Business Finance Final - Chapters 12, 13, 14

The common stock of Metal Molds has a negative growth rate of 1.63 percent and a required return of 18.21 percent. The current stock price is $9.82. What was the amount of the last dividend paid?

$1.98

Tidewater Fishing has a current beta of 1.16. The market risk premium is 6.8 percent and the risk-free rate of return is 2.9 percent. By how much will the cost of equity increase if the company expands its operations such that the compay beta rises to 1.18?

.14%

Walker Systems has an issue of preferred stock outstanding with a stated annual dividend of $2.60 that just sold for $23.85 per share. What is the bank's cost of preferred stock?

10.90%

The Dry Well has 6.85 percent preferred stock outstanding with a market value per share of $79, a stated value of $100 per share, and a book value per share of $29. What is the cost of preferred stock?

8.67%

Gabaldon Group has a stock price of $48.75, a beta of 1.3, and just paid an annual dividend of $1.25 per share. The dividend growth rate is expected to be 6.5 percent per year. What is the estimated cost of equity using the dividend discount model?

9.23%

Which of the following statements regarding the cost of preferred stock is accurate?

It equals the dividend yield.

Assume a firm employs debt in its capital structure. Which of the following statements is accurate?

The WACC would most likely decrease if the firm replaced its preferred stock with debt.

When calculating a firm's weighted average cost of capital, the capital structure weights:

are based on the market values of the outstanding securities.

Velansquez Manufacturing has two vastly different lines of business: Alpha and Omega. The Alpha line is the riskiest of the two, and accounts for 72 percent of the firm's sales. When deciding which project proposals should be accepted, the managers should:

assign appropriate, but differing, discount rates to each business line and then select the projects with the highest net present values.

Wright Market Research is able to borrow money at a rate of 6.8 percent per year. This interest rate is called the:

cost of debt.

Incorporating flotation costs into the analysis of a project will:

increase the initial cash outflow of the project.

Assume a firm has a debt-equity ratio of .62. The firm's weighted average cost of capital is the:

rate of return a company must earn on its existing assets to maintain the current value of its stock.

Suppose ALK Company needs $13.8 million to build a new assembly line. The target debt-equity ratio is .48. The flotation cost for new equity is 9.6 percent, but the floatation cost for debt is only 5.1 percent. What is the true cost of building the new assembly line after taking flotation costs into account?

$15,022,949

Rosa's has a weighted average cost of capital of 11.73 percent. The cost of equity is 15.8 percent and the pretax cost of debt is 7.6 percent. The tax rate is 21 percent. What is the target debt-equity ratio?

.71

Dee's Toys has a target debt-equity ratio of .62. Its WACC is 11.3 percent and the tax rate is 21 percent. What is the cost of equity if the aftertax cost of debt is 6.3 percent?

14.40%

Montez Supply is expected to pay an annual dividend of $.95 per share next year. The market price of the stock is $43.50 and the growth rate is 4.5 percent. What is the cost of equity?

6.68%

Deep Mines has 43,800 shares of common stock outstanding with a beta of 1.54 and a market price of $51 per share. There are 10,000 shares of 7 percent preferred stock outstanding with a stated value of $100 per share and a market value of $83 per share. The 8 percent semiannual bonds have a face value of $1,000 and are selling at 96 percent of par. There are 5,000 bonds outstanding that mature in 13 years. The market risk premium is 7.5 percent, T-bills are yielding 3.6 percent, and the tax rate is 21 percent. What discount rate should the firm apply to a new project's cash flows if the project has the same risk as the company's typical project?

9.30%

When computing the adjusted cash flow from assets, the tax amount is calculated as:

EBIT (Tc).

Which of the following statements regarding the aftertax cost of debt is accurate?

It is highly dependent upon a company's tax rate.

Patel & Howell has zero coupon bonds outstanding that mature in 4 years. The bonds have a face value of $1,000 and a current market price of $798. What is the pretax cost of debt? (Use semiannual compounding.)

5.72%

Which of the following statements regarding a firm's pretax cost of debt is accurate?

It is based on the current yield to maturity of the company's outstanding bonds.

Which of the following statements is accurate regarding the dividend growth model?

It is only as reliable as the estimated rate of growth.

Which of the following statements regarding the weighted average cost of capital is accurate?

It is the return investors require on the total assets of the firm.

The flotation cost for a company is computed as:

the weighted average of the floatation costs associated with each form of financing.

