Financé

A firm has a debt-equity ratio of .64, a cost of equity of 13.04 percent, and a cost of debt of 8 percent. Assume the corporate tax rate is 25 percent. What would be the cost of equity if the firm were all-equity financed?

11.41 percent

LDL Transport is subject to claims from four parties as follows: tax claims = $6,740; bondholder claims = $28,520; bankruptcy claims = $4,300; and shareholder claims = $33,190. What is the total value of the marketed claims?

$61,710 Explanation: Marketed claims = $28,520 + 33,190 Marketed claims = $61,710

The free cash flow hypothesis states that:

issuing debt requires payments to creditors thereby reducing the ability of managers to waste resources.

Joe's Leisure Time Sports is an unlevered firm with an aftertax net income of $78,400. The unlevered cost of capital is 11.4 percent and the tax rate is 23 percent. What is the value of this firm?

$687,719

Joe's Leisure Time Sports is an unlevered firm with an after-tax net income of $78,400. The unlevered cost of capital is 11.4 percent and the tax rate is 23 percent. What is the value of this firm?

$687,719 Explanation: VU = $78,400/.114 VU = $687,719

Lyme Home has 5,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 7.65 percent. Interest is paid semiannually. What is the amount of the annual tax shield on debt if the tax rate is 23 percent?

$87,975

MM Proposition I with no tax supports the argument that:

it is completely irrelevant how a firm arranges its finances.

Rosita's has a cost of equity of 13.76 percent and a pretax cost of debt of 8.5 percent. The debt-equity ratio is .60 and the tax rate is 21 percent. What is Rosita's unlevered cost of capital?

12.07 percent

You are retired, have $264,500 in your savings, withdraw $2,000 each month, and earn 4.5 percent, compounded monthly. How long will it be until you run out of money?

15.25 years

Stu is working on a bid for a contract. Thus far, he has determined that he will need $218,000 for fixed assets and another $41,000 for net working capital at Time 0. He has also determined that he can recover $79,900 aftertax for the combined fixed assets and net working capital at the end of the 3-year project. What operating cash flow will be required each year for the project to return 14 percent in nominal terms?

$88,330.01

Mary owns 100 percent of a gift shop with an equity value of $150,000. If she keeps the shop open 5 days a week, EBIT is $75,000. If the shop remains open 6 days a week, EBIT increases to $92,000 annually. Mary needs an additional $50,000 which she can raise today by either selling stock or issuing debt at an interest rate of 7 percent. The principal amount would be repaid at the end of the fifth year. Ignore taxes. What will be the cash flow for this year to Mary if she issues debt, remains open 6 days a week, and distributes all the residual cash flow to the shareholders?

$88,500

A stock has a rights-on price of $20, an ex-rights price of $18.25, and the number of rights needed to buy one new share is 5. Assuming everything else is held constant, what is the subscription price?

$9.50

A cash payment made by a firm to its owners when some of the firm's assets are sold off is called a:

liquidating dividend.

A stock has a rights-on price of $20, an ex-rights price of $18.25, and the number of rights needed to buy one new share is 5. Assuming everything else is held constant, what is the subscription price?

$9.50 Explanation: $18.25 = [5($20) + Subscription price]/6 Subscription price = $9.50

The market for venture capital refers to the:

private financial marketplace for servicing new, often high-risk firms.

An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and taxes of $138,000. A levered firm with the same operations and assets has both a book value and a face value of debt of $520,000 with an annual coupon of 7 percent. The applicable tax rate is 21 percent. What is the value of the levered firm?

$910,818

Robinson's has 15,000 shares of stock outstanding with a par value of $1 per share and a market price of $36 a share. How many shares of stock will be outstanding of the firm does a 3-for-2 stock split?

22,500 shares

Robinson's has 15,000 shares of stock outstanding with a par value of $1 per share and a market price of $36 a share. How many shares of stock will be outstanding of the firm does a 3-for-2 stock split?

