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7-The Mutton Corporation has a capital structure made up of 40% debt and 60% equity, given a tax rate of 30%. The company will issue $1,000 face value bonds maturing in 20 years with a coupon of 9% at a price of $1,098.18. the current market interest rate on the bonds of a similar risk profile is 8%. The firm is planning to common stock at a price of $45. The next expected dividend on the stock is $2.70. The dividend for the firm is expected to grow at a constant annual rate of 5% per year indefinitely. The company has the following two INDEPENDENT projects available. Project 1 has an initial outlay of $10,000 and an IRR of 7%. Project 2 has an initial outlay of $100,000 and an IRR of 11%. Which of the above projects should the company REJECT?

Select one:

a. Both projects b. Neither project c. Project 1

d. Project 2

8-Which of the following statements is INCORRECT? Select one:

a. If a bond has a market value that is HIGHER than its face value, then the required return on the bond must be HIGHER than the bond coupon rate.

b. To determine the periodic interest payments that a bond makes, multiply the bond stated coupon rate by its face value.

c. Bonds generally have a maturity date while common stocks do not.

d. The face value of a corporate bond indicates the payment that the issuer promises to make to the bondholder at maturity.

9-The Lemon Corporation paid a dividend yesterday of $2.25 per share. The company stock is currently selling for $60 per share, and the required rate of return on the company stock is 16%. What is the GROWTH RATE expected for the company dividends, assuming constant growth?

Select one: a. 10.87% b. 9.47%

c. 11.81% d. 9.89%

10-Which of the following statements is INCORRECT? Select one:

a. The cost of common equity of a corporation may be estimated using either the Dividend Valuation Model or the Capital Asset Pricing Model.

b. If a company tax rate decreases, then its weighted average cost of capital increases. c. The Capital Asset Pricing Model may be used to estimate the cost of debt.

d. The cost of capital is the rate that must be earned on an investment project, if the project is to increase the value of the common shareholders investment.

11-Which of the following statements is CORRECT? Select one:

a. The value of a bond is the present value of both the future coupon payments and the face value of the bond.

b. The yield-to-maturity on the bond varies from investor to investor because each investor has his or her own required return.

c. If a bond has a market value that is HIGHER than its face value, then it is a DISCOUNT bond. d. The value of a bond is directly related to changes in the yield-to-maturity on the bond.

12-The type of financing that is affected by corporate taxes is: Select one:

a. debt

b. ordinary stock

c. common stock d. preferred stock

13-The Apricot Corporation is investing in a capital budgeting project that will require an expenditure of $16 million. The money will be raised by issuing $2 million worth of bonds, $4 million worth of preferred stock, and $10 million worth of common stock. The company estimates its after- tax cost of debt to be 7%, cost of preferred stock to be 9%, the cost of common stock to be 17%. What is the WACC for this project?

Select one: a. 13.1%

b. 13.8%

c. 12.2%

d. 14.2%

7-The Mutton Corporation has a capital structure made up of 40% debt and 60% equity, given a tax rate of 30%. The company will issue $1,000 face value bonds maturing in 20 years with a coupon of 9% at a price of $1,098.18. the current market interest rate on the bonds of a similar risk profile is 8%. The firm is planning to common stock at a price of $45. The next expected dividend on the stock is $2.70. The dividend for the firm is expected to grow at a constant annual rate of 5% per year indefinitely. The company has the following two INDEPENDENT projects available. Project 1 has an initial outlay of $10,000 and an IRR of 7%. Project 2 has an initial outlay of $100,000 and an IRR of 11%. Which of the above projects should the company REJECT?

Select one:

a. Both projects b. Neither project c. Project 1

d. Project 2

8-Which of the following statements is INCORRECT? Select one:

a. If a bond has a market value that is HIGHER than its face value, then the required return on the bond must be HIGHER than the bond coupon rate.

b. To determine the periodic interest payments that a bond makes, multiply the bond stated coupon rate by its face value.

c. Bonds generally have a maturity date while common stocks do not.

d. The face value of a corporate bond indicates the payment that the issuer promises to make to the bondholder at maturity.

9-The Lemon Corporation paid a dividend yesterday of $2.25 per share. The company stock is currently selling for $60 per share, and the required rate of return on the company stock is 16%. What is the GROWTH RATE expected for the company dividends, assuming constant growth?

Select one: a. 10.87% b. 9.47%

c. 11.81% d. 9.89%

10-Which of the following statements is INCORRECT? Select one:

a. The cost of common equity of a corporation may be estimated using either the Dividend Valuation Model or the Capital Asset Pricing Model.

b. If a company tax rate decreases, then its weighted average cost of capital increases. c. The Capital Asset Pricing Model may be used to estimate the cost of debt.

d. The cost of capital is the rate that must be earned on an investment project, if the project is to increase the value of the common shareholders investment.