Question 1

A firm incurs $40,000 in interest expenses each year.If the tax rate of the firm is 40%,what is the effective after-tax interest rate expense for the firm?

Accepted Answer

A)  $22,000 
B)  $24,000 
C)  $27,000 
D)  $29,000 
E)  $33,000 
A)  $22,000 
B)  $24,000 
C)  $27,000 
D)  $29,000 
E)  $33,000

Question 2

Lululemon Athletica is considering introducing a new line of yoga wear that is expected to increase the company's sales by $10 million in the first year,and growing by 3% every year thereafter.If the cost of introducing the new product line is $40 million today,and Lululemon's WACC is 9.4%,what is the NPV of the project?

Accepted Answer

A)  $196.25 million 
B)  $66.38 million 
C)  $116.25 million 
D)  $468.75 million 
E)  $319.15 million 
A)  $196.25 million 
B)  $66.38 million 
C)  $116.25 million 
D)  $468.75 million 
E)  $319.15 million

Question 3

Assume JUP has debt with a book value of $20 million,trading at 120% of par value.The bonds have a yield to maturity of 6%.The firm has book equity of $20 million,and 2 million shares trading at $18 per share.The firm's cost of equity is 12%.What is JUP's WACC if the firm's marginal tax rate is 35%?

Accepted Answer

A)  9.60% 
B)  8.76% 
C)  9.00% 
D)  6.24% 
E)  7.34% 
A)  9.60% 
B)  8.76% 
C)  9.00% 
D)  6.24% 
E)  7.34%

Question 4

A firm has $30 million of common stock,$20 million of preferred stock,and $40 million of debt.The cost of equity is 8.5%,the cost of preferred stock is 9.5%,and the pretax cost of debt is 7%.If the firm's tax rate is 30%,what is the firm's WACC?

Accepted Answer

A)  8.33% 
B)  6.44% 
C)  7.12% 
D)  8.06% 
E)  7.75% 
A)  8.33% 
B)  6.44% 
C)  7.12% 
D)  8.06% 
E)  7.75%

Question 5

A firm has $50 million of common stock,$10 million of preferred stock,and $15 million of debt.The cost of equity is 9%,the cost of preferred stock is 7%,and the pretax cost of debt is 4%.If the firm's tax rate is 25%,what is the firm's WACC?

Accepted Answer

A)  6.67% 
B)  6.33% 
C)  7.73% 
D)  5.16% 
E)  7.53% 
A)  6.67% 
B)  6.33% 
C)  7.73% 
D)  5.16% 
E)  7.53%

Question 6

Verano Inc.has two business divisions-a software product line and a waste water clean-up product line.The software business has a cost of equity capital of 12% and the waste water clean-up business has a cost of equity capital of 8%.Verano has 50% of its revenue from software and the rest from the waste water business.Verano is considering a purchase of another company in the waste water business using equity financing.What is the appropriate cost of capital to evaluate the business?

Accepted Answer

A)  12% 
B)  8% 
C)  10% 
D)  11% 
E)  6% 
A)  12% 
B)  8% 
C)  10% 
D)  11% 
E)  6%

Question 7

The book value of equity of a firm is $100 million and the market value of equity is $200 million.The face value of debt of the firm is $50 million and the market value of debt is $60 million.What is the market value of assets of the firm?

Accepted Answer

A)  $150 million 
B)  $160 million 
C)  $260 million 
D)  $250 million 
E)  $110 million 
A)  $150 million 
B)  $160 million 
C)  $260 million 
D)  $250 million 
E)  $110 million

Question 8

New Flyer Industries has decided to expand its production of hybrid transit buses.The firm expects incremental cash flows of $40 million per year for the next 10 years.The upfront cost of the expansion is $150 million,and there are additional issuance costs for external financing of $15 million.If the New Flyer's WACC is 7.5%,what is the NPV of the project?

Accepted Answer

A)  $235 million 
B)  $125 million 
C)  $110 million 
D)  $95 million 
E)  $219 million 
A)  $235 million 
B)  $125 million 
C)  $110 million 
D)  $95 million 
E)  $219 million

Question 9

Epiphany is an all-equity firm with an estimated market value of $400,000.The firm sells $300,000 of debt and uses the proceeds to purchase outstanding equity.Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.

