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accounting quiz

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Question;Multiple Choice;Conceptual;[i]. Which of;the following is not considered a capital component for the purpose of;calculating the weighted average cost of capital (WACC) as it applies to;capital budgeting?;a.Long-term;debt.;b.Common;stock.;c.Accounts;payable and accruals.;d.Preferred;stock.;[ii]. For a;typical firm with a given capital structure, which of the following is;correct? (Note: All rates are after;taxes.);a.kd;ke > ks > WACC.;b.ks;ke > kd > WACC.;c.WACC >;ke > ks > kd.;d.ke;ks > WACC > kd.;e.None of;the statements above is correct.;[iii]. Which of;the following statements is most correct?;a.If a;company?s tax rate increases but the yield to maturity of its noncallable bonds;remains the same, the company?s marginal cost of debt capital used to calculate;its weighted average cost of capital will fall.;b.All else;equal, an increase in a company?s stock price will increase the marginal cost;of retained earnings, ks.;c.All else;equal, an increase in a company?s stock price will increase the marginal cost;of issuing new common equity, ke.;d.Statements;a and b are correct.;e.Statements;b and c are correct.;[iv]. Which of;the following statements is most correct?;a.Since the;money is readily available, the cost of retained earnings is usually a lot;cheaper than the cost of debt financing.;b.When;calculating the cost of preferred stock, a company needs to adjust for taxes;because preferred stock dividends are tax deductible.;c.When;calculating the cost of debt, a company needs to adjust for taxes, because;interest payments are tax deductible.;d.Statements;a and b are correct.;e.Statements;b and c are correct.;[v]. Which of;the following factors in the discounted cash flow (DCF) approach to estimating;the cost of common equity is the least difficult to estimate?;a.Expected;growth rate, g.;b.Dividend;yield, D1/P0.;c.Required;return, ks.;d.Expected rate of return,.;e.All of the;above are equally difficult to estimate.;Answer: d;[vi]. Which of;the following statements is most correct?;a.The WACC;measures the after-tax cost of capital.;b.The WACC;measures the marginal cost of capital.;c.There is;no cost associated with using retained earnings.;d.Statements;a and b are correct.;e.All of the;statements above are correct.;[vii]. Which of;the following statements about the cost of capital is incorrect?;a.A;company?s target capital structure affects its weighted average cost of;capital.;b.Weighted;average cost of capital calculations should be based on the after-tax costs of;all the individual capital components.;c.If a;company?s tax rate increases, then, all else equal, its weighted average cost;of capital will increase.;d.Flotation;costs can increase the weighted average cost of capital.;e.An;increase in the risk-free rate is likely to increase the marginal costs of both;debt and equity financing.;[viii].Campbell;Co. is trying to estimate its weighted average cost of capital (WACC). Which of the following statements is most;correct?;a.The;after-tax cost of debt is generally cheaper than the after-tax cost of;preferred stock.;b.Since;retained earnings are readily available, the cost of retained earnings is generally;lower than the cost of debt.;c.If;the company?s beta increases, this will increase the cost of equity financing;even if the company is able to rely on only retained earnings for its equity;financing.;d.Statements;a and b are correct.;e.Statements;a and c are correct.;[ix]. Wyden;Brothers has no retained earnings. The;company uses the CAPM to calculate the cost of equity capital. The company?s capital structure consists of;common stock, preferred stock, and debt.;Which of the following events will reduce the company?s WACC?;a.A;reduction in the market risk premium.;b.An;increase in the flotation costs associated with issuing new common stock.;c.An;increase in the company?s beta.;d.An;increase in expected inflation.;e.An;increase in the flotation costs associated with issuing preferred stock.;Answer: c;[x]. Which of;the following statements is most correct?;a.The WACC is a measure of the before-tax cost of;capital.;b.Typically the after-tax cost of debt financing exceeds the after-tax;cost of equity financing.;c.The WACC measures the marginal after-tax cost;of capital.;d.Statements a and b are correct.;e.Statements b and c are correct.;Answer: a;[xi]. A company;has a capital structure that consists of 50 percent debt and 50 percent;equity. Which of the following;statements is most correct?;a.The cost of equity financing is greater than or equal to the cost of;debt financing.;b.The WACC exceeds