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Question 51

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Bob's is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock outstanding that are currently valued at $68 a share and provide a 13.2 percent rate of return. The firm also has 500 bonds outstanding that have a face value of $1,000, a market price of $1,068, and a 7 percent coupon. These bonds mature in 6 years and pay interest semiannually. The tax rate is 35 percent. The firm is considering expanding by building a new superstore. The superstore will require an initial investment of $12.3 million and is expected to produce cash inflows of $1.1 million annually over its 10-year life. The risks associated with the superstore are comparable to the risks of the firm's current operations. The initial investment will be depreciated on a straight line basis over the life of the project. At the end of the 10 years, the firm expects to sell the superstore for $6.7 million. Should the firm accept or reject the superstore project and why?

Select one:

a. Accept; the project's NPV is $1.27 million.

b. Accept; the NPV is $4.89 million.

c. Reject; the NPV is $1.06 million.

d. Reject; the NPV -$3.27 million.

e. Reject; the NPV is -$5.71 million.

Question 52

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Chick 'N Fish is considering two different capital structures. The first option consists of 25,000 shares of stock. The second option consists of 15,000 shares of stock plus $150,000 of debt at an interest rate of 7.5 percent. Ignore taxes. What is the break-even level of earnings before interest and taxes (EBIT) between these two options?

Select one:

a. $2,813

b. $3,134

c. $16,410

d. $28,125

e. $31,338

Question 53

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Gabe's Market is comparing two different capital structures. Plan I would result in 11,000 shares of stock and $225,000 in debt. Plan II would result in 14,000 shares of stock and $150,000 in debt. The interest rate on the debt is 8 percent. Ignoring taxes, compare both of these plans to an all-equity plan assuming that EBIT will be $45,000. The all-equity plan would result in 20,000 shares of stock outstanding. Of the three plans, the firm will have the highest EPS with _____ and the lowest EPS with ____.

Select one:

a. Plan I; Plan II

b. Plan I; all-equity plan

c. Plan II; Plan I

d. Plan II; all-equity plan

e. all-equity plan; Plan I

Question 54

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Which one of the following is an example of a direct bankruptcy cost?

Select one:

a. Operating at a debt-equity ratio that is less than the optimal ratio

b. Reducing the dividend payout ratio as a means of increasing a firm's equity

c. Forgoing a positive net present value project to conserve current cash

d. Incurring legal fees for the preparation of bankruptcy filings

e. Losing a key customer due to concerns over a firm's financial viability

Question 55

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The Christmas Tree Farms, Inc. currently has 45,000 shares of stock outstanding and no debt. The price per share is $17.50. The firm is considering borrowing funds at 7.5 percent interest and using the proceeds to repurchase 4,000 shares of stock. Ignore taxes. How much is the firm borrowing?

Select one:

a. $52,500

b. $70,000

c. $110,500

d. $125,000

e. $140,000