1. TheFantasticStuff Co.currentlyhas debtwith amarketvalueof$400millionoutstanding.The debtconsistsof10%annual coupon bondswhichhave amaturity of10yearsandarecurrentlypriced at$1,211perbond.The parvalueofeach bondis $1,000. Thefirmalso has an issueof3millionpreferredsharesoutstanding withamarketpriceof$15.00.The preferredshares pay an annualdividend of$1.38.Fantastic alsohas20million sharesof commonstockoutstanding witha priceof
$26.00pershare.The firmis expectedtopaya $2.34 common dividend oneyearfromtoday, andthatdividend is expectedtoincreaseby6%peryearforever.Fantastic is subjecttoa40%marginal taxrate.
a. What isthefirm's aftertaxcostof debt?
b. What isthe firm'scostof preferredstock?
c. What isthefirm'scostofcommonstock?
d. What isthe firm'sweighted averagecostof capital?
2. PolkAutomotivesellsabout3,000engines a year.The costofplacing an orderwith itssupplieris$1,000, andtheinventory carrying costsare$208foreach engine.Polk likesto maintainsafety stockof20enginesat all times.
a. What isthefirm'sEOQ?
b. Howmanyorderswill thefirmneedto place thisyear?
c. What istheaverageinventoryfortheseason?
3. You aretryingto value acompany.Following is theinformationforthat company aswellasthe information for acomparablecompany:
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Company youarevaluing
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Comparable company
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Value ofdebt = $7.5million
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Stockprice = $45.00
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Est. EBITDAnextyear=$9million
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Numberofsharesoutstanding =6.5million
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Estincomenextyear= $3million
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Value ofdebt = $35million
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Est. EBITDAnextyear=$32million
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Estincomenextyear= $10 million
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a. Estimatetheenterprise valueof thecompanyyouare evaluating using theP/Emultiples
b. Estimatetheenterprisevalueof thecompanyyouare evaluating using theenterprisevalue/EBITDAmultiples.
Question 4
When a firm follows a flexible current asset management strategy, they invest the minimum possible in cash, marketable securities, and inventory and has strict terms of sale intended to limit credit sales and accounts receivable.
True
False
Question 5
Stonebridge Inc. is going to borrow $700,000 from its bank at an APR of 7%. The bank requires its customers to maintain a 20% compensating balance. What is the effective interest rate on this bank loan?
8.25%
7.75%
7.00%
8.75%
Question 6
Amanda Books, Inc. has borrowed $40 million and is required to pay its lenders $3 million in interest this year. If Amanda is in the 35% marginal tax bracket, then what is the after tax cost of debt in interest?
5.9%
4.9%
5.2%
5.5%
Question 7
Montgomery Corporation's advisors indicate that the risk-free rate equals 2%; the firm's beta equals 1.5; and the market return equals 8%. What is Montgomery Corp.'s required return on common stock?
10%
11%
12%
13%
Question 8
Ryan's Jewelry Inc. finances 50% of his business with common stock, 10% with preferred stock and 40% with debt. If the cost of common stock is 15%, the cost of preferred stock is 16%, and the after-tax cost of debt financing is 9%, what is Ryan's weighted average cost of capital?
12.7%
13.2%
10.5%
7.5%
Question 9
Alloa Corporation is contemplating issuance of a 6% preferred stock that they expect to sell for $35 per share. The cost of issuing and selling the stock will be $5 per share. What is the cost of Alloa's preferred stock?
8%
7%
6%
9%
Question 10
The ability of a company to convert assets into cash quickly without suffering a financial loss is called
convertability
asset turnover utilization
working capital efficiency
liquidity
Question 11
Rickroll Inc. is expected to pay a dividend of $1.80 one year from today on its common shares. That dividend is expected to increase by 4% every year thereafter. If the price of Rickroll is $22.50, what is Rickroll's cost of common stock?
12%
8%
10%
6%
Question 12
The length of time from the point at which a company pays for raw materials until the point at which it receives cash from the sale of finished goods made from those materials is known as the
cash conversion cycle
krebs cycle
operating cycle
spin cycle
Question 13
Assume a company anticipates selling 2,500 units a year. Each order will cost the company $25 to place; and the price per unit is $8 with a 25% carrying cost to maintain the average inventory. Please find the EOQ.
500
1000
250
750