Question 1 Debreu Beverages has an optimal capital structure that is 50% - 88103

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Question 1 Debreu Beverages has an optimal capital structure that is 50% common equity, 40% debt, and 10% preferred stock. Debreu's pretax cost of equity is 12%. It's pretax cost of preferred equity is 7%, and it's pretax cost of debt is also 7%. If the corporate tax rate is 35%, what is the weighed average cost of capital? 1. between 8% and 9% 2. between 10% and 12% 3. between 9% and 10% 4. between 7% and 8% Question 2 For a firm paying 7% for new debt, the higher the firm's tax rate after-tax cost is unchanged. Not enough information to judge. the higher the after-tax cost of debt. the lower the after-tax cost of debt. Question 3 A firm has $25 million in assets and its optimal capital structure is 60% equity. If the firm has $18 million in retained earnings, at what asset level will the firm need to issue additional stock? (Assume no growth in retained earnings.) The firm should have already issued additional stock. There is insufficient information to determine an answer. The firm can increase assets to $30 million The firm can increase assets to $41.67 million Question 4 The pre-tax cost of debt for a new issue of debt is determined by the Federal Reserve declaration for the year the coupon rate of existing debt. the investor's required rate of return on issued stock. the yield to maturity of outstanding bonds. All of the above that are highlighted are correct. So I think you can choose any of those and it will still be correct. Question 5 A firm is paying an annual dividend of $3.63 for its preferred stock which is selling for $62.70. There is a selling cost of $3.30. What is the after-tax cost of preferred stock if the firm's tax rate is 33%? 5.79% 4.09% 2.02% 6.11% Question 6 The cost of equity capital in the form of new common stock will be higher than the cost of retained earnings because of the existence of financial leverage. investors' unwillingness to purchase additional shares of common stock. the existence of taxes. the existence of flotation costs. Question 7 If flotation costs go down, the cost of new preferred stock will go down. go up. slowly increase. stay the same. Question 8 Ten years ago, Stigler Company issued $100 par value preferred stock yielding 8 percent. The preferred stock is now selling for $97 per share. What is the current yield or cost of the preferred stock? (Disregard flotation costs.) 7.76%. 8% 8.25% There is not enough information to answer the question. Question 9 A firm's debt to equity ratio varies at times because a firm will want to sell common stock when prices are high and bonds when interest rates are low. a firm will want to take advantage of timing its fund raising in order to minimize costs over the long run. the market allows some leeway in the debt to equity ratio before penalizing the firm with a higher cost of capital. all of the above are accurate statements. Question 10 In determining the cost of retained earnings: the capital asset pricing model can be used. growth is not considered. the dividend valuation model is inappropriate. flotation costs are included. Question 11 For many firms, the cheapest and most important source of equity capital is in the form of retained earnings. preferred stock. common stock. debt. Question 12 Retained earnings has a cost associated with it because: flotation cost increase the cost of funding. There is an opportunity cost associated with stockholder funds. Ke > g new funds must be raised. Question 13 A firm in a stable industry should use: no debt at all. preferred stock in place of debt. a limited amount of debt to lower the cost of capital. a large amount of debt to lower the cost of capital. Question 14 Although debt financing is usually the cheapest component of capital, it cannot be used to excess because the financial risk of the firm may increase and thus drive up the cost of all sources of financing. the firm's stock price will increase and raise the cost of equity financing. underwriting costs may change. interest rates may change. Question 15 A firm in a cyclical industry should use a limited amount of debt to lower the cost of capital. preferred stock in place of debt. a large amount of debt to lower the cost of capital. no debt at all. Question 16 Marginal cost of capital usually provides the same capital budgeting choices as the use of weighted average cost of capital. recognizes that cost of capital does not stay constant as more funds are raised. can be defined as the cost of capital when no retained earnings are available for expansion. none of the above. Question 17 The weighted average cost of capital is used as a discount rate because as long as the cost of capital is earned, the common stock value of the firm will be maintained. returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders. it is comparable to the prevailing market interest rates. it is an indication of how much the firm is earning overall. Question 18 0 / 3 points Which of the following statements about the "payback method" is true? The payback method uses discounted cash-flow techniques. The payback method generally leads to the same decision as other investment selection methods. The payback method does not consider the time value of money. The payback method considers cash flows after the payback has been reached. Question 19 Stone Inc. is evaluating a project with an initial cost of $8,450. Cash inflows are expected to be $1,000, $1,000 and $10,000 in the three years over which the project will produce cash flows. If the discount rate is 13%, what is the net present value of the project? less than $0 more than $800 between $400 and $800 between $0 and $400 Question 20 Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals that provide returns greater than the after-tax cost of debt. for which it can obtain financing. that have positive cash flows. that have a positive net present value. Question 21 The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method assumes that cash flows are reinvested at the project's internal rate of return. concentrates on the liquidity aspects of investment projects. assumes that cash flows are reinvested at the firm's weighted average cost of capital. none of the above. Question 22 The modified internal rate of return assumes: inflows are reinvested at the cost of capital. outflows must be funded with debt. outflows must be funded with equity. inflows are invested at the traditional interest rate of return. Question 23 An asset fitting into the 5-year MACRS category was purchased 2 years ago for $60,000. The book value of this asset is now $28,800 $60,000 $31,200 $48,000 Question 24 A firm purchases an asset falling into the 3-year MACRS category for $78,000. The second year's depreciation expense for this asset would be $26,000 cannot be determined without knowing second-year earnings before depreciation and taxes. $78,000 $34,710 Question 25 A Monte Carlo simulation model uses: portfolio risk the cost of capital. random variables as inputs. a point estimate. Question 26 The Millennium Charitable Foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Chicago. This year the cost of debt is 15 percent higher; that is, firms that paid 10 percent for debt last year would be paying 11.5 percent this year. a) 11.5% b) 10% c) 9.5% d) 9.2% Question 27 You buy a new piece of equipment for $16,980, and you receive a cash inflow of $3,000 per year for 12 years. What is the internal rate of return? a) 5.66% b) 14% c) 14.45% d) 6% Question 28 Joey's Athletic Lounge is planning an expansion program to increase the sophistication of its exercise equipment. Joey is considering some new equipment priced at $20,000 with an estimated life of five years. He is not sure how many members the new equipment will attract, but he estimates his increased yearly cash flows for each of the next five years will have the probability distribution given below. P (probability) Cash Flow .2..................... $2,400 .4..................... 4,800 .3..................... 6,500 .1..................... 7,400 What is the expected value of the cash flow? a) $4,920 b) $5,010 c) $5,090 d) Answer can not be determined from data provided Question 29 Myers Business Systems is evaluating the introduction of a new product. The possible levels of unit sales and the probabilities of their occurrence are given below: Possible Market Reaction Sales in Units Probabilities Low response........................................... 20 .10 Moderate response................................... 40 .30 High response........................................... 55 .40 Very high response................................... 70 .20 What is the expected value of unit sales for the new product? a) 45 b) 50 c) 60 d) 92.5
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