Traditional Quiz 3, traditional quiz 4 ch 12 &13, Traditional Quiz 2
By considering personal tax rates for dividend income and capital gains, one could argue that
low dividends and high capital gains are best for shareholders.
Which type of risk cannot be eliminated by diversification?
market risk
A stock's beta is a measure of its:
market risk.
The objective of capital structure management is to find the capital mix that results in:
minimization of the cost of capital. maximization shareholder wealth
There is an agency relationship between bondholders and stockholders. The agency costs that arise as a result of this relationship
reduce the market value of the levered firm.
The _______ approach is used by corporations that attempt to consider differential project risk in their capital budgeting procedures.
risk adjusted discount rate
You are considering buying stock in New England Bankshares Corporation. Which of the following are examples of risk that can be diversified away?
risk resulting from an impending lawsuit against New England Bankshares. risk resulting from a strike by New England's tellers.
According to the Modigliani-Miller (independence) hypothesis of capital structure, as the use of debt financing increases,
the cost of capital and the cost of debt remain constant while the cost of equity increases.
If a company decides to conduct a common stock repurchase using the tender offer method,
the firm offers a premium to all stockholders in order to buy back its shares.
According to the moderate view of capital structure, as the use of debt financing increases,
there will be an optimal capital structure, but not at 100 percent debt.
A new security system has a price-tag of $7,000, but should save your company $3,450 each year for the next 10 years in reduced thefts. What is the NPV of the security system? Use a discount rate of 10.8%.
1
Last year, Cayman Corporation had sales of $27 million, total variable costs of $12 million, and total fixed costs of $5,000,000. In addition, they paid $4 million in interest to bondholders. Cayman has a marginal tax rate of 21 percent. If Cayman's sales increase by 15%, what should be the increase in operating income? SET YOUR CALCULATOR TO 4 DECIMAL PLACES THEN ROUND TO 2 DECIMAL PLACES AT THE END. DO NOT ENTER THE % SIGN. FOR EXAMPLE, IF YOUR ANSWER IS 12.7125, ENTER IT AS 12.71.
1
NewTech Corporation is offering a 10% stock dividend. The firm currently has 200,000 shares outstanding and after-tax profits of $800,000. The current price of the stock is $48. What will be the stock price after the stock dividend?
10
Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the machine will be sold for $20,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%.What is the NPV of the project?
10
According to the residual theory of dividends,
dividends should be paid only after all investment financing needs have been met.
Hampton Corporation has a beta of 1.6 and a marginal tax rate of 34%. The expected return on the market is 11% and the risk-free interest rate is 6%. Estimate the firm's cost of internal equity.
11
Joliet Company is planning to issue $1,000 par value bonds that have a coupon rate of 9.6%. The bonds will be sold at a market price of $1,120. Flotation costs will amount to 4 percent of market value. The bonds would mature in 15 years and coupon payments would be semi-annual. Joliet's corporate tax rate is 35%. What is the firm's cost of debt financing?
12
SanData Inc. recently paid its annual dividend of $1.55. Dividends have consistently grown at a rate of 8%. You estimate that the stock has a required return of 19%. What is the intrinsic value of this stock?
13
The preferred stock of Dallas Platinum Exchange has a par value of $48 and pays a 7% dividend rate per year. You calculated a beta of 0.59 for the stock. The risk-free rate is 3.66% and the market return is 9.2%. Assuming that CAPM holds, what is the intrinsic value of this preferred stock?
14
Stock dividends
increase the number of shares outstanding.
Bay Beach Industries wants to maintain their capital structure of 40% debt and 60% equity. The firm's tax rate is 34%. The firm can issue the following securities to finance the investments: Bonds: Mortgage bonds can be issued at a pre-tax cost of 10.0 percent. Debentures can be issued at a pre-tax cost of 12.0 percent. Common Equity: Some retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $50. Flotation costs will be $2 per share. The recent common stock dividend was $7.08. Dividends are expected to grow at 6% in the future. What is the cost of capital using mortgage bonds and internal equity?
15
A $54,000 machine with a 5-year class life was purchased 2 years ago. The machine will now be sold for $50,000 and replaced with a new machine costing $97,000, with a 10-year class life. The new machine will not increase sales, but will decrease operating costs by $13,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the incremental annual cash flow associated with the project?
