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Question;Multiple Choice Questions;91. The City Street Corporation's common stock has a;beta of 1.2. The risk-free rate is 3.5 percent and the expected return on the;market is 13 percent. What is the firm's cost of equity?;A. 11.4 percent;B. 12.8 percent;C. 14.9 percent;D. 17.6 percent;E. 19.1 percent;92. Stock in Country Road Industries has a beta of;0.97. The market risk premium is 10 percent while T-bills are currently;yielding 5.5 percent. Country Road's most recent dividend was $1.70 per share;and dividends are expected to grow at a 7 percent annual rate;cost of preferred?;A. 4.60 percent;B. 4.64 percent;C. 5.39 percentD. 5.43 percent;E. 5.54 percent;indefinitely. The stock sells for $32 a share. What is the;estimated cost of equity using the average of the CAPM approach and the;dividend discount approach?;A. 13.94 percent;B. 14.06 percent;C. 14.21 percent;D. 14.38 percent;E. 14.50 percent;93. Holdup Bank has an issue of preferred stock with a;$5 stated dividend that just sold for $92 per share. What is the bank's;94. Decline, Inc. is trying to determine its cost of debt. The firm has a;debt issue outstanding with 15 years to maturity that is quoted at 107 percent;of face value. The issue makes semiannual payments and has an embedded cost of;11 percent annually. What is the aftertax cost of debt if the tax rate is 33;percent?;A. 6.76 percent;B. 6.90 percent;C. 7.17 percent;D. 7.37 percent;E. 7.42 percent;95. Jiminy's Cricket Farm issued a 30-year, 8 percent;semiannual bond 6 years ago. The bond currently sells for 114 percent of its;face value. What is the aftertax cost of debt if the company's tax rate is 31;percent?;A. 4.63 percent;B. 4.70 percent;C. 4.75 percent;D. 4.82 percent;E. 4.86 percent;96. Mullineaux Corporation has a target capital;structure of 41 percent common stock, 4 percent preferred stock, and 55 percent;debt. Its cost of equity is 19 percent, the cost of preferred stock is 6.5;percent, and the pre-tax cost of debt is 7.5 percent. What is the firm's WACC;given a tax rate of 34 percent?;A. 9.87 percent;B. 10.43 percent;C. 10.77 percent;D. 13.38 percent;E. 15.17 percent;97. Cookie Dough Manufacturing has a target;debt-equity ratio of 0.5. Its cost of equity is 15 percent, and its cost of;debt is 11 percent. What is the firm's WACC given a tax rate of 31;percent?;A. 12.53 percent;B. 12.78 percent;C. 13.11 percent;D. 13.48 percent;E. 13.67 percent;98. Fama's Llamas has a weighted average cost of;capital of 10.5 percent. The company's cost of equity is 15.5 percent, and its;pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What is the;company's target debt-equity ratio?;A. 0.89;B. 0.92;C. 0.98;D. 1.01;E. 1.02;99. Jungle, Inc. has a target debt-equity ratio of;0.72. Its WACC is 11.5 percent and the tax rate is 34 percent. What is the cost;of equity if the aftertax cost of debt is 5.5 percent?;A. 13.75 percent;B. 13.84 percent;C. 14.41 percent;D. 14.79 percent;E. 15.82 percent;100. Titan Mining Corporation has 14 million shares of;common stock outstanding, 900,000 shares of 9 percent preferred stock;outstanding and 210,000 ten percent semiannual bonds outstanding, par value;$1,000 each. The common stock currently sells for $34 per share and has a beta;of 1.15, the preferred stock currently sells for $80 per share, and the bonds;have 17 years to maturity and sell for 91 percent of par. The market risk;premium is 11.5 percent, T-bills are yielding 7.5 percent, and the firm's tax;rate is 32 percent. What discount rate should the firm apply to a new project's;cash flows if the project has the same risk as the firm's typical;project?;A. 14.59 percent;B. 14.72 percent;C. 15.17 percent;D. 15.54 percent;E. 16.41 percent;101. Suppose your company needs $14 million to build a;new assembly line. Your target debt-equity ratio is 0.84. The flotation cost;for new equity is 9.5 percent, but the floatation cost for debt is only 2.5;percent. What is the true cost of building the new assembly line after taking;flotation costs into account?;A. 14.82 million;B. 14.94 million;C. 15.07 million;D. 15.12 million;E. 15.23 million;54. Kelso Electric is debating between a leveraged and;an unleveraged capital structure. The all equity capital structure would;consist of 40,000 shares of stock. The debt and equity option would consist of;25,000 shares of stock plus $280,000 of debt with an interest rate of 7;percent. What is the break-even level of earnings before interest and taxes;between these two options? Ignore taxes.;A. $42,208;B. $44,141;C. $46,333;D. $49,667;E. $52,267;55. Holly's is currently an all equity firm that has;9,000 shares of stock outstanding at a market price of $42 a share. The firm;has decided to leverage its operations by issuing $120,000 of debt at an;interest rate of 9.5 percent. This new debt will be used to repurchase shares;of the outstanding stock. The restructuring is expected to increase the;earnings per share. What is the minimum level of earnings before interest and;taxes that the firm is expecting? Ignore taxes.;A. $35,910;B. $38,516;C. $42,000;D. $44,141;E. $45,020;56. Sewer's Paradise is an all equity firm that has;5,000 shares of stock outstanding at a market price of $15 a share. The firm's;management has decided to issue $30,000 worth of debt and use the funds to;repurchase shares of the outstanding stock. The interest rate on the debt will;be 10 percent. What are the earnings per share at the break-even level of;earnings before interest and taxes? Ignore taxes.;A. $1.46;B. $1.50;C. $1.67;D. $1.88;E. $1.94;57. Miller's Dry Goods is an all