Spring 2009 Exam 3 - Fin 221 Spring 2009 Exam 3 Multiple...

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Fin 221 Spring 2009 Exam 3 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Wagner Inc estimates that its average-risk projects have a WACC of 10%, its below-average risk projects have a WACC of 8%, and its above-average risk projects have a WACC of 12%. Which of the following projects (A, B, and C) should the company accept? A. Project A is of average risk and has a return of 9%. B. Project B is of below-average risk and has a return of 8.5%. C. Project C is of above-average risk and has a return of 11%. D. None of the projects should be accepted. E. All of the projects should be accepted. 2. Anderson Company has four investment opportunities with the following costs (paid at t 0) and expected returns: Expected Project Cost Return A $2,000 16.0% B 3,000 14.5 C 5,000 11.5 D 3,000 9.5 The company has a target capital structure that consists of 40% common equity, 40% debt, and 20% preferred stock. The company has $1,000 in retained earnings. The company expects its year-end dividend to be $3.00 per share (D 1 $3.00). The dividend is expected to grow at a constant rate of 5% a year. The company's stock price is currently $42.75. If the company issues new common stock, the company will pay its investment bankers a 10% flotation cost. The company can issue corporate bonds with a YTM of 10%. The company has a 35% tax rate. How large can the cost of preferred stock be (including flotation costs) and it still be profitable for the company to invest in all four projects? A. 12.68% B. 7.75% C. 10.46% D. 8.90% E. 11.54% 3. A company is considering a project with the following cash flows: Project Year Cash Flow 0 -$100,000 1 50,000 2 50,000 3 50,000 4 -10,000
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The project's WACC is estimated to be 10%. What is the MIRR? A. 20.34% B. 11.56% C. 14.25% D. 13.28% E. 11.25% SCENARIO 10-6 Viduka Construction's CFO has collected the following information to estimate the company's WACC: The company currently has 20-year, 8.5% annual coupon bonds that have a face value of $1,000 and sell for $945. The company's stock has a beta 1.20. The market risk premium, RP m , equals 5%. The risk-free rate is 6%. The company has outstanding preferred stock that pays a $2.00 annual dividend. The preferred stock sells for $25 a share. The company's tax rate is 40%. The company's capital structure consists of 40% long-term debt, 40% common stock, and 20% preferred stock. 4. What is the company's WACC? A. 10.04% B. 8.59% C. 8.67% D. 8.12% E. 7.95% 5. Which of the following statements is CORRECT? A. Since its stockholders are not directly responsible for paying a corporation's income taxes, corporations should focus on before-tax cash flows when calculating the WACC. B.
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This note was uploaded on 02/14/2011 for the course FIN 221 taught by Professor Dyer during the Spring '09 term at University of Illinois, Urbana Champaign.

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Spring 2009 Exam 3 - Fin 221 Spring 2009 Exam 3 Multiple...

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