Part-2 Corp-Finance and Cost of Capital Qs-23-Oct-2021-1 PDF

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Part 2 Corp Finance (Cost of Capital) Question 1 Charlotte Diecast's capital structure includes bonds and common stock with the following details: The company issued $100,000 of 6%, 20-year term bonds at $98. The current market price for these bonds is $102. The company has 1,000 shares of $25 par common stock outstanding. Currently, the market price for the stock is $70 per share. The expected after-tax market return on Charlotte's common equity is 20%. The company's effective tax rate is 40%. What is the weight of the company's bonds in regard to the weighted-average cost of capital? A. B. C. D.

20.5% 59.3% 79.7% Cannot be determined from the information provided.

Question 2 A firm has $10 million in equity and $30 million in long-term debt to finance its operations. The firm's beta is 1.125, the risk-free rate is 6%, and the expected market return is 14%. The firm issued long-term debt at the market rate of 9%. Assume the firm is at its optimal capital structure. The firm's effective income tax rate is 40%. What is the firm's weighted average cost of capital (WACC)? A. B. C. D.

7.8% 8.6% 9.5% 10.5%

Question 3 Julius, Inc., is interested in calculating the weighted-average cost of capital (WACC) for the firm but must first calculate the various component costs of capital. The firm is in a 40% marginal tax bracket. The firm can raise as much capital as needed in the bond market at a cost of 10%. The preferred stock has a fixed dividend of $4. The price of preferred stock is $35, but the net proceeds is 90% of that due to a 10% issuance cost. The after-tax costs of debt and preferred stock, respectively, are closest to: A. B. C. D.

6.0%; 11.4% 10.0%; 12.7% 6.0%; 12.7% 10.0%; 11.4%

Question 4 American Outlook, Inc. will issue bonds to fund the acquisition of a major competitor. American Outlook

Part 2 Corp Finance (Cost of Capital) has previously issued preferred and common stock. Which component cost(s) should American Outlook use in evaluating the financial cost of acquiring the new firm? A. B. C. D.

The weighted-average component cost of common stock, preferred stock, and debt Shareholders’ equity (both preferred and common) Only the cost of the new debt issue alone The coupon rate on the bonds and the dividend yield on the preferred and common stock

Question 5 DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.

The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%. Assume that the after-tax cost of debt is 7% and the cost of equity is 12%. Determine the weighted average cost of capital (WACC). A. B. C. D.

10.5% 2.1% 8.4% 19%

Question 6 You are analyzing the cost of capital for a firm that is financed with 65% equity and 35% debt. The cost of debt capital is 8%, while the cost of equity capital is 20% for the firm. What is the overall cost of capital for the firm? A. B. C. D.

13.0% 14.0% 15.8% 20.0%

Question 7 Osgood Products has announced that it plans to finance future investments so that the firm will achieve an optimum capital structure. Which one of the following corporate objectives is consistent with this announcement? A. B. C. D.

Minimize the cost of debt Maximize earnings per share Minimize the cost of equity Maximize the net value of the firm

Part 2 Corp Finance (Cost of Capital) Question 8 DQZ Telecom is considering a project for the coming year that will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment.

The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be 0.60. DQZ is subject to an effective corporate income tax rate of 40%. The Capital Asset Pricing Model (CAPM) computes the expected return on a security by adding the riskfree rate of return to the incremental yield of the expected market return, which is adjusted by the company's beta. Compute DQZ's expected cost of equity capital. A. B. C. D.

9.2% 12.2% 10% 12%

Question 9 Sun Prairie Traders borrowed $63,000 at an APR of 10%. The loan called for a compensating balance of 10%. What is the effective interest rate on the loan? Round your final percentage answer to two decimal places. A. B. C. D.

10.00% 11.11% 0.00% 20.00%

Question 10 To use a firm's WACC to evaluate its future project's flows, which of the following must hold? A. B. C. D.

The project will be financed with the same proportion of debt and equity as the firm. The systematic risk of the project is less than the overall systematic risk of the firm. The project should have conventional cash flows. The systematic risk of the project is greater than the overall systematic risk of the firm.

Question 11 Williams Inc. is interested in measuring its overall cost of capital and has gathered the following data.

Part 2 Corp Finance (Cost of Capital) Under the terms described below, the company can sell unlimited amounts of all instruments.

