finance data bank
Multiple Choice Questions
91. The City Street Corporation's common stock has a
beta of 1.2. The riskfree rate is 3.5 percent and the expected return on the
market is 13 percent. What is the firm's cost of equity?
A. 11.4 percent
B. 12.8 percent
C. 14.9 percent
D. 17.6 percent
E. 19.1 percent
92. Stock in Country Road Industries has a beta of 0.97. The market risk premium is 10 percent while Tbills are currently yielding 5.5 percent. Country Road's most recent dividend was $1.70 per share, and dividends are expected to grow at a 7 percent annual rate
cost of preferred?
A. 4.60 percent
B. 4.64 percent
C. 5.39 percent
D. 5.43 percent
E. 5.54 percent
indefinitely. The stock sells for $32 a share. What is the
estimated cost of equity using the average of the CAPM approach and the
dividend discount approach?
A. 13.94 percent
B. 14.06 percent
C. 14.21 percent
D. 14.38 percent
E. 14.50 percent
93. Holdup Bank has an issue of preferred stock with a
$5 stated dividend that just sold for $92 per share. What is the bank's
94. Decline, Inc. is trying to determine its cost of debt. The firm has a
debt issue outstanding with 15 years to maturity that is quoted at 107 percent
of face value. The issue makes semiannual payments and has an embedded cost of
11 percent annually. What is the aftertax cost of debt if the tax rate is 33
percent?
A. 6.76 percent
B. 6.90 percent
C. 7.17 percent
D. 7.37 percent
E. 7.42 percent
95. Jiminy's Cricket Farm issued a 30year, 8 percent,
semiannual bond 6 years ago. The bond currently sells for 114 percent of its
face value. What is the aftertax cost of debt if the company's tax rate is 31
percent?
A. 4.63 percent
B. 4.70 percent
C. 4.75 percent
D. 4.82 percent
E. 4.86 percent
96. Mullineaux Corporation has a target capital
structure of 41 percent common stock, 4 percent preferred stock, and 55 percent
debt. Its cost of equity is 19 percent, the cost of preferred stock is 6.5
percent, and the pretax cost of debt is 7.5 percent. What is the firm's WACC
given a tax rate of 34 percent?
A. 9.87 percent
B. 10.43 percent
C. 10.77 percent
D. 13.38 percent
E. 15.17 percent
97. Cookie Dough Manufacturing has a target
debtequity ratio of 0.5. Its cost of equity is 15 percent, and its cost of
debt is 11 percent. What is the firm's WACC given a tax rate of 31
percent?
A. 12.53 percent
B. 12.78 percent
C. 13.11 percent
D. 13.48 percent
E. 13.67 percent
98. Fama's Llamas has a weighted average cost of
capital of 10.5 percent. The company's cost of equity is 15.5 percent, and its
pretax cost of debt is 8.5 percent. The tax rate is 34 percent. What is the
company's target debtequity ratio?
A. 0.89
B. 0.92
C. 0.98
D. 1.01
E. 1.02
99. Jungle, Inc. has a target debtequity ratio of
0.72. Its WACC is 11.5 percent and the tax rate is 34 percent. What is the cost
of equity if the aftertax cost of debt is 5.5 percent?
A. 13.75 percent
B. 13.84 percent
C. 14.41 percent
D. 14.79 percent
E. 15.82 percent
100. Titan Mining Corporation has 14 million shares of
common stock outstanding, 900,000 shares of 9 percent preferred stock
outstanding and 210,000 ten percent semiannual bonds outstanding, par value
$1,000 each. The common stock currently sells for $34 per share and has a beta
of 1.15, the preferred stock currently sells for $80 per share, and the bonds
have 17 years to maturity and sell for 91 percent of par. The market risk
premium is 11.5 percent, Tbills are yielding 7.5 percent, and the firm's tax
rate is 32 percent. What discount rate should the firm apply to a new project's
cash flows if the project has the same risk as the firm's typical
project?
A. 14.59 percent
B. 14.72 percent
C. 15.17 percent
D. 15.54 percent
E. 16.41 percent
101. Suppose your company needs $14 million to build a
new assembly line. Your target debtequity ratio is 0.84. The flotation cost
for new equity is 9.5 percent, but the floatation cost for debt is only 2.5
percent. What is the true cost of building the new assembly line after taking
flotation costs into account?
A. 14.82 million
B. 14.94 million
C. 15.07 million
D. 15.12 million
E. 15.23 million
54. Kelso Electric is debating between a leveraged and
an unleveraged capital structure. The all equity capital structure would
consist of 40,000 shares of stock. The debt and equity option would consist of
25,000 shares of stock plus $280,000 of debt with an interest rate of 7
percent. What is the breakeven level of earnings before interest and taxes
between these two options? Ignore taxes.
A. $42,208
B. $44,141
C. $46,333
D. $49,667
E. $52,267
55. Holly's is currently an all equity firm that has
9,000 shares of stock outstanding at a market price of $42 a share. The firm
has decided to leverage its operations by issuing $120,000 of debt at an
interest rate of 9.5 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.
A. $35,910
B. $38,516
C. $42,000
D. $44,141
E. $45,020
56. Sewer's Paradise is an all equity firm that has
5,000 shares of stock outstanding at a market price of $15 a share. The firm's
management has decided to issue $30,000 worth of debt and use the funds to
repurchase shares of the outstanding stock. The interest rate on the debt will
be 10 percent. What are the earnings per share at the breakeven level of
earnings before interest and taxes? Ignore taxes.
A. $1.46
B. $1.50
C. $1.67
D. $1.88
E. $1.94
57. Miller's Dry Goods is an all equity firm with
45,000 shares of stock outstanding at a market price of $50 a share. The
company's earnings before interest and taxes are $128,000. Miller's has decided
to add leverage to its financial operations by issuing $250,000 of debt at 8
percent interest. The debt will be used to repurchase shares of stock. You own
400 shares of Miller's stock. You also loan out funds at 8 percent interest.
How many shares of Miller's stock must you sell to offset the leverage that
Miller's is assuming? Assume you loan out all of the funds you receive from the
sale of stock. Ignore taxes.
A. 35.6 shares
B. 40.0 shares
C. 44.4 shares
D. 47.5 shares
E. 50.1 shares
58. You currently own 600 shares of JKL, Inc. JKL is an
all equity firm that has 75,000 shares of stock outstanding at a market price
of $40 a share. The company's earnings before interest and taxes are $140,000.
JKL has decided to issue $1 million of debt at 8 percent interest. This debt
will be used to repurchase shares of stock. How many shares of JKL stock must
you sell to unlever your position if you can loan out funds at 8 percent
interest?
A. 120 shares
B. 150 shares
C. 180 shares
D. 200 shares
E. 250 shares
59. Naylor's is an all equity firm with 60,000 shares
of stock outstanding at a market price of $50 a share. The company has earnings
before interest and taxes of $87,000. Naylor's has decided to issue $750,000 of
debt at 7.5 percent. The debt will be used to repurchase shares of the
outstanding stock. Currently, you own 500 shares of Naylor's stock. How many
shares of Naylor's stock will you continue to own if you unlever this position?
Assume you can loan out funds at 7.5 percent interest. Ignore taxes.
A. 300 shares
B. 350 shares
C. 375 shares
D. 425 shares
E. 500 shares
60. Pewter & Glass is an all equity firm that has
80,000 shares of stock outstanding. The company is in the process of borrowing
$600,000 at 9 percent interest to repurchase 12,000 shares of the outstanding
stock. What is the value of this firm if you ignore taxes?
A. $2.5 million
B. $4.0 million
C. $5.0 million
D. $5.5 million
E. $6.0 million
61. The Jean Outlet is an all equity firm that has
146,000 shares of stock outstanding. The company has decided to borrow the $1.1
million to repurchase 7,500 shares of its stock from the estate of a deceased
shareholder. What is the total value of the firm if you ignore taxes?
A. $18,387,702
B. $18,500,000
C. $19,666,667
D. $21,000,000
E. $21,413,333
62. Stacy owns 38 percent of The Town Centre. She has
decided to retire and wants to sell all of her shares in this closely held, all
equity firm. The other shareholders have agreed to have the firm borrow
$650,000 to purchase her shares of stock. What is the total market value of The
Town Centre? Ignore taxes.
A. $1,710,526
B. $1,748,219
C. $1,771,089
D. $1,801,406
E. $1,808,649
63. Winter's Toyland has a debtequity ratio of 0.72.
The pretax cost of debt is 8.7 percent and the required return on assets is
16.1 percent. What is the cost of equity if you ignore taxes?
A. 19.31 percent
B. 19.74 percent
C. 20.29 percent
D. 20.46 percent
E. 21.43 percent
64. Jefferson & Daughter has a cost of equity of
14.6 percent and a pretax cost of debt of 7.8 percent. The required return on
the assets is 13.2 percent. What is the firm's debtequity ratio based on
M&M II with no taxes?
A. 0.26
B. 0.33
C. 0.37
D. 0.43
E. 0.45
65. The Corner Bakery has a debtequity ratio of 0.54.
The firm's required return on assets is 14.2 percent and its cost of equity is
16.1 percent. What is the pretax cost of debt based on M&M Proposition II
with no taxes?
A. 7.10 percent
B. 8.79 percent
C. 10.68 percent
D. 17.56 percent
E. 18.40 percent
66. L.A. Clothing has expected earnings before interest
and taxes of $48,900, an unlevered cost of capital of 14.5 percent, and a tax
rate of 34 percent. The company also has $8,000 of debt that carries a 7
percent coupon. The debt is selling at par value. What is the value of this
firm?
A. $222,579.31
B. $223,333.33
C. $224,108.16
D. $225,299.31
E. $225,476.91
67. Hanover Tech is currently an all equity firm that
has 320,000 shares of stock outstanding with a market price of $19 a share. The
current cost of equity is 15.4 percent and the tax rate is 36 percent. The firm
is considering adding $1.2 million of debt with a coupon rate of 8 percent to
its capital structure. The debt will be sold at par value. What is the levered
value of the equity?
A. $5.209 million
B. $5.312 million
C. $5.436 million
D. $6.512 million
E. $6.708 million
68. Bright Morning Foods has expected earnings before
interest and taxes of $48,600, an unlevered cost of capital of 13.2 percent,
and debt with both a book and face value of $25,000. The debt has an 8.5
percent coupon. The tax rate is 34 percent. What is the value of the
firm?
A. $245,500
B. $247,600
C. $251,500
D. $264,800
E. $271,300
69. Exports Unlimited is an unlevered firm with an
aftertax net income of $47,800. The unlevered cost of capital is 14.1 percent
and the tax rate is 32 percent. What is the value of this firm?
A. $270,867
B. $294,380
C. $339,007
D. $378,444
E. $447,489
70. An unlevered firm has a cost of capital of 17.5
percent and earnings before interest and taxes of $327,500. A levered firm with
the same operations and assets has both a book value and a face value of debt
of $650,000 with a 7.5 percent annual coupon. The applicable tax rate is 38
percent. What is the value of the levered firm?
A. $1,397,212
B. $1,398,256
C. $1,402,509
D. $1,407,286
E. $1,414,414

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