FIN Exam 3

Two IPOs will commence trading next week. Scott places an order to buy 600 shares of IPO A,

-$1,950

Richard Placed an order for 1,000 shares in each of three IPOs at $28 a share.

-$2,160

You own 8,000 shares, or 5 % of printers ink stock.

-.18 percent

Roy's Wedding has a cost of equity of 14.1 percent and a pretax cost of debt of 7.7 %. The required return on the assets is 13.2 percent. waht is the D-E ratio based on M&M II with no taxes?

.164

Mountain Groves has an unlevered cost of capital of 12.8 percent, a cost of debt of 7.8 percent, and a tax rate of 34 percent. What is the target debt-equity ratio if the targeted cost of equity is 15.51 percent?

.34

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 company beta rises to 1.18?

1. .14 Percent 2. Increase = (1.18-1.16)(.068) = .14

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 divident growth rate?

1. 1.85% 2. (1.33-1.32)/1.32 = .00758 2.(1.38-1.33)/1.33 = .03759 4. (1.40-1.38)/1.38 = .01449 5. (1.42-1.40)/1.40 = .01429 6. g = .00758 + .03759 + .01449 +.01429 = .0185 or 1.85%

Southern Bakeries just paid its annual dividend of $.48 a share. The stock has a merket price of $17.23 and a beta of .93. The return on the U.S. Treasury bill is 3.1 percent and the market risk premium is 7.6 percent. What is the cost of equity?`

1. 10.17 percent 2. Re = .031 + .93 (.076) = .1017

Delta Lighting has 24,500 shares of common stock outstanding at a market price of $19 a share. This stock was orginially issues 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?

1. 10.32 Percent

Travis & Sons has a capital structure which is based on 45 percent debt, 5 percent preferred stock, and 50 percent common stock. The pre-tax cost of debt is 8.3percent, the cost of preferred is 9.2 percent, and the cost of common stock is 15.4 percent. The company's tax rate is 21 percent. The company is considering a project that is equally as risky as the overall firm. 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?

1. 101,488

Grill Works has 6 percent preferred stock outstanding that is currently selling for $49 a share. The market rate of return is 14 percent and the firm's tax rate is 21 percent. What is the firm's cost of preferred stock?

1. 12.24 Percent 2. .06(100)/$49 = .1224

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 a share. There are 15,000 shares of preferred stock outstanding at a market price of $43 a share. The bond issue has a face value of $750,000 and a market quote of 1.01. The company's tax rate is 21 percent. What is the weighted average cost of capital?

1. 13.25 percent

Street Corporation's common stokc has a beta of 1.33. The risk-free rate is 3.4 percent and the expected return on the market is 10.97 percent. What is the cost of equity?

1. 13.47 % 2. Re = .034 + 1.33(.1097-.034)

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

1. 13.87 % 2. Re = .029 + 1.62(.082) = .16184 3. [1.87/(1.038)/$25] +.038 = .11564 4. .16184 + .11564)/2 = .1387

Jiminy's Cricket Farm issued a 20 year, 7 percent, semiannual bond 4 years ago. The bond currently sells for 108 percent of its face value. What is the pretax cost of debt?

1. 4.78 Percent 2. I/Y = 6.204 (1-.23)

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

1. 57.40 Percent

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

1. 59.54 Percent

Jiminy's Cricket Farm issued a 20 year, 7 percent, semiannual bond 4 years ago. The bond currently sells for 108 percent of its face value. What is the aftertax cost of debt if the company's tax rate is 23 percent.

1. 6.204 2. Use Calculator to find I/Y and Double (Semiannual)

Chelsea Fashions is expected to pay an annual dividenf of $1.26 a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent. What is the cost of equity?

1. 7.83 % 2. Re = ($1.26/$24.09) +.026

Katlin Markets is debating between a levered and an unlevered capital structure. The all-equity capital structure would consist of 60,000 shares of stock. The debt and equity option would consist of 45,000 shares of stock plus $250,000 of debt with an interest rate of 7.25 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.

1. 72,500

Holdup Bank has an issue of preferred stock with a $7 stated dividend that just sold for $87 per share. What is the bank's cost of preferred?

1. 8.05 Percent 2. $7/$87 = .0805

Sweet Treats common stock is currently priced at $36.72 a share. The company just paid $2.18 per share as its annual dividend. The dividends have been increasing by 2.3 percent annually and are expected to continue doing the same. What is the firm's cost of equity?

1. 8.27% 2. Re = [2.18 (1.022)/36.72+.022

National Home Rentals has a beta of 1.06, a stock price of $17, and recently paid an annual dividend of $.92 a 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. Waht is the estimated Cost of equity using the average return of the CAPM and the dividend discount model?

