Question 16 (2.5 points)

Which of the following assumptions is embodied in the AFN equation?

Question 16 options:

A)	Accounts payable and accruals are tied directly to sales.

B)	Common stock and long-term debt are tied directly to sales.

C)	Fixed assets, but not current assets, are tied directly to sales.

D)	Last year's total assets were not optimal for last year's sales.

E)	None of the firm's ratios will change.

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Question 17 (2.5 points)

The term "additional funds needed (AFN)" is generally defined as follows:

Question 17 options:

	Funds that a firm must raise externally from non-spontaneous sources, i.e., by borrowing or by selling new stock to support operations.
	The amount of assets required per dollar of sales.
	The amount of internally generated cash in a given year minus the amount of cash needed to acquire the new assets needed to support growth.
	A forecasting approach in which the forecasted percentage of sales for each balance sheet account is held constant.
	Funds that are obtained automatically from routine business transactions.

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Question 18 (2.5 points)

Which of the following is NOT a capital component when calculating the weighted average cost of capital (WACC) for use in capital budgeting?

Question 18 options:

A)	Accounts payable.

B)	Accounts payable.

C)	Common stock raised by new issues.

D)	Preferred stock.

E)	Long-term debt.

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Question 19 (2.5 points)

When working with the CAPM, which of the following factors can be determined with the most precision?

Question 19 options:

A)	The beta coefficient, bi, of a relatively safe stock.

B)	The most appropriate risk-free rate, rRF.

C)	The expected rate of return on the market, rM.

D)	The beta coefficient of "the market," which is the same as the beta of an average stock.

E)	The market risk premium (RPM).

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Question 20 (2.5 points)

Which of the following statements is CORRECT?

Question 20 options:

A)	The after-tax cost of debt usually exceeds the after-tax cost of equity.

B)	For a given firm, the after-tax cost of debt is always more expensive than the after-tax cost of non-convertible preferred stock.

C)	Retained earnings that were generated in the past and are reported on the firm's balance sheet are available to finance the firm's capital budget during the coming year.

D)	The WACC that should be used in capital budgeting is the firm's marginal, after-tax cost of capital.

E)	The WACC is calculated using before-tax costs for all components.

Question 21 (2.5 points)

Perpetual preferred stock from Franklin Inc. sells for $97.50 per share, and it pays an $8.50 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 4.00% of the price paid by investors. What is the company's cost of preferred stock for use in calculating the WACC?

Question 21 options:

A)

8.72%

B)

9.08%

C)

9.44%

D)

9.82%

E)

10.22%

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Question 22 (2.5 points)

A company's perpetual preferred stock currently sells for $92.50 per share, and it pays an $8.00 annual dividend. If the company were to sell a new preferred issue, it would incur a flotation cost of 5.00% of the issue price. What is the firm's cost of preferred stock?

Question 22 options:

A)

7.81%

B)

8.22%

C)

8.65%

D)

9.10%

E)

9.56%

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Question 23 (2.5 points)

Adams Inc. has the following data: r_RF = 5.00%; RP_M = 6.00%; and b = 1.05. What is the firm's cost of common from reinvested earnings based on the CAPM?

Question 23 options:

A)

11.30%

B)

11.64%

C)

11.99%

D)

12.35%

E)

12.72%

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Question 24 (2.5 points)

You have been hired as a consultant by Feludi Inc.'s CFO, who wants you to help her estimate the cost of capital. You have been provided with the following data: r_RF = 4.10%; RP_M = 5.25%; and b = 1.30. Based on the CAPM approach, what is the cost of common from reinvested earnings?

Question 24 options:

A)

9.67%

B)

9.97%

C)

10.28%

D)

10.60%

E)

10.93%

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Question 25 (2.5 points)

As a consultant to Basso Inc., you have been provided with the following data: D₁ = $0.67; P₀ = $27.50; and g = 8.00% (constant). What is the cost of common from reinvested earnings based on the DCF approach?

Question 25 options:

A)

9.42%

B)

9.91%

C)

10.44%

D)

10.96%

E)

11.51%

Question 26 (2.5 points)

To help them estimate the company's cost of capital, Smithco has hired you as a consultant. You have been provided with the following data: D₁ = $1.45; P₀ = $22.50; and g = 6.50% (constant). Based on the DCF approach, what is the cost of common from reinvested earnings?

Question 26 options:

A)

11.10%

B)

11.68%

C)

12.30%

D)

12.94%

E)

13.59%

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Question 27 (2.5 points)

Bartlett Company's target capital structure is 40% debt, 15% preferred, and 45% common equity. The after-tax cost of debt is 6.00%, the cost of preferred is 7.50%, and the cost of common using reinvested earnings is 12.75%. The firm will not be issuing any new stock. You were hired as a consultant to help determine their cost of capital. What is its WACC?

Question 27 options:

A)

8.98%

B)

9.26%

C)

9.54%

D)

9.83%

E)

10.12%

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Question 28 (2.5 points)

Kenny Electric Company's noncallable bonds were issued several years ago and now have 20 years to maturity. These bonds have a 9.25% annual coupon, paid semiannually, sells at a price of $1,075, and has a par value of $1,000. If the firm's tax rate is 40%, what is the component cost of debt for use in the WACC calculation?

Question 28 options:

A)

4.35%

B)

4.58%

C)

4.83%

D)

5.08%

E)

5.33%

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Question 29 (2.5 points)

As the assistant to the CFO of Johnstone Inc., you must estimate its cost of common equity. You have been provided with the following data: D₀ = $0.80; P₀ = $22.50; and g = 8.00% (constant). Based on the DCF approach, what is the cost of common from reinvested earnings?

Question 29 options:

A)

10.69%

B)

11.25%

C)

11.84%

D)

12.43%

E)

13.05%

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Question 30 (2.5 points)

Assume that you are an intern with the Brayton Company, and you have collected the following data: The yield on the company's outstanding bonds is 7.75%; its tax rate is 40%; the next expected dividend is $0.65 a share; the dividend is expected to grow at a constant rate of 6.00% a year; the price of the stock is $15.00 per share; the flotation cost for selling new shares is F = 10%; and the target capital structure is 45% debt and 55% common equity. What is the firm's WACC, assuming it must issue new stock to finance its capital budget?

Question 30 options:

A)

6.89%

B)

7.26%

C)

7.64%

D)

8.04%

E)

8.44%