Travis & Sons has a capital structure that is based on 45 percent debt, 5 percent preferred stock, and 50 percent common stock. The pretax cost of debt is 8.3 percent, the cost of preferred is 9.2 percent, and the cost of common stock is 15.4 percent. The tax rate is 21 percent. A project is being considered that is equally as risky as the overall company. This project has initial costs of $287,000 and annual cash inflows of $91,000, $248,000, and $145,000 over the next three years, respectively. What is the projected net present value of this project?

$101,488

Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of 10.6 percent. Al's Construction builds and sells water features and fountains and has an aftertax cost of capital of 10.2 percent. Sister Pools is considering building and selling its own water features and fountains. The initial cash outlay for this project would be $75,000. The expected net cash inflows are $18,000 a year for seven years. What is the net present value of the Sister Pools project?

$12,057

Franktown Motors is expected to have an EBIT of $687,400 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $48,000, $7,000, and $42,000, respectively. All cash flow items are expected to grow at 6 percent per year for four years. After Year 5, the CFA* is expected to grow at 2.1 percent indefinitely. The company currently has $3.2 million in debt and 250,000 shares outstanding. The company's WACC is 9.9 percent and the tax rate is 21 percent. What is the price per share of the company's stock?

$18.74

River Walk Tours is expected to have an EBIT of $184,000 next year. Depreciation, the increase in net working capital, and capital spending are expected to be $11,000, $1,500, and $13,000, respectively. All are expected to grow at 6 percent per year for three years. After Year 4, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The company's WACC is 9.2 percent and the tax rate is 21 percent. What is the terminal value of the company's cash flows?

$2,584,798

The Daily Brew has a debt-equity ratio of .57. The firm is analyzing a new project that requires an initial cash outlay of $260,000 for equipment. The flotation cost is 9.1 percent for equity and 4.4 percent for debt. What is the initial cost of the project including the flotation costs?

$280,758

Yesteryear Productions is considering a project with an initial costs of $318,000. The firm maintains a debt-equity ratio of .60 and has a flotation cost of debt of 5.2 percent and a flotation cost of equity of 11.1 percent. The firm has sufficient internally generated equity to cover the equity cost of this project. What is the initial cost of the project including the flotation costs?

$324,324

You are evaluating a project that requires $324,000 in external financing. The flotation cost of equity is 8.4 percent and the flotation cost of debt is 5.1 percent. What is the initial cost of the project including the flotation costs if you maintain a debt-equity ratio of .35?

$350,439

Carson Electronics uses 58 percent common stock and 42 percent debt to finance its operations. The aftertax cost of debt is 5.4 percent and the cost of equity is 15.3 percent. Management is considering a project that will produce a cash inflow of $49,600 in the first year. The cash inflows will then grow at 2.5 percent per year forever. What is the maximum amount the firm can initially invest in this project to avoid a negative net present value for the project?

$573,941

Western Wear is considering a project that requires an initial investment of $602,000. The firm maintains a debt-equity ratio of .55 and has a flotation cost of debt of 4.9 percent and a flotation cost of equity of 10.2 percent. The firm has sufficient internally generated equity to cover the equity portion of this project. What is the initial cost of the project including the flotation costs?

$612,652

The Bakery is considering a new project it considers to be a little riskier than its current operations. Thus, management has decided to add an additional 1.2 percent to the company's overall cost of capital when evaluating this project. The project has an initial cash outlay of $63,000 and projected cash inflows of $19,000 in Year 1, $34,000 in Year 2, and $28,000 in Year 3. The firm uses 33 percent debt and 67 percent common stock as its capital structure. The company's cost of equity is 13.8 percent while the aftertax cost of debt for the firm is 5.7 percent. What is the projected net present value of the new project?

$618

Panelli's is analyzing a project with an initial cost of $139,000 and cash inflows of $74,000 in Year 1 and $86,000 in Year 2. This project is an extension of current operations and thus is equally as risky as the current company. The company uses only debt and common stock to finance its operations and maintains a debt-equity ratio of .39. The aftertax cost of debt is 5.1 percent, the cost of equity is 13.2 percent, and the tax rate is 21 percent. What is the projected net present value of this project?

-$2,399

Central Systems desires a weighted average cost of capital of 12.7 percent. The firm has an aftertax cost of debt of 4.8 percent and a cost of equity of 15.4 percent. What debt-equity ratio is needed for the firm to achieve its targeted weighted average cost of capital?

.34

Highway Express has paid annual dividends of $1.32, $1.33, $1.38, $1.40, and $1.42 over the past five years, respectively. What is the average dividend growth rate?

1.85%

Granite Works maintains a debt-equity ratio of .58 and has a tax rate of 21 percent. The pretax cost of debt is 8.9 percent. There are 18,000 shares of stock outstanding with a beta of 1.42 and a market price of $23 per share. The current market risk premium is 7.8 percent and the current risk-free rate is 3.1 percent. This year, the firm paid an annual dividend of $1.68 per share and expects to increase that amount by 2 percent each year. Using an average expected cost of equity, what is the weighted average cost of capital?

