Ch14
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Ch14

Course: FIN 600, Spring 2010

School: Odessa

Word Count: 8701

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COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVAS Pool Canvas Add, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Settings to establish which default options, such as feedback and images, are available for question creation. Add Multiple Choice Creation Settings...

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> COURSES FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVAS Pool Canvas Add, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Settings to establish which default options, such as feedback and images, are available for question creation. Add Multiple Choice Creation Settings Name Chapter 14 Cost of Capital Description Questions which Blackboard's assessment component is incapable of supporting are not included in the export. Instructions Add Question Here Question 1 Multiple Choice Question A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called? Answer dividend yield cost of equity capital gains yield cost of capital income return Correct Feedback Incorrect Feedback Refer to section 14.2 Refer to section 14.2 Add Question Here Question 2 Multiple Choice Question Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the: Answer compound rate. current yield. cost of debt. capital gains yield. cost of capital. Correct Feedback Incorrect Feedback Refer to section 14.3 Refer to section 14.3 Add Question Here Question 3 Multiple Choice Question The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the: Answer reward to risk ratio. weighted capital gains rate. structured cost of capital. subjective cost of capital. weighted average cost of capital. Correct Feedback Incorrect Feedback Refer to section 14.4 Refer to section 14.4 Add Question Here Question 4 Multiple Choice Question When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach. Answer subjective risk pure play divisional cost of capital capital adjustment security market line Refer to section 14.5 Refer to section 14.5 Add Question Here Correct Feedback Incorrect Feedback Question 5 Multiple Choice Question A firm's cost of capital: Answer will decrease as the risk level of the firm increases. for a specific project is primarily dependent upon the source of the funds used for the project. is independent of the firm's capital structure. should be applied as the discount rate for any project considered by the firm. depends upon how the funds raised are going to be spent. Correct Feedback Refer to section 14.1 Incorrect Refer to section 14.1 Feedback Add Question Here Question 6 Multiple Choice Question The weighted average cost of capital for a wholesaler: Answer is equivalent to the aftertax cost of the firm's liabilities. should be used as the required return when analyzing a potential acquisition of a retail outlet. is the return investors require on the total assets of the firm. remains constant when the debt-equity ratio changes. is unaffected by changes in corporate tax rates. Correct Feedback Refer to section 14.1 Incorrect Refer to section 14.1 Feedback Add Question Here Question 7 Multiple Choice Question Which one of the following is the primary determinant of a firm's cost of capital? Answer debt-equity ratio applicable tax rate cost of equity cost of debt use of the funds Correct Feedback Incorrect Feedback Refer to section 14.1 Refer to section 14.1 Add Question Here Question 8 Multiple Choice Question Scholastic Toys is considering developing and distributing a new board game for children. The project is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity? Answer by adding the market risk premium to the aftertax cost of debt by multiplying the market risk premium by (1 - 0.40) by using the dividend growth model by using the capital asset pricing model by averaging the costs based on the dividend growth model and the capital asset pricing model Correct Feedback Incorrect Feedback Refer to section 14.2 Refer to section 14.2 Add Question Here Question 9 Multiple Choice Question All else constant, which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2. Answer a reduction in the dividend amount an increase in the dividend amount a reduction in the market rate of return a reduction in the firm's beta a reduction in the risk-free rate Correct Feedback Incorrect Feedback Refer to section 14.2 Refer to section 14.2 Add Question Here Question 10 Multiple Choice Question A firm's overall cost of equity is: Answer is generally less that the firm's WACC given a leveraged firm. unaffected by changes in the market risk premium. highly dependent upon the growth rate and risk level of the firm. generally less than the firm's aftertax cost of debt. inversely related to changes in the firm's tax rate. Correct Feedback Refer to section 14.2 Incorrect Feedback Refer to section 14.2 Add Question Here Question 11 Multiple Choice Question The cost of equity for a firm: Answer tends to remain static for firms with increasing levels of risk. increases as the unsystematic risk of the firm increases. ignores the firm's risks when that cost is based on the dividend growth model. equals the risk-free rate plus the market risk premium. equals the firm's pretax weighted average cost of capital. Correct Feedback Refer to section 14.2 Incorrect Feedback Refer to section 14.2 Add Question Here Question 12 Multiple Choice Question The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. firms that have a 100 percent retention ratio II. firms that pay a constant dividend III. firms that pay an increasing dividend IV. firms that pay a decreasing dividend Answer I and II only I and III only II and III only I, II, and III only II, III, and IV only Correct Feedback Refer to section 14.2 Incorrect Feedback Refer to section 14.2 Add Question Here Question 13 Multiple Choice Question The dividend growth model: Answer is only as reliable as the estimated rate of growth. can only be used if historical dividend information is available. considers the risk that future dividends may vary from their estimated values. applies only when a firm is currently paying dividends. uses beta to measure the systematic risk of a firm. Correct Feedback Refer to section 14.2 Incorrect Feedback Refer to section 14.2 Add Question Here Question 14 Multiple Choice Question Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure. Answer This model considers a firm's rate of growth. The model applies only to non-dividend paying firms. The model is dependent upon a reliable estimate of the market risk premium. The model generally produces the same cost of equity as the dividend growth model. This approach generally produces a cost of equity that equals the firm's overall cost of capital. Correct Feedback Refer to section 14.2 Incorrect Feedback Refer to section 14.2 Add Question Here Question 15 Multiple Choice Question Which of the following statements are correct? I. The SML approach is dependent upon a reliable measure of a firm's unsystematic risk. II. The SML approach can be applied to firms that retain all of their earnings. III. The SML approach assumes a firm's future risks are similar to its past risks. IV. The SML approach assumes the reward-to-risk ratio is constant. Answer I and III only II and IV only III and IV only I, II, and III only II, III, and IV only Correct Feedback Incorrect Feedback Refer to section 14.2 Refer to section 14.2 Add Question Here Question 16 Multiple