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Saint Nick Enterprises has 20,300 shares of common stock outstanding at a price of $83 per share. The company has two bond issues outstanding. The first issue has 7 years to maturity, a par value of $2,000 per bond, and sells for 98.5 percent of par. The second issue matures in 21 years, has a par value of $1,000 per bond, and sells for 93.5 percent of par. The total face value of the first issue is $390,000, while the total face value of the second issue is $490,000. What is the capital structure weight of debt? Multiple Choice .4051 .3333 .3786 .1813 .3055

Common stock:20,300 × $83 =$ 1,684,900Bond 1:.985 × $390,000 =384,150Bond 2:.935 × $490,000 =458,150Total value: $ 2,527,200 XD = ($384,150 + 458,150)/$2,527,200XD = .3333

Which one of the following statements is correct concerning the issuance of long-term debt? Distribution costs are lower for public debt than for private debt. Direct placement debt tends to have more restrictive covenants than publicly issued debt. A direct private long-term loan has to be registered with the SEC. It is easier to renegotiate public debt than private debt. Wealthy individuals tend to dominate the private debt market.

Direct placement debt tends to have more restrictive covenants than publicly issued debt.

Which one of the following statements is correct? Multiple Choice Dividends tend to fluctuate significantly from quarter to quarter. Earnings growth tends to lag dividend growth. A reduction in personal tax rates tends to lead to lower dividends. Dividend payments are highly concentrated in a relatively small set of large companies. Non-dividend-paying companies are generally more apt to commence paying regular dividends than to implement a stock repurchase program.

Dividend payments are highly concentrated in a relatively small set of large companies.

Bowzer Company has just received $4.2 million from the sale of one of its divisions. The company has 450,000 shares outstanding that sell for $86.23 per share. If the company issues the entire proceeds from the sale as a special dividend, what will the ex-dividend stock price be? Ignore taxes. Multiple Choice $78.82 $86.12 $76.90 $86.23 $95.56

Dividend per share = $4,200,000/450,000Dividend per share = $9.33 Ex-dividend price = $86.23 − 9.33Ex-dividend price = $76.90

Summer Tan, Incorporated, is an all-equity firm with a total market value of $476,000 and 33,500 shares of stock outstanding. Management believes the earnings before interest and taxes (EBIT) will be $74,700 if the economy is normal. If there is a recession, EBIT will be 15 percent lower, and if there is a boom, EBIT will be 25 percent higher. The tax rate is 21 percent. What is the EPS in a boom? Multiple Choice $2.20 $1.09 $1.45 $1.23 $1.67

EPS = [$74,700(1 + .25) − $74,700(1 + .25)(.21)]/33,500EPS = $2.20

Rappaport Industries has 4,000 perpetual bonds outstanding with a face value of $1,000 each. The bonds have a coupon rate of 6.5 percent and a yield to maturity of 6.8 percent. The tax rate is 21 percent. What is the present value of the interest tax shield? Multiple Choice $1,440,000 $260,000 $104,000 $840,000 $108,800

Interest tax shield = .21 × 4,000 × $1,000Interest tax shield = $840,000

Which one of the following statements concerning dilution is correct? Multiple Choice Market value dilution occurs when the net present value of a project is negative. Neither book value dilution nor market value dilution has any direct bearing on individual shareholders. Book value dilution is the cause of market value dilution. Market value dilution increases as the net present value of a project increases. Dilution of percentage ownership occurs whenever an investor fully participates in a rights offer.

Market value dilution occurs when the net present value of a project is negative

Skolits Corporation has a cost of equity of 11.3 percent and an aftertax cost of debt of 4.29 percent. The company's balance sheet lists long-term debt of $315,000 and equity of $575,000. The company's bonds sell for 95.7 percent of par and market-to-book ratio is 2.65 times. If the company's tax rate is 21 percent, what is the WACC? Multiple Choice 9.34% 10.14% 8.82% 10.78% 9.86%

Market value of debt = .957($315,000)Market value of debt = $301,455 Market value of equity = 2.65($575,000)Market value of equity = $1,523,750 Market value of company = $301,455 + 1,523,750Market value of company = $1,825,205 WACC = 11.3%($1,523,750/$1,825,205) + 4.29%($301,455/$1,825,205) WACC = 10.14%

A firm has a market value equal to its book value. Currently, the firm has excess cash of $550 and other assets of $8,800. Equity is worth $9,350. The firm has 850 shares of stock outstanding and net income of $1,300. What will the new earnings per share be if the firm uses its excess cash to complete a stock repurchase? Multiple Choice $.61 $1.63 $1.53 $.69