10.06%

Delta Lighting has 24,500 shares of common stock outstanding at a market price of $19 per share. This stock was originally issued at $21 per share. The firm also has a bond issue outstanding with a total face value of $250,000 which is selling for 94 percent of par. The cost of equity is 12.6 percent while the aftertax cost of debt is 5.8 percent. The firm has a beta of 1.33 and a tax rate of 23 percent. What is the weighted average cost of capital?

10.32%

Mullineaux Corporation has a target capital structure of 46 percent common stock, 5 percent preferred stock, and the balance in debt. Its cost of equity is 15.8 percent, the cost of preferred stock is 8.3 percent, and the aftertax cost of debt is 6.8 percent. What is the WACC given a tax rate of 23 percent?

11.02%

Silo Mills is an all-equity financed firm that has a beta of 1.18 and a cost of equity of 12.2 percent. The risk-free rate of return is 2.9 percent. The firm is currently considering a project that has a beta of 1.03 and a project life of six years. What discount rate should be assigned to this project?

11.02%

The Well Derrick has 6.3 percent preferred stock outstanding that sells for $57 per share. This stock was originally issued at $45 per share and has a stated value of $100 per share. What is the cost of preferred stock if the relevant combined tax rate is 23 percent?

11.05%

Kelley Couriers just paid its annual dividend of $5.25 per share. The stock has a market price of $58.25 and a beta of 1.2. The return on the U.S. Treasury bill is 1 percent and the market risk premium is 8.5 percent. What is the cost of equity?

11.2%

Cookie Dough Manufacturing has a target debt-equity ratio of .76. Its cost of equity is 15.3 percent, and its pretax cost of debt is 9 percent. What is the WACC given a tax rate of 21 percent?

11.76%

Kelso's has a debt-equity ratio of .62 and a tax rate of 21 percent. The firm does not issue preferred stock. The cost of equity is 16.3 percent and the aftertax cost of debt is 5.21 percent. What is the weighted average cost of capital?

12.06%

Gill Works has 6 percent preferred stock outstanding that is currently selling for $49 per share. The market rate of return is 14 percent and the tax rate is 21 percent. What is the cost of preferred stock if its stated value is $100 per share?

12.24%

The Oil Derrick has an overall cost of equity of 12.7 percent and a beta of 1.13. The firm is financed solely with common stock. The risk-free rate of return is 4.8 percent. What is an appropriate cost of capital for a division within the firm that has an estimated beta of 1.16?

12.91%

More by Moore has a growth rate of 4.3 percent and its stock is currently selling for $31.88 per share. It is equally as risky as the market. The stock market has an expected return of 13 percent and the expected market risk premium of 11.55 percent. What is the expected rate of return on the stock?

13.00%

Wayco Industrial Supply has a pretax cost of debt of 8.3 percent, a cost of equity of 14.7 percent, and a cost of preferred stock of 8.9 percent. The firm has 165,000 shares of common stock outstanding at a market price of $33 per share. There are 15,000 shares of preferred stock outstanding at a market price of $43 per share. The bond issue has a face value of $750,000 and a market quote of 101. The company's tax rate is 21 percent. What is the weighted average cost of capital?

13.25%

Miller Stores has an overall beta of 1.38 and a cost of equity of 12.7 percent for the company overall. The firm is all-equity financed. Division A within the firm has an estimated beta of 1.52 and is the riskiest of all of the company's operations. What is an appropriate cost of capital for Division A if the market risk premium is 7.4 percent?

13.74%

The Market Outlet is an all-equity financed firm with a beta of 1.08 and a cost of equity of 12.58 percent. The risk-free rate of return is 3.6 percent. What discount rate should the firm assign to a new project that has a beta of 1.22?

13.74%

Stock in Country Road Industries has a beta of 1.62. The market risk premium is 8.2 percent while T-bills are currently yielding 2.9 percent. Country Road's last paid annual dividend was $1.87 per share and dividends are expected to grow at an annual rate of 3.8 percent indefinitely. the stock sells for $25 per share. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?

13.87%

Decker's is an all-equity financed chain of retail furniture stores. Furniture Fashions produces furniture and is the primary supplier to Decker's. Decker's has a beta of 1.62 as compared to Furniture Fashions' beta of 1.43. The risk-free rate of return is 3.1 percent and the market risk premium is 7.6 percent. What discount rate should Decker's use if it considers a project that involves the manufacturing of furniture?

