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finance 320

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Question;1. The weighted average cost of capital is defined as the;weighted average of a firm's;A. return on its investments.;B. cost of equity and its aftertax cost of debt.;C. pretax cost of debt and equity securities.;D. bond coupon rates.;E. dividend and capital gains yields.;2. Which of the following features are advantages of the;dividend growth model?;I. easy to understand;II. model simplicity;III. constant dividend growth rate;IV. model's applicability to all common stocks;A. II only;B. I and III only;C. II and IV only;D. I and II only;E. I, II, and III only;3. All else constant, an increase in a firm's cost of debt;A. could be caused by an increase in the firm's tax rate.;B. will result in an increase in the firm's cost of capital.;C. will lower the firm's weighted average cost of capital.;D. will lower the firm's cost of equity.;E. will increase the firm's capital structure weight of;debt.;4. Which one of the following is the primary determinant of;an investment's cost of capital?;A. Life of investment;B. Initial cash outlay;C. Level of risk;D. Source of funds used for the investment;E. Investment's net present value;5. The aftertax cost of which of the following are affected;by a change in a firm's tax rate?;I. preferred stock;II. debt;III. equity;IV. capital;A. I and III only;B. II and IV only;C. I, II, and IV only;D. II, III, and IV only;E. I, II, III, and IV;6. Which one of the following statements is accurate for a;levered firm?;A. WACC should be used as the required return for all;proposed investments.;B. A firm's WACC will decrease whenever the firm's tax rate;decreases.;C. An increase in the market risk premium will decrease a;firm's WACC.;D. The subjective approach totally ignores a firm's own;WACC.;E. A reduction in the risk level of a firm will tend to;decrease the firm's WACC.;7. Judy's Boutique just paid an annual dividend of $1.65 on;its common stock. The firm increases its dividend by 2.5 percent annually. What;is the rate of return on this stock if the current stock price is $38.20 a;share?;A. 6.93 percent;B. 7.37 percent;C. 7.54 percent;D. 8.19 percent;E. 8.33 percent;8. Winter Wear, Inc. has 6 percent bonds outstanding that;mature in 13 years. The bonds pay interest semiannually and have a face value;of $1,000. Currently, the bonds are selling for $993 each. What is the firm's;pre-tax cost of debt?;A. 5.97 percent;B. 6.08 percent;C. 6.14 percent;D. 6.31 percent;E. 6.40 percent;9. Hi Tech Products has 35,000 bonds outstanding that are;currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent;annual coupon. What is the firm's aftertax cost of debt if the applicable tax;rate is 35 percent?;A. 4.47 percent;B. 4.79 percent;C. 5.63 percent;D. 5.98 percent;E. 6.31 percent;10. The 7.5 percent preferred stock of Home Town Brews is;selling for $43 a share. What is the firm's cost of preferred stock if the tax;rate is 34 percent and the par value per share is $100?;A. 14.47 percent;B. 15.92 percent;C. 16.17 percent;D. 16.52 percent;E. 17.44 percent;11. Chesterfield and Weston has 55,000 shares of common;stock outstanding at a price of $31 a share. It also has 3,000 shares of;preferred stock outstanding at a price of $62 a share. The firm has 8 percent;12-year bonds outstanding with a total face value of $400,000. The bonds are;currently quoted at 101.2 percent of face and pay interest semiannually. What;is the capital structure weight of the firm's debt if the tax rate is 35;percent?;A. 14.49 percent;B. 15.20 percent;C. 15.67 percent;D. 16.84 percent;E. 17.63 percent;12. The General Store has a cost of equity of 15.8 percent;a pre-tax cost of debt of 7.7 percent, and a tax rate of 32 percent. What is;the firm's weighted average cost of capital if the debt-equity ratio is 0.40?;A. 10.18 percent;B. 11.72 percent;C. 12.78 percent;D. 13.30 percent;E. 14.93 percent;13. Healthy Foods has a target capital structure of 55;percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost;of equity is 14.3 percent, the cost of preferred stock is 8.9 percent, and the;pre-tax cost of debt is 8.1 percent. What is the company's WACC if the;applicable tax rate is 34 percent?;A. 9.29 percent;B. 9.61 percent;C. 10.02 percent;D. 10.45 percent;E. 10.83 percent;14. Which one of the following is the equity risk arising;from the daily operations of a firm?;A. Strategic risk;B. Financial risk;C. Liquidity risk;D. Industry risk;E. Business risk;15. Which one of the following is the equity risk arising;from the capital structure selected by a firm?;A. Strategic risk;B. Financial risk;C. Liquidity risk;D. Industry risk;E. Business risk;16. Paying interest reduces the taxes owed by a firm. Which;one of the following terms applies to this relationship?;A. Static theory of interest rates;B. M&M Proposition I;C. Financial risk;D. Interest tax shield;E. Homemade leverage;17. Which one of the following is minimized when the value;of a firm is maximized?;A. Return on equity;B. WACC;C. Debt;D. Taxes;E. Bankruptcy costs;18. Which one of the following conditions exists at the;point where a firm maximizes its value?;A. The tax benefit from an additional dollar of debt is;zero.;B. Financial distress costs are equal to zero.;C. The debt-equity ratio is 1.0.;D. WACC is minimized.;E. The cost of equity is minimized;19. Greenwood Motels has filed a petition for bankruptcy but;hopes to continue its operations both during and after the bankruptcy