FIN 701 Exam 3 Module 5

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?

$101,493

The Boat Works decided to go public by offering a total of 135,000 shares of common stock to the public. The company hired an underwriter who arranged a firm commitment underwriting and an initial selling price of $24 a share with a spread of 8.3 percent. As it turned out, the underwriters only sold 122,400 shares to the public. What is the amount paid to the issuer?

$2,971,080

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

A decrease in the company's tax rate

15) 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? A) 1.85 percent B) 2.16 percent C) 1.98 percent D) 2.47 percent E) 2.39 percent

A) 1.85 percent

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?

B) Cost of equity

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

Dutch auction

11) Jones & Co. recently went public and received $23.07 a share on their entire offer of 30,000 shares. Keeser & Co. served as the underwriter and sold 28,500 shares to the public at an offer price of $26.50 a share. 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 following?

Green Shoe provision

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

Issues of less than $5 million

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

Percentage ownership dilution

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

Provides better returns to issuing firms

4) Which one of the following is a preliminary prospectus?

Red herring

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 prior to the shares being offered to the general public. What is this type of an offer called?

Rights offer

A syndicate can best be defined as a:

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

10) 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.

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

5) 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

Nelson Paints recently went public by offering 50,000 shares of common stock to the public. The underwriters provided their services in a best efforts underwriting. The offering price was set at $17.50 a share and the gross spread was $2.30. After completing their sales efforts, the underwriters determined that they sold a total of 47,500 shares. How much cash did the company receive from its IPO?

$722,000

25) Two IPOS will commence trading next week. Scott places an order to buy 600 shares of IPO A. Steve places an order to purchase 600 shares of IPO A and 600 shares of IPO B. Both IPOS are priced at $21 a share. Scott is allocated 300 shares of IPO A. Steve is allocated 300 shares of IPO A and 600 shares of IPOB. At the end of the first day of trading, IPO A is selling for $23.30 a share and IPO B is selling for $17.75 a share. How much additional profit did Steve have at the end of the first day of trading as compared to Scott?

-$1,950

Richard placed an order for 1,000 shares in each of three IPOS at $28 a share. He was allocated 1,000 shares C opened at $28 a share and ended the day at $27.65 a share. What is the total profit or loss on these three IPO share and ended the day at $24.25 a share. IPOB opened at $30 a share and finished the day at $37 a share. IPO of IPO A, 200 shares of IPO B, and 600 shares of IPO C. On the first day of trading, IPO A opened at $28 a purchases as of the end of the first day of trading?

-$2,160

29) You own 8,000 shares, or 5 percent, of Printers Ink stock. Your shares are valued at $279,280. By what percentage will the total value of your investment change if the company sells an additional 7,500 shares of stock at $33.50 a share and you do not buy any?

-18 percent

Southern Bakeries just paid its annual dividend of $.48 a share. The stock has a market 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?

10.17 percent

Delta Lighting has 24,500 shares of common stock outstanding at a market price of $19 a 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 after-tax 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 percent

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

12.24 percent

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 101. The company's tax rate is 21 percent. What is the weighted average cost of capital?

13.25 percent

Street Corporation's common stock 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?

13.47 percent

Stock in Country Road Industries has a beta of .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 a share. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?

13.87 percent

20) 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?

14 percent

Wear Ever is expanding and needs $6.8 million to help fund this growth. The company estimates it can sell new shares of stock for $43 a share. It also estimates it will cost an additional $352,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a spread of 7.5 percent. How many shares of stock must be sold for the company to fund its expansion?

179,811

21) Shelf registration allows a firm to register multiple issues at one time with the SEC and then sell those registered shares anytime during the subsequent:

2 years.

Kurt currently owns 4.2 percent of NT Co. The company has a total of 685,000 shares outstanding with a current market price of $19.20 a share. At present, the firm is offering an additional 15,000 shares at a price of $18 a share. Kurt decides not to participate in this offering. What will his ownership position be after the offering is completed?

4.11 percent

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 percent?

4.78 percent

The Huff Co. has just gone public. Under a firm commitment agreement, the company received $17.64 for each of the 3.2 million shares sold. The initial offering price was $22.50 per share, and the stock rose to $24.15 per share in the first day of trading. The company paid $984,900 in direct legal and other costs and incurred $340,000 in indirect costs. What was the flotation cost as a percentage of the net amount raised?

40.20 percent

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 a share and 37,500 shares of common stock valued at $19 a share. What weight should be assigned to the common stock when computing the weighted average cost of capital?

57.40 percent

The Downtowner has 168,000 shares of common stock outstanding valued at $53 a 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 percent

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 pretax cost of debt?

6.204 percent

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 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 percent

Chelsea Fashions is expected to pay an annual dividend 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?

7.83 percent

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

8.05 percent

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 2.2 percent annually and are expected to continue doing the same. What is the cost of equity?

8.27 percent

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. What is the estimated cost of equity using the average return of the CAPM and the dividend discount model?

9.68 percent

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? Assume firm currently pays an annual dividend of $1 a share and has a beta of 1.2

A reduction in the risk-free rate

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

1Which one of the following is a key goal of the aftermarket period?

Supporting the market price for a new securities issue

Underwriters generally:

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

With Dutch auction underwriting:

all successful bidders pay the same price per share.

The subjective approach to project analysis:

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

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

both the returns currently required by its debt holders and stockholders.

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

cost of an irregular growth common stock

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

cost of debt.

Existing shareholders:

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

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

13) The 40-day period following an IPO during which the SEC places restrictions on the public communications of the issuer is known as the ______ period.

quiet

The Securities and Exchange Commission:

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

Executive Tours has decided to go public and has hired an investment firm to handle the offering. The investment firm is serving as a(n):

underwriter.

9) The average of a company's cost of equity, cost of preferred, and after-tax cost of debt that is weighted based on the company's capital structure is called the:

weighted average cost of capital.