The cost of funds from the sale of common stock for Williams Inc. is: A. B. C. D.

7.4%. 7%. 7.2%. 7.6%.

Question 12 A company is in the process of considering various methods of raising additional capital to grow the company. The current capital structure is 25% debt totaling $5 million with a pretax cost of 10% and 75% equity with a current cost of equity of 10%. The marginal income tax rate is 40%. The company's policy is to allow a total debt to total capital ratio of up to 50% and a maximum weighted-average cost of capital (WACC) of 10%. The company has the following options. Option 1: Issue debt of $15 million with a pretax cost of 10%. Option 2: Offer shares to the public to generate $15 million. The cost of equity is 10%. Which option should the company select? A. B. C. D.

Option 1 because it has the lower WACC of 7.71%. Option 1 because the equity to total capital ratio will be 43%. Option 2 because the equity to total capital ratio will be 86%. Either Option 1 or 2 because both will yield a WACC of 10%.

Question 13 You are analyzing the cost of capital for a firm that is financed with $300 million of equity and $200 million of debt. The cost of debt capital for the firm is 9%, while the cost of equity capital is 19%. What is the overall cost of capital for the firm? Assume there are no taxes. A. B. C. D.

10.0% 14.0% 15.0% 15.0%

Part 2 Corp Finance (Cost of Capital) Question 14 Thomas Company's capital structure consists of 30% long-term debt, 25% preferred stock, and 45% common equity. The cost of capital for each component is shown below.

If Thomas pays taxes at the rate of 40%, what is the company's after-tax weighted average cost of capital (WACC)? A. B. C. D.

11.9% 11.3% 10.94% 9.5%

Question 15 TRL Inc.’s current capital structure is separated into two sources: (1) debt representing 65% and (2) common stock equity constituting the remaining 35%. Analyses indicate that the pretax cost of the debt is 8%; and the estimated cost of the common equity is 12%. If the company's effective tax rate is 40%, what is TRL's weighted-average cost of capital? A. B. C. D.

5.6% 6.3% 7.3% 9.4%

Question 16 Which of the following, when considered individually, would generally have the effect of increasing a firm's cost of capital?

A. I, III, and IV B. III and IV

Part 2 Corp Finance (Cost of Capital) C. II and IV D. I and III Question 17 Gangland Water Guns Inc. has a debt-to-equity ratio of 0.5. If the firm's after-tax cost of debt is 7% and its cost of equity is 13%, what is the appropriate WACC? A. B. C. D.

6% 10% 11% 16.5%

Question 18 A firm plans to use the historical rate of return to determine the cost of equity capital. In order to use the historical rate, all of the following conditions should exist except which of the following? A. B. C. D.

The firm's performance will hold steady. Interest rates will not significantly change. Investor attitude toward risk will not change. Expected future cash flows will be discounted to present values.

Question 19 A firm has $300 million in outstanding debt and $900 million in outstanding equity. Its cost of equity is 11%, and its after-tax cost of debt is 7%. What is the appropriate WACC? A. B. C. D.

4% 8% 9% 10%

Question 20 Kielly Machines Inc. is planning an expansion program estimated to cost $100 million. Kielly is going to raise funds according to its target capital structure shown below.

Kielly had net income available to common shareholders of $184 million last year, of which 75% was paid out in dividends. The company has a marginal tax rate of 40%.

Part 2 Corp Finance (Cost of Capital) Additional data:

What is Kielly's weighted average cost of capital (WACC)? A. B. C. D.

10.24% 12.22% 13% 13.54%

Question 21 Gangland Water Guns Inc. is expected to pay a dividend of $2.10 one year from today. If the firm's growth in dividends is expected to remain at a flat 3% forever, then what is the cost of equity capital for Gangland if the price of its common shares is currently $17.50? A. B. C. D.

12.00% 12.20% 15.00% 13.64%

Question 22 Trend Inc. has just set up a formal line of credit of $5 million with First National Bank. The line of credit is good for up to three years. The bank will be charging them an interest rate of 7.5% on the loan, and in addition, the firm will pay an annual fee of 50 basis points, 0.50% on the unused balance. The firm borrowed $2,300,000 on the first day the credit line became available, and that amount was outstanding all year. What is the firm's effective interest rate on this line of credit? Round your final percentage answer to one decimal place. A. B. C. D.