Choice Question The pre-tax cost of debt: Answer is based on the current yield to maturity of the firm's outstanding bonds. is equal to the coupon rate on the latest bonds issued by a firm. is equivalent to the average current yield on all of a firm's outstanding bonds. is based on the original yield to maturity on the latest bonds issued by a firm. has to be estimated as it cannot be directly observed in the market. Correct Feedback Refer to section 14.3 Incorrect Feedback Refer to section 14.3 Add Question Here Question 17 Multiple Choice Question The aftertax cost of debt generally increases when: I. a firm's bond rating increases. II. the market rate of interest increases. III. tax rates decrease. IV. bond prices rise. Answer I and III only II and III only I, II, and III only II, III, and IV only I, II, III, and IV Correct Feedback Incorrect Feedback Refer to section 14.3 Refer to section 14.3 Add Question Here Question 18 Multiple Choice Question The cost of preferred stock is computed the same as the: Answer pre-tax cost of debt. return on an annuity. aftertax cost of debt. return on a perpetuity. cost of an irregular growth common stock. Correct Feedback Refer to section 14.3 Incorrect Feedback Refer to section 14.3 Add Question Here Question 19 Multiple Choice Question The cost of preferred stock: Answer is equal to the dividend yield. is equal to the yield to maturity. is highly dependent on the dividend growth rate. is independent of the stock's price. decreases when tax rates increase. Correct Feedback Refer to section 14.3 Incorrect Feedback Refer to section 14.3 Add Question Here Question 20 Multiple Choice Question The capital structure weights used in computing the weighted average cost of capital: Answer are based on the book values of total debt and total equity. are based on the market value of the firm's debt and equity securities. are computed using the book value of the long-term debt and the book value of equity. remain constant over time unless the firm issues new securities. are restricted to the firm's debt and common stock. Correct Feedback Refer to section 14.4 Incorrect Refer to section 14.4 Feedback Add Question Here Question 21 Multiple Choice Question Morris Industries has a capital structure of 55 percent common stock, 10 percent preferred stock, and 45 percent debt. The firm has a 60 percent dividend payout ratio, a beta of 0.89, and a tax rate of 38 percent. Given this, which one of the following statements is correct? Answer The aftertax cost of debt will be greater than the current yield-to-maturity on the firm's bonds. The firm's cost of preferred is most likely less than the firm's actual cost of debt. The firm's cost of equity is unaffected by a change in the firm's tax rate. The cost of equity can only be estimated using the SML approach. The firm's weighted average cost of capital will remain constant as long as the capital structure remains constant. Correct Feedback Refer to section 14.4 Incorrect Feedback Refer to section 14.4 Add Question Here Question 22 Multiple Choice Question The aftertax cost of debt: Answer varies inversely to changes in market interest rates. will generally exceed the cost of equity if the relevant tax rate is zero. will generally equal the cost of preferred if the tax rate is zero. is unaffected by changes in the market rate of interest. has a greater effect on a firm's cost of capital when the debt-equity ratio increases. Correct Feedback Refer to section 14.3 Incorrect Feedback Refer to section 14.3 Add Question Here Question 23 Multiple Choice Question The weighted average cost of capital for a firm may be dependent upon the firm's: I. rate of growth. II. debt-equity ratio. III. preferred dividend payment. IV. retention ratio. Answer I and III only II and IV only I, II, and IV only I, III, and IV only I, II, III, and IV Correct Feedback Incorrect Feedback Refer to section 14.4 Refer to section 14.4 Add Question Here Question 24 Multiple Choice Question The weighted average cost of capital for a firm is the: Answer discount rate which the firm should apply to all of the projects it undertakes. rate of return a firm must earn on its existing assets to maintain the current value of its stock. coupon rate the firm should expect to pay on its next bond issue. minimum discount rate the firm should require on any new project. rate of return shareholders should expect to earn on their investment in this firm. Correct Feedback Refer to section 14.4 Incorrect Refer to section 14.4 Feedback Add Question Here Question 25 Multiple Choice Question Which one of the following statements is correct for a firm that uses debt in its capital structure? Answer The WACC should decrease as the firm's debt-equity ratio increases. When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred. The firm's WACC will decrease as the corporate tax rate decreases. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share. The WACC will remain constant unless a firm retires some of its debt. Correct Feedback Incorrect Feedback Refer to section 14.4 Refer to section 14.4 Add Question Here Question 26 Multiple Choice Question If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to: I. reject some positive net present value projects. II. accept some negative net present value projects. III. favor high risk projects over low risk projects. IV. increase its overall level of risk over time. Answer I and III only III and IV only I, II, and III only I, II, and IV only I, II, III, and IV Correct Feedback Incorrect Feedback Refer to section 14.4 Refer to section 14.4 Add Question Here Question 27 Multiple Choice Question Preston Industries has two separate divisions. Each division is in a separate line of business. Division A is the largest division and represents 70 percent of the firm's overall sales. Division A is also the riskier of the two divisions. Division B is the smaller and least risky of the two. When management is deciding which of the various divisional projects should be accepted, the managers should: Answer allocate more funds to Division A since it is the largest of the two divisions. fund all of Division B's projects first since they tend to be less risky and then allocate the remaining funds to the Division A projects that have the highest net present values. allocate the company's funds to the projects with the highest net present values based on the firm's weighted average cost of capital. assign appropriate, but differing, discount rates to each project and then select the projects with the highest net present values. fund the highest net present value projects from each division based on an allocation of 70 percent of the funds to Division A and 30 percent of the funds to Division B. Correct Feedback Incorrect Feedback Refer to section 14.5 Refer to section 14.5 Add Question Here Question 28 Multiple Choice Question Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to: Answer receive less project funding if its line of business is riskier than that of the other divisions. avoid risky projects so it can receive more project funding. become less risky over time based on the projects that are accepted. have equal probability of receiving funding as compared to the other divisions. prefer higher risk projects over lower risk projects. Correct Feedback Refer to section 14.5 Incorrect Feedback Refer to section 14.5 Add Question Here Question 29 Multiple Choice Question The discount rate assigned to an individual project should be based on: Answer the firm's