Exam3 SP009

Exam3 SP009 - Exam3SP09 sample exam from another professor...

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Exam3SP09 – sample exam from another professor Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Pearson Plastics has two equal-sized divisions, Division A and Division B. The company estimates that if the divisions operated as independent companies Division A would have a cost of capital of 8 percent, while Division B would have a cost of capital of 12 percent. Since the two divisions are the same size, Pearson's composite weighted average cost of capital (WACC) is 10 percent. In the past, Pearson has assigned separate hurdle rates to each division based on their relative risk. Now, however, Pearson has chosen to use the corporate WACC, which is currently 10 percent, for both divisions. Which of the following is likely to occur as a result of this change? Assume that this change is likely to have no effect on the average risk of each division and market conditions remain unchanged. Ch. 10 a. Over time, the overall risk of the company will increase. b. Over time, Division B will become a larger part of the overall company. c. Over time, the company's corporate WACC will increase. d. All of these statements are correct. ____ 2. Clark Communications has a capital structure that consists of 70 percent common stock and 30 percent long- term debt. In order to calculate Clark's weighted average cost of capital (WACC), an analyst has accumulated the following information: ch. 10 The company currently has 15-year bonds outstanding with annual coupon payments of 8 percent. The bonds have a face value of $1,000 and sell for $1,075. I would have written this problem with semi-annual coupon payments, but do the problem as written. This is a good WACC problem. The risk-free rate is 5 percent. The market risk premium is 4 percent. The beta on Clark's common stock is 1.1. The company's retained earnings are sufficient so that they do not have to issue any new common stock to fund capital projects. The company's tax rate is 38 percent. Given this information, what is Clark's WACC? a. 5.93% b. 7.40% c. 7.91% d. 8.07% e. 8.73% Jackson Company The Jackson Company has just paid a dividend of $3.00 per share on its common stock, and it expects this dividend to grow by 10 percent per year, indefinitely. The firm has a beta of 1.50; the risk-free rate is 10 percent; and the expected return on the market is 14 percent. The firm's investment bankers believe that new issues of common stock would have a flotation cost equal to 5 percent of the current market price. ____ 3. Refer to Jackson Company. How much should an investor be willing to pay for this stock today? Calculate the price using the discounted cash flow model without transaction or flotation costs. Ch. 10
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a. $62.81 b. $70.00 c. $43.75 d. $55.00 e. $30.00f ____ 4. Refer to Jackson Company. What will be Jackson's cost of new common stock if it issues new stock in the marketplace today? Use the price calculated in the previous problem to calculate the company’s new cost of
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Exam3 SP009 - Exam3SP09 sample exam from another professor...

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