22,500 shares Explanation: Number of shares = 15,000(3/2) Number of shares = 22,500 shares

DD&L has a market value equal to its book value, excess cash of $400, other assets of $7,600, equity of $8,000, 200 shares of stock outstanding, and net income of $900. The firm has decided to pay out all its excess cash as a cash dividend. What will be the earnings per share after the dividend is paid?

$4.50 Explanation: EPS = $900/200 EPS = $4.50

Ben's Border Café is considering a project that will produce sales of $16,000, increase cash expenses by $10,000, increase taxes by $950, and increase depreciation by $1,500 for each year of the project's 9-year life. What is the amount of the annual operating cash flow using the top-down approach?

$5,050

Jasper Metals is considering installing a new molding machine which is expected to produce operating cash flows of $67,000 per year for 8 years. At the beginning of the project, inventory will decrease by $25,600, accounts receivables will increase by $25,800, and accounts payable will increase by $18,600. At the end of the project, net working capital will return to the level it was prior to undertaking the new project. The initial cost of the molding machine is $285,000. The equipment will be depreciated straight-line to a zero-book value over the life of the project. The equipment will be salvaged at the end of the project creating an after-tax cash flow of $72,000. What is the net present value of this project given a required return of 11.2 percent?

$102,371

The Market Place recently offered 5,000 shares of stock for sale via a Dutch auction. The firm received bids as follows: 500 shares at $22.50; 2,500 shares at $22.20; 3,300 shares at $22; and 5,500 shares at $21. Ignoring all costs, how much will the firm receive from this auction?

$110,000

King Nothing is evaluating a new 6-year project that will have annual sales of $445,000 and costs of $305,000. The project will require fixed assets of $545,000, which will be depreciated on a 5-year MACRS schedule. The annual depreciation percentages are 20.00 percent, 32.00 percent, 19.20 percent, 11.52 percent, 11.52 percent, and 5.76 percent, respectively. The company has a tax rate of 40 percent. What is the operating cash flow for Year 3?

$125,856

Downtown Deli has 2,000 shares of stock outstanding with a par value of $1 per share and a market value of $26 per share. The balance sheet shows $2,000 in the common stock account, $9,500 in the capital in excess of par account, and $14,500 in the retained earnings account. The firm just announced a stock dividend of 75 percent. What is the market value per share after the dividend?

$14.86

For next year, By-Way has projected sales of $435,000, costs of $254,000, depreciation of $35,000, interest expense of $22,000, and taxes of $28,500. What is the amount of the projected operating cash flow?

$152,500

Four Wheels requires $1.75 million to fund a new project and has decided to raise the funds via a seasoned stock offering. Assume the firm will incur $140,000 in indirect costs and pay 8.63 percent of the gross proceeds in direct costs. How much does the firm need to raise in total to cover all the issue costs as well as fund the new project?

$2,068,513 Explanation: Gross proceeds = [($1,750,000 + 140,000)/(1 − .0863)] Gross proceeds = $2,068,513

Juanita's Steak House has $12,000 of debt outstanding that is selling at 101.2 percent of par and has a coupon rate of 8 percent and a current yield of 7.91 percent. The tax rate is 21 percent. What is the present value of the tax shield on debt?

$2,520

TL Company has outstanding debt of $50 that is due in one year. However, given the financial distress costs, the debtholders will only receive $40 if the firm does well and $15 if it does poorly. The probability the firm will do well is 60 percent with the 40 percent probability assigned to poor conditions. What is the current value of the debt if the discount rate is 8 percent?

$27.78 Explanation: Debt value = [.6($40) + .4($15)]/1.08 Debt value = $27.78

You own 300 shares of Abco stock. The firm plans on issuing a dividend of $2.10 a share one year from today and then issuing a final liquidating dividend of $36.45 a share two years from today. Your required rate of return is 14.5 percent. Ignoring taxes, what is the value of one share of this stock to you today?

