Finance multiple choice questions In Tutorial Library
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TITLE: Finance multiple choice questions
UNIVERSITY / INSTITUTE: Purdue University
CLASS / COURSE: MGMT 310
QUESTION DESCRIPTION:
Questions: 23
1. The riskiness of equity securities typically exceeds that of debt securities for firms.
True False
2.
(Points: 1)
Calculation of company costs of capital should be conducted with market values whenever possible.
True False
3.
(Points: 1)
As a firm changes to a higher debt ratio, debtholders are likely to demand higher rates of return.
True False
4.
(Points: 1)
A firm's cost of capital can be used in valuation of every new project they encounter, regardless of its risk.
True False
5.
(Points: 1)
Assuming a project has the same risk and financing as the firm, it will have a positive NPV if its rate of return is greater than the firm's WACC.
True False
6.
(Points: 1)
A change in the company's capital structure will change the amount of taxes paid but will not change the WACC.
True False
7.
(Points: 1)
What appears to be the targeted debt ratio of a firm that issues $15 million in bonds and $35 million in equity to finance its new capital projects?
a. 15.00%
b. 30.00%
c. 35.00%
d. 60.00%
8.
(Points: 1)
What is the WACC for a firm with a 60/40 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be:
a. 7.02%
b. 9.12%
c. 10.80%
d. 13.80%
9.
(Points: 1)
What is the pretax cost of debt for a firm in the 35% tax bracket that has a 9% after-tax cost of debt?
a. 5.85%
b. 12.15%
c. 13.85%
d. 25.71%
10.
(Points: 1)
Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3.00 per share. It also has $2 million in face value of debt that trades at 90% of par. There are no bank notes outstanding. What is the firm's market value debt ratio for purposes of calculating WACC?
a. 15.38%
b. 23.08%
c. 31.0%
d. 33.3%
11.
(Points: 1)
What is the after-tax cost of preferred stock that sells for $10 per share and offers a $1.20 dividend when the tax rate is 35%?
a. 4.20%
b. 7.80%
c. 8.33%
d. 12.00%
12.
(Points: 1)
Should a project be accepted if it offers an annual after-tax cash flow of $1,250,000 indefinitely, costs $10 million, and is riskier than the firm's average projects? The cost of capital for the firm's average projects is 12.5%.
a. Yes, since NPV is positive.
b. Yes, since a zero NPV indicates marginal acceptability.
c. No, since NPV is zero.
d. No, since NPV is negative.
13.
(Points: 1)
Which of the following statements is incorrect?
a. Retained earnings are part of common equity.
b. Market values should be used in WACC calculations.
c. Preferred equity has a separate component.
d. Both interest on debt and dividends on equity are tax deductible
14.
(Points: 1)
What would you estimate to be the required rate of return for equity investors if a stock sells for $40 and will pay a $4.40 dividend that is expected to grow at a constant rate of 5%?
a. 7.6%
b. 12.0%
c. 12.6%
d. 16.0%
15.
(Points: 1)
What is the expected growth rate in dividends for a firm in which shareholders require an 18% rate of return and the dividend yield is 10%?
a. 1.8%
b. 5.2%
c. 8.0%
d. 28.0%
16.
(Points: 1)
As debt is added to the capital structure, the:
a. WACC will continually decline.
b. WACC will continually increase.
c. cost of debt can be expected to rise.
d. WACC will be unaffected.
17.
(Points: 1)
Calculate a firm's WACC given that the total value of the firm is $2,000,000, $600,000 of which is debt, the cost of debt and equity are 10% and 15% respectively, and the firm pays no taxes:
a. 9.0%
b. 11.5%
c. 13.5%
d. 14.4%
18.
(Points: 1)
XYZ Company issues common stock that is expected to pay a dividend over the next year of $4 at a price of $25 per share. If its expected growth rate is 5%, what is XYZ's cost of common equity?
a. 9.0%
b. 11.0%
c. 16.0%
d. 21.0%
19.
(Points: 1)
Find the required rate of return for equity investors of a firm with a beta of 1.3 when the risk free rate is 5%, the market risk premium is 5%, and the return on the market is 10%.
a. 11.5%
b. 13.0%
c. 16.5%
d. 18.0%
20.
(Points: 1)
Calculate the beta of a firm's equity if the asset beta is 1.1, the debt beta is .05, and the firm has 30% debt in the capital structure.
a. 10.85
b. 10.55
c. 1.085
d. 1.55
e. None of the above
21.
(Points: 1)
VALUATION. For this and the next 2 questions: Dozier Corporation is a fast growing supplier of office products. Analysts project the following FCFs (in millions) during the next 3 years after which FCF is expected to grow at a constant rate of 5%. Dozier's cost of capital is 13%. Calculate the horizon value of the firm (i.e. HV3).
Year 1 Year 2 Year 3
FCF -$20 $30 $40
a. $525 million
b. $500 million
c. $323.08 million
d. $397.37 million
e. None of the above
22.
(Points: 1)
Calculate the value of the firm today (i.e. the PV of both the FCFs and the horizon value).
a. $525 million
b. $500 million
c. $323.08 million
d. $397.37 million
e. None of the above
23.
(Points: 1)
Suppose the firm's market value of debt is $50 million. What is your estimate of the firm's value of equity?
a. $330.54
b. $347.37
c. $447.36
d. None of above
SOLUTION DESCRIPTION: Completed Solution is attached. Click on Buy button and then download file to get full solution.
SUBJECTS / CATEGORIES:
1. Finance
2. Financial Management
3. Accounting
4. Corporate Finance
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