Market value per share = Book value per share = $9,350/850 sharesMarket value per share = $11 Number of shares repurchased = $550/$11 per shareNumber of shares repurchased = 50 shares Number of shares outstanding after the repurchase = 850 − 50Number of shares outstanding after the repurchase = 800 shares EPS after repurchase = $1,300/800 sharesEPS after repurchase = $1.63

Robinson's has 48,000 shares of stock outstanding with a par value of $1 per share and a market price of $54 a share. The balance sheet shows $48,000 in the common stock account, $520,000 in the paid-in surplus account, and $540,000 in the retained earnings account. The firm just announced a 3-for-1 stock split. How many shares of stock will be outstanding after the split? Multiple Choice 128,000 shares 96,000 shares 144,000 shares 16,000 shares 143,500 shares

New number of shares outstanding = 48,000(3/1)New number of shares outstanding = 144,000 shares

Storico currently has 25,000 shares outstanding that sell for $46.62 per share. The company plans to issue a stock dividend of 10 percent. How many new shares will be issued? Multiple Choice 2,500 shares 25,000 shares 27,500 shares 2,640 shares

New shares = 25,000(.10)New shares = 2,500 shares

LTE stock sells for $28.53 per share and there are 420,000 shares outstanding. The company plans a 5-for-3 reverse stock split. Assuming no market imperfections or tax effects, what will the stock price be after the split? Multiple Choice $57.06 $47.55 $17.12 $14.27 $42.27

New shares price = $28.53(5/3)New shares price = $47.55

Smathers Corporation stock has a beta of 1.21. The market risk premium is 7.20 percent and the risk-free rate is 2.94 percent annually. What is the company's cost of equity? Multiple Choice 7.64% 11.65% 8.09% 9.87% 7.87%

RE = .0294 + 1.21(.0720)RE = .1165, or 11.65%

The Tree House has a pretax cost of debt of 6.2 percent and a return on assets of 11.1 percent. The debt-equity ratio is .57. Ignore taxes. What is the cost of equity? Multiple Choice 14.59% 14.34% 8.31% 13.89% 15.16%

RE = .111 + [(.111 − .062) × .57]RE = .1389, or 13.89%

Piedmont Hotels is an all-equity company. Its stock has a beta of 1.33. The market risk premium is 7.4 percent and the risk-free rate is 3.2 percent. The company is considering a project that it considers riskier than its current operations so it wants to apply an adjustment of 2.4 percent to the project's discount rate. What should the firm set as the required rate of return for the project? Multiple Choice 8.79% 10.64% 15.44% 11.19% 13.04%

RE = 3.2% + 1.33(7.4%) RE = 13.04%

The Cincinnati Chili Kitchen has just announced the repurchase of $200,000 of its stock. The company has 54,000 shares outstanding and earnings per share of $3.59. The company stock is currently selling for $78.04 per share. What is the price-earnings ratio after the repurchase? Multiple Choice 21.74 times 20.11 times 22.77 times 22.25 times 20.71 times

Shares repurchased = $200,000.00/$78.04Shares repurchased = 2,562.79New shares outstanding = 54,000 − 2,562.79New shares outstanding = 51,437.21New EPS = 54,000($3.59)/51,437.21New EPS = $3.77New PE = $78.04/$3.77New PE = $20.71

Simone's Sweets is an all-equity firm that has 6,400 shares of stock outstanding at a market price of $17 per share. The firm's management has decided to issue $52,000 worth of debt at an interest rate of 9 percent. The funds will be used to repurchase shares of the outstanding stock. What are the earnings per share at the break-even EBIT? $3.20 $1.84 $2.93 $3.17 $1.53

Shares repurchased = $52,000/$17Shares repurchased = 3,058.82 shares Shares outstanding = 6,400 − 3,058.82Shares outstanding = 3,341.18 shares EBIT/6,400 = [EBIT − $52,000(.09)]/3,341.18EBIT = $9,792EPS = $9,792/6,400EPS = $1.53

Plummer Manufacturing recently registered 220,000 shares of stock under SEC Rule 415. The company plans to sell 120,000 shares this year and the remaining 100,000 shares next year. What type of registration is this? Multiple Choice Shelf registration Regulation A registration Regulation Q registration Private placement registration Standby registration

Shelf registration

Which one of the following is a key goal of the aftermarket period? Multiple Choice Establishing a broad-based underwriting syndicate Determining a fair offer price Supporting the market price for a new securities issue Distributing red herrings to as many potential investors as possible

Supporting the market price for a new securities issue

Which one of the following statements is accurate? Multiple Choice Capital structure has no effect on shareholder value. Unlevered firms have more value than levered firms when firms are profitable. The optimal capital structure maximizes shareholder value. The optimal capital structure occurs when the cost of equity is minimized.

