Finance Final
Whatever, Inc., has a bond outstanding with a coupon rate of 5.94 percent and semiannual payments. The yield to maturity is 5.1 percent and the bond matures in 20 years. What is the market price if the bond has a par value of $1,000?
$1,104.55
Sara wants to establish a trust fund to provide $75,000 in scholarships each year and earn a fixed 6.15 percent rate of return. How much money must she contribute to the fund assuming that only the interest income is distributed?
$1,219,512
Weisbro and Sons common stock sells for $32 a share and pays an annual dividend that increases by 4.2 percent annually. The market rate of return on this stock is 9.9 percent. What is the amount of the last dividend paid by Weisbro and Sons?
$1.75
Electric Utilities preferred stock will pay an annual dividend of $12 per share in perpetuity beginning 8 years from now. What is one share of this stock worth today if the market requires a return of 9.5 percent?
$66.92
Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? A. Storing supplies in the same space currently used for materials storage B.Utilizing the basket manager to oversee wreath production C. Hiring additional employees to handle the increased workload should the firm accept the wreath project D. Researching the market to determine if wreath sales might be profitable before deciding to proceed E. Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt
C
The costs incurred by a business in an effort to avoid bankruptcy are classified as _____ costs. A. flotation B. direct bankruptcy C. indirect bankruptcy D. financial solvency E. capital structure
C
Which one of the following statements is correct in relation to M&M Proposition II, without taxes? A) The cost of equity remains constant as the debt-equity ratio increases. B) The cost of equity is inversely related to the debt-equity ratio. C) The required return on assets is equal to the weighted average cost of capital. D) Financial risk determines the return on assets. E) Financial risk is unaffected by the debt-equity ratio.
C
GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? A. Opportunity B. Fixed C. Incremental D. Erosion E. Sunk
E
Ivan's, Inc., paid $476 in dividends and $583 in interest this past year. Common stock increased by $193 and retained earnings decreased by $119. What is the net income for the year?
Net income = Dividends paid + Change in retained earnings Net income = $476 + (- $119) = $357
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?
PV tax shield = .21($57,000) PV tax shield = $11,970
Ignoring taxes, Pewter & Glass has a weighted average cost of capital of 10.82 percent. The company can borrow at 7.4 percent. What is the cost of equity if the debt-equity ratio is .68?
RE = .1082 + (.1082 − .074)(.68) RE = .1315, or 13.15%
First City Bank pays 9 percent simple interest on its savings account balances, whereas Second City Bank pays 9 percent interest compounded annually. If you made a deposit of $7,500 in each bank, how much more money would you earn from your Second City Bank account at the end of eight years?
The difference is: $14,944.22 - 12,900 = $2,044.22
KN Stitches has debt of $26,000, a leveraged value of $78,400, a pretax cost of debt of 7.05 percent, a cost of equity of 15.3 percent, and a tax rate of 21 percent. What is the weighted average cost of capital?
WACC = [($78,400 − 26,000)/$78,400](.153) + ($26,000/$78,400)(.0705)(1 − .21) WACC = .1207, or 12.07%
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?
Annual interest tax shield = $565,000(.0665)(.21) Annual interest tax shield = $7,890
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?
Annual interest tax shield = 7,000($1,000)(.0695)(.23) Annual interest tax shield = $111,895
A project's cash flow is equal to the project's operating cash flow: A. plus the project's depreciation expense minus both the project's taxes and capital spending. B. minus both the project's change in net working capital and capital spending. C. minus the project's change in net working capital plus all of the depreciation expenses. D. plus the project's depreciation expenses minus the project's taxes. E. minus the project's taxes
B
M&M Proposition I with taxes is based on the concept that: A. the optimal capital structure is the one that is totally financed with equity. B. capital structure is irrelevant because investors and companies have differing tax rates. C. WACC is unaffected by a change in the company's capital structure. D. the value of a taxable company increases as the level of debt increases. E, the cost of equity increases as the debt-equity ratio increases.
D
The Corner Bakery has a debt-equity ratio of .53. The required return on assets is 13.5 percent and its cost of equity is 15.8 percent. What is the pretax cost of debt based on M&M Proposition II with no taxes?
RE = .158 = .135 + (.135 − RD)(.53) RD = .0916, or 9.16%
Home Decor has a pretax cost of debt is 6.8 percent and a tax rate of 22 percent. What is the cost of equity if the debt-equity ratio is .65?
