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UNIVERSITY / INSTITUTE: Purdue University

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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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