weighted average cost of capital. the actual sources of funding used for the project. an average of the firm's overall cost of capital for the past five years. the current risk level of the overall firm. the risks associated with the use of the funds required by the project. Correct Feedback Refer to section 14.5 Incorrect Feedback Refer to section 14.5 Add Question Here Question 30 Multiple Choice Question Assigning discount rates to individual projects based on the risk level of each project: Answer may cause the firm's overall weighted average cost of capital to either increase or decrease over time. will prevent the firm's overall cost of capital from changing over time. will cause the firm's overall cost of capital to decrease over time. decreases the value of the firm over time. negates the firm's goal of creating the most value for the shareholders. Correct Feedback Incorrect Feedback Refer to section 14.5 Refer to section 14.5 Add Question Here Question 31 Multiple Choice Question Which one of the following statements is correct? Answer Firms should accept low risk projects prior to funding high risk projects. Making subjective adjustments to a firm's WACC when determining project discount rates unfairly punishes low-risk divisions within a firm. A project that is unacceptable today might be acceptable tomorrow given a change in market returns. The pure play method is most frequently used for projects involving the expansion of a firm's current operations. Firms that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate. Correct Feedback Incorrect Feedback Refer to section 14.5 Refer to section 14.5 Add Question Here Question 32 Multiple Choice Question Phil's is a sit-down restaurant that specializes in home-cooked meals. Theresa's is a walk-in deli that specializes in specialty soups and sandwiches. Both firms are currently considering expanding their operations during the summer months by offering pre-wrapped donuts, sandwiches, and wraps at a local beach. Phil's currently has a WACC of 14 percent while Theresa's WACC is 10 percent. The expansion project has a projected net present value of $12,600 at a 10 percent discount rate and a net present value of -$2,080 at a 14 percent discount rate. Which firm or firms should expand and offer food at the local beach during the summer months? Answer Phil's only Theresa's only both Phil's and Theresa's neither Phil's nor Theresa's cannot be determined from the information provided Correct Feedback Incorrect Feedback Refer to section 14.5 Refer to section 14.5 Add Question Here Question 33 Multiple Choice Question Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel Excitement has an aftertax cost of capital of 11 percent. Both firms are considering building wilderness campgrounds complete with man-made lakes and hiking trails. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project? Answer Wilderness Adventures only Travel Excitement only both Wilderness Adventures and Travel Excitement neither Wilderness Adventures nor Travel Excitement cannot be determined without further information Correct Feedback Incorrect Feedback Refer to section 14.5 Refer to section 14.5 Add Question Here Question 34 Multiple Choice Question The subjective approach to project analysis: Answer is used only when a firm has an all-equity capital structure. uses the WACC of firm X as the basis for the discount rate for a project under consideration by firm Y. assigns discount rates to projects based on the discretion of the senior managers of a firm. allows managers to randomly adjust the discount rate assigned to a project once the project's beta has been determined. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt. Correct Feedback Incorrect Feedback Refer to section 14.5 Refer to section 14.5 Add Question Here Question 35 Multiple Choice Question Which one of the following statements is correct? Answer The subjective approach assesses the risks of each project and assigns an adjustment factor that is unique just for that project. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. Firms will correctly accept or reject every project if they adopt the subjective approach. Mandatory projects should only be accepted if they produce a positive NPV when the firm's WACC is used as the discount rate. The pure play approach should only be used with low-risk projects. Correct Feedback Incorrect Feedback Refer to section 14.5 Refer to section 14.5 Add Question Here Question 36 Multiple Choice Question When a firm has flotation costs equal to 7 percent of the funding need, project analysts should: Answer increase the project's discount rate to offset these expenses by multiplying the firm's WACC by 1.07. increase the project's discount rate to offset these expenses by dividing the firm's WACC by (1 - 0.07). add 7 percent to the firm's WACC to get the discount rate for the project. increase the initial project cost by multiplying that cost by 1.07. increase the initial project cost by dividing that cost by (1 - 0.07). Correct Feedback Incorrect Feedback Refer to section 14.6 Refer to section 14.6 Add Question Here Question 37 Multiple Choice Question The flotation cost for a firm is computed as: Answer the arithmetic average of the flotation costs of both debt and equity. the weighted average of the flotation costs associated with each form of financing. the geometric average of the flotation costs associated with each form of financing. one-half of the flotation cost of debt plus one-half of the flotation cost of equity. a weighted average based on the book values of the firm's debt and equity. Correct Feedback Incorrect Feedback Refer to section 14.6 Refer to section 14.6 Add Question Here Question 38 Multiple Choice Question Incorporating flotation costs into the analysis of a project will: Answer cause the project to be improperly evaluated. increase the net present value of the project. increase the project's rate of return. increase the initial cash outflow of the project. have no effect on the present value of the project. Correct Feedback Refer to section 14.6 Incorrect Feedback Refer to section 14.6 Add Question Here Question 39 Multiple Choice Question Flotation costs for a levered firm should: Answer be ignored when analyzing a project because they are not an actual project cost. be spread over the life of a project thereby reducing the cash flows for each year of the project. only be considered when two projects are mutually exclusive. be weighted and included in the initial cash flow. be totally ignored when internal equity funding is utilized. Correct Feedback Refer to section 14.6 Incorrect Refer to section 14.6 Feedback Add Question Here Question 40 Multiple Choice Question Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of equity? Answer 7.58 percent 7.91 percent 8.24 percent 8.57 percent 9.00 percent Correct Feedback Incorrect Feedback Add Question Here Question 41 Multiple Choice Question The Shoe Outlet has paid annual dividends of $0.65, $0.70, $0.72, and $0.75 per share over the last four years, respectively. The stock is currently selling for $26 a share. What is this firm's cost of equity? Answer 7.56 percent 7.93 percent 10.38 percent 10.53 percent 11.79 percent Correct Feedback ($0.70 - $0.65)/$0.65 = 0.076923 ($0.72 - $0.70)/$0.70 = 0.028571 ($0.75 - $0.72)/$0.72 = 0.041667 g = (0.076923 + 0.028571 + 0.041667)/3 = .049054 Re = [($0.75 1.049054)/$26] + .049054 = 7.93 percent ($0.70 - $0.65)/$0.65 = 0.076923 ($0.72 - $0.70)/$0.70 = 0.028571 ($0.75 - $0.72)/$0.72 = 0.041667 g = (0.076923 + 0.028571 + 0.041667)/3 = .049054 Re = [($0.75 1.049054)/$26] + .049054 = 7.93 percent Add Question Here Incorrect Feedback Question 42 Multiple Choice Question Sweet Treats common stock is currently priced at $19.06 a share. The company just paid $1.15 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. What is this firm's cost of equity? Answer 6.03 percent 6.18 percent 8.47 percent 8.68 percent 8.82 percent Correct Feedback Incorrect Feedback e = [($1.15 1.025)/$19.06] + 0.025 = 8.68 percent e = [($1.15 1.025)/$19.06] + 0.025 = 8.68 percent Add Question Here Question 43 Multiple Choice Question The common stock of Metal Molds has a negative growth rate of 1.5 percent and a required return of 18 percent. The current stock price is $11.40. What was the amount of the last dividend paid? Answer $2.07 $2.11 $2.19 $2.22 $2.26 Correct Feedback Incorrect Feedback D1 = [(0.18 - (-0.015)) $11.40] = $2.223; D0 = $2.223/(1 - 0.015) = $2.26 D1 = [(0.18 - (-0.015)) $11.40] = $2.223; D0 = $2.223/(1 - 0.015) = $2.26 Add Question Here Question 44 Multiple Choice Question Highway Express has paid annual dividends of $1.16, $1.20, $1.25, $1.10, and $0.95 over the past five years respectively. What is the average dividend growth rate? Answer -4.51 percent -3.60 percent 2.28 percent 2.47 percent 4.39 percent Correct Feedback ($1.20 - $1.16)/$1.16 = 0.034483 ($1.25 - $1.20)/$1.20 = 0.041667 ($1.10 - $1.25)/$1.25 = -0.12 ($0.95 - $1.10)/$1.10 = -0.136364 g = (0.034483 + 0.041667 - 0.12 - 0.136364)/4 = -4.51 percent ($1.20 - $1.16)/$1.16 = 0.034483 ($1.25 - $1.20)/$1.20 = 0.041667 ($1.10 - $1.25)/$1.25 = -0.12 ($0.95 - $1.10)/$1.10 = -0.136364 g = (0.034483 + 0.041667 - 0.12 - 0.136364)/4 = -4.51 percent Add Question Here Incorrect Feedback Question 45 Multiple Choice Question Southern Home Cookin' just paid its annual dividend of $0.65 a share. The stock has a market price of $13 and a beta of 1.12. The return on the U.S. Treasury bill is 2.5 percent and the market risk premium is 6.8 percent. What is the cost of equity? Answer 9.98 percent 10.04 percent 10.12 percent 10.37 percent 10.45 percent Correct Feedback Incorrect Feedback Re = 0.025 + (1.12 0.068) = 10.12 percent Re = 0.025 + (1.12 0.068) = 10.12 percent Add Question Here Question 46 Multiple Choice Question National Home Rentals has a beta of 1.38, a stock price of $19, and recently paid an annual dividend of $0.94 a share. The dividend growth rate is 4.5 percent. The market has a 10.6 percent rate of return and a risk premium of 7.5 percent. What is the firm's cost of equity? Answer 7.05 percent 8.67 percent 9.13 percent 10.30 percent 11.56 percent Correct Feedback Re = (0.106 - 0.075) + (1.38 0.075) = 0.1345 Re = [($0.94 1.045)/$19] + 0.045 = 0.0967 Re Average = (0.1345 + 0.0967)/2 = 11.56 percent Re = (0.106 - 0.075) + (1.38 0.075) = 0.1345 Re = [($0.94 1.045)/$19] + 0.045 = 0.0967 Re Average = (0.1345 + 0.0967)/2 = 11.56 percent Add Question Here Incorrect Feedback Question 47 Multiple Choice Question Henessey Markets has a growth rate of 4.8 percent and is equally as risky as the market. The stock is currently selling for $17 a share. The overall stock market has a 10.6 percent rate of return and a risk premium of 8.7 percent. What is the expected rate of return on this stock? Answer 8.7 percent 9.2 percent 10.6 percent 11.3 percent 11.7 percent Correct Feedback Incorrect Feedback Re = (0.106 - 0.087) + (1.00 0.087) = 10.6 percent Re = (0.106 - 0.087) + (1.00 0.087) = 10.6 percent Add Question Here Question 48 Multiple Choice Question Tidewater Fishing has a current beta of 1.48. The market risk premium is 8.9 percent and the risk-free rate of return is 3.2 percent. By how much will the cost of equity increase if the company expands its operations such that the company beta rises to 1.60? Answer 0.88 percent 1.07 percent 1.50 percent 2.10 percent 2.26 percent Correct Feedback Incorrect Feedback Increase in cost of equity = (1.60 - 1.48) 0.089 = 1.07 percent Increase in cost of equity = (1.60 - 1.48) 0.089 = 1.07 percent Add Question Here Question 49 Multiple Choice Question Wind Power Systems has 20-year, semi-annual bonds outstanding with a 5 percent coupon. The face amount of each bond is $1,000. These bonds are currently selling for 114 percent of face value. What is the company's pre-tax cost of debt? Answer 3.98 percent 4.42 percent 4.71 percent 5.36 percent 5.55 percent Correct Feedback Incorrect Feedback Add Question Here Question 50 Multiple Choice Question Boulder Furniture has bonds outstanding that mature in 13 years, have a 6 percent coupon, and pay interest annually. These bonds have a face value of $1,000 and a current market price of $1,040. What is the company's aftertax cost of debt if its tax rate is 32 percent? Answer 2.97 percent 3.24 percent 3.78 percent 5.21 percent 5.53 percent Correct Feedback Incorrect Feedback Add Question Here Question 51 Multiple Choice Question Handy Man, Inc. has zero coupon bonds outstanding that mature in 8 years. The bonds have a face value of $1,000 and a current market price of $640. What is the company's pre-tax cost of debt? Answer 2.55 percent 5.09 percent 5.66 percent 7.31 percent 7.48 percent Correct Feedback Incorrect Feedback Add Question Here Question 52 Multiple Choice Question Dog Gone Good Engines has a bond issue outstanding with 17 years to maturity. These bonds have a $1,000 face value, a 9 percent coupon, and pay interest semi-annually. The bonds are currently quoted at 87 percent of face value. What is the company's pre-tax cost of debt if the tax rate is 38 percent? Answer 4.10 percent 4.42 percent 6.61 percent 8.90 percent 10.67 percent Correct Feedback Incorrect Feedback Add Question Here Question 53 Multiple Choice Question The Corner Bakery has a bond issue outstanding that matures in 7 years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 101.4 percent of face value and carry a 9 percent coupon. What is the firm's aftertax cost of debt if the tax rate is 30 percent? Answer 4.88 percent 5.36 percent 5.45 percent 6.11 percent 8.74 percent Correct Feedback Incorrect Feedback Add Question Here Question 54 Multiple Choice Question The outstanding bonds of Tech Express are priced at $989 and mature in 8 years. These bonds have a 6 percent coupon and pay interest annually. The firm's tax rate is 39 percent. What is the firm's aftertax cost of debt? Answer 3.01 percent 3.22 percent 3.35 percent 3.77 percent 4.41 percent Correct Feedback Incorrect Feedback Add Question Here Question 55 Multiple Choice Question Simple Foods has a zero coupon bond issue outstanding that matures in 9 years. The bonds are selling at 42 percent of par value. What is the company's aftertax cost of debt if the tax rate is 38 percent? Answer 5.48 percent 5.73 percent 6.12 percent 7.73 percent 9.88 percent Correct Feedback Incorrect Feedback Add Question Here Question 56 Multiple Choice Question Grill Works and More has 8 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 37 percent. What is the firm's cost of preferred stock? Answer percent 14.77 15.29 percent 15.67 percent 16.33 percent 16.54 percent Correct Feedback Incorrect Feedback Rp = (0.08 $100)/$49 = 16.33 percent Rp = (0.08 $100)/$49 = 16.33 percent Add Question Here Question 57 Multiple Choice Question Samuelson Plastics has 7.5 percent preferred stock outstanding. Currently, this stock has a market value per share of $52 and a book value per share of $38. What is the cost of preferred stock? Answer 7.50 percent 13.88 