FIN 3403 FINAL
Holly's is currently an all-equity firm that has 12,000 shares of stock outstanding at a market price of $36 a share. The firm has decided to leverage its operations by issuing $120,000 of debt at an interest rate of 7.2 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.
$31,104
On July 9, you purchased 600 shares of Blue Water stock for $32 a share. On August 4, you sold 100 shares of this stock for $33 a share. You sold an additional 100 shares on August 14 at a price of $34.50 a share. The company declared a dividend of $.76 per share on August 3 to holders of record as of Monday, August 17. This dividend is payable on September 15. How much dividend income will you receive on September 15?
$380
Katlin Markets is debating between a levered and an unlevered capital structure. The all-equity capital structure would consist of 75,000 shares of stock. The debt and equity option would consist of 40,000 shares of stock plus $320,000 of debt with an interest rate of 6.25 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes.
$42,857.14
Aaron purchased 200 shares of KMP stock on May 8. On May 16, he purchased another 300 shares and then on May 20 he purchased a final 100 shares of KMP stock. The company declared a dividend of $1.22 a share on May 6 to holders of record on Friday, May 22. The dividend is payable on June 12. How much dividend income will Steve receive on June 12?
$610
The Well Derrick has 5.5 percent preferred stock outstanding that sells for $48 a share. This stock was originally issued at $45 per share. What is the cost of preferred stock if the firm's tax rate is 35 percent?
11.46%
Street Corporation's common stock has a beta of 1.27. The risk-free rate is 3.2 percent and the expected return on the market is 12.68 percent. What is the firm's cost of equity?
15.24%
the ex-dividend date is defined as _____ business day(s) before the date of record
2
Jiminy's Cricket Farm issued a 30-year, 8 percent, semiannual bond six years ago. The bond currently sells for 114 percent of its face value. What is the aftertax cost of debt if the company's tax rate is 31 percent?
4.70%
Jay's Bakery has a bond issue outstanding that matures in four years. The bonds pay interest semiannually. Currently, the bonds are quoted at 102.3 percent of face value and carry a coupon rate of 9 percent. What is the firm's after tax cost of debt if the tax rate is 35 percent?
5.40 %
Holdup Bank has an issue of preferred stock with a $5 stated dividend that just sold for $92 per share. What is the bank's cost of preferred?
5.43%
The Downtowner has 950,000 shares of common stock outstanding valued at $38 a share along with 40,000 bonds selling for $1,020 each. What weight should be given to the debt when the firm computes its weighted average cost of capital?
53.06%
which of the following statements is correct?
A. The subjective approach assesses the risks of each project and assigns an adjustment factor that is unique just for that project. B. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. C. Firms will correctly accept or reject every project if they adopt the subjective approach. D. Mandatory projects should only be accepted if they produce a positive NPV when the firm's WACC is used as the discount rate. E. The pure play approach should only be used with low-risk projects. answer: B
Textile Mills borrows money at a rate of 13.5 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
A firm's cost of capital
Depends upon how the funds raised are going to be spent
Which of the following represent problems encountered when comparing the financial statements of two separate entities?
I. Either one, or both, of the firms may be conglomerates and thus have unrelated lines of business. II. The operations of the two firms may vary geographically. III. The firms may use differing accounting methods. IV. The two firms may be seasonal in nature and have different fiscal year ends.
When a manager develops a cost of capital for a specific project based on the cost of capital for another firm that has a similar line of business as the project, the manager is utilizing the _____ approach.
Pure play
a $.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of business is called a:
Regular cash dividend
a reverse stock split is defined as
a decrease in the number of shares outstanding that does not affect total owners' equity
stock splits can be used to:
adjust the market price of a stock so it falls within a preferred trading range
the subjective approach to project analysis
assigns discount rates to projects based on the discretion of the senior managers of a firm
which one of the following statements is correct concerning the relationship between a levered and an unlevered capital structure? ignore taxes
at the break-even point, there is no advantage to debt
which one of the following is the equity risk that is most related to the daily operations of a firm
business risk
The common stock of Dayton Dry Goods has historically had a low dividend yield that is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to by which one of the following terms?
clientele effect
which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?
date of record
The board of directors of Wilson Sporting Equipment met this afternoon and passed a resolution to pay a cash dividend of $.42 a share next month. In relation to this dividend, today is referred to as which one of the following dates?
declaration date
which one of the following statements is correct?
dividend payments are highly concentrated in a relatively small set of large firms
which one of the following statements related to dividend policy is correct
dividend policy focuses on the timing of dividend payments
which one of the following statements appears to be supported by the current dividend policies of U.S industrial firms?
dividends are still viewed by shareholders as a signal of a firm's future outlook
relationships determined from a firm's financial information and used for comparison purposes are known as:
financial ratios
Incorporating floatation costs into the analysis of a project will :
increase the initial cash outflow of the project
westover mills reduced its taxes last year by $680 by increasing its interest expense by $2,000. Which one of the following terms is used to describe this tax savings?
interest tax shield
which form of financing do firms prefer to use first according to the pecking-order theory?
internat funds
the pretax cost of debt
is based on the current yield to maturity of the firm's outstanding bonds
the dividend growth model
is only as reliable as the estimated rate of growth
if a firm uses its WACC as the discount rate for all of the projects it undertakes, then the firm will tend to do all of the following except:
lower the average risk level of the firm over time
the fact that flotation costs can be significant is an argument for
maintaining a low dividend policy and rarely issuing extra dividends
which one of the following statements is correct
maintaining a steady dividend is a key goal of most dividend-paying firms
the information content of a dividend increase generally signals that
management believes earnings growth will be strong going forward
a firm should select the capital structure that
maximizes the value of the firm
ratios that measure how efficiently a firm manages its assets and operations to generate net income are referred to as____ ratios
profitability
the discount rate assigned to an individual project should be based on the
risks associated with the use of the funds required by the project
a common-size income statement is an accounting statement that expresses all of a firm's expenses as a percentage of:
sales
the U.S. government coding system that classifies a firm by the nature of its business operations is known as the
standard industrial classification codes
HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called?
stock repurchase
which one of the following statements related to WACC is correct for a firm that uses debt in its capital structure
the WACC should decrease as the firm's debt-equity ratio increases
M&M Proposition I with no tax supports the argument that:
the debt-equity ratio of a firm is completely irrelevant
what is the information content effect
the financial market's reaction to a change in the amount of a firm's dividend
which one of the following statements related to the capital asset pricing model approach to equity valuation is correct? assume the firm uses debt in its capital structure
the model is dependent upon a reliable estimate of the market risk premium
the basic lesson of M&M theory is that the value of a firm is dependent upon
the total cash flow of the firm
corporations in the U.S tend to
underutilize debt
Which one of the following is the primary determinant of a firm's cost of capital
use of the funds
if a firm has the optimal amount of debt, then the
value of the levered firm will exceed the value of the firm if it were unlevered
in general, the capital structures used by U.S firms
vary significantly across industries
the value of a firm is maximized when the
weighted average cost of capital is minimized
the optimal capital structure
will vary over time as taxes and market conditions change