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finance exam




Question;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.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 understandII. model simplicityIII. constant dividend growth rateIV. model's applicability to all common stocks A. II onlyB. I and III onlyC. II and IV onlyD. I and II onlyE. I, II, and III only3. 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 investmentB. Initial cash outlayC. Level of riskD. Source of funds used for the investmentE. Investment's net present value5. The aftertax cost of which of the following are affected;by a change in a firm's tax rate?I. preferred stockII. debtIII. equityIV. capital A. I and III onlyB. II and IV onlyC. I, II, and IV onlyD. II, III, and IV onlyE. I, II, III, and IV6. 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 percentB. 7.37 percentC. 7.54 percentD. 8.19 percentE. 8.33 percent8. 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 percentB. 6.08 percentC. 6.14 percentD. 6.31 percentE. 6.40 percent9. 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 percentB. 4.79 percentC. 5.63 percentD. 5.98 percentE. 6.31 percent10. 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 percentB. 15.92 percentC. 16.17 percentD. 16.52 percentE. 17.44 percent11. 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 percentB. 15.20 percentC. 15.67 percentD. 16.84 percentE. 17.63 percent12. 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 percentB. 11.72 percentC. 12.78 percentD. 13.30 percentE. 14.93 percent13. 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 percentB. 9.61 percentC. 10.02 percentD. 10.45 percentE. 10.83 percent14. Which one of the following is the equity risk arising;from the daily operations of a firm? A. Strategic riskB. Financial riskC. Liquidity riskD. Industry riskE. Business risk15. Which one of the following is the equity risk arising;from the capital structure selected by a firm? A. Strategic riskB. Financial riskC. Liquidity riskD. Industry riskE. Business risk16. Paying interest reduces the taxes owed by a firm. Which;one of the following terms applies to this relationship? A. Static theory of interest ratesB. M&M Proposition IC. Financial riskD. Interest tax shieldE. Homemade leverage17. Which one of the following is minimized when the value;of a firm is maximized? A. Return on equityB. WACCC. DebtD. TaxesE. Bankruptcy costs18. 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 minimized19. 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 bankruptcyB. LiquidationC. Technical insolvencyD. Accounting insolvencyE. Reorganization20. 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 sharesB. 3,516 sharesC. 3,921 sharesD. 4,607 sharesE. 5,742 shares21. 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. $0.25B. $0.33C. $0.38D. $0.41E. $0.4722. 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. $1,260,000B. $1,400,000C. $1,485,000D. $1,620,000E. $1,750,00023. 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 sharesB. 12,552 sharesC. 12,846 sharesD. 13,030 sharesE. 13,561 shares24. 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. 0.44B. 0.47C. 0.61D. 0.68E. 0.7425. 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. $4,887B. $5,010C. $5,395D. $5,708;E. $6,023="msonormal">


Paper#60759 | Written in 18-Jul-2015

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