Exam 3: Essential Concepts in Finance: Part B

Your firm's k_s is 10%, k_d is 6% before taxes, tax rate is 40%. Given the following balance sheet, calculate the firm's after tax WACC: Total assets = $25,000 Total debt = 15,000 Total equity = 10,000

If the dividends paid on a common stock issue are $4.00 per share, the cost of equity is 15%, and price of the common stock is $40, calculate the growth rate.

Debt is almost always the cheapest component of a company's cost of capital. Why don't companies have debt weightings of 90 or even 95%?

You have three projects costing $100,000. The total capital budget is $300,000. The returns on the projects and the marginal costs of capital are as follows: Which projects should be undertaken? Why?

The CAPM risk measure reflects:

Given the following information, calculate the required return on this firm's securities: beta is 1.5, the risk- free rate is 6%, and the required return on the overall market is 9.

Your Aunt Matilda Mae makes you the following offer: $15,000 upon graduation in one year or $18,000 upon MBA graduation in 3 years. a) Which offer should you take if current rates are 14% b) Which offer should you take if current rates are 5%

Use the following information to answer the question below. As an investor, you are considering investing in the Locke Corporation (LC). According to your estimation there is a 75% probability that the return will be 17%, a 15% probability that the return will be 20%, and a 10% probability that the return will be 8%. You have also estimated LC's beta as 1.7.The market required rate of return is 15% and the risk free rate is 9%. -Your portfolio has a value of $1,800,000 with a beta of 1. Then, you buy$200,000 of the LC stock without selling any existing stock. What is the new beta of your portfolio?

What is the standard deviation of following income statement sales projection given the following information?

The expected return on an investment is:

Explain the difference between WACC and MCC.

Why is it important to use a firm's MCC and not a firm's initial WACC to evaluate investments?

Use the following information to answer the question below. -What are the coefficients of variation for BIF Corporation and Norwood, Inc.?

A risk averse manager:

Would a firm use WACC or MCC to identify which new capital budgeting projects should be selected?

After ________ stocks, the addition of more stocks does little to reduce the portfolio's standard deviation.

Which of the following statements is (are) true?

How long will it take to triple your money at 8% interest compounded quarterly?

How much will you have at the end of the 6th year if you invest $5,000 annually for six years at a 7% annual rate, if you: a. Start one year from today b. Start today

Use the following information to answer the question below. CDE Inc.'s current (and optimal) capital structure is 40% debt, 10% preferred stock, and 50% common equity. CDE is in the 40% tax bracket. The company can issue up to $20,000,000 in new bonds at par with a 7% coupon; any subsequent amount must carry a 2% premium to compensate investors for added risk. A new issue of preferred stock would pay an annual dividend of $4.00 and be priced to net the company $50.00 per share after the $3.00 per share floatation cost. The firm has $21,000,000 in retained earnings. CDE's common stock trades at $40.00 per share and the expected dividend on the common stock is 2.00. Floatation costs on common equity issues is $5.00 per share. The company is growing at 7% per year. -What is the marginal cost of capital (MCC) break point for common equity?