the cost of equity financing.;c.The WACC is calculated on a before-tax basis.;d.The WACC represents the cost of capital based on historical;averages. In that sense, it does not represent the marginal cost of capital.;e.The cost of retained earnings exceeds the cost of issuing new common;stock.;Answer: e;[xii]. A firm;estimates that its proposed capital budget will force it to issue new common;stock, which has a greater cost than the cost of retained earnings. The firm, however, would like to avoid;issuing costly new common stock. Which;of the following steps would mitigate the firm?s need to raise new common;stock?;a.Increasing the company?s dividend payout ratio;for the upcoming year.;b.Reducing the company?s debt ratio for the;upcoming year.;c.Increasing the company?s proposed capital;budget.;d.All of the statements above are correct.;e.;None of the;statements above is correct.;[xiii].Dick Boe;Enterprises, an all-equity firm, has a corpor?ate beta coefficient of 1.5. The financial manager is evaluating a proj?ect;with an expected return of 21 percent, before any risk adjustment. The risk-free rate is 10 percent, and the;required rate of return on the market is 16 percent. The project being evaluated is risk?ier than;Boe?s average project, in terms of both beta risk and total risk. Which of the following statements is most;correct?;a.The;project should be accepted since its expected return (before risk adjustment);is greater than its required return.;b.The;project should be rejected since its expected return (before risk adjustment);is less than its re?quired return.;c.The;accept/reject decision depends on the risk-adjustment policy of the firm. If the firm?s policy were to reduce a;riskier-than-average project?s expected return by 1 percentage point, then the;project should be accepted.;d.Riskier-than-average;projects should have their expected returns increased to reflect their added;riskiness. Clearly, this would make the;project acceptable regardless of the amount of the adjustment.;e.Projects;should be evaluated on the basis of their total risk alone. Thus, there is;insuffi?cient information in the problem to make an accept/reject decision.;[xiv]. A company;estimates that an average-risk project has a WACC of 10 percent, a;below-average risk project has a WACC of 8 percent, and an above-average risk;project has a WACC of 12 percent. Which;of the following independent projects should the company accept?;a.Project A;has average risk and a return of 9 percent.;b.Project B;has below-average risk and a return of 8.5 percent.;c.Project C;has above-average risk and a return of 11 percent.;d.All of the;projects above should be accepted.;e.None of;the projects above should be accepted.;[xv]. Conglomerate;Inc. consists of 2 divisions of equal size, and Conglomerate is 100 percent;equity financed. Division A?s cost of;equity capital is 9.8 percent, while Division B?s cost of equity capital is 14;percent. Conglomerate?s composite WACC;is 11.9 percent. Assume that all;Division A projects have the same risk and that all Division B projects have;the same risk. However, the projects in;Division A are not the same risk as those in Division B. Which of the following projects should;Conglomerate accept?;a.Division A project with an 11 percent return.;b.Division B;project with a 12 percent return.;c.Division B;project with a 13 percent return.;d.Statements;a and c are correct.;e.Statements;b and d are correct.;[xvi]. Which of;the following will increase a company?s retained earnings break point?;a.An;increase in its net income.;b.An;increase in its dividend payout.;c.An increase;in the amount of equity in its capital structure.;d.An;increase in its capital budget.;e.All of the;statements above are correct.;[xvii].Which of;the following actions will increase the retained earnings break point?;a.An;increase in the dividend payout ratio.;b.An;increase in the debt ratio.;c.An;increase in the capital budget.;d.An;increase in flotation costs.;e.All;of the statements above are correct.;[xviii]. Which;of the following statements is most correct?;a.Since debt;capital is riskier than equity capital, the cost of debt is always greater than;the WACC.;b.Because of;the risk of bankruptcy, the cost of debt capital is always higher than the cost;of equity capital.;c.If a;company assigns the same cost of capital to all of its projects regardless of;the project?s risk, then it follows that the company will generally reject too;many safe projects and accept too many risky projects.;d.Because;you are able to avoid flotation costs, the cost of retained earnings is;generally lower than the cost of debt.;e.Higher;flotation costs tend to reduce the cost of equity