FIN 701 Exam 3 Module 6
South Shore Limited has 14,500 shares of stock outstanding with a par value of $1 per share and a market price of $54.10 a share. The firm just announced a stock split of seven-for-two. What will be the par value of the stock after the split?
$.29
Paradise Travels is an all-equity firm that has 9,000 shares of stock outstanding at a market price of $27 a share. Management has decided to issue $25,000 worth of debt and use the funds to repurchase shares of the outstanding stock. The interest rate on the debt will be 7.3 percent. What are the earnings per share at the break even level of earnings before interest and taxes? Ignore taxes.
$1.97
You own 900 shares of Dell Hardware. The company plans on issuing a dividend of $1.98 a share one year from now and then issuing a final liquidating dividend of $11.32 a share after one additional year. Your required rate of return on this security is 16.5 percent. Ignoring taxes, what is the value of one share of this stock to you today?
$10.04
D. L. Tuckers has $57,000 of debt outstanding that is selling at par and has a coupon rate of 7.15 percent The tax rate is 21 percent. What is the present value of the tax shield?
$11,970
Georga's Restaurants has 7,000 bonds outstanding with a face value of $1,000 each, a market price of $982, and a coupon rate of 6.95 percent. The interest is paid semiannually. What is the amount of the annual interest tax shield if the tax rate is 23 percent?
$111,895
22) Lamont Corp. is debt-free and has a weighted average cost of capital of 12.7 percent. The current market value of the equity is $2.3 million and there are no taxes. According to M&M Proposition I, what will be the value of the company if it changes to a debt-equity ratio of .85?
$2,300,000
Which one of the following is a direct result of a two-for-one stock split?
A 50 percent decrease in the par value per share
Which one of the following dates is used to determine the names of shareholders who will receive a dividend payment?
Date of record
Which one of the following is a marketed claim against the cash flows of a company?
Dividend payment to shareholders
Westover Mills reduced its taxes last year by $210 by increasing its interest expense by $1,000. Which one of the following terms is used to describe this tax savings?
Interest tax shield
Kate purchased 500 shares of Fast Deliveries stock on Wednesday, July 7. Ted purchased 100 shares of Fast Deliveries stock on Thursday, July 8. Fast Deliveries declared a dividend on June 20 to shareholders of record on July 12 and payable on August 1. Which one of the following statements concerning the dividend paid on August 1 is correct given this information?
Kate is entitled to the dividend but Ted is not
You have computed the break-even point between a levered and an unlevered capital structure. Ignore taxes. At the break-even level, the:
company is earning just enough to pay for the cost of the debt.
The optimal capital structure has been achieved when the:
debt-equity ratio results in the lowest possible WACC.
A $0.45 quarterly cash payment paid by Jones & Co. to its shareholders in the normal course of business becomes a liability of the company on the:
declaration date
A reverse stock split is defined as a(n):
decrease in the number of shares outstanding without affecting total owners' equity.
Financial risk is:
dependent upon a company's capital structure.
The explicit costs, such as legal and administrative expenses, associated with corporate default are classified as __________ costs.
direct bankruptcy
Assume you are reviewing a graph that plots EPS against EBIT. The steeper the slope of the plotted line the:
greater the sensitivity of EPS to changes in EBIT.
The business risk of a company:
has a positive relationship with the company's cost of equity.
The costs incurred by a business in an effort to avoid bankruptcy are classified as _________ costs.
indirect bankruptcy
A stock repurchase program:
is essentially the same as a cash dividend program provided there are no taxes or other costs
The fact that flotation costs can be significant is an argument for:
maintaining a low dividend policy and rarely issuing extra dividends.
The optimal capital structure of a company:
maximizes the value of that company's marketed claims.
A firm should select the capital structure that:
maximizes the value of the firm.
The market value balance sheet for Apple Pie Corp. reflects cash of $42,000, fixed assets of $319,000, and equity of $237,000. There are 7,500 shares of stock outstanding with a par value of $i per share. The company has declared a dividend of $1.03 per share. The stock goes ex dividend tomorrow. Ignore any tax effects. What will be the price of the stock tomorrow morning?
$30.57
The June Bug has a $565,000 bond issue outstanding. These bonds have a coupon rate of 6.65 percent, pay interest semiannually, and sell at 98.7 percent of face value. The tax rate is 21 percent. What is the amount of the annual interest tax shield?
$7,890
Katlin Markets is debating between a levered and an unlevered capital structure. The all-equity capital structure would consist of 60,000 shares of stock. The debt and equity option would consist of 45,000 shares of stock plus $250,000 of debt with an interest rate of 7.25 percent. What is the break-even level of earnings before interest and taxes between these two options? Ignore taxes
$72,500
31) Mountain Groves has an unlevered cost of capital of 13.2 percent, a cost of debt of 8.3 percent, and a tax rate of 21 percent. What is the target debt-equity ratio if the targeted cost of equity is 14.5 percent?
34
A company wants to maintain a stock price around $16 a share. Due to a recent market downturn, the stock is currently selling for $6 a share. The company should consider a __________ stock split.
4-for-1
20) Della's Pools has 36,000 shares of stock outstanding with a par value of $1 per share and a market price of $38 a share. The company just announced a stock split of four-for-three. How many shares of stock will be outstanding after the split?
48,000
Which one of the following is the equity risk that is most related to the daily operations of a firm?
Business risk
What is the information content effect?
The financial market's reaction to a change in the amount of a company's dividend
3) Bailey's decided on Friday, March 7, to pay a dividend of $.28 a share on Monday, April 7. The ex-dividend date is Tuesday, March 18. What is the date of record?
