1.

Table 9.2

A firm has determined its optimal structure which is composed of the following sources and target market value proportions.

Target Market

Source of Capital Proportions

Longterm debt 60%

Common stock equity 40

Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond for $1,050. A flotation cost of 2 percent of the face value would be required in addition to the premium of $50.

Common Stock: A firm's common stock is currently selling for $75 per share. The dividend expected to be paid at the end of the coming year is $5. Its dividend payments have been growing at a constant rate for the last five years. Five years ago, the dividend was $3.10. It is expected that to sell, a new common stock issue must be underpriced $2 per share and the firm must pay $1 per share in flotation costs. Additionally, the firm has a marginal tax rate of 40 percent.

The firm's before-tax cost of debt is ________.

A. 10.6 percent

B. 12.7 percent

C. 11.2 percent

D. 7.7 percent

2. What is the expected return for Asset X if it has a beta of 2.0, the expected market return is 10 percent, and the riskfree rate is 2 percent?

A. 16.0%

B. 22.0%

C. 10.0%

D. 18.0%

3. A few years ago, Largo Industries implemented an inventory auditing system at an installed cost of $178,000. Since then, it has taken depreciation deductions totaling $126,380. What is the system's current book value? If Largo sold the system for $109,000, how much recaptured depreciation would result?

What is the current book value is ____ (Round to the nearest dollar.)

The recaptured depreciation is ____ (Round to the nearest dollar.)

4. If a stock's beta increases and all other factors remain unchanged ________.

A. the stock's price will rise

B. the market risk premium will increase

C. the stock's expected return will fall

D. the stock's price will fall

5. Bryson Sciences is planning to purchase a high-powered microscopy machine for $386,000and incur an additional $32,200 in installation expenses. It is replacing older microscopy equipment that can be sold for $116,200, resulting in taxes from a gain on the sale of $43,000. Because of this transaction, current assets will increase by $15,000 and current liabilities will increase by $5,000. Calculate the initial cash flow in the high-powered microscopy machine.

The initial cash flow is____(Round to the nearest dollar.)