The optimal capital structure maximizes shareholder value.

Bo's Home Manufacturing has 390,000 shares outstanding that sell for $46.40 per share. The company has announced that it will repurchase $59,000 of its stock. What will the share price be after the repurchase? Multiple Choice $46.25 $43.51 $40.47 $46.55 $46.40

The stock price will be unaffected by the repurchase and will remain at $46.40.

Which one of the following favors a low dividend policy? Multiple Choice The tax on capital gains is deferred until the gain is realized. Few, if any, positive net present value projects are available to a firm. A majority of the shareholders have a low tax rate. A majority of the shareholders have better investment opportunities than the firm. The presence of an agency conflict with the company's senior managers.

The tax on capital gains is deferred until the gain is realized.

Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $189,000 per year. The cost of equity is 13.5 percent and the tax rate is 21 percent. Assume there is no depreciation, no capital spending and no change in net working capital. The firm can borrow perpetual debt at 6.1 percent. Currently, the firm is considering converting to a debt-equity ratio of .99. What is the firm's levered value? MM assumptions hold. Multiple Choice $910,000 $819,000 $1,150,638 $989,225 $1,221,546

VU = $189,000(1 − .21)/.135VU = $1,106,000VL = $1,106,000 + .21(.99/1.99)($1,106,000)VL = $1,221,546

Alpha Industries is considering a project with an initial cost of $7.8 million. The project will produce cash inflows of $1.84 million per year for 6 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 5.55 percent and a cost of equity of 11.23 percent. The debt-equity ratio is .58 and the tax rate is 21 percent. What is the net present value of the project? Multiple Choice $554,793 $524,178 $641,095 $528,375 $418,544

WACC = (1/1.58)(11.23%) + (.58/1.58)(5.55%)(1 − .21)WACC = 8.72% NPV = −$7,800,000 + $1,840,000(PVIFA8.72%,6) NPV = $524,178

Alpha Industries is considering a project with an initial cost of $9.7 million. The project will produce cash inflows of $1.67 million per year for 9 years. The project has the same risk as the firm. The firm has a pretax cost of debt of 6.12 percent and a cost of equity of 11.61 percent. The debt-equity ratio is .77 and the tax rate is 21 percent. What is the net present value of the project? Multiple Choice $222,456 $598,181 $569,696 $450,872 $691,231

WACC = (1/1.77)(11.61%) + (.77/1.77)(6.12%)(1 − .21)WACC = 8.66% NPV = −$9,700,000 + $1,670,000(PVIFA8.66%,9) NPV = $450,872

Kountry Kitchen has a cost of equity of 10.8 percent, a pretax cost of debt of 5.4 percent, and the tax rate is 21 percent. If the company's WACC is 8.65 percent, what is its debt-equity ratio? Multiple Choice .29 .49 2.39 .55 1.39

WACC = .0865 = (1 − XD)(.108) + (XD)(.054)(1 − .21)XD = .3290 D/E = .3290/(1 − .3290)D/E = .49

A firm has a cost of debt of 6 percent and a cost of equity of 10.9 percent. The debt-equity ratio is .60. There are no taxes. What is the firm's weighted average cost of capital? Multiple Choice 8.16% 9.54% 7.55% 9.06% 8.37%

WACC = .109(1/1.60) + .060(.60/1.60)WACC = .0906, or 9.06%

James Fashions has a target debt-equity ratio of .52. Its cost of equity is 14.5 percent and its pretax cost of debt is 8 percent. Its combined tax rate is 22 percent. What is the company's WACC? Multiple Choice 10.14% 9.07% 12.28% 11.67% 7.10%

WACC = [.145(1/1.52)] + [.08(.52/1.52)](1 − .22)WACC = .1167, or 11.67%

The Drogon Company just issued a dividend of $2.36 per share on its common stock. The company is expected to maintain a constant 5 percent growth rate in its dividends indefinitely. If the stock sells for $55 a share, what is the company's cost of equity? Multiple Choice 9.03% 9.51% 9.29% 9.98% 4.6%

With the information given, we can find the cost of equity using the dividend growth model. Using this model, the cost of equity is: RE = [$2.43(1.05)/$55] + 0.05 RE = 0.0951, or 9.51%

Underwriters generally: Multiple Choice provide only best efforts underwriting in the U.S. pass the risk of unsold shares back to the issuing firm via a firm commitment agreement. accept the risk of selling the new securities in exchange for the gross spread. pay a spread to the issuing firm. market and distribute an entire issue of new securities within their own firm.