Accepted Answer

A)  0.2, 0.8 
B)  0.25, 0.75 
C)  0.4, 0.6 
D)  0.5, 0.5 
E)  0.1, 0.3 
A)  0.2, 0.8 
B)  0.25, 0.75 
C)  0.4, 0.6 
D)  0.5, 0.5 
E)  0.1, 0.3

Question 10

Shaw Communications is currently financed with 30% equity,10% preferred stock,and 60% debt.It has a cost of equity capital of 11%,a cost of preferred stock of 7.5%,and its pretax cost of debt is 6%.If the firm has a tax rate of 30%,what is Shaw's WACC?

Accepted Answer

A)  7.57% 
B)  8.17% 
C)  5.82% 
D)  6.57% 
E)  7.65% 
A)  7.57% 
B)  8.17% 
C)  5.82% 
D)  6.57% 
E)  7.65%

Question 11

A firm has a pre-tax cost of debt of 8.5%.If the firm has a marginal tax rate of 40%,what is its effective cost of debt?

Accepted Answer

A)  5.1% 
B)  3.4% 
C)  8.5% 
D)  8.1% 
E)  7.2% 
A)  5.1% 
B)  3.4% 
C)  8.5% 
D)  8.1% 
E)  7.2%

Question 12

Manitou Inc has preferred stock paying an annual dividend of $2.25,and common stock paying an annual dividend of $0.85.If the current preferred stock price is $18.75,what is Manitou's cost of preferred stock capital?

Accepted Answer

A)  11% 
B)  12% 
C)  4.5% 
D)  10% 
E)  13% 
A)  11% 
B)  12% 
C)  4.5% 
D)  10% 
E)  13%

Question 13

What is the assumption about leverage when using WACC to evaluate a project?

Accepted Answer

The implied assumption in using WACC to

Question 14

New Flyer Industries has decided to expand its production of hybrid transit buses.The firm expects incremental cash flows of $20 million in the first year,growing by 2% every year thereafter.The upfront cost of the expansion is $95 million,and there are additional issuance costs for external financing of $12 million.If the New Flyer's WACC is 6.2%,what is the NPV of the project?

Accepted Answer

A)  $228 million 
B)  $357 million 
C)  $381 million 
D)  $216 million 
E)  $369 million 
A)  $228 million 
B)  $357 million 
C)  $381 million 
D)  $216 million 
E)  $369 million

Question 15

A firm is considering investing in a new project with an upfront cost of $400 million.The project will generate an incremental free cash flow of $50 million in the first year and this cash flow is expected to grow at an annual rate of 4% forever.If the firm's WACC is 13%,what is the value of this project?

Accepted Answer

A)  $155.6 million 
B)  $555.6 million 
C)  $577.8 million 
D)  $177.8 million 
E)  $181.4 million 
A)  $155.6 million 
B)  $555.6 million 
C)  $577.8 million 
D)  $177.8 million 
E)  $181.4 million

Question 16

Verano Inc.has two business divisions-a software product line and a waste water clean-up product line.The software business has a cost of equity capital of 10% and the waste water clean-up business has a cost of equity capital of 7%.Verano has 50% of its revenue from software and the rest from the waste water business.Verano is considering a purchase of another company in the waste water business using equity financing.What is the appropriate cost of capital to evaluate the business?

Accepted Answer

A)  10% 
B)  7% 
C)  8.5% 
D)  9% 
E)  6.5% 
A)  10% 
B)  7% 
C)  8.5% 
D)  9% 
E)  6.5%

Question 17

IBM expects to pay a dividend of $4 next year and expects these dividends to grow at 7% a year.The price of IBM is $90 per share.What is IBM's cost of equity capital?

Accepted Answer

A)  9.65% 
B)  10.23% 
C)  10.89% 
D)  11.44% 
E)  12.36% 
A)  9.65% 
B)  10.23% 
C)  10.89% 
D)  11.44% 
E)  12.36%

Question 18

What is the assumption about risk when using WACC to evaluate a project?

Accepted Answer

Using WACC in evaluating a fir

Question 19

A firm incurs $50,000 in interest expenses each year.If the tax rate of the firm is 30%,what is the effective after-tax interest rate expense for the firm?

Accepted Answer

A)  $27,000 
B)  $29,000 
C)  $32,000 
D)  $35,000 
E)  $39,000 
A)  $27,000 
B)  $29,000 
C)  $32,000 
D)  $35,000 
E)  $39,000

Question 20

As a firm increases its level of debt relative to its level of equity,the firm is

Accepted Answer

A)  increasing the fraction of the firm financed with equity. 
B)  decreasing the fraction of the firm financed with debt. 
C)  decreasing its leverage. 
D)  increasing its leverage. 
E)  becoming unlevered. 
A)  increasing the fraction of the firm financed with equity. 
B)  decreasing the fraction of the firm financed with debt. 
C)  decreasing its leverage. 
D)  increasing its leverage. 
E)  becoming unlevered.