WACC = (1/1.65)RE + (.65/1.65)(.068)(1 − .22) RE = .1644, or 16.44%
An unlevered company has a cost of capital of 14.6 percent and earnings before interest and taxes of $240,090. A levered company with the same operations and assets has a face value of debt of $85,000 with a coupon rate of 7.5 percent that sells at par. The applicable tax rate is 22 percent. What is the value of the levered company?
VU = [$240,090(1 − .22)]/.146 VU = $1,282,673 VL = $1,282,673 + .22($85,000) VL = $1,301,373
The Lo Sun Corporation offers a 6.0 percent bond with a current market price of $788.50. The yield to maturity is 8.40 percent. The face value is $1,000. Interest is paid semiannually. How many years until this bond matures?
16.38 years
An annuity that pays $12,500 a year at an annual interest rate of 5.45 percent costs $150,000 today. What is the length of the annuity time period?
20 years
Galloway, Inc., just paid a dividend of $3 per share and has announced that it will increase its dividend by $1 per share for each of the next 4 years, and then never pay another dividend. What is the current per share value at a required return of 12.7 percent?
$16.02
You would like to provide $125,000 a year forever for your heirs. How much money must you deposit today to fund this goal if you can earn a guaranteed 4.5 percent rate of return?
$2,777,778
There are zero coupon bonds outstanding that have a YTM of 5.85 percent and mature in 21 years. The bonds have a par value of $10,000. If we assume semiannual compounding, what is the price of the bonds?
$2,979.36
Brickhouse is expected to pay a dividend of $2.80 and $2.32 over the next two years, respectively. After that, the company is expected to increase its annual dividend at 3.2 percent. What is the stock price today if the required return is 10.6 percent?
$30.86
A preferred stock pays an annual dividend of $5.20. What is one share of this stock worth today if the rate of return is 10.44 percent?
$49.81
Your broker is offering 1.2 percent compounded daily on its money market account. If you deposit $7,500 today, how much will you have in your account 15 years from now?
$8,979.10
You have just deposited $6,000 into an account that promises to pay you an annual interest rate of 5.5 percent each year for the next 6 years. You will leave the money invested in the account and 10 years from today, you need to have $12,800 in the account. What annual interest rate must you earn over the last 4 years to accomplish this goal?
11.53%
Sweet Sue Foods has bonds outstanding with a coupon rate of 5.62 percent paid semiannually and sell for $1,890.64. The bonds have a par value of $2,000 and 17 years to maturity. What is the current yield for these bonds?
5.95%
A bond that pays interest semiannually has a price of $948.63 and a semiannual coupon payment of $30.25. If the par value is $1,000, what is the current yield?
6.38%
M&M Proposition II with taxes: A. has the same general implications as M&M Proposition II without taxes. B. states that capital structure is irrelevant to shareholders. C. supports the argument that business risk is determined by the capital structure decision. D. supports the argument that the cost of equity decreases as the debt-equity ratio increases. E. concludes that the capital structure decision is irrelevant to the value of a firm.
A
If a company has the optimal amount of debt, then the: A. direct financial distress costs must equal the present value of the interest tax shield. B. value of the levered company will exceed the value of the unlevered company. C. company has no financial distress costs. D. Value of the firm is equal to VL + TCD. E. debt-equity ratio is equal to 1.
B
Lamey Co. has an unlevered cost of capital of 12.3 percent, a total tax rate of 25 percent, and expected earnings before interest and taxes of $32,840. The company has $60,000 in bonds outstanding that sell at par and have a coupon rate of 7.2 percent. What is the cost of equity?
VU = [$32,840(1 − .25)]/.123 VU = $200,244 VL = $200,244 + .25($60,000) VL = $215,244 VE = $215,244 − 60,000 VE = $155,244 RE = .123 + (.123 − .072)($60,000/$155,244)(1 − .25) RE = .1378 or 13.78%
Marcus is scheduled to receive annual payments of $3,600 for each of the next 12 years. The discount rate is 8 percent. What is the difference in the present value if these payments are paid at the beginning of each year rather than at the end of each year?
$2,170.39
Sue just purchased an annuity that will pay $24,000 a year for 25 years, starting today. What was the purchase price if the discount rate is 8.5 percent?
$266,498
Railway Cabooses just paid its annual dividend of $2.50 per share. The company has been reducing the dividends by 11.7 percent each year. How much are you willing to pay today to purchase stock in this company if your required rate of return is 13 percent?
