Given the following information for Electric Transport, find the WACC. Assume the
company’s tax rate is 34 percent.Debt: 7,500, 8.4 percent coupon bonds outstanding.
$1,000 par value, 22 years to maturity, selling for 103 percent of par, the bonds make
semiannual payments.Common stock: 195,000 shares outstanding, selling for $78 per
share, beta is 1.21.Preferred stock: 11,000 shares of 6.35 percent preferred stock
outstanding, currently selling for $76 per share.Market: 8 percent market risk premium
and 5.1 percent risk-free rate.
A. 11.49 percent
B. 12.07 percent
C. 12.42 percent
D. 13.33 percent
E. 13.80 percent
Bob’s is a retail chain of specialty hardware stores. The firm has 21,000 shares of stock
outstanding that are currently valued at $68 a share and provide a 13.2 percent rate of
return. The firm also has 500 bonds outstanding that have a face value of $1,000, a
market price of $1,068, and a 7 percent coupon. These bonds mature in 6 years and pay
interest semiannually. The tax rate is 35 percent. The firm is considering expanding by
building a new superstore. The superstore will require an initial investment of $12.3
million and is expected to produce cash inflows of $1.1 million annually over its
10-year life. The risks associated with the superstore are comparable to the risks of the
firm’s current operations. The initial investment will be depreciated on a straight line
basis over the life of the project. At the end of the 10 years, the firm expects to sell the
superstore for $6.7 million. Should the firm accept or reject the superstore project and
why?
A. Accept; the project’s NPV is $1.27 million.
B. Accept; the NPV is $4.89 million.
C. Reject; the NPV is $1.06 million.
D. Reject; the NPV -$3.27 million.
E. Reject; the NPV is -$5.71 million.
A limited liability company:
A. is a hybrid between a sole proprietorship and a partnership.
B. prefers its profits be taxed as personal income to its owners.
C. that meets the IRS criteria to be an LLC will be taxed like a corporation.
D. provides limited liability for some, but not all, of its owners.
E. cannot be created for professional service firms, such as accountants and attorneys.
A new financial services company just opened in your town. To attract customers, it is
offering a “9-11” loan special. The company will lend $9 today in exchange for a
payment of $11 one year from today. What is the APR on this loan?
A. 20.00 percent
B. 20.76 percent
C. 21.84 percent
D. 22.22 percent
E. 23.08 percent
One year ago, you bought a stock for $36.48 a share. You received a dividend of $1.62
per share last month and sold the stock today for $41.18 a share. What is the capital
gains yield on this investment?
A. 2.86 percent
B. 4.70 percent
C. 12.88 percent
D. 15.62 percent
E. 18.53 percent
Which one of the following best describes an agreement you make today to exchange
U.S. dollars for British pounds three months from now?
A. Forward trade
B. Spot trade
C. Arbitrage transaction
D. Cross-rate exchange
E. Eurocurrency transaction
Boyertown Industrial Tools is considering a three-year project to improve its production
efficiency. Buying a new machine press for $611,000 is estimated to result in $193,000
in annual pretax cost savings. The press falls in the MACRS five-year class, and it will
have a salvage value at the end of the project of $162,000. The press also requires an
initial investment in spare parts inventory of $19,000, along with an additional $2,000
in inventory for each succeeding year of the project. If the tax rate is 35 percent and the
discount rate is 12 percent, should the company buy and install the machine press? Why
or why not?
Table 9.7 Modified ACRS depreciation allowances
A. Yes; the NPV is $51,613
B. Yes; the NPV is $45,607
C. No; the NPV is -$22,311
D. No; the NPV is -$52,918
E. No; the NPV is -$74,945
Research conducted on firms’ dividend policies over time support which one of the
following conclusions?
A. Aggregate dividends and stock repurchases have steadily declined in real terms.
B. Dividends are currently paid by the vast majority of firms.
C. Managers tend to smooth dividends.
D. Stock prices tend to increase whenever anticipated changes in dividends occur.
E. Firms commence paying dividends prior to doing any stock repurchases.
Compass Bank is offering 0.8 percent compounded daily on its savings accounts. If you
deposit $2,500 today, how much will you have in the account in 15 years?
A. $2,567.15
B. $2,675.10
C. $2,761.32
D. $2,818.74
E. $2,890.62
A protective covenant:
A. protects the borrower from unscrupulous practices by the lender.
B. is designed to protect the bond dealer from potential legal liability related to the
bond issue.
C. prevents a bond from being called.
D. limits the actions of the borrower.
E. guarantees that a bond will be repaid in full with interest.
Jeff deposits $3,000 into an account which pays 2.5 percent interest, compounded
annually. At the same time, Kurt deposits $3,000 into an account paying 5 percent
interest, compounded annually. At the end of three years:
A. Both Jeff and Kurt will have accounts of equal value.
B. Kurt will have twice the money saved that Jeff does.
C. Kurt will earn exactly twice the amount of interest that Jeff earns.
D. Kurt will have a larger account value than Jeff will.
E. Jeff will have more money saved than Kurt.
The Bird Cage has the following estimated sales.
Purchases are equal to 67 percent of the following quarter’s sales. The sales for the first
quarter of the following year are estimated at $42,100. The accounts receivable period
is 30 days and the accounts payable period is 45 days. Assume there are 30 days in each
month. By how much will the firm’s collections exceed its payments for quarter 2?
A. $9,648.50
B. $11,884.20
C. $13,383.50
D. $17,925.00
E. $24,211.70
Gabella’s is an all-equity firm that has 21,000 shares of stock outstanding at a market
price of $40 a share. The firm has earnings before interest and taxes of $84,000 and has
a 100 percent dividend payout ratio. Ignore taxes. Gabella’s has decided to issue
$160,000 of debt at a rate of 12 percent and use the proceeds to repurchase shares. Terry
owns 400 shares of Gabella’s stock and has decided to continue holding those shares.
How will Gabella’s debt issue affect Terry’s annual dividend income?
A. Decrease from $2,400 to $1,840
B. Increase from $2,400 to $2,160
C. Decrease from $1,600 to $1,525
D. Increase from $1,600 to $2,094
E. No change
A project has the following cash flows. What is the internal rate of return?
A. 8.26 percent
B. 9.11 percent
C. 10.58 percent
D. 11.23 percent
E. 12.18 percent
Identify three managerial options that relate to project analysis and explain how those
options affect the net present value of a project.
Explain the concept of the subjective approach to assigning a required return to a
project.
You are having a discussion with one of your classmates on dividend policy. Your
classmate states that dividend policy is totally irrelevant. Write a response to this
statement justifying that in the real world, dividend policy does matter.
Assume this is your first day on the job as the new chief financial officer of a midsize
company. Identify the three key ratios that you would compute first as you begin to try
to understand the financial status of the firm. Explain why you selected the three ratios
that you did.
How should a firm determine whether a restrictive or a flexible financial policy is best
given its current situation?
Todd wants to start his own business and is debating between organizing the business as
a sole proprietorship or a corporation. Explain the pros and cons of both forms of
business organization.
Explain the difference between scenario analysis and sensitivity analysis and identify
the purpose of each.
Explain how a zero coupon bond can create taxable income during a year in which the
bond pays no interest payments. Also, explain how the annual taxable amount can be
computed.