capital.;[xix]. Which of the;following statements is most correct?;a.Higher;flotation costs reduce investor returns, and therefore reduce a company?s WACC.;b.The WACC;represents the historical cost of capital and is usually calculated on a;before-tax basis.;c.The cost;of retained earnings is zero because retained earnings are readily available;and do not require the payment of flotation costs.;d.All of the;statements above are correct.;e.None of;the statements above is correct.;[xx]. Which of;the following statements is most correct?;a.In the;weighted average cost of capital calculation, we must adjust the cost of;preferred stock for the tax exclusion of 70 percent of dividend income.;b.We ideally;would like to use historical measures of the component costs from prior;financings in estimating the appropriate weighted average cost of capital.;c.The cost;of a new equity issuance (ke) could possibly be lower than the cost;of retained earnings (ks) if the market risk premium and risk-free;rate decline by a substantial amount.;d.Statements;b and c are correct.;e.None of;the statements above is correct.;[xxi]. Which of;the following statements is most correct?;a.The cost;of retained earnings is the rate of return stockholders require on a firm?s;common stock.;b.The;component cost of preferred stock is expressed as kp(1 - T), because;preferred stock dividends are treated as fixed charges, similar to the;treatment of debt interest.;c.The;bond-yield-plus-risk-premium approach to estimating a firm?s cost of common;equity involves adding a subjectively determined risk premium to the market;risk-free bond rate.;d.The higher;the firm?s flotation cost for new common stock, the more likely the firm is to;use preferred stock, which has no flotation cost.;e.None of;the statements above is correct.;[xxii].Which of;the following statements is correct?;a.The cost;of capital used to evaluate a project should be the cost of the specific type;of financing used to fund that project.;b.The cost;of debt used to calculate the weighted average cost of capital is based on an;average of the cost of debt already issued by the firm and the cost of new;debt.;c.One;problem with the CAPM approach in estimating the cost of equity capital is that;if a firm?s stockholders are, in fact, not well diversified, beta may be a poor;measure of the firm?s true investment risk.;d.The;bond-yield-plus-risk-premium approach is the most sophisticated and objective;method of estimating a firm?s cost of equity capital.;e.The cost;of equity capital is generally easier to measure than the cost of debt, which;varies daily with interest rates, or the cost of preferred stock since;preferred stock is issued infrequently.;[xxiii]. Which of;the following statements is correct?;a.Although;some methods of estimating the cost of equity capital encounter severe;difficulties, the CAPM is a simple and reliable model that provides great;accuracy and consistency in estimating the cost of equity capital.;b.The DCF;model is preferred over other models to estimate the cost of equity because of;the ease with which a firm?s growth rate is obtained.;c.The;bond-yield-plus-risk-premium approach to estimating the cost of equity is not;always accurate but its advantages are that it is a standardized and objective;model.;d.Depreciation-generated;funds are an additional source of capital and, in fact, represent the largest;single source of funds for some firms.;e.None of;the statements above is correct.;[xxiv].In applying;the CAPM to estimate the cost of equity capital, which of the following;elements is not subject to dispute or controversy?;a.The;expected rate of return on the market, kM.;b.The;stock?s beta coefficient, bi.;c.The;risk-free rate, kRF.;d.The market;risk premium (RPM).;e.All of the;above are subject to dispute.;[xxv]. Which of;the following statements is most correct?;a.Beta;measures market risk, but if a firm?s stockholders are not well diversified;beta may not accurately measure stand-alone risk.;b.If the;calculated beta underestimates the firm?s true investment risk, then the CAPM;method will overestimate ks.;c.The;discounted cash flow method of estimating the cost of equity can?t be used;unless the growth component, g, is constant during the analysis period.;d.An;advantage shared by both the DCF and CAPM methods of estimating the cost of;equity capital, is that they yield precise estimates and require little or no;judgement.;e.None of;the statements above is correct.;[xxvi].Which of;the following statements is most correct?;a.The;weighted average cost of capital for a given capital budget level is a weighted;average of the marginal cost of each relevant capital component that makes