$8.94
A bond has a par value of $1,000, a current yield of 7.79 percent, and semiannual coupon payments. The bond is quoted at 101.17. What is the coupon rate of the bond?
7.88%
Jamison's has expected earnings before interest and taxes of $11,900. Its unlevered cost of capital is 12.8 percent and its tax rate is 21 percent. The company has debt with both a book and a face value of $12,500. This debt has a coupon rate of 7.6 percent and pays interest annually. What is the weighted average cost of capital?
VU = [$11,900(1 − .21)]/.128 VU = $73,445 VL = $73,445 + .21($12,500) VL = $76,070 VE = $76,070 − 12,500 VE = $63,570 RE = .128 + (.128 − .076)($12,500/$63,570)(1 − .21) RE = .1361 WACC = ($63,570/$76,070)(.1361) + ($12,500/$76,070)(.076)(1 − .21) WACC = .1236, or 12.36%
Waldo expects to save the following amounts: Year 1 = $50,000; Year 2 = $28,000; Year 3 = $12,000. If he can earn an average annual return of 10.5 percent, how much will he have saved in this account exactly 25 years from the time of the first deposit?
$1,033,545
The Bell Weather Co. is a new firm in a rapidly growing industry. The company is planning on increasing its annual dividend by 21 percent a year for the next 4 years and then decreasing the growth rate to 6 percent per year. The company just paid its annual dividend in the amount of $2.10 per share. What is the current value of one share of this stock if the required rate of return is 7.60 percent?
$233.85
Assume you work for an employer who will contribute $60 a week for the next 20 years into a retirement plan for your benefit. At a discount rate of 9 percent, what is this employee benefit worth to you today?
$28,927.38
A bond has a par value of $1,000, a current yield of 6.93 percent, and semiannual coupon payments. The bond is quoted at 101.56. What is the amount of each coupon payment?
$35.19
Troy will receive $7,500 at the end of Year 2. At the end of the following two years, he will receive $9,000 and $12,500, respectively. What is the future value of these cash flows at the end of Year 6 if the interest rate is 8 percent?
$36,121.08
You just obtained a loan of $16,700 with monthly payments for four years at 6.35 percent interest, compounded monthly. What is the amount of each payment?
$394.89
You are considering a project with cash flows of $16,500, $25,700, and $18,000 at the end of each year for the next three years, respectively. What is the present value of these cash flows, given a discount rate of 7.9 percent?
$51,695.15
Southern Tours is considering acquiring Holiday Vacations. Management believes Holiday Vacations can generate cash flows of $218,000, $224,000, and $238,000 over the next three years, respectively. After that time, they feel the business will be worthless. If the desired rate of return is 14.5 percent, what is the maximum Southern Tours should pay today to acquire Holiday Vacations?
$519,799.59
The Distribution Point plans to save $2,000 a month for the next 3 years for future emergencies. The interest rate is 4.5 percent compounded monthly. The first monthly deposit will be made today. What would today's deposit amount have to be if the firm opted for one lump sum deposit that would yield the same amount of savings as the monthly deposits after 3 years?
$67,485.97
Dee's made two announcements concerning its common stock today. First, the company announced that the next annual dividend will be $1.58 a share. Secondly, all dividends after that will decrease by 1.15 percent annually. What is the value of this stock at a discount rate of 15.5 percent?
$9.49
Wine and Roses, Inc., offers a bond with a coupon of 9.5 percent with semiannual payments and a yield to maturity of 10.56 percent. The bonds mature in 8 years. What is the market price of a $1,000 face value bond?
$943.69
A bond that pays interest semiannually has a coupon rate of 4.99 percent and a current yield of 5.25 percent. The par value is $1,000. What is the bond's price?
$950.48
ABC and XYZ are identical firms in all respects except for their capital structures. ABC is all-equity financed with $530,000 in stock. XYZ has the same total value but uses both stock and perpetual debt; its stock is worth $310,000 and the interest rate on its debt is 7.9 percent. Both firms expect EBIT to be $62,222. Ignore taxes. The cost of equity for ABC is _____ percent and for XYZ it is ______ percent.
11.74; 14.47 ABC: RE = RA = $62,222/$530,000 RE = .1174, or 11.74% XYZ: RE = .1174 + (.1174 − .079)[($530,000 − 310,000)/$310,000] RE = .1447, or 14.47%
Suppose you know that a company's stock currently sells for $74 per share and the required return on the stock is 10.6 percent. You also know that the total return on the stock is evenly divided between a capital gains yield and a dividend yield. If it's the company's policy to always maintain a constant growth rate in its dividends, what is the current dividend per share?