13.97%

The Shoe Outlet has paid annual dividends of $.58, $.66, $.72, and $.75 per share over the last four years respectively. The stock is currently selling for $10.08 per share. What is the cost of equity?

17.13%

Castillo Corporation common stock is currently priced at $39..75 per share. The company just paid $4.35 per share as its annual dividend. The dividends have been increasing by 7.5 percent annually and are expected to continue doing the same. What is the cost of equity?

19.26%

Nguyen Corporation's common stock has a beta of 1.38. The risk-free rate is 1.78 percent and the expected return on the market is 14.6 percent. What is the cost of equity?

19.47%

Linchtenfeld has a bond issue outstanding that matures in 19 years. The bonds pay interest semiannually. The bonds have a face value of $1,000 and are currently priced at $995.28. The bonds carry a coupon rate of 3.5 percent. What is the aftertax cost of debt if the total tax rate is 22 percent?

2.76%

Simple Foods has a zero coupon bond issue outstanding that matures in 14 years. The bonds are selling at 56 percent of par value. What is the company's aftertax cost of debt if the combined tax rate is 23 percent? (Use semiannual compounding.)

3.22%

The outstanding bonds of Harden Fitness are priced at $1,014.66 and mature in 5 years. These bonds have a face value of $1,000, a coupon rate of 4.5 percent, and pay interest semiannually. The tax rate is 21 percent. What is the aftertax cost of debt?

3.30%

Gould Design has $1,000 face value bonds outstanding with 17 years to maturity, a coupon rate of 5 percent, semiannual interest payments, and a current price of $987.78. What is the aftertax cost of debt if the tax rate is 21 percent?

4.04%

Decline, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 13 years to maturity that is quoted at 105.2 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the aftertax cost of debt if the tax rate is 21 percent?

4.30%

Epsy Hotels has bonds outstanding that mature in 9 years, pay interest semiannually, and have a coupon rate of 5.5 percent. These bonds have a face value of $1,000 and a current market price of $989.28. What is the company's aftertax cost of debt if its tax rate is 22 percent?

4.41%

Bleakly Enterprises has a capital structure of 56 percent common stock, 4 percent preferred stock, and 40 percent debt. The flotation costs are 3.7 percent for debt, 4.8 percent for preferred stock, and 5.2 percent for common stock. The corporate tax rate is 21 percent. What is the weighted average flotation cost?

4.58%

Jiminy's Cricket Farm issued a 20-year, 7 percent, semiannual bond four years ago. The bond currently sells for 108 percent of its face value. What is the aftertax cost of debt if the company's combined tax rate is 23%?

4.78%

Ahmad Couture has bonds outstanding with a face value of $1,000, 11 years to maturity, and a coupon rate is 6 percent paid semiannually. What is the company's pretax cost of debt if the bonds currently sell for $1,067.12?

5.19%

Theresa's Flower Garden has 650 bonds outstanding that are selling for $1,007 each, 2,100 shares of preferred stock with a market price of $68 per share, and 42,000 shares of common stock valued at $44 per share. What weight should be assigned to the preferred stock when computing the weighted average cost of capital?

5.40%

Florida Groves has a $380,000 bond issue outstanding that is selling at 97.4 percent of face value. The firm also has 2,600 shares of preferred stock valued at $61 per share and 37,500 shares of common stock valued at $19 per share. What weight should be assigned to the common stock when computing the weighted average cost of capital?

57.40%

The Downtowner has 168,000 shares of common stock outstanding valued at $53 per share along with 13,000 bonds selling for $1,008 each. What weight should be given to the debt when the company computes its weighted average cost of capital?

59.54%

AZ Products has 140,000 shares of common stock outstanding at a market price of $27 per share. Next year's annual dividend is expected to be $1.43 per share and the dividend growth rate is 2 percent. The company also has 2,500 bonds outstanding with a face value of $1,000 per bond. The bonds have a pretax yield of 7.35 percent and sell at 98.2 percent of face value. The company's tax rate is 21 percent. What is the weighted average cost of capital?

6.71%

Deep Hollow Markets has a target capital structure of 35 percent debt, 5 percent preferred stock, and 60 percent common stock. The flotation costs are 8.6 percent for common stock, 6.2 percent for preferred stock, and 3.8 percent for debt. The corporate tax rate is 21 percent. What is the weighted average flotation cost?

6.80%

Phillips Equipment has 6,500 bonds outstanding that are selling at 96.5 percent of par. Bonds with similar characteristics are yielding 6.7 percent, pretax. The company also has 48,000 shares of 5.5 percent preferred stock and 75,000 shares of common stock outstanding. The preferred stock sells for $64 per share. The common stock has a beta of 1.32 and sells for $41 per share. The preferred stock has a stated value of $100. The U.S. Treasury bill is yielding 2.2 percent and the return on the market is 10.6 percent. The corporate tax rate is 21 percent. What is the weighted average cost of capital?