1. 9.68% 2. Re = (.112-.073) + 1.06 (.073) = .11638 3. RE = {[.92(1.022]/17} +.022 - .07731 4. (.11638+.07731)/2 = .0968

Paradise Travels is an all-equity firm that has 9,000 shares of stock outstanding at a market price of $27 a share. The firm's management has decided to issue $25,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 7.3 percent. What are the earnings per share at the break-even level of earnings before interest and taxes? Ignore taxes.

1.97

D.L Tuckers has $21,000 of debt outstanding that is selling at par and has a coupon rate of 7.5 percent. The tax rate is 32 percent. What is the present value of the tax shield?

11,970

Georga's Restaurants has 4,500 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.25 percent. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 37 percent?

111,895

Jamison's has expected earnings before interest and taxes of $11,900. Unlevered cost of capital is 12.8% and its tax rate is 21 percent. The company has debt with both a book and a face value of $12,500. This debt has a coupon rate of 7.6% and pays interest annually. What is WACC?

12.36 %

Ignoring taxes, Pewter ^ Glass has a weighted average cost of capital of 10.82 %. The company can borrow at 7.4%. What is the cost of equity if the debt-equity ratio is .68?

13.15%

Johnson Tire Distributors has debt with both a face and a market value of $12,000. This debt has a coupon rate of 6 percent and pays interest annually. The expected earnings before interest and taxes are $2,100, the tax rate is 30 percent, and the unlevered cost of capital is 11.7 percent. What is the firm's cost of equity?

14.56 %

Douglas & Frank has a debt-equity ratio of .61. The pretax cost of debt is 7.8 percent while the unlevered CoC is 12.6 %. Waht is cost of equity if tax rate is 21%?

14.91 %

Wear Ever is expanding and needs $6.8 mil to help fund this growth

179,811

Winter's Toyland has a d-e ratio of .57. The pretax cost of debt is 8.2% and requried return on asset is 14.7. Waht is company's cost of equity if you ignore taxes?

18.41 %

The ex-dividend date is defined as _____ business day(s) before the date of record.

2 business days

Shelf Registration allows a firm to register multiper issues at one time with the SEC and then sell those registered shares anytime during the subsequent

2 years

Lamont Corp is a debt-free and has aw eighted average cost of capital of 12.7 %. The current market value is 2.3 million and there are no taxes. According to M&M Prop I, what will be value of company if it changes to a d-e ratio of .85?

2,300,000

The boat works decided to go public by offering a total of 135,000 shares of common stock.

2,971,080

Holly's is currently an all equity firm that has 7,200 shares of stock outstanding at a market price of $41 a share. The firm has decided to leverage its operations by issuing $60,000 of debt at an interest rate of 7.6 percent. This new debt will be used to repurchase shares of the outstanding stock. The restructuring is expected to increase the earnings per share. What is the minimum level of earnings before interest and taxes that the firm is expecting? Ignore taxes.

22,435

L.A. Clothing has expected earnings before interest and taxes of $63,300, an unlevered cost of capital of 14.7 percent, and a tax rate of 23percent. The company also has $11,000 of debt that carries a 7 percent coupon. The debt is selling at par value. What is the value of this firm?

334,101

Kurt currently owns 4.2 % of NT Co. Company has total of 685,000 shares

4.11 %

The Huff Co. has just gone public. Under a firm committment

40.20 %

AZ Products has 140,000 shares of common stock outstanding at a market price of $27 a share. Next year's annual dividend is expected to be $1.43 a share and the dividend growth rate is 2 percent. The firm 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 firm's weighted average cost of capital?

6.71 PErcent

The June Bug has a $65,000 bond issue outstanding. These bonds ahve a coupon rate of 6.65 %, pay interest semiannual, and sell at 98.7 % of face value. The tax rate is 21%. Waht is amount of annual interest tax shield?

7,890

NElson Paints recently went public by offering 50,000 shares. Offeringp rice was 17.40 and gross spread was 2.30.

722,000

Which one of these will increase a company's aftertax cost of debt?

A decrease in the company's tax rate

Which one of the following statements related to cash dividends is correct?

A dividend is never a liability of the issuer until it has been declared.

What is a prospectus?

A document that describes the details of a proposed security offering along with relevant information about the issuer

All Else constant, which one of the following will increase a company's cost of equity if the company computes that cost using the security market line approach?

A reduction in the risk-free rate.

Underwriters generally

Accept the risk of selling the new securities in exchange for the gross spread.

the subjective approach to project analysis:

Assigns discount rates to projects based on the discretion of the senior mangers of a firm.

A Company's current cost of capital is based on:

Both the returns currently required by its debtholders and stockholders

Which one of the following is the qeuity risk that is most related to the daily operations of a firm?

Business Risk

Textile Mills borrows money at a rate of 8.7 percent. This interest rate is referred to as the:

Cost of Debt

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith Inc. What is the return that these individuals require on this investment called?

Cost of Equity

Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?