$29.64 Explanation: Value per share = $2.10/1.145 + $36.45/1.1452 Value per share = $29.64

A rights offer was set at four rights plus $25 for each new share. What is the rights-on price if the ex-rights price is $30?

$31.25

A firm has negotiated a seasoned equity offer that will provide the firm with $1.68 million in net proceeds. The underwriting spread is 7.35 percent and the firm needs to sell 50,000 shares. What is the offer price?

$36.27

Jensen's has a market value equal to its book value, excess cash of $500, other assets of $9,500, and equity worth $10,000. The firm has 250 shares of stock outstanding and net income of $1,400. What will be the stock price per share if the firm pays out its excess cash as a cash dividend?

$38

Assume a firm has a market value equal to its book value, excess cash of $900, other assets of $16,500, and equity valued at $17,400. The firm has 1,200 shares of stock outstanding and net income of $15,400. If the firm spends all of its excess cash on share repurchases, how many shares will be outstanding after the repurchases are completed? (Round your answer up to the nearest whole share)

1,138 shares

A firm has an equity multiplier of 1.57, an unlevered cost of equity of 14 percent, a levered cost of equity of 15.6 percent, and a tax rate of 21 percent. What is the cost of debt?

10.45 percent Explanation: B/S = 1.57 − 1 B/S = .57 .156 = .14 + .57(1 −.21)(.14 − RB) RB = .1045, or 10.45%

A firm has debt of $7,000, equity of $12,000, a cost of debt of 7 percent, a cost of equity of 14 percent, and a tax rate of 21 percent. What is the firm's weighted average cost of capital?

10.88 percent Explanation: RWACC = [$12,000/($7,000 + 12,000)(.14)] + [$7,000/($7,000 + 12,000)](.07)(1 − .21) RWACC = .1088, or 10.88%

Anderson's Furniture Outlet has an unlevered cost of capital of 10.3 percent, a tax rate of 21 percent, and expected earnings before interest and taxes of $1,900. The company has $4,000 in bonds outstanding that have an annual coupon of 7 percent. If the bonds are selling at par, what is the cost of equity?

11.21 percent

Anderson's Furniture Outlet has an unlevered cost of capital of 10.3 percent, a tax rate of 21 percent, and expected earnings before interest and taxes of $1,900. The company has $4,000 in bonds outstanding that have an annual coupon of 7 percent. If the bonds are selling at par, what is the cost of equity?

11.21 percent Explanation: VL = [$1,900(1 − .21)/.103] + .21($4,000) VL = $15,412.82 VS = $15,412.82 − 4,000 VS = 11,412.82 RS = .103 + [($4,000/$11,412.82)(1 − .21)(.103 − .07)] RS = .1121, or 11.21%

The Tinslow Co. has 125,000 shares of stock outstanding at a market price of $93 a share. The company has just announced a 5-for-2 stock split. How many shares of stock will be outstanding after the split?

312,500 Explanation: Number of shares = 125,000(5/2) Number of shares = 312,500

Lasko's has 250,000 shares of stock outstanding, $400,000 in perpetual annual earnings, and a discount rate of 16 percent. The firm is considering a new project that has initial costs of $350,000 and annual perpetual cash flows of $60,000. How many new shares must be issued to fund the new project? Ignore taxes.

34,653 Explanation: Current price per share = ($400,000/250,000)/.16 Current price per share = $10 Firm value with project = −$350,000 + [($400,000 + 60,000)/.16] Firm value with project = $2,525,000 Price per share with project = $2,525,000/250,000 Price per share with project = $10.10 New shares needed = $350,000/$10.10 New shares needed = 34,653

Assume BJ Companies is indifferent between issuing equity and issuing debt. Assume the corporate tax rate is 21 percent and dividends are taxed at the personal level at 20 percent. What is the personal tax on interest income?

