Finance Homework 12

Free Trade Partners needs to raise $24.2million to expand its operations into South America. The company will sell new shares of common stock using a general cash offering. The underwriters will charge a spread of 7.6 percent, the administrative costs will be $631,000, and the offer price will be $32 per share. How many shares of stock must be sold if the firm is to raise the funds it desires? 839,793 shares 1,051,515 shares 911,502 shares 989,415 shares 748,315 shares

839,793 shares Number of shares = [($24,200,000 + 631,000)/(1-.076)] / $32 = 839,793

You are given the following information concerning Around Town Tours: Debt:7,500, 6.8 percent coupon bonds outstanding, with 11 years to maturity and a quoted price of 97.9. These bonds pay interest semiannually. Common stock:284,000 shares of common stock selling for $68 per share. The stock has a beta of 1.04 and will pay a dividend of $2.62 next year. The dividend is expected to grow by 2.5 percent per year indefinitely. Preferred stock:9,000 shares of $8 preferred stock selling at $88 per share. Market:14.6 percent expected return, 4.1 percent risk-free rate Company:34 percent tax rate. Calculate the WACC for this firm. 10.0 percent 9.6 percent 8.7 percent 9.0 percent 9.4 percent

9.0% Common: 284,000 × $68 = $19,312,000 Preferred: 9,000 × $88 = $792,000 Debt: 7,500 × .979 × $1,000 = $7,342,500 Value = $19,312,000 + 792,000 + $7,342,500 = $27,446,500 RE = .041 + 1.04(.146-.041) = .1502 RE = ($2.62 /$68) + .025 = .0635 Average RE = (.1502+ .0635)/2 = .1069 RP = $8/$88 = .0909 $979 = [(.068 × $1,000) / 2] × ({1- 1 / [1 + (r/ 2)]22} / (r / 2)) + $1,000 / [1 + (r / 2)]22 r = 7.08 percent WACC = ($19,312,000/$27,446,500)(.1069) + ($792,000/$27,446,500)(.0909) + ($7,342,500/$27,446,500)(.0708)(1 -.34) = .090, or 9.0 percent

Assume the exchange rate is .96 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,500 Swiss francs? $1,521.21 $1,528.80 $1,440.00 $1,418.46 $1,562.50

$1,562.50 SF1,500×($1/SF.96) = $1,562.50

Assume the exchange rate is .96 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,500 Swiss francs? $1,562.50 $1,521.21 $1,528.80 $1,440.00 $1,418.46

$1,562.50 SF1,500×($1/SF.96) = $1,562.50

You just returned from a trip to Germany and have 356euros in your pocket. How many dollars will you receive when you exchange this money if the U.S. dollar equivalent of the euro is 1.2452? $411.40 $397.18 $462.05 $402.08 $443.29

$443.29 €356×($1.2452/€1) = $443.29

Jasper Industrial has no debt outstanding and a total market value of $216,000. Earnings before interest and taxes, EBIT, are projected to be $15,000 if economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 12 percent higher. If there is a recession, then EBIT will be 15 percent lower. There are currently 8,600 shares outstanding. Ignore taxes. What is the percentage change in EPS when a normal economy slips into recession? -15.0 percent -15.5 percent -16.1 percent -14.8 percent -15.2 percent

-15.0 percent EPSNormal = $15,000/8,600 = $1.744 EPSRecession = $15,000(1 - .15)/ 8,600 = $1.483 Percentage change ($1.483 -1.744)/$1.744 = -15 percent

Design Interiors has a cost of equity of 14.9 percent and a pretax cost of debt of 8.6 percent. The firm's target weighted average cost of capital is 11 percent and its tax rate is 34 percent. What is the firm's target debt-equity ratio? .98 1.37 1.02 .87 .73

.73 WACC = .11 = (1 -x)(.149) + (x)(.086)(1 -.34) x = .4228 Debt-equity ratio = .4228 /(1 -.4228) = .73

he preferred stock of Dolphin Pools pays an annual dividend of $5.25 a share and sells for $48a share. The tax rate is 35 percent. What is the firm's cost of preferred stock? 15.59 percent 16.47 percent 9.67 percent 10.94 percent 15.07 percent

10.94 percent Rp = $5.25/$48 = .1094, or 10.94 percent

The Five and Dime Store has a cost of equity of 14.8 percent, a pretax cost of debt of 6.7 percent, and a tax rate of 34 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is .46? 13.49 percent 10.18 percent 14.93 percent 11.72 percent 11.53 percent

11.53 percent WACC = (1/1.46)(.148) + (.46/1.46)(.067)(1 -.34) = .1153, or 11.53 percent