percent 14.42 percent 19.29 percent 19.74 percent Correct Feedback Incorrect Feedback Rp = (0.075 $100)/$52 = 14.42 percent Rp = (0.075 $100)/$52 = 14.42 percent Add Question Here Question 58 Multiple Choice Question New York Deli's has 7 percent preferred stock outstanding that sells for $36 a share. This stock was originally issued at $50 per share. What is the cost of preferred stock? Answer 13.68 percent 14.00 percent 14.29 percent 19.44 percent 19.80 percent Correct Feedback Incorrect Feedback Rp = (0.07 $100)/$36 = 19.44 percent Rp = (0.07 $100)/$36 = 19.44 percent Add Question Here Question 59 Multiple Choice Question Nelson's Landscaping has 1,200 bonds outstanding that are selling for $990 each. The company also has 2,500 shares of preferred stock at a market price of $28 a share. The common stock is priced at $37 a share and there are 28,000 shares outstanding. What is the weight of the common stock as it relates to the firm's weighted average cost of capital? Answer 43.08 percent 45.16 percent 47.11 percent 54.00 percent 55.45 percent Correct Feedback Incorrect Feedback Add Question Here Question 60 Multiple Choice Question Mangrove Fruit Farms has a $200,000 bond issue outstanding that is selling at 92 percent of face value. The firm also has 1,500 shares of preferred stock and 15,000 shares of common stock outstanding. The preferred stock has a market price of $35 a share compared to a price of $24 a share for the common stock. What is the weight of the preferred stock as it relates to the firm's weighted average cost of capital? Answer 6.75 percent 7.20 percent 7.75 percent 8.30 percent 8.80 percent Correct Feedback Incorrect Feedback Add Question Here Question 61 Multiple Choice Question Electronics Galore has 950,000 shares of common stock outstanding at a market price of $38 a share. The company also has 40,000 bonds outstanding that are quoted at 106 percent of face value. What weight should be given to the debt when the firm computes its weighted average cost of capital? Answer 42 percent 46 percent 50 percent 54 percent 58 percent Correct Feedback Incorrect Feedback Add Question Here Question 62 Multiple Choice Question Phillips Equipment has 80,000 bonds outstanding that are selling at par. Bonds with similar characteristics are yielding 6.75 percent. The company also has 750,000 shares of 7 percent preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $53 a share. The common stock has a beta of 1.34 and sells for $42 a share. The U.S. Treasury bill is yielding 2.8 percent and the return on the market is 11.2 percent. The corporate tax rate is 38 percent. What is the firm's weighted average cost of capital? Answer 10.39 percent 10.64 percent 11.18 percent 11.30 percent 11.56 percent Correct Feedback Re = 0.028 + 1.34 (0.112 - 0.028) = 0.14056 Rp = (0.07 $100)/$53 = 0.13208 Incorrect Feedback WACC = ($105m/$224.75m) (0.14056) + ($39.75m/$224.75m) (0.13208) + ($80m/ $224.75m) (0.0675) (1 - 0.38) = 10.39 percent Re = 0.028 + 1.34 (0.112 - 0.028) = 0.14056 Rp = (0.07 $100)/$53 = 0.13208 WACC = ($105m/$224.75m) (0.14056) + ($39.75m/$224.75m) (0.13208) + ($80m/ $224.75m) (0.0675) (1 - 0.38) = 10.39 percent Add Question Here Question 63 Multiple Choice Question Wayco Industrial Supply has a pre-tax cost of debt of 7.6 percent, a cost of equity of 14.3 percent, and a cost of preferred stock of 8.5 percent. The firm has 220,000 shares of common stock outstanding at a market price of $27 a share. There are 25,000 shares of preferred stock outstanding at a market price of $41 a share. The bond issue has a face value of $550,000 and a market quote of 101.2. The company's tax rate is 37 percent. What is the firm's weighted average cost of capital? Answer 10.18 percent 10.84 percent 11.32 percent 12.60 percent 12.81 percent Correct Feedback WACC = ($5,940,000/$7,521,600) (0.143) + ($1,025,000/$7,521,600) (0.085) + ($556,600/ $7,521,600) (0.076) (1 - 0.37) = 12.81 percent Incorrect Feedback WACC = ($5,940,000/$7,521,600) (0.143) + ($1,025,000/$7,521,600) (0.085) + ($556,600/ $7,521,600) (0.076) (1 - 0.37) = 12.81 percent Add Question Here Question 64 Multiple Choice Question Central Systems, Inc. desires a weighted average cost of capital of 8 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.2 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital? Answer 0.38 0.44 1.02 2.25 2.63 Correct Feedback WACC = 0.08 = [We 0.152] + [(1 - We) 0.048)] We = 0.3077; Wd = 1 - We = 0.6923 Debt-equity ratio = 0.6923/0.3077 = 2.25 WACC = 0.08 = [We 0.152] + [(1 - We) 0.048)] We = 0.3077; Wd = 1 - We = 0.6923 Debt-equity ratio = 0.6923/0.3077 = 2.25 Add Question Here Incorrect Feedback Question 65 Multiple Choice Question R.S. Green has 250,000 shares of common stock outstanding at a market price of $28 a share. Next year's annual dividend is expected to be $1.55 a share. The dividend growth rate is 2 percent. The firm also has 7,500 bonds outstanding with a face value of $1,000 per bond. The bonds carry a 7 percent coupon, pay interest semiannually, and mature in 7.5 years. The bonds are selling at 98 percent of face value. The company's tax rate is 34 percent. What is the firm's weighted average cost of capital? Answer 5.4 percent 6.2 percent 7.5 percent 8.5 percent 9.6 percent Correct Feedback Incorrect Feedback Add Question Here Question 66 Multiple Choice Question Kelso's has a debt-equity ratio of 0.55 and a tax rate of 35 percent. The firm does not issue preferred stock. The cost of equity is 14.5 percent and the aftertax cost of debt is 4.8 percent. What is the weighted average cost of capital? Answer 10.46 percent 10.67 percent 11.06 percent 11.38 percent 11.57 percent Correct Feedback Incorrect Feedback WACC = (1/1.55) (0.145) + (0.55/1.55) (0.048) = 11.06 percent WACC = (1/1.55) (0.145) + (0.55/1.55) (0.048) = 11.06 percent Add Question Here Question 67 Multiple Choice Question Granite Works maintains a debt-equity ratio of 0.65 and has a tax rate of 32 percent. The firm does not issue preferred stock. The pre-tax cost of debt is 9.8 percent. There are 25,000 shares of stock outstanding with a beta of 1.2 and a market price of $19 a share. The current market risk premium is 8.5 percent and the current risk-free rate is 3.6 percent. This year, the firm paid an annual dividend of $1.10 a share and expects to increase that amount by 2 percent each year. Using an average expected cost of equity, what is the weighted average cost of capital? Answer 8.44 percent 8.78 percent 8.96 percent 9.13 percent 9.20 percent Correct Feedback Re = 0.036 + 1.2(0.085) = 0.138 Re = [($1.10 1.02)/$19] + 0.02 = 0.0790526 Re Average = (0.138 + 0.0790526)/2 = 0.108526 WACC = (1/1.65) (0.108526) + (0.65/1.65) (0.098) (1 - 0.32) = 9.20 percent Re = 0.036 + 1.2(0.085) = 0.138 Re = [($1.10 1.02)/$19] + 0.02 = 0.0790526 Re Average = (0.138 + 0.0790526)/2 = 0.108526 WACC = (1/1.65) (0.108526) + (0.65/1.65) (0.098) (1 - 0.32) = 9.20 percent Add Question Here Incorrect Feedback Question 68 Multiple Choice Question Delta Lighting has 30,000 shares of common stock outstanding at a market price of $17.50 a share. This stock was originally issued at $31 per share. The firm also has a bond issue outstanding with a total face value of $280,000 which is selling for 86 percent of par. The cost of equity is 16 percent while the aftertax cost of debt is 6.9 percent. The firm has a beta of 1.48 and a tax rate of 30 percent. What is the weighted average cost of capital? Answer 11.07 percent 13.14 percent 14.36 percent 15.29 percent 15.47 percent Correct Feedback Incorrect Feedback Add Question Here Question 69 Multiple Choice Question The Market Outlet has a beta of 1.38 and a cost of equity of 14.945 percent. The risk-free rate of return is 4.25 percent. What discount rate should the firm assign to a new project that has a beta of 1.25? Answer 13.54 percent. 