Bus342 s04 quiz4 - KC EST-I.1 IO WW7 Quiz 4 RF 0,9 I III K...

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Unformatted text preview: KC: EST-I? .1 IO WW7 Quiz 4 RF . 0,9- - I, III K? “:0 J 1. Find the required rate of return for equity investors of a firm with a betao hen the risk , free rate i. @the market risk premium isfj/Dand the return on the market Is 10%. RM — I lo @115% Ke‘ er BCMRP) vim 0.3) b. 13. 0% p f I ,2 I A c. 16.5% ; ‘051—8‘3L05) DJWIWCD’?) d. 18.0% = .Ilfy" ll 50/0 “5;”,5 6on 4’? 2. Plasti- tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt has a before- tax interest rate - 2% Plasti-tech’s common stock trades a ~15 er share and its most recent dividend was uture dividends are expected to grow b w The firm has 2.5 million 67 (7 . , shares outstanding. if the tax ratei 34%, what Is Plasti— tech’s WACC? Pl: l5 VVIllllOl/“I a. 7.39% lo NJ I001?) Do : I00 39.57% well: .4- Kol . l'L QI W at} ) 973% ’44 IQXI- b‘i—Ja—bLlO‘l’b) :I 0000+ 04*) d 11 20% 03m; 0:— 3. A project will generate $1 million net cash flow annually In perpetuity. If the Diprbject‘ costs $7 million, what Is the lowest WACC shown below that will make the NPV negative? l 000000 7 7 l 426097 a. 00 ~ ‘4‘ D b. 13;, fig?“ (019, 0,000 W” ”(I c. 14% ' (my/SQODD" "i 000 000 . 16% m...“ ,2“ __ ji— 4 What is the WACC }or a firm with equal amounts of debt and equity financing, [email protected] tax cost of capifaT, a 35% tax rate, and a 10% coupon rate on its debt that Is selling at par value? é1o.40% WA ‘5 KW Kol l0 9 @1425% Wg- ,9 : l< . lo . 40+ 6 c K 1:.-QQ-Irj C“ 1513:“ €61.35 ‘ .5226“ ll {3 PI d.16.00%1 lie [27/ 5. What Is the after— tax cost of preferred stock that pays a 12% dividend and sells at par if the firm stax rate Is 35%? YII) ‘ID’lX Ol/l )y'f f‘ICI/I/fi fil SITE/L (/ 2172:: I? KIN-Q” / 12. 0% / @ 16. 2% W P! (A, £4— 6. Which of the following changes would tend to Mthe company cost of capital for a / traditional firm? “ K4 "' ~ 5 K4 " I, I a. Decrease the proportion of equity financing. b. increase the market value of the debt. PI 1 DO W © Decrease the proportion of debt financing K .. g d. Decrease the market value of the equity (7; .4C~I1)ti<b4)+.o(IIoch) PICK“17‘ :O’bllofb + .ovsw —- 017M; .232 152+? .. e I M . (1.720% W " Kg? Rr—f BlRM‘Rf‘) \(q1WOllfiallWfiKC K VP". H? WOW 7 , I’IQL l) I 4(1) Wd‘a K01: JO Quiz4 We: .7 Ke -‘ / 7 Calculate a firm’ 5 WACC given that thewme firm Is $2,000, 000 and $600,000 of that value I debt. The cost of debt and equity 5 10 o and 15% respectively, and the firm pays notaxes. WA . K4 ‘|O @( [0) ‘l .~’l( l5) a-“m mm .7 Kg lb .0% + Ios b. 11.5% I?) /‘J C/ @ 13.5% VW JlMCS “le; )7) d. 14. 4% 8. If a company’ 5 cost of capital Is less than the required return on equity, then the firm: a. ls financedwrfithmore than 50% debt. m...“ Fol ' W4 k4 + W6 k€ , b. ls perceived to be safe Kol W0! I‘fi 0? " $1?th C, Has debt in its capital structure. 7?“ d. Cannot be using any debt. 9. If a firm earns the WACC as an average return on its average— —risk assets, then” 1 \Q \S a. Equity holders will be satisfied, but bondholders will not. ‘7 {N , U I C b. Bondholders will be satisfied , but equity holders will not. \Am? YVX @ All investors will earn their minimum required rate of return. d. The firm is investing only in positive NPV projects. 10. What is the WACC for a firm using 55% equity with a required return of 15%/35% debt with a required return of 8%, 10% preferred stock with a required return of 10%, and a tax rate of 33% 10 72? W6 '1.“ 95.. K6 7.1.“; W01“, (JMI if i6. <Efl—wgih/ .11:°7% M—ng—WK&% was +(K4 , 1 FIT/U c. 11.70% W __ lo K 10 d. 12.05% 13..-»..69 F m < M, Hajj “tr'q ”u-..” 72% O‘DXI 3%)“ 8% l9) + WC ‘0) are; (KI :W L I @923 + 191 I < III with l\.O’l°/I \Kclki Iiemvmq (Wt Will WW 00er of (WW I We fqém... U) H“ ...
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