# exam 3b - Name _ Peoplesoft Number _ University of Houston...

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Name _________________________________ Peoplesoft Number _________________________________ University of Houston Bauer College of Business Finance 3332 Principles of Financial Management Exam 3B: Fall, 2009 Show equations either in variable form or equations with numbers plugged in, unless instructed differently Calculator financial function inputs must be shown. Clearly indicate your (one) answer Carry all decimals, rounding only final answer Decimal places on answers should be rounded to 4 places (2 in percent form) Currency answers rounded to the nearest cent, where applicable Include applicable units on answers Point values are in parentheses. 1. Management is planning for a capital budget of \$500 million. Retained earnings for the coming year are expected to be  \$200 million, and the firm’s marginal tax rate is 40 percent. The firm can net \$843.77 on each new bond, \$1000 par, 3 percent coupon paid annually, 25 years to maturity. (Only  calculator inputs are required.) The firm’s \$2 preferred stock is selling for \$30 per share. New \$2.00 preferred can be issued to net the firm \$28.57 per  share The firm’s common stock is expected to pay a dividend of \$1.00 per share next year, its market price is \$20 per share, and  analysts expect a growth rate of about 4 percent per year. New common stock can be issued to net the firm \$16.66 share.   Calculate and clearly identify the cost of  each  source  of capital.  (10) 2.  Manage m e nt  is planning  for a  capital  budget  of \$4  million.  Retained  earnings  for the  coming  year  are  expe cted   \$2  million,  and  the  firm’s  marginal  tax rate  is 40  percent.  Calculate  the  firm’s  WACC  given  the  following  compon e   costs  of capital.  (8) Component Costs of Capital Before  tax cost  of debt 3% Cost  of retained  earnings 6% Cost  of new  equity 8% Target Capital Structure Debt 30% Com m o n  stock 70%

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3.  Castle  Corporation  is planning  a  capital  project  with equipm ent  costing  a  total of \$900,000,  which  includes  shi   of \$20,000  and  installation  of \$400,000.  This  equipm ent  has  an  expe cted  life  of 18  years  and  a  salvage  value  of   Revenu e s  are  expe cted  to increas e  by  \$200,000  per  year  and  operating  expens e s  by  \$20,000  per  year.  An add   working  capital  investm ent  of \$8000  is also  required,  and  the  firm’s  marginal  tax rate  is 40  percent.  What are  the Net Cash Flows  per  year  of this  project,  including  any  one- time,  end  of project  cash  flows?  (6) 4.   Circle the  correct  respons e.  (2)  A ten- year,  4 percent  coupon  bond,  with a  par  value  of \$1000  sells  at \$1002.7   bond  is said  to be  selling  at:
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## This note was uploaded on 11/30/2010 for the course FINA 10606 taught by Professor Darlachisholm during the Fall '08 term at University of Houston.

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exam 3b - Name _ Peoplesoft Number _ University of Houston...

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