13.72 percent. 13.94 percent. 14.14 percent. 14.36 percent. Correct Feedback Incorrect Feedback RE = 0.14945 = 0.0425 + (1.38 mrp); mrp = 0.0775 RProject = 0.0425 + (1.25 0.0775) = 13.94 percent RE = 0.14945 = 0.0425 + (1.38 mrp); mrp = 0.0775 RProject = 0.0425 + (1.25 0.0775) = 13.94 percent Add Question Here Question 70 Multiple Choice Question Silo Mills has a beta of 0.87 and a cost of equity of 11.9 percent. The risk-free rate of return is 2.8 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of 6 years. What discount rate should be assigned to this project? Answer 13.33 percent. 13.57 percent. 13.62 percent. 13.84 percent. 14.09 percent. Correct Feedback Incorrect Feedback RE = 0.119 = 0.028 + (0.87 mrp); mrp = 0.1046 RProject = 0.028 + (1.03 0.1046) = 13.57 percent RE = 0.119 = 0.028 + (0.87 mrp); mrp = 0.1046 RProject = 0.028 + (1.03 0.1046) = 13.57 percent Add Question Here Question 71 Multiple Choice Question Travis & Sons has a capital structure which is based on 40 percent debt, 5 percent preferred stock, and 55 percent common stock. The pre-tax cost of debt is 7.5 percent, the cost of preferred is 9 percent, and the cost of common stock is 13 percent. The company's tax rate is 39 percent. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of $325,000 and annual cash inflows of $87,000, $279,000, and $116,000 over the next three years, respectively. What is the projected net present value of this project? Answer $68,211.04 $68,879.97 $69,361.08 $74,208.18 $76,011.23 Correct Feedback WACC = (0.55 0.13) + (0.05 0.09) + [0.40 0.075 (1 - 0.39)] =0.0943 NPV -$325,000 + ($87,000/1.0943) + ($279,000/1.09432) + ($116,000/1.09433) = $76,011.23 WACC = (0.55 0.13) + (0.05 0.09) + [0.40 0.075 (1 - 0.39)] =0.0943 NPV -$325,000 + ($87,000/1.0943) + ($279,000/1.09432) + ($116,000/1.09433) = $76,011.23 Add Question Here Incorrect Feedback Question 72 Multiple Choice Question Panelli's is analyzing a project with an initial cost of $102,000 and cash inflows of $65,000 in year one and $74,000 in year two. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance its operations and maintains a debt-equity ratio of 0.45. The aftertax cost of debt is 4.8 percent, the cost of equity is 12.7 percent, and the tax rate is 35 percent. What is the projected net present value of this project? Answer $15,411 $15,809 $16,333 $16,938 $17,840 Correct Feedback Incorrect Feedback WACC = (1/1.45) (0.127) + (0.45/1.45) (0.048) = 0.102483 NPV = -$102,000 + ($65,000/1.102483) + ($74,000/1.1024832) = $17,840 WACC = (1/1.45) (0.127) + (0.45/1.45) (0.048) = 0.102483 NPV = -$102,000 + ($65,000/1.102483) + ($74,000/1.1024832) = $17,840 Add Question Here Question 73 Multiple Choice Question Carson Electronics uses 70 percent common stock and 30 percent debt to finance its operations. The aftertax cost of debt is 5.4 percent and the cost of equity is 15.4 percent. Management is considering a project that will produce a cash inflow of $36,000 in the first year. The cash inflows will then grow at 3 percent per year forever. What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project? Answer $299,032 $382,979 $411,406 $434,086 $441,414 Correct Feedback Incorrect Feedback WACC = 0.70(0.154) + 0.30(0.054) = 0.124 PV = $36,000/(0.124 - 0.03) = $382,979 WACC = 0.70(0.154) + 0.30(0.054) = 0.124 PV = $36,000/(0.124 - 0.03) = $382,979 Add Question Here Question 74 Multiple Choice Question The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.5 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $62,000 and projected cash inflows of $17,000 in year one, $28,000 in year two, and $30,000 in year three. The firm uses 25 percent debt and 75 percent common stock as its capital structure. The company's cost of equity is 15.5 percent while the aftertax cost of debt for the firm is 6.1 percent. What is the projected net present value of the new project? Answer -$6,208 -$5,964 -$2,308 $1,427 $1,573 Correct Feedback WACCFirm = (0.75 0.155) + (0.25 0.061) = 0.1315 WACCProject = 0.1315 + 0.015 = 0.1465 NPV = -$62,000 + ($17,000/1.1465) + ($28,000/1.14652) + ($30,000/1.14653) = $5,964 WACCFirm = (0.75 0.155) + (0.25 0.061) = 0.1315 WACCProject = 0.1315 + 0.015 = 0.1465 NPV = -$62,000 + ($17,000/1.1465) + ($28,000/1.14652) + ($30,000/1.14653) = $5,964 Add Question Here Incorrect Feedback Question 75 Multiple Choice Question The Oil Derrick has an overall cost of equity of 13.6 percent and a beta of 1.28. The firm is financed solely with common stock. The risk-free rate of return is 3.4 percent. What is an appropriate cost of capital for a division within the firm that has an estimated beta of 1.18? Answer 12.37 percent 12.41 percent 12.54 percent 12.67 percent 12.80 percent Correct Feedback Incorrect Feedback 0.136 = 0.034 + 1.28mrp; mrp = 0.0796875 ReDivision = 0.034 + 1.18(0.0796875) = 12.80 percent 0.136 = 0.034 + 1.28mrp; mrp = 0.0796875 ReDivision = 0.034 + 1.18(0.0796875) = 12.80 percent Add Question Here Question 76 Multiple Choice Question Miller Sisters has an overall beta of 0.64 and a cost of equity of 11.2 percent for the firm overall. The firm is 100 percent financed with common stock. Division A within the firm has an estimated beta of 1.08 and is the riskiest of all of the firm's operations. What is an appropriate cost of capital for division A if the market risk premium is 9.5 percent? Answer 15.12 percent 15.38 percent 15.63 percent 15.77 percent 16.01 percent Correct Feedback Incorrect Feedback 0.112 = rf + 0.64(0.095); rf = 0.0512 ReDivision = 0.0512 + 1.08(0.095) = 15.38 percent 0.112 = rf + 0.64(0.095); rf = 0.0512 ReDivision = 0.0512 + 1.08(0.095) = 15.38 percent Add Question Here Question 77 Multiple Choice Question Deep Mining and Precious Metals are separate firms that are both considering a silver exploration project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 12.8 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 10.6 percent. The project under consideration has initial costs of $575,000 and anticipated annual cash inflows of $102,000 a year for ten years. Which firm(s), if either, should accept this project? Answer Company A only Company B only both Company A and Company B neither Company A or Company B cannot be determined without further information Correct Feedback Neither company should accept this project as the applicable discount rate for both firms is 12.8 percent and the NPV is negative at this discount rate. Incorrect Feedback Neither company should accept this project as the applicable discount rate for both firms is 12.8 percent and the NPV is negative at this discount rate. Add Question Here Question 78 Multiple Choice Question Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 11.6 percent. Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.8 percent. Sister Pools is considering building and selling its own water features and fountains. The sales manager of Sister Pools estimates that the water features and fountains would produce 20 percent of the firm's future total sales. The initial cash outlay for this project would be $85,000. The expected net cash inflows are $16,000 a year for 7 years. What is the net present value of the Sister Pools project? Answer -$11,044 -$9,115 -$7,262 -$4,508 $1,219 Correct Feedback Incorrect Feedback Add Question Here Question 79 Multiple Choice Question Decker's is a chain of furniture retail stores. Furniture Fashions is a furniture maker and a supplier to Decker's. Decker's has a beta of 1.38 as compared to Furniture Fashion's beta of 1.12. The riskfree rate of return is 3.5 percent and the market risk premium is 8 percent. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture? Answer 12.46 percent 12.92 percent 13.50 percent 14.08 percent 14.54 percent Correct Feedback Incorrect Feedback Re = 0.035 + 1.12(0.08) = 12.46 percent Re = 0.035 + 1.12(0.08) = 12.46 percent Add Question Here Question 80 Multiple Choice Question Bleakly Enterprises has a capital structure of 55 percent common stock, 10 percent preferred stock, and 35 percent debt. The flotation costs are 4.5 percent for debt, 7 percent for preferred stock, and 9.5 percent for common stock. The corporate tax rate is 34 percent. What is the weighted average flotation cost? Answer 5.8 percent 6.2 percent 6.7 percent 7.0 percent 7.5 percent Correct Feedback Incorrect Feedback Average flotation cost = (0.55 0.095) + (0.10 0.07) + (0.35 0.045) = 7.5 percent Average flotation cost = (0.55 0.095) + (0.10 0.07) + (0.35 0.045) = 7.5 percent Add Question Here Question 81 Multiple Choice Question Justice, Inc. has a capital structure which is based on 30 percent debt, 5 percent preferred stock, and 65 percent common stock. The flotation costs are 11 percent for common stock, 10 percent for preferred stock, and 7 percent for debt. The corporate tax rate is 37 percent. What is the weighted average flotation cost? Answer 8.97 percent 9.48 percent 9.62 percent 9.75 percent 10.00 percent Correct Feedback Incorrect Feedback Average flotation cost = (0.65 0.11) + (0.05 0.10) + (0.30 0.07) = 9.75 percent Average flotation cost = (0.65 0.11) + (0.05 0.10) + (0.30 0.07) = 9.75 percent Add Question Here Question 82 Multiple Choice Question The Daily Brew has a debt-equity ratio of 0.72. The firm is analyzing a new project which requires an initial cash outlay of $420,000 for equipment. The flotation cost is 9.6 percent for equity and 5.4 percent for debt. What is the initial cost of the project including the flotation costs? Answer $302,400 $368,924 $455,738 $456,400 $583,333 Correct Feedback Incorrect Feedback Average flotation cost = (1/1.72) (0.096) + (0.72/1.72) (0.054) = 0.0784186 Initial cost = $420,000/(1 - 0.0784186) = $455,738 Average flotation cost = (1/1.72) (0.096) + (0.72/1.72) (0.054) = 0.0784186 Initial cost = $420,000/(1 - 0.0784186) = $455,738 Add Question Here Question 83 Multiple Choice Question You are evaluating a project which requires $230,000 in external financing. The flotation cost of equity is 11.6 percent and the flotation cost of debt is 5.4 percent. What is the initial cost of the project including the flotation costs if you maintain a debt-equity ratio of 0.45? Answer $248,494 $249,021 $254,638 $255,551 $255,646 Correct Feedback Incorrect Feedback Average flotation cost = (1/1.45) (0.116) + (0.45/1.45) (0.054) = 0.0967586 Initial cost = $230,000/(1 - 0.0967586) = $254,638 Average flotation cost = (1/1.45) (0.116) + (0.45/1.45) (0.054) = 0.0967586 Initial cost = $230,000/(1 - 0.0967586) = $254,638 Add Question Here Question 84 Multiple Choice Question Western Wear is considering a project that requires an initial investment of $274,000. The firm maintains a debt-equity ratio of 0.40 and has a flotation cost of debt of 7 percent and a flotation cost of equity of 10.5 percent. The firm has sufficient internally generated equity to cover the equity portion of this project. What is the initial cost of the project including the flotation costs? Answer $279,592 $281,406 $288,005 $297,747 $302,762 Correct Feedback Incorrect Feedback Average flotation cost = (1/1.40) (0) + (0.40/1.40) (0.07) = 0.02 Initial cost = $274,000/(1 - 0.02) = $279,592 Average flotation cost = (1/1.40) (0) + (0.40/1.40) (0.07) = 0.02 Initial cost = $274,000/(1 - 0.02) = $279,592 Add Question Here Question 85 Multiple Choice Question Yesteryear Productions is considering a project with an initial start up cost of $960,000. The firm maintains a debt-equity ratio of 0.50 and has a flotation cost of debt of 6.8 percent and a flotation cost of equity of 11.4 percent. The firm has sufficient internally generated equity to cover the equity cost of this project. What is the initial cost of the project including the flotation costs? Answer $979,417 $982,265 $992,386 $1,038,513 $1,065,089 Correct Feedback Average flotation cost = (1/1.5) (0.0) + (0.5/1.5) (0.068) = 0.0226667 Initial cost = $960,000/(1 - 0.0226667) = $982,265 Incorrect Feedback Average flotation cost = (1/1.5) (0.0) + (0.5/1.5) (0.068) = 0.0226667 Initial cost = $960,000/(1 - 0.0226667) = $982,265 Add Question Here Question 86 Essay Question What role does the weighted average cost of capital play when determining a project's cost of capital? Answer Assuming a project is equally as risky as a firm's current operations, WACC will be used as the discount rate when computing the NPV of the project. Therefore, having an accurate WACC is essential to correctly evaluating the project. If a project has a different risk level than the firm's current operations, then the firm's WACC should be adjusted in accordance with the project's risk or in some instances, a different firm's WACC should be applied as the discount rate for the project. Feedback: Refer to section 14.5 Add Question Here Question 87 Essay Question What are some advantages of the subjective approach to determining the cost of capital and why do you think that approach is utilized? Answer The subjective approach allows management to adjust a firm's overall cost of capital for individual divisions based upon its evaluation of the risks associated with each division as compared to the overall risk level of the firm. This risk adjustment is based on the wisdom, knowledge, and experiences of the managers. To try and determine a more accurate estimate of the appropriate discount rate might encounter costs that would outweigh any potential benefit. Thus, the subjective approach is useful because it adjusts discount rates in a cost effective and efficient manner. Feedback: Refer to section 14.5 Add Question Here Question 88 Essay Question Give an example of a situation where a firm should adopt the pure play approach for determining the cost of capital for a project. Answer Student examples will vary but should illustrate a project that is unrelated to the current operations of Firm A. The example should explain why the WACC of Firm B, which is engaged in the type of operations Firm A is considering, should be used as the basis for setting the discount rate for the proposed project. Feedback: Refer to section 14.5 Add Question Here Question 89 Essay Question Suppose your boss comes to you and asks you to re-evaluate a capital budgeting project. The first evaluation was in error, he explains, because it ignored flotation costs. To correct for this, he asks you to evaluate the project using a higher cost of capital which incorporates these costs. Is your boss' approach correct? Why or why not? Answer Your boss is confused since it is the use of funds, and not the source of funds, that determines the cost of capital. Flotation costs should be included in the initial cash flow of a project and not in the cost of capital. Feedback: Refer to section 14.6 Add Question Here Question 90 Essay Question Explain how the use of internal