Finance Chapter 13 2 For Company That Pays Corporate Taxes

Topic: Weighted-average cost of capital

58.

For a company that pays no corporate taxes, its WACC will be equal to:

59.

A firm is 40% financed by debt with a yield–to-maturity of 8.5%. The equity has a beta of 1.3, the market risk premium is

8.4% and the risk-free rate is 3.8%. What is the firm’s WACC if the tax rate is 34%?

60.

If a firm has twice as much equity as debt in its capital structure, then the firm is financed with:

61.

If a firm has three times as much equity as debt in its capital structure, then the firm is financed with:

62.

If a company‘s WACC is less than the required return on equity, then the firm:

63.

The company cost of capital is the return that is expected on a portfolio of the company’s:

64.

A firm has just paid its annual dividend of $5.64 a share. Thereafter the dividend is expected to increase at a rate of 2% a

year. If the firm‘s stock currently sells for $60 a share, what is the cost of equity?

65.

What is the WACC for a firm financed with 30% debt if the debt investors require a return of 12.5% and equity investors

require a 16% return? The corporate tax rate is 20%.

66.

Which one of the following changes would tend to increase the WACC for a tax-paying firm?

67.

A firm is considering expanding its current operations and has estimated the internal rate of return on that expansion to be

12.2%. The firm’s WACC is 11.8%. Given this, you know that the:

68.

A firm has 12,500 shares of stock outstanding that sell for $42 each. The book value of equity is $400,000. The firm has also

issued $250,000 face value of debt that is currently quoted at 101.2. What value should be used as the weight of equity when

computing WACC?

70.

Assume a firm’s debt is selling at face value. What is the firm’s cost of debt if the debt has a coupon rate of 7.5% and the tax

rate is 35%?

71.

What proportion of a firm is equity financed if the WACC is 14%, the after–tax cost of debt is 7%, the tax rate is 35%, and

the required return on equity is 18%?

72.

What proportion of a firm is equity financed if the WACC is 14%, the before–tax cost of debt is 10.77%, the tax rate is 35%,

and the required return on equity is 18%?

73.

A firm has a debt-to-value ratio of 40%, a cost of equity of 14%, and an after-tax cost of debt of 5.5%. It plans to launch a

new product that will produce cash flows of $398,000 next year and $211,000 in year 2. If this project is about as risky as the

firm’s existing assets, what is the present value of the project?

74.

Al’s Market plans to close after 3 more years. The firm expects to have free cash flows of $148,000 next year, $128,000 in

Year 2, and $65,000 in Year 3 after incurring the costs of closing. The firm’s cost of equity is 15.5% and its after-tax cost of

debt is 6.2%. What is the present value of the firm if its debt to value ratio is 30%?

75.

A proposed project has a positive NPV if it is financed entirely by equity. If the project can sensibly be financed partly by

debt and the firm pays tax, will the project remain acceptable?

76.

What is the after-tax cost of preferred stock that pays a 12% dividend and sells at par if the firm’s tax rate is 35%?

77.

What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if their respective costs are 6% after tax,

12%, and 18%? The firm’s tax rate is 35%.

78.

What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if their respective costs are 9.23% before

tax, 12%, and 18%? The firm’s tax rate is 35%.

79.

A project will generate a $1 million net cash flow annually in perpetuity. If the project costs $7 million, what is the break–

even WACC?

80.

Which one of the following changes offers the greatest chance of changing a project’s NPV from negative to positive?

81.

What decision should be made on a project with above-average market risk?

82.

If equity investors require a 20% rate of return, what is the maximum acceptable amount of equity financing for a project

with cash flows of $2 million a year in perpetuity before tax and interest? The project supports debt of $3 million with a 10%

coupon, and the tax rate is 35%.

83.

For purposes of computing the WACC, if the book value of equity exceeds the market value of equity, then:

84.

How much cash flow before tax and interest is necessary to support a project if $2 million is used to pay interest, the tax rate

is 35%, and equity investors require annual income of $4 million?

85.

What equity proportion should be used when calculating WACC for a firm with $50 million in debt selling at 85% of par,

$50 million in book value of equity, and $65 million in market value of equity?

86.

According to CAPM estimates, what is the cost of equity for a firm with a beta of 1.5 when the risk-free interest rate is 6%

and the expected return on the market portfolio is 15%?

87.

What return on equity do investors expect for a firm with a $55 share price, an expected dividend of $4.60, a beta of 0.9, and

a constant growth rate of 3.5%?

88.

Changing the capital structure by adding debt will:

89.

The company cost of capital:

90.

XYZ Company issues common stock at a price of $25 a share. The firm expects to pay a dividend of $2.20 a share next year.

If the dividend is expected to grow at 2.5% annually, what is XYZ’s cost of common equity?

91.

Find the required rate of return for equity investors of a firm with a beta of 1.3 when the risk free rate is 5% and the return on

92.

Plasti-tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt has a pretax interest rate of 12%. Plasti–

tech’s common stock trades at $15.00 per share and its most recent dividend was $1.00. Future dividends are expected grow

by 4%. If the tax rate is 34%, what is Plasti-tech’s WACC?

93.

The capital structure for the CR Corporation includes bonds valued at $5,500 and common stock valued at $11,000. If CR

has an after-tax cost of debt of 6%, and a cost of common stock of 16%, what is its WACC?

94.

What is the yield to maturity on Dotte Inc.’s bonds if its after-tax cost of debt is 10% and its tax rate is 35%?

0.10 = rd(1 − 0.35); rd = 15.38%

95.

Increasing debt financing will do all of the following except:

96.

Suppose an analyst estimates that free cash flow will be $2.43 million in year 5. What is the present value of this free cash

flow if the company cost of capital is 12%, the WACC is 10%, and the equity cost of capital is 15%?

97.

WACC can be used to determine the value of a firm by discounting the firm’s:

Chapter 13 Test bank – Static Summary