fa06ex4 - Fin 221 Fall 2006 Exam 4 Multiple Choice Identify...

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Fin 221 Fall 2006 Exam 4 Multiple Choice Identify the choice that best completes the statement or answers the question. 1) Several years ago the Haverford Company sold a $1,000 par value bond that now has 25 years to maturity and an 8.00% annual coupon that is paid quarterly. The bond currently sells for $900.90, and the company's tax rate is 40%. What is the component cost of debt for use in the WACC calculation? A. 5.40% B. 5.73% C. 5.98% D. 6.09% E. 6.24% 2) Assume that Mary Brown Inc. hired you as a consultant to help it estimate the cost of capital. You have been provided with the following data: D 0 $1.20; P 0 $40.00; and g 7% (constant). Based on the DCF approach, what is Brown's cost of equity from retained earnings? A. 10.06% B. 10.21% C. 10.37% D. 10.54% E. 10.68% 3) Crum International's target capital structure calls for 80% debt and 20% equity. The company expects to have $3 million of net income this year, and 60% of the net income will be paid out in dividends. How large can the firm's capital budget be this year before it will have to issue new common stock? A. $5.5 million B. $6.0 million C. $6.3 million D. $6.8 million E. $7.1 million 4) Assume that you are on the financial staff of Christopher Inc., and you have collected the following data: (1) The yield on the company's outstanding bonds is 7.0%, and its tax rate is 40%. (2) The expected year-end dividend is $0.80 a share, the dividend is expected to grow at a constant rate of 6% a year, the price of Christopher's stock is $25 per share, and the flotation cost for selling new shares is 10%. (3) The target capital structure is 40% debt and 60% equity. What is Christopher's WACC assuming that it must issue new stock to finance its capital budget? A. 7.11% B. 7.26% C. 7.41% D. 7.67% E. 7.89%
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5) Moussawi Enterprises, which finances only with equity from retained earnings, is considering two large capital budgeting projects, and its CFO hired you to assist in deciding whether one, both, or neither of the projects should be accepted. You have the following information: (1) r RF 5.5%; RP M 6%; and b 0.8. (2) The company adds 3% to the corporate WACC when it evaluates relatively risky projects, and it deducts 1% from the WACC when evaluating relatively safe projects. (3) Project S is relatively safe, it costs $10,000, and its expected rate of return is 8%, while Project R is relatively risky, it costs $15,000, and its expected rate of return is 12%. If these are the only two projects under consideration, how large should the capital budget be? A. $ 5,000 B. $10,000 C. $15,000 D. $20,000 E. $25,000 6) Which of the following statements is CORRECT? A. If a company's tax rate increases but the YTM of its noncallable bonds remains the same, the after-tax cost of its debt will fall. B. All else equal, an increase in a company's stock price will increase its marginal cost of
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This note was uploaded on 10/20/2008 for the course FIN 301 taught by Professor Rj during the Spring '08 term at Punjab Engineering College.

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fa06ex4 - Fin 221 Fall 2006 Exam 4 Multiple Choice Identify...

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