up;the firm?s target capital structure.;b.The;weighted average cost of capital is calculated on a before-tax basis.;c.An;increase in the risk-free rate is likely to increase the marginal costs of both;debt and equity financing.;d.Statements;a and c are correct.;e.All of the;statements above are correct.;[xxvii]. Which of;the following statements is correct?;a.The WACC;should include only after-tax component costs.;Therefore, the required rates of return (or ?market rates?) on debt;preferred, and common equity (kd, kp, and ks);must be adjusted to an after-tax basis before they are used in the WACC;equation.;b.The cost;of retained earnings is generally higher than the cost of new common stock.;c.Preferred;stock is riskier to investors than is debt. Therefore, if someone told you that;the market rates showed kd>kp for a given;company, that person must have made a mistake.;d.If a;company with a debt ratio of 50 percent were suddenly exempted from all future;income taxes, then, all other things held constant, this would cause its WACC to;increase.;e.None of;the statements above is correct.;[xxviii]. Which of;the following statements is most correct?;a.An;increase in flotation costs incurred in selling new stock will increase the;cost of retained earnings.;b.The WACC;should include only after-tax component costs.;Therefore, the required rates of return (or ?market rates?) on debt;preferred, and common equity (kd, kp, and ks);must be adjusted to an after-tax basis before they are used in the WACC;equation.;c.An;increase in a firm?s corporate tax rate will increase the firm?s cost of debt;capital, as long as the yield to maturity on the company?s bonds remains;constant or falls.;d.Statements;b and c are correct.;e.None of;the statements above is correct.;[xxix].Which of;the following statements is most correct?;a.Since;stockholders do not generally pay corporate taxes, corporations should focus on;before-tax cash flows when calculating the weighted average cost of capital;(WACC).;b.All else;equal, an increase in flotation costs will increase the cost of retained;earnings.;c.When;calculating the weighted average cost of capital, firms should rely on;historical costs rather than marginal costs of capital.;d.Statements;a and b are correct.;e.None of;the statements above is correct.;[xxx]. Which of;the following statements is correct?;a.Because we;often need to make comparisons among firms that are in different income tax;brackets, it is best to calculate the WACC on a before-tax basis.;b.If a firm;has been suffering accounting losses and is expected to continue suffering such;losses, and therefore its tax rate is zero, it is possible that its after-tax;component cost of preferred stock as used to calculate the WACC will be less;than its after-tax component cost of debt.;c.Normally;the cost of external equity raised by issuing new common stock is above the;cost of retained earnings. Moreover, the;higher the growth rate is relative to the dividend yield, the more the cost of;external equity will exceed the cost of retained earnings.;d.The lower;a company?s tax rate, the greater the advantage of using debt in terms of;lowering its WACC.;e.None of;the statements above is correct.;\;[xxxi].Kemp;Consolidated has two divisions of equal size: a computer division and a;restaurant division. Stand-alone restaurant companies typically;have a cost of capital of 8 percent, while stand-alone computer companies;typically have a 12 percent cost of capital.Kemp?s restaurant division has;the same risk as a typical restaurant company, and its computer division has;the same risk as a typical computer company.Consequently, Kemp estimates;that its composite corporate cost of capital is 10 percent. The company?s;consultant has suggested that they use an 8 percent hurdle rate for the;restaurant division and a 12 percent hurdle rate for the computer division.However, Kemp has chosen to;ignore its consultant, and instead, chooses to assign a 10 percent cost of;capital to all projects in both divisions.;Which of the following statements is most correct?;a.While;Kemp?s decision to not risk adjust its cost of capital will lead it to accept;more projects in its computer division and fewer projects in its restaurant;division, this should not affect the overall value of the company.;b.Kemp?s;decision to not risk adjust means that it is effectively subsidizing its;restaurant division, which means that its restaurant division is likely to;become a larger part of the overall company over time.;c.Kemp?s;decision to not risk adjust means that the company will accept too many;projects in the computer business and too few projects in the restaurant;business. This will lead