Sample_Test_Questions_Chapters_17_and_18

# Sample_Test_Questions_Chapters_17_and_18 - Sample Questions...

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1 Sample Questions MBA522 Spring 2011 Midterm 2 Multiple Choice Questions Instructions: To answer these questions, bubble in the letter that corresponds with the best answer for each question on you answer key. 1. Constance Flatt’s Tire Co. (CFTC) has 24,000 shares of common stock outstanding at a market price of \$14 a share. The firm also has a bond issue outstanding with a total face value of \$300,000 which is selling for 94 percent of face value. The cost of equity is 13 percent while the after-tax cost of debt is 3.3 percent. What is CFTC’s after-tax weighted average cost of capital? a. 5.8 percent b. 7.7 percent c. 14.0 percent D . 8.6 percent e. 6.5 percent Common: 24,000 × \$14 = \$336,000 Debt: \$300,000 × .94 = \$282,000 Total = \$618,000 WACC = [(\$336,000/\$618,000) × .13] + [(\$282,000/ \$618,000) × .033] = .0707 + .0151 = .08574 = 8.57 percent 2. Alphabet Chocolates Co. has a levered cost of equity of 18 percent and a pre-tax cost of debt of 7 percent. The debt-equity ratio is 1.35. What is the firm’s unlevered cost of capital if the firm currently pays no taxes?

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