 0.10C) 0.17D) 1.00

Consider the following information regarding corporate bonds and answer the following questions:RatingAAAAAABBBBBBCCCAverage Default Rate0.0%0.1%0.2%0.5%2.2%5.5%12.2%Recession Default Rate0.0%1.0%3.0%3.0%8.0%16.0%48.0%Average Beta0.050.050.050.100.170.260.31Smartline Corp plans to issue 10-year bonds that it believes will have a B rating. Suppose AAA bonds with the same maturity have a 5% yield. Assume that the market risk premium is 6% and the expected loss rate in the event of default on the bonds is 65%. What is the yield that these bonds will have to pay during recession times? (3 marks)Your firm is considering expanding its consumer division. You identify Negtle as a comparable firm. Suppose Negtle has a market capitalization of 120 billion and a beta of 1.27. Negtle also has $30 billion of BBB-rated debt outstanding, with an average yield of 4.3%. Estimate the cost of capital of your firm’s investment given the risk-free rate of 4% and a market risk-premium of 6% (3 marks).

Consider the following information regarding corporate bonds:RatingAAAAAABBBBBBCCCAverage Default Rate0.0%0.0%0.2%0.4%2.1%5.2%9.9%Recession Default Rate0.0%1.0%3.0%3.0%8.0%16.0%43.0%Average Beta0.050.050.050.100.17 0.26  0.31Perpetual Motors plans to issue 10-year bonds that it believes will have a BBB rating. Suppose AAA bonds with the same maturity have a 2% yield. Assume that the market risk premium is 5% and the expected loss rate in the event of default on the bonds is 65%. The yield that these bonds will have to pay during average economic times is closest to:A.4.50%B.3.50%C.4.00%D.2.50%

Use the following information to answer the question(s) below.SecurityTerm(years)Yield(%)Treasury 20 5.5%AAA Corporate207.0%BBB Corporate208.0%B Corporate209.6%The credit spread on AAA-rated corporate bonds is:a.2.6%.b.4.1%.c.1.5%.d.7%.e.1.0%.

Which of the following corporate debt ratings are ordered in terms of INCREASING market interest rate?a. AAA, A, BB, Cb. A, AAA, BB,C BB, C, A, AAAd. C, BB, A, AAAe. None of the above