to a reduction;in the overall value of the company.;d.Statements;a and b are correct.;e.Statements;b and c are correct.;\al;[xxxii]. The;Barabas Company has an equal amount of low-risk projects, average-risk;projects, and high-risk projects.;Barabas estimates that the overall company?s WACC is 12 percent. This is also the correct cost of capital for;the company?s average-risk projects. The;company?s CFO argues that, even though the company?s projects have different;risks, the cost of capital for each project should be the same because the;company obtains its capital from the same sources. If the company follows the CFO?s advice, what;is likely to happen over time?;a.The;company will take on too many low-risk projects and reject too many high-risk;projects.;b.The;company will take on too many high-risk projects and reject too many low-risk;projects.;c.Things;will generally even out over time, and therefore, the risk of the firm should;remain constant over time.;d.Statements;a and c are correct.;e.Statements;b and c are correct.;\;[xxxiii]. If a;company uses the same cost of capital for evaluating all projects, which of the;following results is likely?;a.Accepting;poor, high-risk projects.;b.Rejecting;good, low-risk projects.;c.Accepting;only good, low-risk projects.;d.Accepting;no projects.;e.Answers a;and b are corre;[xxxiv]. If a;typical U.S.;company uses the same cost of capital to evaluate all projects, the firm will;most likely become;a.Riskier;over time, and its value will decline.;b.Riskier;over time, and its value will rise.;c.Less risky;over time, and its value will rise.;d.Less risky;over time, and its value will decline.;e.There is;no reason to expect its risk position or value to change over time as a result;of its use of a single discount rate.;\;[xxxv].Pearson;Plastics has two equal-sized divisions, Division A and Division B. The company;estimates that if the divisions operated as independent companies Division A;would have a cost of capital of 8 percent, while Division B would have a cost;of capital of 12 percent. Since the two;divisions are the same size, Pearson?s composite weighted average cost of;capital (WACC) is 10 percent. In the;past, Pearson has assigned separate hurdle rates to each division based on;their relative risk. Now, however;Pearson has chosen to use the corporate WACC, which is currently 10 percent;for both divisions. Which of the;following is likely to occur as a result of this change? Assume that this change is likely to have no;effect on the average risk of each division and market conditions remain;unchanged.;a.Over time;the overall risk of the company will increase.;b.Over time;Division B will become a larger part of the overall company.;c.Over time;the company?s corporate WACC will increase.;d.Statements;a and c are correct.;e.All of the;statements above are correct.;\ Answer: e;[xxxvi]. Smith;Electric Co. and Ferdinand Water Co. are the same size and have the same;capital structure. Smith Electric Co. is;riskier than Ferdinand and has a WACC of 12 percent. Ferdinand Water Co. is safer than Smith and;has a WACC of 10 percent. Ferdinand;Water Co. is considering Project X. Project X has an IRR of 10.5 percent, and;has the same risk as a typical project undertaken by Ferdinand Water Co. Smith Electric Co. is considering Project;Y. Project Y has an IRR of 11.5 percent;and has the same risk as a typical project undertaken by Smith Electric Co.;Now assume that Smith Electric Co. and Ferdinand;Water Co. merge to form a new company, Leeds United Utilities. The merger has no impact on the cash flows or;risk of either Project X or Project Y.;Leeds United Utilities? CFO is trying to establish hurdle rates for the;new company?s projects that accurately reflect the risk of each project. (That;is, he is using risk-adjusted hurdle rates.);Which of the following statements is most correct?;a.Leeds United Utilities? weighted average cost;of capital is 11 percent.;b.Project;X has a positive NPV.;c.After;the merger, Leeds United Utilities should select Project X and reject Project;Y.;d.Statements;a and b are correct.;e.All;of the statements above are correct.;[xxxvii]. Which of;the following statements is correct?;a.A;relatively risky future cash outflow should be evaluated using a relatively low;discount rate.;b.If a;firm?s managers want to maximize the value of the stock, they should;concentrate exclusively on projects? market, or beta, risk.;c.If a firm;evaluates all projects using the same cost of capital, then the riskiness of;the firm as measured by its beta will probably decline over time.;d.If a firm;has a beta that is less than 1.0, say 0.9, this would suggest that its assets?;returns are