8% 7% 7.5% 8.1%

Question 23 National Auto uses debt, preferred stock, and common stock to finance operations. Calculating the cost of capital requires identifying the: A. B. C. D.

risk-free rate. company's product. percentage of financing coming from each financing source. net present value of the project to be financed.

Part 2 Corp Finance (Cost of Capital) Question 24 Melba's Toast has a capital structure with 30% debt and 70% equity. Its pretax cost of debt is 6%, and its cost of equity is 10%. The firm's marginal corporate income tax rate is 35%. What is the appropriate WACC? A. B. C. D.

8.17% 5.73% 8.80% 7.20%

Question 25 UltraFlex Diving Boards Inc. just paid a dividend of $1.50. If the firm's growth in dividends is expected to remain at a flat 4 percent forever, then what is the cost of equity capital for Ultra Flex Diving Boards if the price of its common shares is currently $26.00? A. B. C. D.

5.77% 6.00% 9.77% 10.00%

Question 26 In calculating the component costs of long-term funds, the appropriate cost of retained earnings, ignoring flotation costs, is equal to: A. B. C. D.

the same as the cost of preferred stock. the weighted average cost of capital for the firm. the cost of common stock. zero, or no cost.

Question 27 When estimating the cost of borrowing for a firm, we are primarily interested in which of the following? A. B. C. D.

The weighted average cost of capital The cost of long-term debt The coupon rate of the debt The cost of equity financing

Question 28 An accountant for Stability Inc. must calculate the weighted average cost of capital (WACC) of the

Part 2 Corp Finance (Cost of Capital) corporation using the following information.

What is the WACC of Stability? A. B. C. D.

5.58% 13.4% 10.4% 13.67%

Question 29 Turquoise Electronics Inc. paid a dividend of $1.87 last year. If the firm's growth in dividends is expected to be 10% next year and then zero thereafter, then what is its cost of equity capital if the price of its common shares is currently $25.71? A. B. C. D.

7.27% 8.00% 18.00% 6.6%

Question 30 Swirlpool Inc. has found that its cost of common equity capital is 18%, and its cost of debt capital is 8%. The firm is financed with 60% common shares and 40% debt. What is the after-tax weighted average cost of capital for Swirlpool, if it is subject to a 40% marginal tax rate? A. B. C. D.

10.37% 12.00% 12.72% 14.00%

Question 31 Angela Company's capital structure consists entirely of long-term debt and common equity. The cost of capital for each component is shown below.

Part 2 Corp Finance (Cost of Capital)

Angela pays taxes at a rate of 40%. If Angela's weighted average cost of capital is 10.41%, what proportion of the company's capital structure is in the form of long-term debt? A. B. C. D.

55% 39% 45% 66%

Question 32

Part 2 Corp Finance (Cost of Capital) Additional data:

Using the Capital Asset Pricing Model (CAPM), Martin Corporation's current cost of common equity is: A. B. C. D.

15%. 17%. 10%. 18.75%.

Question 33 Kennedy Company's current capital structure is separated into two sources:

If the company's effective tax rate is 40%, what is Kennedy's current after-tax cost of the bonds payable? A. B. C. D.

6.0% 10% 10.2% 6.1%

When calculating the weighted-average cost of capital (WACC), an adjustment is made for taxes because: A. B. C. D.

equity is risky. the interest on debt is tax deductible. preferred stock is used. equity earns higher return than debt.

Question 35 Williams Inc. is interested in measuring its overall cost of capital and has gathered the following data.

Part 2 Corp Finance (Cost of Capital) Under the terms described below, the company can sell unlimited amounts of all instruments.

The cost of funds from retained earnings for Williams Inc. is: A. B. C. D.

7.6%. 7.2%. 7%. 7.4%.

Question 36 The WACC for a firm is 13.00%. You know that the firm's cost of debt capital is 10% and the cost of equity capital is 20%. What proportion of the firm is financed with debt? Assume there are no taxes. A. B. C. D.

30% 50% 100% 70%

Question 37 Which of the following influence(s) the cost of capital? A. Marketability of securities B. General economic conditions C. Marketability of securities, general economic conditions, and amount of financing the firm requires D. Amount of financing the firm requires Question 38 Stryder Inc. has 3 million shares outstanding at a current price of $15 per share. The book value of the shares is $10 per share. The firm also has $30 million in par value of bonds outstanding. The bonds are selling at a price equal to 101% of par. What is the enterprise value of the firm? A. B. C. D.