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

Stock splits can be used to: Multiple Choice increase the par value per share while decreasing the market price per share. adjust the market price of a stock so it falls within a preferred trading range. increase the total equity of a firm. adjust the debt-equity ratio to its preferred level.

adjust the market price of a stock so it falls within a preferred trading range.

The dividend market is in equilibrium when: Multiple Choice dividends remain constant and no special dividends are declared. all clienteles are satisfied. all companies adopt a low dividend policy. half of the companies adopt a low dividend policy and half adopt a high dividend policy. the total amount of the annual dividends is equal to the net income for the year.

all clienteles are satisfied.

The common stock of Battle Gaming has historically had a low dividend yield, and that circumstance is expected to continue. As a result, the majority of its shareholders are individuals who prefer capital gains over cash dividends for tax reasons. The fact that most of these shareholders have similar characteristics is referred to as the _____ effect. Multiple Choice investor information content clientele distribution market reaction

clientele

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs. Multiple Choice indirect bankruptcy flotation issue direct bankruptcy unlevered

direct bankruptcy

The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as _____ costs. Multiple Choice unlevered flotation direct bankruptcy indirect bankruptcy

direct bankruptcy

According to the static theory of capital structure, the optimal capital structure for a company: Multiple Choice remains fixed over time. is independent of the company's debt-equity ratio. equates marginal tax savings from additional debt to the marginal increased bankruptcy costs of that debt. is highly dependent upon a constant debt-equity ratio over time. is independent of the company's tax rate.

equates marginal tax savings from additional debt to the marginal increased bankruptcy costs of that debt

venture capital

financial institution specialized in financing for new, often high-risk, ventures or start-ups

M&M Proposition II with taxes: Multiple Choice supports the argument that business risk is determined by the capital structure decision. concludes that the capital structure decision is irrelevant to the value of a firm. supports the argument that the cost of equity decreases as the debt-equity ratio increases. has the same general implications as M&M Proposition II without taxes. states that capital structure is irrelevant to shareholders.

has the same general implications as M&M Proposition II without taxes.

According to the pecking-order theory, firms prefer to use ________ before any other form of financing. Multiple Choice common stock preferred stock regular debt convertible debt internal funds

internal funds

underwriters

investment banks that act as intermediaries between a company selling securities and the investing public

A stock repurchase program: Multiple Choice has no effect on a company's financial statements. requires all shareholders to sell a fraction of their shares. decreases both the number of shares outstanding and the market price per share. is preferred over a high-dividend program only by tax-exempt shareholders. is essentially the same as a cash dividend program provided there are no taxes or other costs.

is essentially the same as a cash dividend program provided there are no taxes or other costs.

A(n) ________ does not require a registration statement to be filed with the SEC. Multiple Choice issue that has received an approved letter of comment loan that matures in one year or less issue of less than $5 million issue that has an approved prospectus loan of $10 million or less

issue of less than $5 million

Which one of the following involves a payment in shares that increases the number of shares a shareholder owns but also decreases the value per share? Multiple Choice Stock repurchase Reverse stock split Stock split Stock dividend Cash dividend

stock dividend

WACC(weighted avg cost of capital)

the overall return the firm must earn on its existing assets to maintain the value of its stock and bond

cost of equity

the return that equity investors require on their investment in the firm

cost of debt

the return that lenders require on the firm's debt

M&M Proposition I with tax implies that the: Multiple Choice weighted average cost of capital decreases as the debt-equity ratio increases. value of a company is inversely related to the amount of leverage used by that company. cost of capital is the same regardless of the mix of debt and equity used value of an unlevered company equals the value of a levered company plus the value of the interest tax shield. cost of equity increases as the debt-equity ratio decreases.

weighted average cost of capital decreases as the debt-equity ratio increases.

The optimal capital structure: Multiple Choice will vary over time as taxes and market conditions change. is unaffected by changes in the financial markets. places more emphasis on operations than on financing. will be the same for all companies within the same industry. will remain constant over time unless the company changes its primary operations.

will vary over time as taxes and market conditions change.