37 percent Explanation: (1 − TB) = (1 − TC)(1 − TS) (1 − TB) = (1 − .21)(1 − .20) TB = .37, or 37%

The Wordsmith Corporation has 40,000 shares outstanding with a market price of $25 each. The firm expects to raise $200,000 via a rights offering at a subscription price of $20. How many rights must be submitted to acquire one new share?

4.00

You are borrowing $5,200 at 7.8 percent, compounded monthly. The monthly loan payment is $141.88. How many loan payments must you make before the loan is paid in full?

42

Assume CRT debtholders are promised payments in one year of $35 if the firm does well and $20 if the firm does poorly. There is a 50/50 chance of the firm doing well or poorly. If debtholders are willing to pay $25.50 today to purchase this debt, what is the promised return to those debtholders?

7.8 percent Explanation: Expected return = [.5($35) + .5($20) − $25.50)]/$25.50 Expected return = .078, or 7.8%

Which one of the following is not a reason why firms choose repurchases rather than dividends?

Conserve cash

Which one of these lowers cash flows?

The associated costs of bankruptcy

The dividend-irrelevance proposition of Miller and Modigliani depends on which one of the following relationships between investment policy and dividend policy?

The investment policy is set ahead of time and not altered by changes in dividend policy.

MM Proposition II is the proposition that:

a firm's cost of equity capital is a positive linear function of the firm's capital structure.

If a firm issues debt and includes protective covenants in the indenture then the firm's debt will probably be issued at ________ similar debt without the covenants.

a lower interest rate than

Nu Tech is a technology firm with good growth prospects. The firm wishes to do something to acknowledge the loyalty of its shareholders but needs all its available cash to fund its rapid growth. The market price of its stock is currently trading in the upper end of its preferred trading range. The firm could consider:

a stock dividend.

The Green Shoe provision is used to:

cover oversubscriptions.

Ignoring taxes and all else held constant, the market value of a stock should decrease by the amount of the dividend on the:

ex-dividend date.

The first equity issue offered to the general public by a firm is a:

general cash offer

Tokens offered in initial coin offerings:

may be obtained in the hope that the tokens will appreciate in value.

The firm's capital structure refers to the:

mix of debt and equity used to finance the firm's assets.

Management's first step in any issue of securities to the public is to:

obtain approval from the board of directors.

The Cameron Co. is paying a dividend of $.82 a share today. There are 120,000 shares outstanding with a par value of $1 per share. As a result of this dividend, the:

retained earnings will decrease by $98,400. Explanation: Decrease in retained earnings = $.82($120,000) Decrease in retained earnings = $98,400

Bryan invested in Bryco stock when the firm was financed solely with equity. The firm now has a debt-equity ratio of .3. To maintain the same level of leverage he originally had, Bryan needs to:

sell some shares of Bryco stock and loan out the proceeds.

When comparing levered versus unlevered capital structures, leverage works to increase EPS for high levels of EBIT because interest payments on the debt:

stay fixed, leaving more income to be distributed over fewer shares.

One of the indirect costs of bankruptcy is the effect that a potential bankruptcy has on the firm's decisions. The general result is that:

stockholders expropriate value from bondholders by selecting high-risk projects.

The value of a firm is maximized when the:

weighted average cost of capital is minimized.

Boutelle Homes has an all-equity value of $648,200, a cost of equity of 11.7 percent, and a tax rate of 35 percent. Assume the firm's capital structure changes to 30 percent debt followed by a lowering of the tax rate to 21 percent. What will be the change in the levered value of the firm due to the reduction in the tax rate?

−$27,224 Explanation: ΔV = .21(.3)($648,200) − .35(.3)($648,200) ΔV = −$27,224

Rita placed an order for 300 shares of each of four separate IPOs (Orders A, B, C, and D) with an offer price of $16 each. She received 100 shares of Order B, 200 shares of Order D, and 300 shares of the other orders. At the end of the first day, Order A was overpriced by $2 a share, Order B was underpriced by $4 a share, Order C was correctly priced, and Order D was overpriced by $1 a share. What was combined total profit or loss for the first day on these four orders?

−$400