3.72
A7X Corp. just paid a dividend of $1.55 per share. The dividends are expected to grow at 21 percent for the next eight years and then level off to a growth rate of 3.5 percent indefinitely. If the required return is 12 percent, what is the price of the stock today?
52.86
Lohn Corporation is expected to pay the following dividends over the next four years: $13, $9, $6, and $2.75. Afterward, the company pledges to maintain a constant 5 percent growth rate in dividends forever. If the required return on the stock is 10.75 percent, what is the current share price?
58.70
Crossfade Corp. has a bond with a par value of $2,000 that sells for $1,890.64. The bond has a coupon rate of 7.14 percent and matures in 16 years. If the bond makes semiannual coupon payments, what is the YTM of the bond?
7.74%
There is a zero coupon bond that sells for $4,187.32 and has a par value of $10,000. If the bond has 11 years to maturity, what is the yield to maturity? Assume semiannual compounding.
8.07%
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: A. incremental cash flows. B. internal cash flows. C. external cash flows. D. erosion effects. E. financing cash flows
A
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? A. Interest tax shield B. Interest credit C. Homemade leverage shield D. Current tax yield E. Tax-loss interest
A
Which one of the following is an example of a sunk cost? A. $1,500 of lost sales because an item was out of stock B. $1,200 paid to repair a machine last year C. $20,000 project that must be forfeited if another project is accepted D. $4,500 reduction in current shoe sales if a store commences selling sandals E. $1,800 increase in comic book sales if a store ceases selling puzzles
B
Which one of the following states that the value of a company is unrelated to the company's capital structure? A) Homemade leverage B) M&M Proposition I, no tax C) M&M Proposition II, no tax D) Pecking-order theory E) Static theory of capital structure
B
You own a house that you rent for $1,300 per month. The maintenance expenses on the house average $240 per month. The house cost $227,000 when you purchased it 4 years ago. A recent appraisal on the house valued it at $249,000. If you sell the house you will incur $19,920 in real estate fees. The annual property taxes are $2,900. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office? A. $224,640 B. $0 C. $229,080 D. $249,000 E. $227,000
C
Shelton Co. purchased a parcel of land six years ago for $874,500. At that time, the firm invested $146,000 in grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $54,500 a year. The company is now considering building a warehouse on the site as the rental lease is expiring. The current value of the land is $926,000. What value should be included in the initial cost of the warehouse project for the use of this land? A. $0 B. $874,500 C. $1,020,500 D. $1,072,000 E. $926,000
E
Hanover Tech is currently an all-equity company that has 145,000 shares of stock outstanding with a market price of $22 a share. The current cost of equity is 13.9 percent and the tax rate is 21 percent. The company is considering adding $1.5 million of debt with a coupon rate of 7.5 percent to its capital structure. The debt will be sold at par value. What is the levered value of the equity?
VL = 145,000($22) + .21($1,500,000) VL = $3,505,000 VE = $3,505,000 − 1,500,000 VE = $2,005,000, or $2.005 million
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?
VL = VE = $2,300,000
SLG Corp. is an all-equity firm with a weighted average cost of capital of 10.02 percent. The current market value of the equity is $13.4 million and the total tax rate is 22 percent. What is EBIT?
VU = $13,400,000 = EBIT(1 − .22)/.1002 EBIT = $1,721,385
Bruce & Co. expects its EBIT to be $165,000 every year forever. The company currently has no debt but can borrow at 8.6 percent while its cost of equity is 14.7 percent. The tax rate is 21 percent. The company is planning to borrow $55,000 and use the loan proceeds to repurchase shares. What will be the WACC after recapitalization?
VU = $165,000(1 − .21)/.147 VU = $886,735 VL = $886,735 + .21($55,000) VL = $898,285 VE = $898,285 − 55,000 VE = $843,285 RE = .147 + (.147 − .086)($55,000/$843,285)(1 − .21) RE = .1501, or 15.01% WACC = ($843,285/$898,285)(.1501) + ($55,000/$898,285)(.086)(1 − .21) WACC = .1451, or 14.51%
L.A. Clothing has expected earnings before interest and taxes 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?
VU = [$63,300(1 − .23)]/.147 VU = $331,571 VL = $331,571 + .23($11,000) VL = $334,101