Thursday, March 20
M&M Proposition I with tax implies that the:
WACC decreases as the D/E ratio increases.
The value of a firm is maximized when the:
WACC is minimized.
Alfonzo's Italian House has 17,000 shares of stock outstanding with a par value of $1 per share and a market price of $24.60 a share. The firm just announced a stock split of three-for-two. What will be the market price per share after the split?
$16.40
The Peanut Shack has 3,500 shares of stock outstanding with a par value of $1 per share. The current market value of the firm is $178,200. The company just announced a stock split of seven-for-three. What will be the market price per share after the split?
$21.82
Holly's is currently an all-equity firm that has 7,200 shares of stock outstanding at a market price of $41 a share. The firm has decided to leverage its operations by issuing $60,000 of debt at an interest rate of 7.6 percent. This new debt will be used to repurchase shares of the outstanding stock The restructuring is expected to increase the earnings per share. What is the minimum level of earnings before interest and taxes that the firm is expecting? Ignore taxes.
$22,435
City Center Pharmacy has 24,500 shares of stock outstanding with a par value of $1 per share and a market value of $18.90 a share. The company just announced a reverse stock split of three-for-five. What will be the market value per share after the reverse stock split?
$31.50
L.A. Clothing has expected earnings before interest and taxes (EBIT) of $63,300, an unlevered cost of capital of 14.7 percent, and a combined tax rate of 23 percent. The company also has $11,000 of debt that carries a coupon rate of 7 percent. The debt is selling at par value. What is the value of this company?
$334,101
The Green Fiddle has declared a dividend of $2.60 per share. Suppose capital gains are not taxed but dividends are taxed at 15 percent. New IRS regulations require that taxes be withheld at the time the dividend is paid. Green Fiddle stock closed at $36.80 per share today and the stock goes ex dividend tomorrow. What will be the ex-dividend price?
$34.59
Mario's has 24,000 shares of stock outstanding with a par value of $1 per share and a market price of $11.40 a share. The balance sheet shows $68,600 in the capital in excess of par value account, and $34,910 in the retained earnings account. The company just announced a stock split of three-for-one. What will be the capital in excess of par account value after the split?
$68,600
Jamison's has expected earnings before interest and taxes of $11,900, Its unlevered cost of capital is 12.8 and a face value of $12,500. This percent and its tax rate is 21 percent and pays interest annually. What is the percent. The company has debt with both a book weighted average cost of capital? debt has a coupon rate of 7.6
12.36 percent
borrow at 7.4 percent. What is the cost of equity if the debt-equity ratio is .68? 23) Ignoring taxes, Pewter & Glass has a weighted average cost of capital of 10.82 percent?
13.15%
Johnson Tire Distributors has debt with both a face and a market value of $35,000. This debt has a coupon rate of 6.6 percent and pays interest annually. The expected earnings before interest and taxes are $8,300, the tax rate is 21 percent, and the unlevered cost of capital is 10.9 percent. What is the cost of equity?
14.56 percent
Douglass & Frank has a debt-equity ratio of .61. The pretax cost of debt is 7.8 percent while the unlevered cost of capital is 12.6 percent. What is the cost of equity if the tax rate is 21 percent?
14.91 percent
25) Roy's Welding has a cost of equity of 14.1 percent and a pretax cost of debt of 7.7 percent. The required return on the assets is 13.2 percent. What is the debt-equity ratio based on M&M II with no taxes?
164
Winter's Toyland has a debt-equity ratio of 57. The pretax cost of debt is 8.2 percent and the required return on assets is 14.7 percent. What is the company's cost of equity if you ignore taxes?
18.41 percent
The ex-dividend date is defined as ___________ business day(s) prior to the date of record
2
The owners' equity accounts for Buel Industries include common stock of $24,000 with a $l par value, capital in excess of par value of $287,000, and retained earnings of $408,500. How many shares will be outstanding and what will be the par value per share if the firm declares a reverse stock split of one-for-four? A) 6,000; $1.00 B) 6,000; $4.00 C) 24,000; $.25 D) 96,000; $.25 E) 96,000; $4.00
6,000; $4.00
1) Which one of the following statements related to cash dividends is correct?
A dividend is never a liability of the issuer until it has been declared
Which one of the following states that the value of a company is unrelated to the company's capital structure?
M&M Proposition I, no tax
Which type of dividend is considered to be a one-time event that will not be repeated?
Special dividend
HJ Corporation has excess cash and has opted to buy some of its outstanding shares. What is this process of buying called?
Stock repurchase
Which one of the following does not affect the total equity of a company but does increase the number of shares outstanding?
Stock split
Which one of the following statements is correct in relation to M&M Proposition II, without taxes?
The required return on assets is equal to the WACC.
United Foods declared a dividend of $.62 a share on Thursday, October 16. The dividend will be paid on Monday, November 10, to shareholders of record on Friday, October 31. Which one of the following is the ex- dividend date?
Wednesday, October 29
A one-for-four reverse stock split will increase:
a $I par value to $4.
The dividend market is in equilibrium when:
all clienteles are satisfied
The common stock of Dayton Dry Goods has historically had a low dividend yield that 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.
clientele
The interest tax shield is a key reason why:
the net cost of debt is generally less than the cost of equity.
The proposition that a company borrows up to the point where the marginal benefit of the interest tax shield derived from increased debt is just equal to the marginal expense of the resulting increase in financial distress costs is called:
the static theory of capital structure.