16
Tom's Trashbins Inc. has fixed costs of $226,615. The firm's sales are expected to be $427,715 this year if the firm sells 9,451 units. Variable costs amount to 41 percent of sales. What is the breakeven point in units for Tom's Trashbins? SET YOUR CALCULATOR TO 4 DECIMAL PLACES. ROUND TO THE NEAREST WHOLE NUMBER AT THE END. FOR EXAMPLE, IF YOUR ANSWER IS 8297.6901, ROUND TO 8298.
16-wrong
A $89,000 machine with a 7-year class life was purchased 5 years ago. The machine will now be sold for $20,000 and replaced with a new machine costing $63,000, with a 5-year class life. The new machine will not increase sales, but will decrease operating costs by $16,000 per year. Simplified straight line depreciation is employed for both machines, and the marginal corporate tax rate is 34 percent. What is the initial outlay for the project?
17
XYZ has 414,239 shares of common stock outstanding, a P/E ratio of 8, and $507,347 in net income. The board of directors has just voted in favor of a 4-for-1 stock split. You owned 209 shares before the stock split. What will be the total value of your investment after the split? SET YOUR CALCULATOR TO 4 DECIMAL PLACES. ROUND TO THE NEAREST WHOLE NUMBER AT THE END. FOR EXAMPLE, IF YOUR ANSWER IS 1700.5567, ENTER IT AS 1701.
17-wrong
Riverview Company is evaluating the proposed acquisition of a new production machine. The machine's base price is $200,000, and installation costs would amount to $28,000. Also, $10,000 in net working capital would be required at installation. The machine will be depreciated for 3 years using simplified straight line depreciation. The machine would save the firm $110,000 per year in operating costs. The firm is planning to keep the machine in place for 5 years. At the end of the fifth year, the machine will be sold for $20,000. Riverview has a cost of capital of 12% and a marginal tax rate of 34%.What is the IRR of the project?
18
XYZ has 413,216 shares of common stock outstanding, a P/E ratio of 8, and $577,647 in net income. The board of directors has just voted in favor of a 3-for-2 stock split. You owned 221 shares before the stock split. How many shares will you own after the split? SET YOUR CALCULATOR TO 4 DECIMAL PLACES. ROUND TO THE NEAREST WHOLE NUMBER AT THE END. FOR EXAMPLE, IF YOUR ANSWER IS 433.5000, ENTER IT AS 434.
18
Southern Corporation has a capital structure of 40% debt and 60% common equity. This capital structure is expected not to change. The firm's tax rate is 34%. The firm can issue the following securities to finance capital investments: Debt: Capital can be raised through bank loans at a pretax cost of 8.2%. Also, bonds can be issued at a pretax cost of 7.3%. Common Stock: Retained earnings will be available for investment. In addition, new common stock can be issued at the market price of $90. Flotation costs will be $3 per share. The recent common stock dividend was $4.76. Dividends are expected to grow at 5% in the future. What is the cost of external equity?
19
A rider-mower costs $594 and generates an annual after-tax cash flow of $330 for your landscaping business. What is the payback period of the mower?
2
Last year, Cayman Corporation had sales of $6 million, total variable costs of $2 million, and total fixed costs of $1 million. In addition, they paid $480,000 in interest to bondholders. Cayman has a 21% marginal tax rate. If Cayman's sales increase 6%, what should be the increase in operating income? SET YOUR CALCULATOR TO 4 DECIMAL PLACES. ROUND TO 2 DECIMAL PLACES AT THE END. DO NOT ENTER THE % SIGN. FOR EXAMPLE, IF YOUR ANSWER IS 9.4567, ENTER IT AS 9.46.
2
Hampton Corporation has a beta of 1.79 and a marginal tax rate of 34%. The expected return on the market is 14% and the risk-free interest rate is 2.46%. Estimate the firm's cost of internal equity.
20
By purchasing training software for $7,000, you can eliminate other training costs of $3,450 each year for the next 10 years. What is the profitability index of the software? Use a discount rate of 10.4%.