negatively correlated with the returns of most other firms? assets.;e.None of;the statements above is correct.;[xxxviii].Which of;the following statements is most correct?;a.Suppose a;firm is losing money and thus, is not paying taxes, and that this situation is;expected to persist for a few years whether or not the firm uses debt;financing. Then the firm?s after-tax;cost of debt will equal its before-tax cost of debt.;b.The;component cost of preferred stock is expressed as kp(1 - T), because;preferred stock dividends are treated as fixed charges, similar to the;treatment of debt interest.;c.The reason;that a cost is assigned to retained earnings is because these funds are already;earning a return in the business, the reason does not;involve the opportunity cost principle.;d.The;bond-yield-plus-risk-premium approach to estimating a firm?s cost of common;equity involves adding a subjectively determined risk premium to the market;risk-free bond rate.;e.None of;the statements above is correct.;Multiple Choice;Problems;[xxxix]. Your;company?s stock sells for $50 per share, its last dividend (D0) was;$2.00, its growth rate is a constant 5 percent, and the company will incur a;flotation cost of 15 percent if it sells new common stock. What is the firm?s cost of new equity, ke?;a. 9.20%;b. 9.94%;c.10.50%;d.11.75%;e.12.30%;[xl]. Blair;Brothers? stock currently has a price of $50 per share and is expected to pay a;year-end dividend of $2.50 per share (D1 = $2.50). The dividend is expected to grow at a constant;rate of 4 percent per year. The company has insufficient retained earnings to;fund capital projects and must, therefore, issue new common stock. The new stock has an estimated flotation cost;of $3 per share. What is the company?s;cost of equity capital?;a.10.14%;b. 9.21%;c. 9.45%;d. 9.32%;e. 9.00%;[xli]. Allison;Engines Corporation has established a target capital structure of 40 percent;debt and 60 percent common equity. The;current market price of the firm?s stock is P0 = $28, its last dividend;was D0 = $2.20, and its expected dividend growth rate is 6;percent. What will Allison?s marginal;cost of retained earnings, ks, be?;a.15.8%;b.13.9%;c. 7.9%;d.14.3%;e. 9.7%;Answer: a;[xlii].Ananalysthas collected the following information regarding Christopher Co.;?;The company?s;capital structure is 70 percent equity and 30 percent debt.;?;The yield to;maturity on the company?s bonds is 9 percent.;?;The company?s;year-end dividend is forecasted to be $0.80 a share.;?;The company;expects that its dividend will grow at a constant rate of 9 percent a year.;?;The company?s;stock price is $25.;?;The company?s;tax rate is 40 percent.;?;The company;anticipates that it will need to raise new common stock this year, and total;flotation costs will equal 10 percent of the amount issued.;Assume the;company accounts for flotation costs by adjusting the cost of capital. Given this information, calculate the;company?s WACC.;a.10.41%;b.12.56%;c.10.78%;d.13.55%;e. 9.29%;[xliii]. Flaherty;Electric has a capital structure that consists of 70 percent equity and 30;percent debt. The company?s long-term;bonds have a before-tax yield to maturity of 8.4 percent. The company uses the DCF approach to;determine the cost of equity. Flaherty?s;common stock currently trades at $45 per share.;The year-end dividend (D1) is expected to be $2.50 per share;and the dividend is expected to grow forever at a constant rate of 7 percent a;year. The company estimates that it will;have to issue new common stock to help fund this year?s projects. The flotation cost on new common stock issued;is 10 percent, and the company?s tax rate is 40 percent. What is the company?s weighted average cost;of capital, WACC?;a.10.73%;b.10.30%;c.11.31%;d. 7.48%;e. 9.89%;[xliv].Billick;Brothers is estimating its WACC. The;company has collected the following information;?;Its capital;structure consists of 40 percent debt and 60 percent common equity.;?;The company;has 20-year bonds outstanding with a 9 percent annual coupon that are trading;at par.;?;The company?s;tax rate is 40 percent.;?;The risk-free;rate is 5.5 percent.;?;The market;risk premium is 5 percent.;?;The stock?s;beta is 1.4.;What is the company?s WACC?;a. 9.71%;b. 9.66%;c. 8.31%;d.11.18%;e.11.10%;[xlv]. Dandy;Product?s overall weighted average required rate of return is 10 percent. Its yogurt division is riskier than average;its fresh produce division has average risk, and its institutional foods;division has below-average risk. Dandy;adjusts for both divisional and project risk by adding or subtracting 2;percentage points. Thus, the maximum;adjustment is 4 percentage points. What;is the risk-adjusted required rate of return for a low-risk project in the;yogurt division?;a. 6%;b. 8%;c.10%;d.12%;e.14%;[xlvi].Stephenson;Sons has a capital structure that consists of 20 percent equity and 80;percent debt. The company expects to;report $3 million in net income this year, and 60 percent of the net income;will be paid out as dividends. How large;must the firm?s capital budget be this year without it having to issue any new;common stock?;a.