Date of Record

The optimal capital structure has been achieved when the:

Debt-equity ratio results in the lowest possible weighted average cost of capital

A $.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of business becomes a liability of the company on the:

Declaration date

Financial Risk is

Dependent upon a compan'ys capital structure

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as ____ costs

Direct Bankruptcy

Which one of the following is a marketed claim agains the cash flows a company?

Dividend payment to shareholders

Blue stone Builders recently offered to sell 45,000 newly issues shares of stock to the public. The underwriters charged a fee of 8.2 percent and paid BSS the uniform auction price for each of those shares. Which one of the following terms best describes this underwriting?

Dutch auction

Jones and CO. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser and CO. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50. What type of underwriting was this?

Firm commitment

What is an issue of securities that is offered for sale to the general public on a direct cash basis called?

General Cash offer

Mobile Units recently offered 75,000 new shares of stock for sale. The underwriters sold a total of 78,500 shares to the public at a price of $16 a share. The additional 3,500 shares were purchased in accordance with which one of the folowing?

Green Shoe Provision

A syndicate can best be defined as a

Group of underwriters sharing the risk of selling a new issue of securities

If a company uses its WACC as the discount rate for all of the projects it undertakes then the company will tend to:

Increase the Average Risk Level of the company over time

The costs incurred by a business in an effort to avoid bankruptcy are classified as ___Costs

Indirect bankruptcy costs

Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings?

Interest TAx shield

Assume Russo's has a debt-equity ratio of .4 and uses the capital asset pricing model to determine its cost of equity. As a result, the companys cost of equity:

Is dependent upon a reliable estimate of the market risk premium

A company's weighted average cost of capital:

Is the return investors require on the total assets of the firm

Which one of these best describes an exception to the registration filing requirement of the SEC?

Issues of less than $5 Million

Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7th. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8th. Fast Deliveries declared a dividend on June 20th to shareholders of record on July 12th and payable on August 1st. Which one of the following statements concerning the dividend paid on August 1st is correct given this information?

Kate is entitled to the dividend but Ted is not

Which one of the following states that the value of a company is unrelated to the company's capital structure?

M&M Proposition I, no tax

Existing Shareholders

May or may not have a pre-emptive right to newly issued shares.

All of the following are supporting arguments in favor of IPO underpricing except which one?

PRovides better returns to issuing firms

Before a seasoned stock offering, you owned 500 shares of a firm that has 20,000 shares outstanding. After the seasoned offering, you still owned 500 shares but the number os shares outstanding rose to 25,000. Which one of the following terms best describes this situation?

Percentage ownership dillution

The Cost of preferred stock is computed the same as the:

Rate of return on a perpetuity

Which one of the following is a preliminary prospectus?

Red Herring

The Securities and EXchange Commission

Reviews registration statements to ensure they comply with current laws and regulations.

Alberto currently owns 2,500 shares of Southern Tools. He has just been notified that the company is issuing additional shares and he is being given a chance to purchase some of these shares prio to the shares being offered to the general public. What is this type of offer called?

Rights offer

PEarson electric recently registered 180,000 shares of stock under SEC Rule 415. The company plans to sell 100,000 shares this year and the remaining 80,000 shares next year. What type of registration was this?

Shelf Registration

Which type of dividend is considered to be a one-time event that will not be repeated?

Special dividend

Which one of the following is a key goal of the aftermarket period?

Supporting the market price for a new securities issue

The interest tax shield is a key reason why

The net cost of debt is generally less than the cost of equity

Which one of the following statements is correct in relation to M^M Proposition II, without taxes?

The required return on assets is equal to the weighted average cost of capital.

The proposition that a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to th marginal expense of the resulting increase in financial distress costs is called

The static theory of capital structure

Bailey's decided on Friday, March 7 to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?

Thursday, MArch 20

United Foods declared a dividend of $.62 a share on Thursday, october 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex-dividend date?

Wednesday, October 29

The average of a company's cost of equity, cost of preferred, and aftertax cost of debt that is weighted based on the ocmpany's capital structure is called the:

Weighted Average Cost of Capital

M&M Proposition I with Tax implies that the

Weighted average cost of capital decreases as the debt-equity ratio incrreases

The value of a firm is maximized when the:

Weighted average cost of capital is minimized

With Dutch auction underwriting

all successful bidders pay the same price per share.

You have computed the break-even point between a levered and an unlevered capital structure, ignore taxes at the break-evne line, the

company is earning just enough to pay for the cost of the debt.

The business risk of a company

has a positive relationship with the company's cost of equity.

The optimal capital structure of a company

maximizes the value of that compan'ys marketed claims

A firm should select the capital structure that:

maximizes the value of the firm

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.

pure play

The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issue is known as the _____ period

quiet period

Assume you are reviewing a graph that plots earnings per share against earning before interest and EBIT. The steeper the slope of the plotted line

the greater the sensitivity of EPS to change in EBIT

Advertisements in a financial newspaper announcing a public offering of securities, along with a list of the investment banks handling the offering, are called

tombstones

Executive tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as an

underwriter