Healthy Snacks has a target capital structure of 60 percent common stock, 3 percent preferred stock, and 37 percent debt. Its cost of equity is 16.8 percent, the cost of preferred stock is 11.4 percent, and the pretax cost of debt is 8.3 percent. What is the company's WACC if the applicable tax rate is 34 percent? 12.45 percent 13.29 percent 12.61 percent 12.34 percent 12.83 percent

12.45 percent WACC = .60(.168) + .03(.114) + .37(.083)(1 -.34) = .1245, or 12.45 percent

The common stock of Contemporary Interiors has a beta of 1.13 and a standard deviation of 21.4 percent. The market rate of return is 12.7 percent and the risk-free rate is 4.1 percent. What is the cost of equity for this firm? 11.76 percent 13.05 percent 13.82 percent 14.40 percent 12.08 percent

13.82 percent RE= .041 + 1.13 ×(.127-.041) = .1382, or 13.82 percent

The 6.5 percent preferred stock of Home Town Brewers is selling for $42 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100? 16.17 percent 15.92 percent 17.50 percent 16.52 percent 15.48 percent

15.48 percent Rp = (.065 ×$100)/$42 = .1548, or 15.48 percent

Electronic Products has 22,500 bonds outstanding that are currently quoted at 101.6. The bonds mature in 8 years and pay an annual coupon payment of $90. What is the firm's aftertax cost of debt if the applicable tax rate is 34 percent? 4.79 percent 5.75 percent 6.67 percent 5.47 percent 6.98 percent

5.75 percent $1,016 = $90 ×({1 - [1 / (1 + RD )^8]} / RD) + $1,000 / (1 + RD)^8 RD = 8.714 percent Aftertax cost of debt = 8.714 percent ×(1 -.34) = .0575, or 5.75 percent

Three years ago, the Morgan Co. issued 15-year, 6.5 percent semiannual coupon bonds at par. Today, the bonds are quoted at 100.6. What is this firm's pretax cost of debt? 6.83 percent 6.27 percent 6.43 percent 6.08 percent 6.29 percent

6.43 percent $1,006= [(.065 ×$1,000) / 2] ×({1 - 1 / [1 + (RD / 2)]24} / (RD / 2))+ $1,000 / [1 + (RD / 2)]24 RD = 6.43 percent

Judy's Boutique just paid an annual dividend of $1.48 on its common stock and increases its dividend by 2.2 percent annually. What is the rate of return on this stock if the current stock price is $29.60 a share? 8.19 percent 8.33 percent 7.31 percent 8.37 percent 7.54 percent

7.31 percent Re = [($1.48× 1.022) / $29.60] + .022 = .0731, or 7.31 percent

Which one of the following best defines legal bankruptcy? Negotiating new payment terms with a firm's creditors The failure of a firm to meet its financial obligations in a timely manner The internal process of revising the capital structure of a firm A legal proceeding for liquidating or reorganizing a business A temporary technical insolvency

A legal proceeding for liquidating or reorganizing a business

You are debating between spending a week in Brazil or a week in Chile. You've estimated the cost of the Brazilian trip at 56,300 reals and the Chilean trip at 13.6 million pesos. The currency per U.S. dollar is 2.5658 reals and 609.10 pesos. If you prefer the less expensive trip, as measured in U.S. dollars, you should travel to _____ because you can save ____. Chile; you can save $384.29 Chile; you can save $613.33 Brazil; you can save $518.74 Brazil; you can save $460.45 Brazil; you can save $385.55

Brazil; you can save $385.55 R$56,300 ($1/R$2.5658) = $21,942.47 13,600,000CLP (1USD/609.10CLP) = $22,328.02 Difference = $22,328.02-21,942.47 = $385.55

Which one of the following best defines a regular cash dividend? One-time payment of cash by a firm to its shareholders Payment from any source by a firm to its owners Distribution by a firm to its shareholders Cash payment by a firm to its owners as part of a firm's normal operations Distribution of the proceeds from the sale of a portion of a firm's operations

Cash payment by a firm to its owners as part of a firm's normal operations

Which one of the following is the date on which the board of directors agrees to pay a dividend and passes a resolution to do so? Date of record Public announcement date Ex-dividend date Declaration date Payment date

Declaration date

Which term is defined as having international operations in a world where relative currency values change? Interest rate parity Exchange rate risk Relative purchasing power parity Political risk Absolute purchasing power parity

Exchange rate risk

Which one of the following statements concerning financial leverage is correct? Financial leverage magnifies both profits and losses. Financial leverage refers to the use of common stock. Increasing financial leverage will always decrease the earnings per share. Financial leverage has no effect on a firm's return on equity. Financial leverage increases profits and decreases losses.

Financial leverage magnifies both profits and losses.

