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davenport finc620 week 1 quiz

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Question;?;Question 1;2 out of 2 points;Several years ago the Jakob Company sold a $1,000;par value, noncallable bond that now has 20 years to maturity and a 7.00%;annual coupon that is paid semiannually. The bond currently sells for $925;and the company's tax rate is 40%. What is the component cost of debt for use;in the WACC calculation?;?;Question 2;2 out of 2 points;Sorensen Systems Inc. is expected to pay a $2.50;dividend at year end (D1 =;$2.50), the dividend is expected to grow at a constant rate of 5.50% a year;and the common stock currently sells for $52.50 a share. The before-tax cost;of debt is 7.50%, and the tax rate is 40%. The target capital structure;consists of 45% debt and 55% common equity. What is the company's WACC if all;the equity used is from retained earnings?;?;Question 3;2 out of 2 points;To help finance a major expansion, Castro;Chemical Company sold a noncallable bond several years ago that now has 20;years to maturity. This bond has a 9.25% annual coupon, paid semiannually;sells at a price of $1,075, and has a par value of $1,000. If the firm's tax;rate is 40%, what is the component cost of debt for use in the WACC;calculation?;?;Question 4;2 out of 2 points;Safeco Company and Risco Inc are identical in;size and capital structure. However, the riskiness of their assets and cash;flows are somewhat different, resulting in Safeco having a WACC of 10% and;Risco a WACC of 12%. Safeco is considering Project X, which has an IRR of;10.5% and is of the same risk as a typical Safeco project. Risco is;considering Project Y, which has an IRR of 11.5% and is of the same risk as a;typical Risco project.;Now assume that the two companies merge and form a new company, Safeco/Risco;Inc. Moreover, the new company's market risk is an average of the pre-merger;companies' market risks, and the merger has no impact on either the cash;flows or the risks of Projects X and Y. Which of the following statements is;CORRECT?;?;Question 5;2 out of 2 points;A. Butcher Timber Company hired your consulting;firm to help them estimate the cost of common equity. The yield on the firm's;bonds is 8.75%, and your firm's economists believe that the cost of common;can be estimated using a risk premium of 3.85% over a firm's own cost of;debt. What is an estimate of the firm's cost of common from retained;earnings?;?;Question 6;2 out of 2 points;Multi-Part 9-1:Assume that you have been hired as a consultant;by CGT, a major producer of chemicals and plastics, including plastic grocery;bags, styrofoam cups, and fertilizers, to estimate the firm's weighted;average cost of capital. The balance sheet and some other information are;provided below.;Assets;Current assets;$;38,000,000;Net plant, property, and equipment;101,000,000;Total assets;$139,000,000;Liabilities and Equity;Accounts payable;$;10,000,000;Accruals;9,000,000;Current liabilities;$;19,000,000;Long-term debt (40,000 bonds, $1,000 par value);40,000,000;Total liabilities;$;59,000,000;Common stock (10,000,000 shares);30,000,000;Retained earnings;50,000,000;Total shareholders' equity;80,000,000;Total liabilities and shareholders' equity;$139,000,000;The stock is currently selling for $15.25 per share, and its noncallable;$1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling;for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%;and the yield on a 20-year Treasury bond is 5.50%. The required return on the;stock market is 11.50%, but the market has had an average annual return of;14.50% during the past 5 years. The firm's tax rate is 40%.;Refer to Multi-Part 9-1. What is the best estimate of the after-tax cost of;debt?;?;Question 7;2 out of 2 points;Multi-Part 9-1:Assume that you have been hired as a consultant;by CGT, a major producer of chemicals and plastics, including plastic grocery;bags, styrofoam cups, and fertilizers, to estimate the firm's weighted;average cost of capital. The balance sheet and some other information are;provided below.;Assets;Current assets;$;38,000,000;Net plant, property, and equipment;101,000,000;Total assets;$139,000,000;Liabilities and Equity;Accounts payable;$;10,000,000;Accruals;9,000,000;Current liabilities;$;19,000,000;Long-term debt (40,000 bonds, $1,000 par value);40,000,000;Total liabilities;$;59,000,000;Common stock (10,000,000 shares);30,000,000;Retained earnings;50,000,000;Total shareholders' equity;80,000,000;Total liabilities and shareholders' equity;$139,000,000;The stock is currently selling for $15.25 per share, and its noncallable;$1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling;for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%;and the yield on a 20-year Treasury bond is 5.50%. The required return on the;stock market is 11.50%, but the market has had an average annual return of;14.50% during the past 5 years. The firm's tax rate is 40%.;Refer to Multi-Part 9-1. What is the best estimate of the firm's WACC?;?;Question 8;2 out of 2 points;Teall Development Company hired you as a;consultant to help them estimate its cost of capital. You have been provided;with the following data: D1 = $1.45, P0 =;$22.50, and g = 6.50% (constant). Based on the DCF approach, what is the cost;of common from retained earnings?;?;Question 9;2 out of 2 points;Which of the following statements is CORRECT?;?;Question 10;2 out of 2 points;Which of the following is NOT a;capital component when calculating the weighted average cost of capital;(WACC) for use in capital budgeting?;?;Question 11;2 out of 2 points;Assume that Kish Inc. hired you as a consultant;to help estimate its cost of common equity. You have obtained the following;data: D0 =;$0.90, P0 =;$27.50, and g = 7.00% (constant). Based on the DCF approach, what is the cost;of common from retained earnings?;?;Question 12;2 out of 2 points;Sapp Trucking's balance sheet shows a total of;noncallable $45 million long-term debt with a coupon rate of 7.00% and a;yield to maturity of 6.00%. This debt currently has a market value of $50;million. The balance sheet also shows that the company has 10 million shares;of common stock, and the book value of the common equity (common stock plus;retained earnings) is $65 million. The current stock price is $22.50 per;share, stockholders' required return, rs, is 14.00%, and the firm's tax rate is 40%. The CFO thinks the WACC;should be based on market value weights, but the president thinks book;weights are more appropriate. What is the difference between these two WACCs?;?;Question 13;2 out of 2 points;Multi-Part 9-1:Assume that you have been hired as a consultant;by CGT, a major producer of chemicals and plastics, including plastic grocery;bags, styrofoam cups, and fertilizers, to estimate the firm's weighted;average cost of capital. The balance sheet and some other information are;provided below.;Assets;Current assets;$;38,000,000;Net plant, property, and equipment;101,000,000;Total assets;$139,000,000;Liabilities and Equity;Accounts payable;$;10,000,000;Accruals;9,000,000;Current liabilities;$;19,000,000;Long-term debt (40,000 bonds, $1,000 par value);40,000,000;Total liabilities;$;59,000,000;Common stock (10,000,000 shares);30,000,000;Retained earnings;50,000,000;Total shareholders' equity;80,000,000;Total liabilities and shareholders' equity;$139,000,000;The stock is currently selling for $15.25 per share, and its noncallable;$1,000 par value, 20-year, 7.25% bonds with semiannual payments are selling;for $875.00. The beta is 1.25, the yield on a 6-month Treasury bill is 3.50%;and the yield on a 20-year Treasury bond is 5.50%. The required return on the;stock market is 11.50%, but the market has had an average annual return of;14.50% during the past 5 years. The firm's tax rate is 40%.;Refer to Multi-Part 9-1. Which of the following is the best estimate for the;weight of debt for use in calculating the firm's WACC?;?;Question 14;2 out of 2 points;Cranberry Corp. has two divisions of equal size;a computer manufacturing division and a data processing division. Its CFO;believes that stand-alone data processor companies typically have a WACC of;8%, while stand-alone computer manufacturers typically have a 12% WACC. He;also believes that the data processing and manufacturing divisions have the;same risk as their typical peers. Consequently, he estimates that the;composite, or corporate, WACC is 10%. A consultant has suggested using an 8%;hurdle rate for the data processing division and a 12% hurdle rate for the;manufacturing division. However, the CFO disagrees, and he has assigned a 10%;WACC to all projects in both divisions. Which of the following statements is;CORRECT?;?;Question 15;2 out of 2 points;Keys Printing plans to issue a $1,000 par value;20-year noncallable bond with a 7.00% annual coupon, paid semiannually. The;company's marginal tax rate is 40.00%, but Congress is considering a change;in the corporate tax rate to 30.00%. By how much would the component cost of;debt used to calculate the WACC change if the new tax rate was adopted?

 

Paper#50570 | Written in 18-Jul-2015

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