hw2 - HW2 MGT3004 Prof. Ahn Make sure to show your...

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MGT3004 Prof. Ahn Make sure to show your calculation for problem solving questions 1. Which of the following statements are correct concerning the security market line (SML) approach to determining the cost of equity for a firm? I. The SML approach considers the amount of unsystematic risk associated with a firm. II. The SML approach can be applied to more firms than the dividend growth model can. III. The SML approach considers only future information. IV. The SML approach assumes the reward-to-risk ratio is constant. a. I and III only b. II and IV only c. III and IV only d. I, II, and III only e. I, II, III, and IV 2. Ellie's Boutique has a bond issue outstanding that matures in fourteen years. The bonds pay interest semi-annually. Currently, the bonds are quoted at 98 percent of face value and carry an 8 percent coupon. The firm's tax rate is 35 percent. What is the firm's aftertax cost of debt? a. 2.88 percent b. 5.36 percent c. 5.45 percent d. 8.24 percent e. 10.72 percent 3. Blue Ribbon, Inc. wants to have a weighted average cost of capital of 10 percent. The firm has an aftertax cost of debt of 4 percent and a cost of equity of 12 percent. What debt-equity ratio is needed for the firm to achieve their targeted weighted average cost of capital? a. .25 b. .33 c. .50 d. .67 e. .75 4. McKean, Inc. has a debt-equity ratio of .70 and a tax rate of 34 percent. The firm does not issue preferred stock. The cost of equity is 12 percent and the aftertax cost of debt is 6 percent. What is McKean's weighted average cost of capital? a. 7.3
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hw2 - HW2 MGT3004 Prof. Ahn Make sure to show your...

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