A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, an aftertax cost of debt of 5.2 percent, and a tax rate of 35 percent. Given this, which one of the following will increase the firm's weighted average cost of capital? Increasing the firm's tax rate Increasing the firm's beta Issuing new bonds at par Redeeming shares of common stock Increasing the debt-equity ratio

Increasing the firm's beta

Which one of the following is the best universal definition of an exchange rate? Number of units of a currency that were originally required to obtain one euro when a country adopted the euro as its official currency Price that must be paid to obtain a good or service from another country Number of foreign dollars that can be purchased for every one U.S. dollar paid Price of a country's currency expressed in terms of that country's currency unit Price of one country's currency expressed in terms of another country's currency

Price of one country's currency expressed in terms of another country's currency

What is the legal document called that is provided to potential investors and describes a new security offering? Security agreement Prospectus Formal filing Registration statement Public statement

Prospectus

Modern Art Online is preparing to sell new shares of stock to the general public. As part of this process, the firm just filed the required paperwork with the SEC that contains the material information related to this issue of stock. What is the name associated with this paperwork? Security agreement Red herring Registration statement Comment letter Prospectus

Registration statement

You own 400 of the 21,000 outstanding shares of DLK stock. The firm just announced that it will be issuing an additional 3,000 shares to the general public in a cash offer at $16 per share. What type of event are you participating in if you opt to purchase 100 of these additional shares? Private placement IPO Seasoned equity offering Dutch auction Rights offer

Seasoned equity offering

A registration of securities under SEC 415 which permits a firm to issue the securities over a two-year period is which type of registration? Extended registration Seasoned registration Shelf registration Negotiated registration Delayed registration

Shelf registration

GW Underwriters retains the difference between its buying price and its offering price on new securities. What is this amount called? Spread Offer Markup Commission Rights price

Spread

Which of these is a noncash payment made by a firm to its shareholders that lessens the value of each outstanding share? Reverse stock split Stock dividend Liquidating dividend Cash distribution Regular dividend

Stock dividend

Assume you are comparing two firms that are identical in every aspect, except one is levered and one is unlevered. Which one of the following statements is correct regarding these two firms? The levered firm has higher EPS (earnings per share) than the unlevered firm at the break-even point. The levered firm will have higher EPS than the unlevered firm at all levels of EBIT. The unlevered firm will have higher EPS than the levered firm at relatively high levels of EBIT. The EPS for the unlevered firm will always exceed those of the levered firm. The unlevered firm will have higher EPS at relatively low levels of EBIT.

The unlevered firm will have higher EPS at relatively low levels of EBIT.

What is the advertisement, commonly found in financial newspapers, that announces a public offering of securities and provides the name of the underwriters called? Prospectus Red herring Underwriter's ad Green Shoe Tombstone

Tombstone

Kelsey International declared a dividend on Friday, November 13, that is payable on Friday, December 11, to holders of record on Monday, November 30. What is the latest date that you can purchase this stock if you wish to receive this dividend? Assume there are no banking holidays within this period of time. Monday, November 30 Thursday, November 26 Friday, November 27 Wednesday, November 25 Tuesday, November 24

Wednesday, November 25

Which one of the following represents the minimum rate of return a firm must earn on its assets if it is to maintain the current value of its securities? Aftertax cost of debt Weighted average cost of capital Pretax cost of debt Weighted average cost of preferred and common stock Cost of equity

Weighted average cost of capital

An American Depositary Receipt is defined as a security: issued in multiple countries but denominated in U.S. currency. issued in the U.S. that represents shares of a foreign stock. that has a guarantee of payment from a U.S. bank. issued outside the U.S. that represents shares of a U.S. stock. that has been deposited in an interest-bearing account at a U.S. bank.

issued in the U.S. that represents shares of a foreign stock.

Eurobonds are best defined as international bonds issued in _____ and denominated in ____. multiple countries; a single currency multiple countries; multiple currencies a single country; a single currency Euroland; euros a single country; multiple currencies

multiple countries; a single currency

A new issue of common stock offered to the general public by a firm that is currently publicly held is called a(n): initial public offering. seasoned equity offering. rights offer. private placement. venture capital offer.

seasoned equity offering.

You are comparing two possible capital structures for a firm. The first option is an all-equity firm. The second option involves the use of $3.8 million of debt. The break-even point between these two financing options occurs when the earnings before interest and taxes (EBIT) are $428,000. Given this, you know that leverage is beneficial to the firm: whenever EBIT is less than $428,000. only when EBIT is $428,000. only if the debt is decreased by $428,000. only if the debt is increased by $428,000. whenever EBIT exceeds $428,000.

whenever EBIT exceeds $428,000.