8.09%

National Home Rentals has a beta of 1.06, a stock price of $17, and recently paid an annual dividend of $.92 per share. The dividend growth rate is 2.2 percent. The market has a rate of return of 11.2 percent and a risk premium of 7.3 percent. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?

9.68%

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $2.40 per share and has a beta of 1.42, all else constant, which of the following actions will decrease the firm's cost of equity?

A decrease in the firm's beta.

Assume a firm utilizes the security market line approach to determine the cost of equity. If the firm currently pays an annual dividend of $3.36 per share and has a beta of 1.38, all else constant, which of the following actions will increase the firm's cost of equity?

A decrease in the risk-free rate.

With respect to evaluating capital projects, which of the following statements is accurate?

A project that is unacceptable today might be acceptable tomorrow given a change in market returns.

Deep Mining and Precious Metals are separate firms that are both considering a silver mining project. Deep Mining is in the actual mining business and has an aftertax cost of capital of 16.2 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of capital of 13.4 percent. The project under consideration has initial costs of $950,000 and anticipated annual cash inflows of $165,000 a year for 12 years. Which firm(s), if either, should accept this project?

Neither Deep Mining nor Precious Metals

With respect to capital project analysis, which of the following statements is accurate?

Overall, a company makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects.

The capital structure of Pendekanti Products is 58 percent common stock, 2 percent preferred stock, and 40 percent debt. The firm maintains a divided payout ratio of 24 percent, has a beta of 1.08, and has an income tax of 21 percent. Given this information, which one of the following statements is accurate?

The cost of equity is unaffected by a change in the company's tax rate.

Which of the following is the main advantage of using the dividend growth model to estimate a firm's cost of equity?

The simplicity of the model.

When valuing an entire firm using the cash flow from assets approach, why must the tax amount be adjusted?

The tax effect of the interest expense must be removed.

When using the subjective approach to project analysis, a firm:

assigns discount rates to projects based on the discretion of the senior managers of a firm.

When utilizing the capital asset model approach to value equity, the outcome:

assumes the reward-to-risk ratio is constant.

When evaluating capital project proposals, assume a firm assigns unique discount rates based on the risk level of each project. Accordingly the:

company's overall cost of capital may increase or decrease over time.

Okonjo Economics has a debt-equity ratio of .38. All of the firm's outstanding shares were purchased by a small number of investors. The return these investors require is called the:

cost of equity.

A firm's aftertax cost of debt will increase if there is a(n):

decrease in the company's tax rate.

When evaluating any capital project proposal, the cost of capital:

depends upon how the funds raised for that project are going to be spent.

Assume a firm has a debt-equity ratio of .48. The firm's cost of equity is:

directly related to the risk level of the firm.

Assume a firm utilizes its WACC as the discount rate for every capital project it implements. Accordingly, the firm will tend to:

increase the average risk level of the company over time.

Assume a firm's flotation costs are 7.8 percent of the funding need. Accordingly, when analyzing capital projects, the firm's managers should:

increase the initial project cost by dividing that cost by (1-.078).

Assume a firm has a debt-equity ratio of .36. The firm's cost of equity:

is affected by both a change in the firm's beta and the firm's projected rate of growth.

Assume Barnes' Boots has a debt-equity ratio of .52. The firm uses the capital asset pricing model to determine its cost of equity. Accordingly, the firm's estimated cost of equity:

is dependent upon a reliable estimate of the market risk premium.

Thorton homes has multiple divisions which operate as separate lines of business and face risk unique to those lines. The firm uses its overall WACC as the discount rate to evaluate all proposed projects. Accordingly, each division within the firm will tend to:

prefer higher risk projects over lower risk projects.

Assume a manager determines the cost of capital for a specific project based on the cost of capital at another firm with a line of business that is similar to the project. Accordingly, the manager is using the ___________ approach.

pure play

The cost of preferred stock is equivalent to the:

rate of return on a perpetuity.

For any given capital project proposal, the discount rate should be based on the:

risk associated with the use of the funds required by the project.

When determining a firm's weighted average cost of capital, the item with the least amount of impact is the:

standard deviation of the company's common stock.

To determine a firm's cost of capital, one must include:

the returns currently required by both debtholders and stockholders.

When determining a firm's cost of capital, the most important determinant is the:

use of the funds raised.

Flotation costs for a levered firm should be:

weighted and included in the initial cash flow.