FIN 412 HW 5

Brad's Boat Company, a company in the 40% tax bracket, has riskless debt in its capital structure which makes up 30% of the total capital structure, and equity is the other 70%. The beta of the assets for this business is .9 and the equity beta is:

1.13.

The Felix Filter Corp. maintains a debt-equity ratio of .6. The cost of equity for Richardson Corp. is 16%, the cost of debt is 11% and the marginal tax rate is 30%. What is the weighted average cost of capital?

12.89%

The Tip-Top Paving Co. has an equity cost of capital of 16.97%. The debt to value ratio is .6, the tax rate is 34%, and the cost of debt is 11%. What is the cost of equity if Tip-Top was unlevered?

14.0%

The Tip-Top Paving Co. has a beta of 1.11, a cost of debt of 11% and a debt to value ratio of .6. The current risk free rate is 9% and the market rate of return is 16.18%. What is the company's cost of equity capital?

16.97%

Wear Ever is expanding and needs $11 million to help fund this growth. The firm estimates it can sell new shares of stock for $30 a share. It also estimates it will cost an additional $350,000 for filing and legal fees related to the stock issue. The underwriters have agreed to a 7 percent spread. How many shares of stock must the firm sell if it is going to have $11 million available for its expansion needs?

406,810 shares

If a project's debt level is known over the life of the project, one should use

APV.

An equity issue sold to the firm's existing stockholders is called:

a rights offer.

The acronym APV stands for:

adjusted present value.

Venture capitalists provide financing for new firms from the seed and start-up stage all the way to mezzanine and bridge financing. In exchange for financing, entrepreneurs give:

an equity position and usually board of director positions.

In calculating the NPV using the flow-to-equity approach the discount rate is the:

cost of equity for the levered firm.

The flow-to-equity (FTE) approach in capital budgeting is defined to be the:

discounting of the levered cash flows to the equity holders for a project at the required return on equity.

Empirical evidence suggests that upon announcement of a new equity issue, current stock prices generally:

drop, perhaps because the new issue reflects management's view that common stock is currently overvalued.

In a best efforts offering the investment banker makes their money primarily by:

earning a commission on each share sold.

The first public equity issue made by a company is a(n):

initial public offering.

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

to obtain approval from the board of directors

A firm commitment arrangement with an investment banker occurs when:

when the investment banker buys the securities for less than the offering price and accepts the risk of not being able to sell them.