A firm incurs $40,000 in interest expenses each year.If the tax rate of the firm is 40%,what is the effective after-tax interest rate expense for the firm?

Assume JUP has debt with a book value of $20 million,trading at 120% of par value.The bonds have a yield to maturity of 6%.The firm has book equity of $20 million,and 2 million shares trading at $18 per share.The firm's cost of equity is 12%.What is JUP's WACC if the firm's marginal tax rate is 35%?

A firm has $30 million of common stock,$20 million of preferred stock,and $40 million of debt.The cost of equity is 8.5%,the cost of preferred stock is 9.5%,and the pretax cost of debt is 7%.If the firm's tax rate is 30%,what is the firm's WACC?

A firm has $50 million of common stock,$10 million of preferred stock,and $15 million of debt.The cost of equity is 9%,the cost of preferred stock is 7%,and the pretax cost of debt is 4%.If the firm's tax rate is 25%,what is the firm's WACC?

The book value of equity of a firm is $100 million and the market value of equity is $200 million.The face value of debt of the firm is $50 million and the market value of debt is $60 million.What is the market value of assets of the firm?

Epiphany is an all-equity firm with an estimated market value of $400,000.The firm sells $300,000 of debt and uses the proceeds to purchase outstanding equity.Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.

Shaw Communications is currently financed with 30% equity,10% preferred stock,and 60% debt.It has a cost of equity capital of 11%,a cost of preferred stock of 7.5%,and its pretax cost of debt is 6%.If the firm has a tax rate of 30%,what is Shaw's WACC?

A firm has a pre-tax cost of debt of 8.5%.If the firm has a marginal tax rate of 40%,what is its effective cost of debt?

Manitou Inc has preferred stock paying an annual dividend of $2.25,and common stock paying an annual dividend of $0.85.If the current preferred stock price is $18.75,what is Manitou's cost of preferred stock capital?

What is the assumption about leverage when using WACC to evaluate a project?

IBM expects to pay a dividend of $4 next year and expects these dividends to grow at 7% a year.The price of IBM is $90 per share.What is IBM's cost of equity capital?

What is the assumption about risk when using WACC to evaluate a project?

A firm incurs $50,000 in interest expenses each year.If the tax rate of the firm is 30%,what is the effective after-tax interest rate expense for the firm?

As a firm increases its level of debt relative to its level of equity,the firm is

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

Exam 12: Determining the Cost of Capital

A firm incurs $40,000 in interest expenses each year.If the tax rate of the firm is 40%,what is the effective after-tax interest rate expense for the firm?

A firm has $30 million of common stock,$20 million of preferred stock,and $40 million of debt.The cost of equity is 8.5%,the cost of preferred stock is 9.5%,and the pretax cost of debt is 7%.If the firm's tax rate is 30%,what is the firm's WACC?

A firm has $50 million of common stock,$10 million of preferred stock,and $15 million of debt.The cost of equity is 9%,the cost of preferred stock is 7%,and the pretax cost of debt is 4%.If the firm's tax rate is 25%,what is the firm's WACC?

The book value of equity of a firm is $100 million and the market value of equity is $200 million.The face value of debt of the firm is $50 million and the market value of debt is $60 million.What is the market value of assets of the firm?

Epiphany is an all-equity firm with an estimated market value of $400,000.The firm sells $300,000 of debt and uses the proceeds to purchase outstanding equity.Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.

Shaw Communications is currently financed with 30% equity,10% preferred stock,and 60% debt.It has a cost of equity capital of 11%,a cost of preferred stock of 7.5%,and its pretax cost of debt is 6%.If the firm has a tax rate of 30%,what is Shaw's WACC?

A firm has a pre-tax cost of debt of 8.5%.If the firm has a marginal tax rate of 40%,what is its effective cost of debt?

Manitou Inc has preferred stock paying an annual dividend of $2.25,and common stock paying an annual dividend of $0.85.If the current preferred stock price is $18.75,what is Manitou's cost of preferred stock capital?

What is the assumption about leverage when using WACC to evaluate a project?

IBM expects to pay a dividend of $4 next year and expects these dividends to grow at 7% a year.The price of IBM is $90 per share.What is IBM's cost of equity capital?

What is the assumption about risk when using WACC to evaluate a project?

A firm incurs $50,000 in interest expenses each year.If the tax rate of the firm is 30%,what is the effective after-tax interest rate expense for the firm?

As a firm increases its level of debt relative to its level of equity,the firm is

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Investment Decision Rules

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters