1) Adventure Outfitter Corp. can sell common stock for $27 per share and its investors require a 17% return. However, the administrative or flotation costs associated with selling the stock amount to $2.70 per share. What is the cost of capital for Adventure Outfitter if the corporation raises money by selling common stock?
A) 27.00%
B) 18.89%
C) 18.33%
D) 17.00%
2) A company has preferred stock that can be sold for $21 per share. The preferred stock pays an annual dividend of 3.5% based on a par value of $100. Flotation costs associated with the sale of preferred stock equal $1.25 per share. The company's marginal tax rate is 35%. Therefore, the cost of preferred stock is
A) 18.87%.
B) 17.72%.
C) 14.26%.
D) 12.94%.
3) Sentry Manufacturing paid a dividend yesterday of $5 per share (D0 = $5). The dividend is expected to grow at a constant rate of 8% per year. The price of Sentry Manufacturing's stock today is $29 per share. If Sentry Manufacturing decides to issue new common stock, flotation costs will equal $2.50 per share. Sentry Manufacturing's marginal tax rate is 35%. Based on the above information, the cost of retained earnings is
A) 28.38%.
B) 24.12%.
C) 26.62%.
D) 31.40%.
4) The risk free rate of return is 2.5% and the market risk premium is 8%. Rogue Transport has a beta of 2.2 and a standard deviation of returns of 28%. Rogue Transport's marginal tax rate is 35%. Analysts expect Rogue Transport's dividends to grow by 6% per year for the foreseeable future. Using the capital asset pricing model, what is Rogue Transport's cost of retained earnings?
A) 16.4%
B) 17.7%
C) 19.6%
D) 20.1%
5) The DEF Company is planning a $64 million expansion. The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock. The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent. If the company is in the 35 percent tax bracket, what is the firm's cost of capital?
A) 8.92%
B) 9.89%
C) 11.50%
D) 10.74%
6) Texas Transport has five possible investment projects for the coming year. Each project is indivisible. They are:
Project Investment (million) IRR
A $ 6 18%
B $10 15%
C $ 9 20%
D $ 4 12%
E $ 3 24%
The firm's weighted marginal cost of capital schedule is 12 percent for up to $6 million of investment; 16 percent for between $6 million and $18 million of investment; and above $18 million the weighted cost of capital is 18 percent. If Texas Transport is only using IRR to choose their projects, they will decide that their optimal capital budget is
A) $12 million.
B) $18 million.
C) $23 million.
D) $28 million.
7) Given the following information on S & G Inc.'s capital structure, compute the company's weighted average cost of capital.
Type of Percent of Before-Tax
Capital Capital Structure Component Cost
Bonds 40% 7.5%
Preferred Stock 5% 11%
Common Stock (Internal Only) 55% 15%
The company's marginal tax rate is 40%.
A) 13.3%
B) 7.1%
C) 10.6%
D) 10%
8) Project W requires a net investment of $1,000,000 and has a payback period of 5.6 years. You analyze Project W and decide that Year 1 free cash flow is $100,000 too low, and Year 3 free cash flow is $100,000 too high. After making the necessary adjustments
A) the payback period for Project W will be longer than 5.6 years.
B) the payback period for Project W will be shorter than 5.6 years.
C) the IRR of Project W will increase.
D) the NPV of Project W will decrease.
9) Project Alpha has an internal rate of return (IRR) of 15 percent. Project Beta has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is MOST correct?
A) Both projects have a positive net present value (NPV).
B) Project Alpha must have a higher NPV than Project Beta.
C) If the required return were less than 12 percent, Project Beta would have a higher IRR than Project Alpha.
D) Project Beta has a higher profitability index than Project Alpha.
10) DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the payback period of this project?
A) 4.00 years
B) 3.09 years
C) 2.91 years
D) 2.50 years
11) DYI Construction Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. DYI's required rate of return is 8%. What is the net present value of this project?
A) $104,089
B) $100,328
C) $96,320
D) $87,417
12) Project LMK requires an initial outlay of $400,000 and has a profitability index of 1.5. The project is expected to generate equal annual cash flows over the next twelve years. The required return for this project is 20%. What is project LMK's net present value?
A) $600,000
B) $200,000
C) $120,000
D) $80,000
13) Raindrip Corp. can purchase a new machine for $1,875,000 that will provide an annual net cash flow of $650,000 per year for five years. The machine will be sold for $120,000 after taxes at the end of year five. What is the net present value of the machine if the required rate of return is 13.5%.
A) $558,378
B) $513,859
C) $473,498
D) $447,292
14) You are in charge of one division of Yeti Surplus Inc. Your division is subject to capital rationing. Your division has 4 indivisible projects available, detailed as follows:
Project Initial Outlay IRR NPV
1 2 million 18% 2,500,000
2 1 million 15% 950,000
3 1 million 10% 600,000
4 3 million 9% 2,000,000
If you must select projects subject to a budget constraint of 5 million dollars, which set of projects should be accepted so as to maximize firm value?
A) Projects 1, 2 and 3
B) Project 1 only
C) Projects 1 and 4
D) Projects 2, 3 and 4
15) Kohler Manufacturing typically achieves one of three production levels in any given year: 8 million pounds of steel, 10 million pounds of steel, or 16 million pounds of steel. In tracking some of its costs, Kohler's controller discovered one cost that was $10 per pound no matter what the production level for the year. This is an example of a
A) variable cost.
B) fixed cost.
C) semivariable cost.
D) semifixed cost.
16) QuadCity Manufacturing, Inc. reported the following items: Sales = $6,000,000; Variable Costs of Production = $1,500,000; Variable Selling and Administrative Expenses = $550,000; Fixed Costs = $1,350,000; EBIT = $2,600,000; and the Marginal Tax Rate =35%. QuadCity's break-even point in sales dollars is
A) $2,050,633.
B) $2,197,500.
C) $2,438,750.
D) $2,785,000.
17) Based on the data contained in Table A, what is the break-even point in units produced and sold?
TABLE A
Average selling price per unit $18.00
Variable cost per unit $13.00
Units sold 400,000
Fixed costs $650,000
Interest expense $ 50,000
A) 130,000
B) 140,000
C) 150,000
D) 180,000
18) ACME, Inc. reported the following income statement for 2009:
|
Sales
|
$2,500,000
|
|
Variable Costs
|
900,000
|
|
Fixed Operating Costs
|
700,000
|
|
EBIT
|
900,000
|
|
Interest Expense
|
200,000
|
|
EBT
|
700,000
|
|
Taxes (30%)
|
210,000
|
|
Net Income
|
$490,000
|
|
Earnings Per Share
|
$4.90
|
If ACME's sales next year increase by 20%, what will ACME's earnings per share be?
A) $5.76
B) $6.45
C) $7.14
D) $7.58
19) A firm's optimal capital structure occurs where?
A) EPS are maximized, and WACC is minimized.
B) Stock price is maximized, and EPS are maximized.
C) Stock price is maximized, and WACC is maximized.
D) WACC is minimized, and stock price is maximized.
20) One component of a firm's financial structure which is NOT a component of its capital structure is
A) common stock.
B) accounts payable.
C) long-term debt.
D) preferred stock.