equity rather than external equity affects the analysis of a project. Answer Internal equity avoids the flotation costs associated with raising external equity. Therefore, by utilizing internal equity rather than external equity, the initial cost of the project is decreased. Decreasing the initial cost increases the NPV of the project. Feedback: Refer to section 14.6 Add Question Here Multiple Choice Question 91 Question 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? Answer 11.4 percent 12.8 percent 14.9 percent 17.6 percent 19.1 percent Correct Feedback Incorrect Feedback RE = 0.035 + 1.2(0.13 - 0.035) = 14.9 percent RE = 0.035 + 1.2(0.13 - 0.035) = 14.9 percent Add Question Here Question 92 Multiple Choice Question 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 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? Answer 13.94 percent 14.06 percent 14.21 percent 14.38 percent 14.50 percent Correct Feedback RE = 0.055 + 0.97(0.10) = 0.152 RE = [($1.70 1.07)/$32] + 0.07 = 0.12684375 RE Average = (0.152 + 0.12684375)/2 = 13.94 percent RE = 0.055 + 0.97(0.10) = 0.152 RE = [($1.70 1.07)/$32] + 0.07 = 0.12684375 RE Average = (0.152 + 0.12684375)/2 = 13.94 percent Add Question Here Incorrect Feedback Question 93 Multiple Choice Question 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 cost of preferred? Answer 4.60 percent 4.64 percent 5.39 percent 5.43 percent 5.54 percent Correct Feedback Incorrect Feedback RP = $5/$92 = 5.43 percent RP = $5/$92 = 5.43 percent Add Question Here Question 94 Multiple Choice Question 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? Answer 6.76 percent 6.90 percent 7.17 percent 7.37 percent 7.42 percent Correct Feedback Incorrect Feedback Add Question Here Question 95 Multiple Choice Question 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? Answer 4.63 percent 4.70 percent 4.75 percent 4.82 percent 4.86 percent Correct Feedback Incorrect Feedback Add Question Here Question 96 Multiple Choice Question 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? Answer 9.87 percent 10.43 percent 10.77 percent 13.38 percent 15.17 percent Correct Feedback Incorrect Feedback WACC = 0.41(0.19) + (0.04)(.065) + (0.55)(.075)(1 - 0.34) = 10.77 percent WACC = 0.41(0.19) + (0.04)(.065) + (0.55)(.075)(1 - 0.34) = 10.77 percent Add Question Here Question 97 Multiple Choice Question 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? Answer 12.53 percent 12.78 percent 13.11 percent 13.48 percent 13.67 percent Correct Feedback WACC = (1/1.5)(0.15) + (0.5/1.5)(0.11)(1 - 0.31) = 12.53 percent Incorrect Feedback WACC = (1/1.5)(0.15) + (0.5/1.5)(0.11)(1 - 0.31) = 12.53 percent Add Question Here Question 98 Multiple Choice Question 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? Answer 0.89 0.92 0.98 1.01 1.02 Correct Feedback WACC = 0.105 = 0.155(E/V) + (0.085) (D/V) (1 - 0.34) 0.105(V/E) = 0.155 + 0.085(0.66) (D/E) 0.105(1 + D/E) = 0.155 + 0.0561(D/E) D/E = 1.02 WACC = 0.105 = 0.155(E/V) + (0.085) (D/V) (1 - 0.34) 0.105(V/E) = 0.155 + 0.085(0.66) (D/E) 0.105(1 + D/E) = 0.155 + 0.0561(D/E) D/E = 1.02 Add Question Here Incorrect Feedback Question 99 Multiple Choice Question 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? Answer 13.75 percent 13.84 percent 14.41 percent 14.79 percent 15.82 percent Correct Feedback Incorrect Feedback WACC = 0.115 = (1/1.72) RE + (0.72/1.72)(0.055); RE = 15.82 percent WACC = 0.115 = (1/1.72) RE + (0.72/1.72)(0.055); RE = 15.82 percent Add Question Here Question 100 Multiple Choice Question 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? Answer 14.59 percent 14.72 percent 15.17 percent 15.54 percent 16.41 percent Correct Feedback MVD = 210,000 ($1,000) (0.91) = $191,100,000 MVE = 14,000,000 ($34) = $476,000,000 MVP = 900,000 ($80) = $72,000,000 V = $191,100,000 + $476,000,000 + $72,000,000 = $739,100,000 D/V = $191,100,000/$739,100,000 = 0.258558 E/V = $476,000,000/$739,100,000 = 0.644027 P/V = $72,000,000/$739,100,000 = 0.097416 RE = 0.075 + 1.15(0.115) = 0.20725 RP = $9/$80 = 0.1125 Incorrect Feedback RD Aftertax = 0.1119514 (1 - 0.32) = 0.076127 WACC = 0.644027(0.20725) + 0.097416 (0.1125) + 0.258558 (0.076127) = 16.41 percent MVD = 210,000 ($1,000) (0.91) = $191,100,000 MVE = 14,000,000 ($34) = $476,000,000 MVP = 900,000 ($80) = $72,000,000 V = $191,100,000 + $476,000,000 + $72,000,000 = $739,100,000 D/V = $191,100,000/$739,100,000 = 0.258558 E/V = $476,000,000/$739,100,000 = 0.644027 P/V = $72,000,000/$739,100,000 = 0.097416 RE = 0.075 + 1.15(0.115) = 0.20725 RP = $9/$80 = 0.1125 RD Aftertax = 0.1119514 (1 - 0.32) = 0.076127 WACC = 0.644027(0.20725) + 0.097416 (0.1125) + 0.258558 (0.076127) = 16.41 percent Add Question Here Question 101 Multiple Choice Question 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? Answer 14.82 million 14.94 million 15.07 million 15.12 million 15.23 million Correct Feedback Incorrect Feedback fA = (1/1.84)(0.095) + (0.84/1.84) (0.025) = 0.063043 Amount raised = $14m/(1 - 0.063043) = $14.94 million fA = (1/1.84)(0.095) + (0.84/1.84) (0.025) = 0.063043 Amount raised = $14m/(1 - 0.063043) = $14.94 million Add Question Here

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Odessa - FIN - 600
COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E - ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Se
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COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Set
Odessa - FIN - 600
COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Set
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COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Set
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COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Set
Odessa - FIN - 600
COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. UseCreation Set
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COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Set
Odessa - FIN - 600
COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E - ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Se
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COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Set
Odessa - FIN - 600
COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Set
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COURSES > FUNDAMENTALS OF CORPORATE FINANCE:, 9/E- ROSS > CONTROL PANEL > POOL MANAGER > POOL CANVASPool CanvasAdd, modify, and remove questions. Select a question type from the Add Question drop-down list and click Go to add questions. Use Creation Set
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SFASU - MKT - 11111
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Brittany Stephen Kari Eckblad Byron Winfree Homework #8 1. S = $50 D = 20,000 H = $.50 Workdays = 250 a) EOQ = sqrt(2SD/H) = 2,000 = Q b) orders = D/Q = 10 c) annual oc = SD/Q = $500 d) oct = workdays/(D/Q) = 25 e) 0 f) 2,000 g) avg = Q/2 = 1,000 h) annua
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Network Pop Quiz 1Brought to you by www.RMRoberts.com please visit our site! This is a set of questions to help you prepared for the CompTIA Network+ certification examination. You should not exceed twenty minutes for completing this examination. 1. Whic
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Tennessee - CIT - 601
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University of Florida - EGM - EGM 2511
University of Florida - EGM - EGM 2511
University of Florida - EGM - EGM 2511
University of Florida - EGM - EGM 2511