Homework Quiz Chapter 10: FIN3403 B51 1208 PDF

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Homework Quiz Chapter 10 Due Dec 9 at 11:59pm

Points 100

Questions 11

Available Nov 2 at 12am - Dec 9 at 11:59pm about 1 month

Time Limit None

Allowed Attempts 3

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Attempt History Attempt

Time

Score

KEPT

Attempt 2

3 minutes

100 out of 100

LATEST

Attempt 2

3 minutes

100 out of 100

Attempt 1

27 minutes

87.02 out of 100

! Correct answers are hidden. Score for this attempt: 100 out of 100 Submitted Nov 16 at 7:05pm This attempt took 3 minutes.

Question 1

27.75 / 27.75 pts

Match the textbook definition on the left to the correct term on the right.

The mix of debt, preferred

Target capital structure

stock, and common equity the firm plans to raise to fund its future projects. The interest rate the firm must pay on new debt.

Before-tax cost of debt

The relevant cost of new debt, taking into account

After-tax cost of debt

the tax deductibility of interest; used to calculate the WACC. The rate of return investors require on the firm’s preferred stock; rp is calculated as the

Cost of preferred stock

preferred dividend, Dp, divided by the current price, Pp. The rate of return required by stockholders on a firm’s common stock.

Cost of retained earning

22.2 / 22.2 pts

Question 2

Match the textbook definition on the left to the correct term on the right.

The cost of external equity; based on the cost of retained earnings, but increased for flotation

Cost of new common st

costs necessary to issue new common stock. The percentage cost of issuing new common stock.

Flotation cost

The amount of capital raised beyond which new common stock must be issued. A weighted average of the component costs of debt, preferred stock, and

Retained earnings break

Weighted average cost

common equity.

Question 3

5.65 / 5.65 pts

Leon Inc. has the following capital structure, which it considers to be optimal: Debt

25%

Preferred stock

15

Common equity

60

Leon’s expected net income this year is $34,285.72, its established dividend payout ratio is 30%, its federal-plus-state tax rate is 25%, and investors expect future earnings and dividends to grow at a constant rate of 9%. Leon paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. Leon can obtain new capital in the following ways: 1. New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. 2. Debt can be sold at an interest rate of 12%.

Determine the cost of each capital component. 16.27

%

Cost of Preferred Stock = 11.58

%

Cost of Common Equity =

Cost of Debt = 9

Answer 1: 16.27 Answer 2: 11.58 Answer 3:

%

9

5.55 / 5.55 pts

Question 4

Leon Inc. has the following capital structure, which it considers to be optimal: Debt

25%

Preferred stock

15

Common equity

60

Leon’s expected net income this year is $34,285.72, its established dividend payout ratio is 30%, its federal-plus-state tax rate is 25%, and investors expect future earnings and dividends to grow at a constant rate of 9%. Leon paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. Leon can obtain new capital in the following ways: 1. New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. 2. Debt can be sold at an interest rate of 12%.

Calculate the WACC. Note: answer is a percentage, enter only the number

13.75

Question 5

5.55 / 5.55 pts

Leon Inc. has the following capital structure, which it considers to be optimal: Debt

25%

Preferred stock

15

Common equity

60

Leon’s expected net income this year is $34,285.72, its established dividend payout ratio is 30%, its federal-plus-state tax rate is 25%, and investors expect future earnings and dividends to grow at a constant rate of 9%. Leon paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. Leon can obtain new capital in the following ways: 1. New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. 2. Debt can be sold at an interest rate of 12%.

Leon has the following investment opportunities that are average-risk projects: Project

Cost at t=0

Rate of Return

A

$10,000

17.4%

B

20,000

16.0

C

10,000

14.2

D

20,000

13.2

E

10,000

12.0

Which projects should Leon accept? Assume that Leon does not want to issue any new common stock.

A B

C

Question 6

5.55 / 5.55 pts

Leon Inc. has the following capital structure, which it considers to be optimal: Debt

25%

Preferred stock

15

Common equity

60

Leon’s expected net income this year is $34,285.72, its established dividend payout ratio is 30%, its federal-plus-state tax rate is 25%, and investors expect future earnings and dividends to grow at a constant rate of 9%. Leon paid a dividend of $3.60 per share last year, and its stock currently sells for $54.00 per share. Leon can obtain new capital in the following ways: 1. New preferred stock with a dividend of $11.00 can be sold to the public at a price of $95.00 per share. 2. Debt can be sold at an interest rate of 12%.

Leon has the following investment opportunities that are average-risk projects: Project

Cost at t=0

Rate of Return

A

$10,000

17.4%

B

20,000

16.0

C

10,000

14.2

D

20,000

13.2

E

10,000

12.0

Calculate the Retained earnings breakpoint. Assume that Leon does not want to issue any new common stock.

40,000

5.55 / 5.55 pts

Question 7

A company has outstanding 20-year noncallable bonds with a face value of $1,000, an 11% annual coupon, and a market price of $1,294.54. If the company was to issue new debt, what would be a reasonable estimate of the interest rate on that debt? If the company’s tax rate is 25%, what is its after-tax cost of debt? a) Estimate of interest rate on new debt =

b) After-tax cost of debt = 6.00

8.00

%

%

Answer 1: 8.00 Answer 2: 6.00

Question 8

5.55 / 5.55 pts

Suppose you are an analyst with the following data: rRF = 5.5% rM – rRF = 6% b=0.8 D 1 = $1.00 P 0 = $25.00 g = 6% firm’s bond yield = 6.5%

What is this firm’s cost of equity using the CAPM? Note: answer is a percentage, enter only the number

10.3

Question 9

5.55 / 5.55 pts

Suppose you are an analyst with the following data: rRF = 5.5% rM – rRF = 6% b=0.8 D 1 = $1.00 P 0 = $25.00 g = 6% firm’s bond yield = 6.5%

What is this firm’s cost of equity using the DCF? Note: answer is a percentage, enter only the number

10

Question 10

5.55 / 5.55 pts

Suppose you are an analyst with the following data: rRF = 5.5% rM – rRF = 6% b=0.8 D 1 = $1.00 P 0 = $25.00 g = 6% firm’s bond yield = 6.5%

What is this firm’s cost of equity using the bond-yield-plus-risk-premium approach? Use the midrange of the judgmental risk premium for the bond-yield-plus-risk-premium approach. Note: answer is a percentage, enter only the number

10.5

Question 11

5.55 / 5.55 pts

Firm A has 11 equally risky capital budgeting projects, each costing $29.608 million and each having an expected rate of return of 8.25%. Firm A’s retained earnings breakpoint is $296.08 million. The firm’s WACC using retained earnings is 8.0% but increases to 8.5% if new equity must be issued. The company invests in projects where the expected return exceeds the cost of capital. How much capital should Firm A raise and invest? Note: answer is in millions of dollars, enter only the number

296.08

Quiz Score: 100 out of 100...