Practice quiz 12

Romeo Inc. has a debt-equity ratio of 2, a share price of $5, and 500,000 shares outstanding. What is Romeo's market firm value?

Select one:

a.$2,500,000

b.$3,750,000

c.$5,250,000

d.$6,250,000

e.$7,500,000

Sierra Corporation has just paid a dividend of $2 per share, and its dividends are expected to grow at a steady rate of 6% for the foreseeable future. The firm's shares are currently selling for $30 per share, with an equity beta of 1.2. The risk-free rate is 5% and expected market return is 12%. What is the firm's estimated cost of equity if we were to calculate it as the average of the costs of equity from the dividend growth model and the security market line?

Select one:

a.13.07%

b.13.23%

c.13.43%

d.14.23%

e.14.37%

Tango Enterprises has issued 100,000 coupon bonds, with maturity of eight years. Each bond sells for $1,075. The bonds pay semi-annual coupons of 9% on face value of $1,000. What is Tango's cost of debt?

Select one:

a.3.86%

b.6.57%

c.7.15%

d.7.28%

e.7.73%

An issue of preferred shares has a par value of $150 per share, with a dividend on par of 8%. If the preferred shares are currently selling for $95 per share, what is the percentage cost of preferred shares?

Select one:

a.5.07%

b.5.33%

c.8.00%

d.12.63%

e.15.79%

Unbelievable Deals Inc. has the following capital structure and marginal tax rate of 35%. What is its WACC?

Debt:

100,000 coupon bonds

Eight-year maturity

Face value of $1,000

Semi-annual coupon rate of 9%

Bond price of $1,075

Common shares:

Risk-free rate = 5%

Expected market risk premium = 7%

Beta = 1.2

Number of common shares = 3,000,000

Common share price = $30

Preferred shares:

Par value = $150

Dividends = $12

Share price = $95

Number of preferred shares = 100,000

Select one:

a.7.14%

b.8.80%

c.9.01%

d.10.39%

e.11.56%

Van Bran Inc. is looking into financing a $30 million project with an equity issue. If the firm's underwriter charges a spread (i.e., underwriting fee) of 6% on equity issues, what is the gross amount that must be raised in Van Bran's equity issue?

Select one:

a.$31,914,894

b.$32,000,000

c.$33,264,980

d.$33,684,210

e.$34,042,553

The cost of capital associated with a project depends on

Select one:

a.the whims of investors.

b.the management of the company that requires the funds.

c.the risk of the project.

d.the debt-equity ratio of the company that requires the funds.

e.the stability of the financial market.

Walter Inc. had net income of $650,000, debt-equity ratio of 1, book value of assets of $5 million, and 1,000,000 common shares outstanding. The company just paid a dividend per share of $0.5. What is Walter's estimated growth rate?

Select one:

a.4.5%

b.5.0%

c.6.0%

d.7.5%

e.10.5%

X-Tra Ltd. has a firm-wide WACC of 10%. However, it uses a project's unique risk and WACC in its capital budgeting decisions. This decision-making approach is called

Select one:

a.the net present value approach.

b.the subjective approach.

c.the systematic risk approach.

d.the discounted cash flow approach.

e.the pure play approach.

A firm is anticipated to generate an EBIT of $2 million, with depreciation of $200,000, change in NWC of $120,000, and capital spending of $350,000 per year. The firm's marginal tax rate is 40%. What is the firm's annual adjusted cash flow from assets without debt financing?

Select one:

a.$830,000

b.$930,000

c.$1,030,000

d.$1,730,000

e.$1,970,000