finance exam

A. return on its investments.

B. cost of equity and its aftertax cost of debt.

C. pretax cost of debt and equity securities.

D. bond coupon rates.

E. dividend and capital gains yields.

2. Which of the following features are advantages of the dividend growth model?

I. easy to understand

II. model simplicity

III. constant dividend growth rate

IV. model's applicability to all common stocks

A. II only

B. I and III only

C. II and IV only

D. I and II only

E. I, II, and III only

3. All else constant, an increase in a firm's cost of debt:

A. could be caused by an increase in the firm's tax rate.

B. will result in an increase in the firm's cost of capital.

C. will lower the firm's weighted average cost of capital.

D. will lower the firm's cost of equity.

E. will increase the firm's capital structure weight of debt.

4. Which one of the following is the primary determinant of an investment's cost of capital?

A. Life of investment

B. Initial cash outlay

C. Level of risk

D. Source of funds used for the investment

E. Investment's net present value

5. The aftertax cost of which of the following are affected by a change in a firm's tax rate?

I. preferred stock

II. debt

III. equity

IV. capital

A. I and III only

B. II and IV only

C. I, II, and IV only

D. II, III, and IV only

E. I, II, III, and IV

6. Which one of the following statements is accurate for a levered firm?

A. WACC should be used as the required return for all proposed investments.

B. A firm's WACC will decrease whenever the firm's tax rate decreases.

C. An increase in the market risk premium will decrease a firm's WACC.

D. The subjective approach totally ignores a firm's own WACC.

E. A reduction in the risk level of a firm will tend to decrease the firm's WACC.

7. Judy's Boutique just paid an annual dividend of $1.65 on its common stock. The firm increases its dividend by 2.5 percent annually. What is the rate of return on this stock if the current stock price is $38.20 a share?

A. 6.93 percent

B. 7.37 percent

C. 7.54 percent

D. 8.19 percent

E. 8.33 percent

8. Winter Wear, Inc. has 6 percent bonds outstanding that mature in 13 years. The bonds pay interest semiannually and have a face value of $1,000. Currently, the bonds are selling for $993 each. What is the firm's pre-tax cost of debt?

A. 5.97 percent

B. 6.08 percent

C. 6.14 percent

D. 6.31 percent

E. 6.40 percent

9. Hi Tech Products has 35,000 bonds outstanding that are currently quoted at 102.3. The bonds mature in 11 years and carry a 9 percent annual coupon. What is the firm's aftertax cost of debt if the applicable tax rate is 35 percent?

A. 4.47 percent

B. 4.79 percent

C. 5.63 percent

D. 5.98 percent

E. 6.31 percent

10. The 7.5 percent preferred stock of Home Town Brews is selling for $43 a share. What is the firm's cost of preferred stock if the tax rate is 34 percent and the par value per share is $100?

A. 14.47 percent

B. 15.92 percent

C. 16.17 percent

D. 16.52 percent

E. 17.44 percent

11. Chesterfield and Weston has 55,000 shares of common stock outstanding at a price of $31 a share. It also has 3,000 shares of preferred stock outstanding at a price of $62 a share. The firm has 8 percent, 12-year bonds outstanding with a total face value of $400,000. The bonds are currently quoted at 101.2 percent of face and pay interest semiannually. What is the capital structure weight of the firm's debt if the tax rate is 35 percent?

A. 14.49 percent

B. 15.20 percent

C. 15.67 percent

D. 16.84 percent

E. 17.63 percent

12. The General Store has a cost of equity of 15.8 percent, a pre-tax cost of debt of 7.7 percent, and a tax rate of 32 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40?

A. 10.18 percent

B. 11.72 percent

C. 12.78 percent

D. 13.30 percent

E. 14.93 percent

13. Healthy Foods has a target capital structure of 55 percent common stock, 5 percent preferred stock, and 40 percent debt. Its cost of equity is 14.3 percent, the cost of preferred stock is 8.9 percent, and the pre-tax cost of debt is 8.1 percent. What is the company's WACC if the applicable tax rate is 34 percent?

A. 9.29 percent

B. 9.61 percent

C. 10.02 percent

D. 10.45 percent

E. 10.83 percent

14. Which one of the following is the equity risk arising from the daily operations of a firm?

A. Strategic risk

B. Financial risk

C. Liquidity risk

D. Industry risk

E. Business risk

15. Which one of the following is the equity risk arising from the capital structure selected by a firm?

A. Strategic risk

B. Financial risk

C. Liquidity risk

D. Industry risk

E. Business risk

16. Paying interest reduces the taxes owed by a firm. Which one of the following terms applies to this relationship?

A. Static theory of interest rates

B. M&M Proposition I

C. Financial risk

D. Interest tax shield

E. Homemade leverage

17. Which one of the following is minimized when the value of a firm is maximized?

A. Return on equity

B. WACC

C. Debt

D. Taxes

E. Bankruptcy costs

18. Which one of the following conditions exists at the point where a firm maximizes its value?

A. The tax benefit from an additional dollar of debt is zero.

B. Financial distress costs are equal to zero.

C. The debt-equity ratio is 1.0.

D. WACC is minimized.

E. The cost of equity is minimized

19. Greenwood Motels has filed a petition for bankruptcy but hopes to continue its operations both during and after the bankruptcy process. Which one of the following terms best applies to this situation?

A. Chapter 7 bankruptcy

B. Liquidation

C. Technical insolvency

D. Accounting insolvency

E. Reorganization

20. The Green Briar is an all-equity firm with a total market value of $418,000 and 20,000 shares of stock outstanding. Management is considering issuing $120,000 of debt at an interest rate of 9 percent and using the proceeds on a stock repurchase. Ignore taxes. How many shares will the firm repurchase if it issues the debt securities?

A. 2,871 shares

B. 3,516 shares

C. 3,921 shares

D. 4,607 shares

E. 5,742 shares

21. Cross Town Cookies is an all-equity firm with a total market value of $720,000. The firm has 150,000 shares of stock outstanding. Management is considering issuing $200,000 of debt at an interest rate of 7 percent and using the proceeds to repurchase shares. The projected earnings before interest and taxes are $58,600. What are the anticipated earnings per share if the debt is issued? Ignore taxes.

A. $0.25

B. $0.33

C. $0.38

D. $0.41

E. $0.47

22. Henderson's is an all-equity firm that has 135,000 shares of stock outstanding. Neal, the financial vice-president, is considering borrowing $220,000 at 7.25 percent interest to repurchase 20,000 shares. Ignoring taxes, what is the value of the firm?

A. $1,260,000

B. $1,400,000

C. $1,485,000

D. $1,620,000

E. $1,750,000

23. The Gable Inn is an all-equity firm with 16,000 shares outstanding at a value per share of $14.50. The firm is issuing $50,000 of debt and using the proceeds to reduce the number of outstanding shares. How many shares of stock will be outstanding once the debt is issued? Ignore taxes.

A. 11,970 shares

B. 12,552 shares

C. 12,846 shares

D. 13,030 shares

E. 13,561 shares

24. The Water Works has a return on assets of 13.7 percent, a cost of equity of 18.6 percent, and a pre-tax cost of debt of 7.1 percent. What is the debt-equity ratio? Ignore taxes.

A. 0.44

B. 0.47

C. 0.61

D. 0.68

E. 0.74

25. Stone House Cafe has a 30 percent tax rate and total taxes of $35,280. What is the value of the interest tax shield if the interest expense is $16,700?

A. $4,887

B. $5,010

C. $5,395

D. $5,708

E. $6,023