equity firm with;45,000 shares of stock outstanding at a market price of $50 a share. The;company's earnings before interest and taxes are $128,000. Miller's has decided;to add leverage to its financial operations by issuing $250,000 of debt at 8;percent interest. The debt will be used to repurchase shares of stock. You own;400 shares of Miller's stock. You also loan out funds at 8 percent interest.;How many shares of Miller's stock must you sell to offset the leverage that;Miller's is assuming? Assume you loan out all of the funds you receive from the;sale of stock. Ignore taxes.;A. 35.6 shares;B. 40.0 shares;C. 44.4 shares;D. 47.5 shares;E. 50.1 shares;58. You currently own 600 shares of JKL, Inc. JKL is an;all equity firm that has 75,000 shares of stock outstanding at a market price;of $40 a share. The company's earnings before interest and taxes are $140,000.;JKL has decided to issue $1 million of debt at 8 percent interest. This debt;will be used to repurchase shares of stock. How many shares of JKL stock must;you sell to unlever your position if you can loan out funds at 8 percent;interest?;A. 120 shares;B. 150 shares;C. 180 shares;D. 200 shares;E. 250 shares;59. Naylor's is an all equity firm with 60,000 shares;of stock outstanding at a market price of $50 a share. The company has earnings;before interest and taxes of $87,000. Naylor's has decided to issue $750,000 of;debt at 7.5 percent. The debt will be used to repurchase shares of the;outstanding stock. Currently, you own 500 shares of Naylor's stock. How many;shares of Naylor's stock will you continue to own if you unlever this position?;Assume you can loan out funds at 7.5 percent interest. Ignore taxes.;A. 300 shares;B. 350 shares;C. 375 shares;D. 425 shares;E. 500 shares;60. Pewter & Glass is an all equity firm that has;80,000 shares of stock outstanding. The company is in the process of borrowing;$600,000 at 9 percent interest to repurchase 12,000 shares of the outstanding;stock. What is the value of this firm if you ignore taxes?;A. $2.5 million;B. $4.0 million;C. $5.0 million;D. $5.5 million;E. $6.0 million;61. The Jean Outlet is an all equity firm that has;146,000 shares of stock outstanding. The company has decided to borrow the $1.1;million to repurchase 7,500 shares of its stock from the estate of a deceased;shareholder. What is the total value of the firm if you ignore taxes?;A. $18,387,702;B. $18,500,000;C. $19,666,667;D. $21,000,000;E. $21,413,333;62. Stacy owns 38 percent of The Town Centre. She has;decided to retire and wants to sell all of her shares in this closely held, all;equity firm. The other shareholders have agreed to have the firm borrow;$650,000 to purchase her shares of stock. What is the total market value of The;Town Centre? Ignore taxes.;A. $1,710,526;B. $1,748,219;C. $1,771,089;D. $1,801,406;E. $1,808,649;63. Winter's Toyland has a debt-equity ratio of 0.72.;The pre-tax cost of debt is 8.7 percent and the required return on assets is;16.1 percent. What is the cost of equity if you ignore taxes?;A. 19.31 percent;B. 19.74 percent;C. 20.29 percent;D. 20.46 percent;E. 21.43 percent;64. Jefferson & Daughter has a cost of equity of;14.6 percent and a pre-tax cost of debt of 7.8 percent. The required return on;the assets is 13.2 percent. What is the firm's debt-equity ratio based on;M&M II with no taxes?;A. 0.26;B. 0.33;C. 0.37;D. 0.43;E. 0.45;65. The Corner Bakery has a debt-equity ratio of 0.54.;The firm's required return on assets is 14.2 percent and its cost of equity is;16.1 percent. What is the pre-tax cost of debt based on M&M Proposition II;with no taxes?;A. 7.10 percent;B. 8.79 percent;C. 10.68 percent;D. 17.56 percent;E. 18.40 percent;66. L.A. Clothing has expected earnings before interest;and taxes of $48,900, an unlevered cost of capital of 14.5 percent, and a tax;rate of 34 percent. The company also has $8,000 of debt that carries a 7;percent coupon. The debt is selling at par value. What is the value of this;firm?;A. $222,579.31;B. $223,333.33;C. $224,108.16;D. $225,299.31;E. $225,476.91;67. Hanover Tech is currently an all equity firm that;has 320,000 shares of stock outstanding with a market price of $19 a share. The;current cost of equity is 15.4 percent and the tax rate is 36 percent. The firm;is considering adding $1.2 million of debt with a coupon rate of 8 percent to;its capital structure. The debt will be sold at par value. What is the levered;value of the equity?;A. $5.209 million;B. $5.312 million;C. $5.436 million;D. $6.512 million;E. $6.708 million;68. Bright Morning Foods has expected earnings before;interest and taxes of $48,600, an unlevered cost of capital of 13.2 percent;and debt with both a book and face value of $25,000. The debt has an 8.5;percent coupon. The tax rate is 34 percent. What is the value of the;firm?;A. $245,500;B. $247,600;C. $251,500;D. $264,800;E. $271,300;69. Exports Unlimited is an unlevered firm with an;aftertax net income of $47,800. The unlevered cost of capital is 14.1 percent;and the tax rate is 32 percent. What is the value of this firm?;A. $270,867;B. $294,380;C. $339,007;D. $378,444;E. $447,489;70. An unlevered firm has a cost of capital of 17.5;percent and earnings before interest and taxes of $327,500. A levered firm with;the same operations and assets has both a book value and a face value of debt;of $650,000 with a 7.5 percent annual coupon. The applicable tax rate is 38;percent. What is the value of the levered firm?;A. $1,397,212;B. $1,398,256;C. $1,402,509;D. $1,407,286;E. $1,414,414

Paper#51106 | Written in 18-Jul-2015

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