3
Last year, Cayman Corporation had sales of $6,671,529, total variable costs of $2,780,745, and total fixed costs of $1,560,643. In addition, they paid $480,000 in interest to bondholders. Cayman has a 21% marginal tax rate. If Cayman's sales increase 7%, what should be the increase in earnings per share? SET YOUR CALCULATOR TO 4 DECIMAL PLACES. ROUND TO 2 DECIMAL PLACES AT THE END. DO NOT ENTER THE % SIGN. FOR EXAMPLE, IF YOUR ANSWER IS 9.4567, ENTER IT AS 9.46.
3
A new security system has a price-tag of $8,000, but should save your company $3,000 each year for the next 10 years in reduced thefts. What is the IRR of the security system?
4
Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 7% coupon bonds will be sold. The firm's marginal tax rate is 34%. Determine the level of operating income at which Sand Key would be indifferent between debt financing and equity financing.
4
Given the following cash flows for two mutually exclusive projects, and a required rate of return of 12%, which of the following statements is true? Year Project A Project B 0 -580,000 -580,000 1 290,000 130,000 2 290,000 130,000 3 150,000 230,000 4 150,000 230,000 5 230,000 6 115,000
5
Sand Key Development Company has a capital structure consisting of $20 million of 10% debt and $30 million of common equity. The firm has 500,000 shares of common stock outstanding. Sand Key is planning a major expansion and will need to raise $15 million. The firm must decide whether to finance the expansion with debt or equity. If equity financing is selected, common stock will be sold at $75 per share. If debt financing is chosen, 8% coupon bonds will be sold. The firm's marginal tax rate is 34%. Determine the level of operating income at which Sand Key would be indifferent between debt financing and equity financing.
5
Gizmo Industries is currently selling for $91. It just paid its annual dividend of $5, which have consistently grown at a rate of 6.6%. What is the expected return of this stock?
6
Suppose you own 5% of Coastal Corporation's 200,000 outstanding common shares. The stock was trading for $135 per share before Coastal executives announced a 3-for-2 stock split. After the split, you will own _____ shares worth _____ per share.
6
Broden, Inc. recently issued $63 par value preferred stock that pays an annual dividend of $17. If the stock is currently selling for $95, what is the expected return of this preferred stock?
7
Colonnade Corporation purchased a machine for use in the firm's manufacturing process. The original cost of the machine was $1,800,000. The machine has a class life of 15 years, but after 13 years, the firm has decided to sell the machine for $320,000. If Colonnade has a marginal tax rate of 34%, what is the tax effect associated with the decision? Assume the machine was depreciated straight-line over the 15-year life to zero salvage value.
8
Crossroad Corporation is trying to decide whether to invest to automate a production line. If the project is accepted, labor costs will decrease by $680,000 per year. However, other cash operating expenses will increase by $165,000 per year. The equipment will cost $173,000 and is depreciable over 12 years using simplified straight line to a zero salvage value. Crossroad will invest $47,000 in net working capital at installation. The firm has a marginal tax rate of 34%. Calculate the firm's annual cash flows associated with the new project.
9
Kiwi Airlines has fixed operating costs of $3 million, and its variable costs amount to 22 percent of sales revenue. The firm has $2 million in bonds outstanding with a coupon interest rate of 8 percent. Revenues for the firm are $8 million and the firm is in the 21 percent corporate income tax bracket. What is the firm's degree of operating leverage? SET YOUR CALCULATOR TO 4 DECIMAL PLACES. ROUND TO 2 DECIMAL PLACES AT THE END. FOR EXAMPLE, IF YOUR ANSWER IS 9.4567, ENTER IT AS 9.46.
9
Which of the following has a beta of zero?
a risk-free asset
According to the capital asset pricing model, the appropriate measure for risk is:
beta.
With the assumption of perfect markets, the Modigliani-Miller (independence) hypothesis of capital structure asserts that:
capital structure does not affect firm value.
Which of the following dividend policies will cause dividends per share to fluctuate the most?
constant dividend payout ratio policy.
The optimal capital structure is determined by several factors including all of the following except
corporate capital gains.
Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal?
cost of issuing new bonds to finance the new project.
Rank the dividend payment procedure in the proper chronological sequence.
declaration date, ex-dividend date, record date, payment date
The increased variability in earnings per share due to the firm's use of debt financing is measured by:
degree of financial leverage.
According to the constant dividend payout ratio policy
dividend payments are a fixed percentage of earnings per share.
According to the residual theory of dividends
dividends should be paid only after all investment financing needs have been met.