$30.0 million $45.0 million $60.0 million $75.3 million

Part 2 Corp Finance (Cost of Capital) Question 39 A company's current dividend is $2 for a share of stock currently selling at $50. If the company issues new common stock, it expects to pay flotation costs of 10%. The company's marginal tax rate is 40%. If the company projects a long-term growth in dividends of 8%, its after-tax cost of new equity is closest to: A. B. C. D.

12.44%. 12.32%. 12.8%. 12%.

Question 40 The overall cost of capital is the: A. B. C. D.

average rate of return a firm earns on its assets. rate of return on assets that covers the costs associated with the funds employed. minimum rate a firm must earn on high-risk projects. cost of the firm's equity capital at which the market value of the firm will remain unchanged.

Question 41 Bellamee Inc. has a weighted average cost of capital of 12% and an after-tax cost of debt of 6.25%. Its current debt-to-equity ratio is 1/5. What is the required rate of return on its equity? A. B. C. D.

9.125% 13.15% 18.25% 5.75%.

Question 42 The firm's marginal cost of capital A. B. C. D.

is a weighted average of the investor's required returns on debt and equity. should be the same as the firm's rate of return on equity. is unaffected by the firm's capital structure. is inversely related to the firm's required rate of return used in capital budgeting.

Question 43 Ravencroft Supplies is estimating its weighted-average cost of capital. Ravencroft's optimal capital structure includes 10% preferred stock, 30% debt, and 60% common stock. It can sell additional bonds at a rate of 8%. The cost of issuing new preferred stock is 12%. The firm can issue new shares of common stock at a cost of 14.5%. The firm's marginal tax rate is 35%. Ravencroft's WACC is closest to: A. 11.1%. B. 12.3%. C. 13.1%.

Part 2 Corp Finance (Cost of Capital) D. 11.5%. Question 44 If Brewer Corporation's bonds are currently yielding 8% in the marketplace, why would the firm's cost of debt be lower? A. B. C. D.

There should be no difference; cost of debt is the same as the bonds’ market yield. Interest is deductible for tax purposes. Additional debt can be issued more cheaply than the original debt. Market interest rates have increased.

Question 45 The required rate of return used to calculate an investment's net present value is related to the firm's A. B. C. D.

contribution margin. cost of capital. depreciation methods. fixed costs.

Question 46 Maloney's Inc. has found that its cost of common equity capital is 17% and its cost of debt capital is 6%. The firm is financed with $3,000,000 of common shares (market value) and $2,000,000 of debt. What is the after-tax weighted average cost of capital for Maloney's, if it is subject to a 40% marginal tax rate? A. B. C. D.

8.96% 10.40% 11.64% 12.60%

Question 47 Charlotte Diecast's capital structure includes bonds and common stock with the following details: The company issued $100,000 of 6%, 20-year term bonds at 98. The current market price for these bonds is 102. The company has 1,000 shares of $25 par common stock outstanding. Currently, the market price for the stock is $70 per share. The expected after-tax market return on Charlotte's common equity is 20%. The company's effective tax rate is 40%. What is the after-tax rate of return for the bonds to be used in calculating the weighted-average cost of capital? A. 3.5% B. 3.6% C. 5.9%

Part 2 Corp Finance (Cost of Capital) D. 6.1% Question 48 A company's $100, 10% preferred stock is currently selling for $90. If the company issues new shares, the flotation costs will be 7%. The company's tax rate is 40%. What is the company's after-tax cost of new preferred stock? A. B. C. D.

11.11% 11.95% 10% 10.75%

Question 49 What is the weighted average cost of capital (WACC) for a firm given the information in the chart?

A. B. C. D.

8% 12% 6% 8.8%

Question 50 Droz's Hiking Gear Inc. has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected Droz's Hiking Gear Inc. has found that its common equity capital shares have a beta equal to 1.5 while the risk-free return is 8 percent and the expected a yield to maturity of 12 percent. The firm is financed with $120,000,000 of common shares (market value) and $80,000,000 of debt. What is the after-tax weighted average cost of capital for Droz's, if it is subject to a 35 percent marginal tax rate? Round your final percentage answer to two decimal places. A. B. C. D.

11.48% 11.52% 15.00% 13.32%

Question 51 Ronnie's Comics has found tha...