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Question;1);If a firm's marginal tax rate is;increased, this would, other things held constant, lower the cost of debt;used to calculate its WACC.;a.;True;b.;False;2);The lower the firm's tax rate, the;lower will be its after-tax cost of debt and WACC, other things held;constant.;a.;True;b.;False;3);If investors' aversion to risk;rose, causing the slope of the SML to increase, this would have a greater;impact on the required rate of return on equity, rs, than on the;interest rate on long-term debt, rd, for most firms. Other things held constant, this would lead;to an increase in the use of debt and a decrease in the use of equity. However, other things would not stay;constant if firms used a lot more debt, as that would increase the riskiness;of both debt and equity and thus limit the shift toward debt.;a.;True;b.;False;4);Jackson Inc. uses only equity;capital, and it has 2 equally-sized divisions. Division A?s cost of capital;is 10.0%, Division B?s cost is 14.0%, and the composite WACC is 12.0%. All of Division A?s projects have the same;risk, as do all of Division B's projects.;However, the projects in Division A have less risk than those in;Division B. Which of the following;projects should Jackson;accept?;a.;A Division B project with a 13%;return.;b.;A Division B project with a 12%;return.;c.;A Division A project with an 11%;return.;d.;A Division A project with a 9%;return.;e.;A Division B project with an 11%;return.;5);Vang Inc. estimates that its;average-risk projects have a WACC of 10%, its below-average risk projects;have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and;C) should the company accept?;a.;Project B is of below-average risk;and has a return of 8.5%.;b.;Project C is of above-average risk;and has a return of 11%.;c.;Project A is of average risk and;has a return of 9%.;d.;None of the projects should be;accepted.;e.;All of the projects should be;accepted.;6);Nelson Enterprises, an all-equity;firm, has a beta of 2.0. Nelson?s;chief financial officer is evaluating a project with an expected return of;21%, before any risk adjustment. The;risk-free rate is 7%, and the market risk premium is 6%. The project being evaluated is riskier than;Nelson?s average project, in terms of both its beta risk and its total;risk. Which of the following;statements is CORRECT?;a.;The project should definitely be;accepted because its expected return (before any risk adjustments) is greater;than its required return.;b.;The project should definitely be;rejected because its expected return (before risk adjustment) is less than;its required return.;c.;Riskier-than-average projects;should have their expected returns increased to reflect their higher;risk. Clearly, this would make the;project acceptable regardless of the amount of the adjustment.;d.;The accept/reject decision depends;on the firm's risk-adjustment policy.;If Nelson's policy is to increase the required return on a;riskier-than-average project to 3% over rS, then it should reject;the project.;e.;Capital budgeting projects should;be evaluated solely on the basis of their total risk. Thus, insufficient;information has been provided to make the accept/reject decision.;7);Which of the following statements;is CORRECT?;a.;The WACC is calculated using;before-tax costs for all components.;b.;The after-tax cost of debt usually;exceeds the after-tax cost of equity.;c.;For a given firm, the after-tax;cost of debt is always more expensive than the after-tax cost of preferred;stock.;d.;Retained earnings that were;generated in the past and are reflected on the firm?s balance sheet are;generally available to finance the firm?s capital budget during the coming;year.;e.;The WACC that should be used in;capital budgeting is the firm?s marginal, after-tax cost of capital.;8);Assume that you are a consultant;to Magee Inc., and you have been provided with the following data: rRF;= 4.00%, RPM = 5.00%, and b = 1.15. What is the cost of equity from retained;earnings based on the CAPM approach?;a.;9.75%;b.;10.04%;c.;10.34%;d.;10.65%;e.;10.97%;9);Lanser Inc. hired you as a;consultant to help them estimate its cost of capital. You have been provided with the following;data: D1 = \$0.80, P0;= \$22.50, and g = 5.00% (constant).;Based on the DCF approach, what is the cost of equity from retained;earnings?;a.;7.34%;b.;7.72%;c.;8.13%;d.;8.56%;e.;8.98%;10);You were hired as a consultant to;Kroncke Company, whose target capital structure is 40% debt, 10% preferred;and 50% common equity. The after-tax;cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of;retained earnings is 13.25%. The firm;will not be issuing any new stock.;What is its WACC?;a.;9.48%;b.;9.78%;c.;10.07%;d.;10.37%;e.;10.68%;11);To help finance a major expansion;Delano Development Company sold a noncallable bond several years ago that now;has 15 years to maturity. This bond;has a 10.25% annual coupon, paid semiannually, it sells at a price of \$1,025;and it has a par value of \$1,000. If Delano?s tax rate is;40%, what component cost of debt should be used in the WACC calculation?;a.;5.11%;b.;5.37%;c.;5.66%;d.;5.96%;e.;6.25%;12);Chambliss Inc. hired you as a;consultant to help estimate its cost of capital. You have been provided with the following;data: D0 = \$0.90, P0;= \$27.50, and g = 8.00% (constant).;Based on the DCF approach, what is the cost of equity from retained;earnings?;a.;10.41%;b.;10.96%;c.;11.53%;d.;12.11%;e.;12.72%;13);You were recently hired by Nast;Media Inc. to estimate its cost of capital.;You were provided with the following data: D1 = \$2.00, P0 = \$55.00;g = 8.00% (constant), and F = 5.00%.;What is the cost of equity raised by selling new common stock?;a.;11.24%;b.;11.83%;c.;12.42%;d.;13.04%;e.;13.69%;14);Schadler Systems is expected to;pay a \$3.50 dividend at year end (D1 = \$3.50), the dividend is;expected to grow at a constant rate of 6.50% a year, and the common stock;currently sells for \$62.50 a share.;The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of;40% debt and 60% common equity. What;is the company?s WACC if all equity is from retained earnings?;a.;8.35%;b.;8.70%;c.;9.06%;d.;9.42%;e.;9.80%;15);Roxie Epoxy?s balance sheet shows;a total of \$50 million long-term debt with a coupon rate of 8.00% and a yield;to maturity of 7.00%. This debt;currently has a market value of \$55 million.;The balance sheet also shows that that the company has 20 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 \$8.25 per share, stockholders' required;return, rs, is 10.00%, and the firm's tax rate is 40%. Based on market value weights, and assuming;the firm is currently at its target capital structure, what WACC should Roxie;use to evaluate capital budgeting projects?;a.;7.26%;b.;7.56%;c.;7.88%;d.;8.21%;e.;8.55%;16);Assume that you are on the financial;staff of Michelson Inc., and you have collected the following data: (1) The yield on the company?s outstanding;bonds is 8.00%, and its tax rate is 40%.;(2) The next expected dividend is \$0.65 a share, and the dividend is;expected to grow at a constant rate of 6.00% a year. (3) The price of Michelson's stock is;\$17.50 per share, and the flotation cost for selling new shares is F =;10%. (4) The target capital structure;is 45% debt and the balance is common equity.;What is Michelson's WACC, assuming it must issue new stock to finance;its capital budget?;a.;6.63%;b.;6.98%;c.;7.34%;d.;7.73%;e.;8.12%

Paper#51044 | Written in 18-Jul-2015

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