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To raise money to finance the capital budget projects you've been evaluating, your firm plans to borrow money at an interest rate of 14%, before-tax....

To raise money to finance the capital budget projects you've been evaluating, your firm plans to borrow money at an interest rate of 14%, before-tax. If your firm's effective tax rate is 40%, what is the aftertax cost in percent of the new loan?


Flag this QuestionQuestion 122pts

Here is a condensed version of your firm's balance sheet:

                                               Total liabilities..................$30,000,000

                                               Preferred stock................$10,000,000

                                               Common Stock................$60,000,000

Total assets...$100,000,000  Total liabilities & equity...$100,000,000

If your firm's aftertax cost of debt is 6%, the cost of preferred stock is 10%, and the cost of common stock is 11%, what is the Weighted Average Cost of Capital (WACC)?

Some other value .

Flag this QuestionQuestion 132pts Michigan Mattress Company is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm's after-tax cash flow will be $100,000 starting at the end of the second year, and that this incremental inflow would increase at a 10 percent rate annually over the next 10 years. What is the approximate payback period?

two years
four years
six years
eight years
ten years

Flag this QuestionQuestion 142ptsLloyd Enterprises has a project which has the following cash flows:

YearCash Flow

0      -$200,000

1         50,000

2        100,000

3        150,000

4         40,000

5         25,000

The cost of capital is 10 percent.  What is the project'sdiscounted payback?

Sometime in the first year
Sometime in the second year
Sometime in the third year
Sometime in the fourth year
Sometime in the fifth year

Flag this QuestionQuestion 152ptsWhich of the following events is likely to encourage a company to raise its target debt ratio?

An increase in the corporate tax rate.
An increase in the personal tax rate.
An increase in the company’s operating leverage.

Flag this QuestionQuestion 162ptsWhich of the following statements is most correct?

A firm can use retained earnings without paying a flotation cost. Therefore, while the cost of retained earnings is not zero, the cost of retained earnings is generally lower than the after-tax cost of debt financing.
The capital structure that minimizes the firm’s cost of capital is also the capital structure that maximizes the firm’s stock price.
The capital structure that minimizes the firm’s cost of capital is also the capital structure that maximizes the firm’s earnings per share.
If a firm finds that the cost of debt financing is currently less than the cost of equity financing, an increase in its debt ratio will always reduce its cost of capital.

Flag this QuestionQuestion 172pts Ridgefield Enterprises has total assets of $300 million and EBIT of $45 million. The company currently has no debt in its capital structure. The company is contemplating a recapitalization where it will issue debt at 10 percent and use the proceeds to buy back shares of the company's common stock. If the company proceeds with the recapitalization, its operating income, total assets, and tax rate will remain the same. Which of the following will occur as a result of the recapitalization?

The company's ROA and ROE will increase
The company's ROA and ROE will decrease.
The company's ROA will decrease and ROE will increase
The company's ROA will increase and ROE will decrease
Can't tell without knowing more information.

Flag this QuestionQuestion 182pts If you constructed a set of pro forma financial statements for 2014 and found that projected Total Assets exceeded projected Total Liabilities and Equity by $11,250, you would know that:

your forecasting method is inaccurate
your forecasting assumptions or calculations must be in error, because projected Assets and projected Liabilities and Equity must always balance
you must arrange for $11,250 in additional financing
your firm will have $11,250 of excess funds available in 2014

Flag this QuestionQuestion 192pts Considering each action independently and holding other things constant, which of the following actions would reduce a firm's need for additional capital?

An increase in the dividend payout ratio.
A decrease in the profit margin.
A decrease in the days sales outstanding.
An increase in expected sales growth.

Flag this QuestionQuestion 202pts

Consider the following condensed Income Statement:

Sales $8,000,000
COGS 6,500,000
Gross Profit 1,500,000

Sales growth in 2014 is expected to be 15% 

If COGS is assumed to vary directly with sales, then Gross Profit for 2014 will be:


Flag this QuestionQuestion 212pts

Kenney Corporation recently reported the following income statement for 2013 (numbers are in millions of dollars):

Sales $7,000
Total operating costs 3,000
EBIT 4,000
Interest 200
Earnings before tax (EBT) 3,800
Taxes (40%) 1,520
Net income available to common shareholders 2,280

The company forecasts that its sales will increase by 10 percent in 2014 and its operating costs will increase in proportion to sales. The company's interest expense is expected to remain at $200 million, and the tax rate will remain at 40 percent. The company plans to pay out 50 percent of its net income as dividends, the other 50 percent will be additions to retained earnings. What is the forecasted addition to retained earnings for 2014?


Flag this QuestionQuestion 222pts Other things held constant, which of the following will cause anincreasein net working capital?

Cash is used to buy marketable securities
A cash dividend is declared and paid
Merchandise is sold at a profit, but the sale is on credit
Long-term bonds are retired with the proceeds of a preferred stock issue
Missing inventory is written off against retained earnings

Flag this QuestionQuestion 232pts Paul Stone can get 3/15, net 65 from his suppliers. Paul would like to delay paying the suppliers as long as possible because his cash account balance is very low, but his Dad, a famous financial expert, recommends that he borrow from his local bank at 10% and pay early to take advantage of the discount. Which of the following should Paul do?

Pay within 15 days, borrowing from the bank, if necessary, to get the money.
Pay on the 16th day
Pay on the 65th day
Send a hit man after his Dad

Flag this QuestionQuestion 242pts Stone's Stones and Rocks buys on terms of 2/10, net 30 from its suppliers. If it pays on the 8th day, taking the discount, what is the percent cost of the trade credit that it receives?


Top Answer

Let me explain the... View the full answer


Cost of borrowing
After tax cost of borrowing 14.00%
Weight Total liabilities
Preferred stock
Common stock
Total $30,000,000
$100,000,000 Cost

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Other Answers

The answer to this question... View the full answer


The key here is that interest paid on debt securities issued by a company are before taxes in the US.
That means you must subtract those interest costs from Operating Profit BEFORE you tax...

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