$ 1.20;million;b.$13.00;million;c.$ 1.50;million;d.$ 0.24;million;e.$ 6.00;million;Medium;[xlvii]. The;common stock of Anthony Steel has a beta of 1.20. The risk-free rate is 5 percent and the market;risk premium (kM - kRF) is 6 percent. Assume the firm will be able to use retained;earnings to fund the equity portion of its capital budget. What is the company?s cost of retained;earnings, ks?;a. 7.0%;b. 7.2%;c.11.0%;d.12.2%;e.12.4%;[xlviii]. A company;just paid a $2.00 per share dividend on its common stock (D0 =;$2.00). The dividend is expected to grow;at a constant rate of 7 percent per year.;The stock currently sells for $42 a share. If the company issues additional stock, it;must pay its investment banker a flotation cost of $1.00 per share. What is the cost of external equity, ke?;a.11.76%;b.11.88%;c.11.98%;d.12.22%;e.12.30%;[xlix].Hamilton;Company?s 8 percent coupon rate, quarterly payment, $1,000 par value bond;which matures in 20 years, currently sells at a price of $686.86. The company?s tax rate is 40 percent. Based on the nominal interest rate, not the;EAR, what is the firm?s component cost of debt for purposes of calculating the;WACC?;a. 3.05%;b. 7.32%;c. 7.36%;d.12.20%;e.12.26%;Answer: e;[l]. Trojan;Services? CFO is interested in estimating the company?s WACC and has collected;the following information;?;The company;has bonds outstanding that mature in 26 years with an annual coupon of 7.5;percent. The bonds have a face value of;$1,000 and sell in the market today for $920.;?;The risk-free;rate is 6 percent.;?;The market;risk premium is 5 percent.;?;The stock?s;beta is 1.2.;?;The company?s;tax rate is 40 percent.;?;The company?s;target capital structure consists of 70 percent equity and 30 percent debt.;?;The company;uses the CAPM to estimate the cost of equity and does not include flotation;costs as part of its cost of capital.;What is;Trojan?s WACC?;a. 9.75%;b. 9.39%;c.10.87%;d. 9.30%;e. 9.89%;[li]. A company;has determined that its optimal capital structure consists of 40 percent debt;and 60 percent equity. Assume the firm;will not have enough retained earnings to fund the equity portion of its;capital budget. Also, assume the firm;accounts for flotation costs by adjusting the cost of capital. Given the following information, calculate;the firm?s weighted average cost of capital.;?;kd;= 8%.;?;Net income =;$40,000.;?;Payout ratio;= 50%.;?;Tax rate =;40%.;?;P0;= $25.;?;Growth = 0%.;?;Shares;outstanding = 10,000.;?;Flotation;cost on additional equity = 15%.;a. 7.60%;b. 8.05%;c.11.81%;d.13.69%;e.14.28%;[lii]. Hatch;Corporation?s target capital structure is 40 percent debt, 50 percent common;stock, and 10 percent preferred stock.;Information regarding the company?s cost of capital can be summarized as;follows;?;The company?s;bonds have a nominal yield to maturity of 7 percent.;?;The company?s;preferred stock sells for $42 a share and pays an annual dividend of $4 a;share.;?;The company?s;common stock sells for $28 a share, and is expected to pay a dividend of $2 a;share at the end of the year (i.e., D1 = $2.00). The dividend is;expected to grow at a constant rate of 7 percent a year.;?;The firm will;be able to use retained earnings to fund the equity portion of its capital;budget.;?;The company?s;tax rate is 40 percent.;What is the company?s weighted average cost of;capital (WACC)?;a. 9.25%;b. 9.70%;c.10.03%;d.10.59%;e.11.30%;WACC;[liii].Hilliard;Corp. wants to calculate its weighted average cost of capital (WACC). The company?s CFO has collected the following;information;?;The company?s;long-term bonds currently offer a yield to maturity of 8 percent.;?;The company?s;stock price is $32 a share (P0 = $32).;?;The company;recently paid a dividend of $2 a share (D0 = $2.00).;?;The dividend;is expected to grow at a constant rate of 6 percent a year (g = 6%).;?;The company;pays a 10 percent flotation cost whenever it issues new common stock (F = 10;percent).;?;The company?s;target capital structure is 75 percent equity and 25 percent debt.;?;The company?s;tax rate is 40 percent.;?;The firm will;be able to use retained earnings to fund the equity portion of its capital;budget.;What is the company?s WACC?;a.10.67%;b.11.22%;c.11.4

 

Paper#45228 | Written in 18-Jul-2015

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