ch 13 and 15 quiz Flashcards
ch 13 and 15 quiz
The firm’s mix of long-term financing [debt and equity]
Capital Structure
A weighted average of the returns demanded by debt and equity investors. The return the firm’s investors could expect to earn if they invested in securities with comparable risk.
Cost of Capital
Executive Fruit has issued debt, preferred stock and common stock. The market value of these securities are $4mil, $2mil, and $6mil, respectively. The required returns are 6%, 12%, and 18%, respectively. Determine the WACC for Executive Fruit.
12.3%
Interest rate
Bank Loan
YTM
The Expected Return on Bonds
represents a standard discount rate for average risk projects.
WACC
should be considered for issuing new shares.
Floating Costs
Freshy Co. has 2.90 million shares of common stock outstanding with a book value of $2.45 per share. The stock trades for $3.09 per share. It also has $2.90 million in face value of debt that trades at 90% of face value. What is the debt ratio that should be used to calculate WACC?
0.2256, or 22.56%
Adam Co. has 16,000 shares of common stock outstanding with a book value of $24 per share and a market value of $43. There are 5,000 shares of preferred stock with a book value of $26 and a market value of $34. There is a $420,000 face value bond issue outstanding that is selling at 87% of par. What weight should be placed on the preferred stock when computing the firm’s WACC?
Total Value= 688k+ 170k+365400 = 1223400
Value of the preferred stock = P/V = 170k/1223400 = 13.9%
South Co. has a debt-to-equity ratio of 1/4. The WACC is 19.5%, and the pretax cost of debt is 10.3%. What is the cost of common equity if the tax rate is 21%?
19.5%=0.2×10.3%×(1−0.21)+0.8×re→re=22.34%
Which of the following events would increase the cost of capitals?
a. a reduction in the proportion of equity in the firm
b. a reduction in the growth rate of the dividend
c. an increase in the market return
d. an increase in the tax rate
C
A company has a beta of 1.2. The risk free interest rate is 5 percent, and the expected market risk premium is 10 percent. what is the required rate of return on this stock?
a. 17 percent
b. 11 percent
c. 10 percent
d. 5 percent
A
A company has bonds outstanding with a coupon rate of 10 percent, 5 years to maturity which is currently priced at $920. If the firms tax bracket is 35 percent, what is its after - tax cost of debt?
a. 10 percent
b. 6.5 percent
c. 3.5 percent
d. 7.95 percent
e. 12.25 percent
Calculate r using a financial calculator and then calculate after tax cost of debt.
12.23% (1-35%) = 7.95%
Secure Yourself is specialized in home security cameras and has a WACC of 13 percent. The company is considering manufacturing security cameras for cars. Secure ourselves specializes in security cameras for cars and has a WACC of 11 percent. What discount rate should Secure Yourself use to evaluate this investment?
a. 12 percent because after investment, Secure Yourself will be a combination of the two businesses.
b. 11 percent because that is appropriate given the risk of the project.
c. 13 percent because that is the appropriate rate for the company
d. A weighted average of 13 and 11 with the weights based on the proportion of each business.
e. Not enough information.
B