process.;Which one of the following terms best applies to this situation?;A. Chapter 7 bankruptcy;B. Liquidation;C. Technical insolvency;D. Accounting insolvency;E. Reorganization;20. The Green Briar is an all-equity firm with a total;market value of $418,000 and 20,000 shares of stock outstanding. Management is;considering issuing $120,000 of debt at an interest rate of 9 percent and using;the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm;repurchase if it issues the debt securities?;A. 2,871 shares;B. 3,516 shares;C. 3,921 shares;D. 4,607 shares;E. 5,742 shares;21. Cross Town Cookies is an all-equity firm with a total;market value of $720,000. The firm has 150,000 shares of stock outstanding.;Management is considering issuing $200,000 of debt at an interest rate of 7;percent and using the proceeds to repurchase shares. The projected earnings;before interest and taxes are $58,600. What are the anticipated earnings per;share if the debt is issued? Ignore taxes.;A. $0.25;B. $0.33;C. $0.38;D. $0.41;E. $0.47;22. Henderson's is an all-equity firm that has 135,000;shares of stock outstanding. Neal, the financial vice-president, is considering;borrowing $220,000 at 7.25 percent interest to repurchase 20,000 shares.;Ignoring taxes, what is the value of the firm?;A. $1,260,000;B. $1,400,000;C. $1,485,000;D. $1,620,000;E. $1,750,000;23. The Gable Inn is an all-equity firm with 16,000 shares;outstanding at a value per share of $14.50. The firm is issuing $50,000 of debt;and using the proceeds to reduce the number of outstanding shares. How many;shares of stock will be outstanding once the debt is issued? Ignore taxes.;A. 11,970 shares;B. 12,552 shares;C. 12,846 shares;D. 13,030 shares;E. 13,561 shares;24. The Water Works has a return on assets of 13.7 percent;a cost of equity of 18.6 percent, and a pre-tax cost of debt of 7.1 percent.;What is the debt-equity ratio? Ignore taxes.;A. 0.44;B. 0.47;C. 0.61;D. 0.68;E. 0.74;25. Stone House Cafe has a 30 percent tax rate and total;taxes of $35,280. What is the value of the interest tax shield if the interest;expense is $16,700?;A. $4,887;B. $5,010;C. $5,395;D. $5,708;E. $6,023;4. The Cracker Mill has a beta of 0.97, a dividend growth;rate of 3.2 percent, a stock price of $33 a share, and an expected annual;dividend of $1.06 per share next year. The market rate of return is 11.2;percent and the risk-free rate is 3.7 percent. What is the firm's cost of;equity?;A. 7.74 percent;B. 8.69 percent;C. 9.30 percent;D. 9.72 percent;E. 10.01 percent4. The Cracker Mill has a beta of 0.97, a;dividend growth rate of 3.2 percent, a stock price of $33 a share, and an;expected annual dividend of $1.06 per share next year. The market rate of;return is 11.2 percent and the risk-free rate is 3.7 percent. What is the;firm's cost of equity?;A. 7.74 percent;B. 8.69 percent;C. 9.30 percent;D. 9.72 percent;E. 10.01 percent;1. Katie owns 100 shares of ABC stock. Which one of the;following terms is used to refer to the return that Katie and the other;shareholders require on their investment in ABC?;A. Weighted average cost of capital;B. Pure play cost;C. Cost of equity;D. Subjective cost;E. Cost of debt;C;2. Lester lent money to The Corner Store by purchasing bonds;issued by the store. The rate of return that he and the other lenders require;is referred to as the;A. pure play cost.;B. cost of debt.;C. weighted average cost of capital.;D. subjective cost.;E. cost of equity.;B;3. The common stock of Modern Interiors has a beta of 1.61;and a standard deviation of 27.4 percent. The market rate of return is 13.2;percent and the risk-free rate is 4.8 percent. What is the cost of equity for;this firm?;A. 18.32 percent;B. 19.97 percent;C. 21.08 percent;D. 24.40 percent;E. 26.05 percent;A;4. The Cracker Mill has a beta of 0.97, a dividend growth;rate of 3.2 percent, a stock price of $33 a share, and an expected annual;dividend of $1.06 per share next year. The market rate of return is 11.2;percent and the risk-free rate is 3.7 percent. What is the firm's cost of;equity?;A. 7.74 percent;B. 8.69 percent;C. 9.30 percent;D. 9.72 percent;E. 10.01 percent;5. Which one of the following terms is inclusive of both;direct and indirect bankruptcy costs?;A. Financial distress costs;B. Capital structure costs;C. Financial leverage;D. Homemade leverage;E. Cost of capital;6. Ernst Electrical has 9,000 shares of stock outstanding;and no debt. The new CFO is considering issuing $80,000 of debt and using the;proceeds to retire 1,500 shares of stock. The coupon rate on the debt is 7.5;percent. What is the break-even level of earnings before interest and taxes;between these two capital structure options?;A. $18,500;B. $21,000;C. $24,000;D. $32,500;E. $36,000;E;7. Shoe Box Stores is currently an all-equity firm with;28,000 shares of stock outstanding. Management is considering changing the;capital structure to 40 percent debt. The interest rate on the debt would be 9;percent. Ignore taxes. Jamie owns 300 shares of Shoe Box Stores stock that is;priced at $17 a share. What should Jamie do if she prefers the all-equity;structure but Shoe Box Stores adopts the new capital structure?;A. Borrow money and buy an additional 120 shares.;B. Borrow money and buy an additional 180 shares.;C. Keep her shares but loan out all of the dividend income;at 9 percent.;D. Sell 120 shares and loan out the proceeds at 9 percent.;E. Sell 180 shares and loan out the proceeds at 9 percent.

 

Paper#60757 | Written in 18-Jul-2015

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