87) Miller Stores has an overall beta of 1.38 and a cost of equity of 12.7 percent for the company
overall. The firm is all-equity financed. Division A within the firm has an estimated beta of 1.52
and is the riskiest of all of the company’s operations. What is an appropriate cost of capital for
Division A if the market risk premium is 7.4 percent?
A) 13.12 percent
B) 13.74 percent
C) 12.63 percent
D) 12.77 percent
E) 13.01 percent
88) Deep Mining and Precious Metals are separate firms that are both considering a silver
mining project. Deep Mining is in the actual mining business and has an aftertax cost of capital
of 16.2 percent. Precious Metals is in the precious gem retail business and has an aftertax cost of
capital of 13.4 percent. The project under consideration has initial costs of $950,000 and
anticipated annual cash inflows of $165,000 a year for 12 years. Which firm(s), if either, should
accept this project?
A) Deep Mining only
B) Precious Metals only
C) Both Deep Mining and Precious Metals
D) Neither Deep Mining nor Precious Metals
E) Cannot be determined without further information
89) Sister Pools sells outdoor swimming pools and currently has an aftertax cost of capital of
10.6 percent. Al’s Construction builds and sells water features and fountains and has an aftertax
cost of capital of 10.2 percent. Sister Pools is considering building and selling its own water
features and fountains. The initial cash outlay for this project would be $75,000. The expected
net cash inflows are $18,000 a year for seven years. What is the net present value of the Sister
Pools project?
A) –$4,608
B) $12,057
C) $2,262
D) –$11,508
E) $5,220
90) Decker’s is an all-equity financed chain of retail furniture stores. Furniture Fashions produces
furniture and is the primary supplier to Decker’s. Decker’s has a beta of 1.62 as compared to
Furniture Fashions’ beta of 1.43. The risk-free rate of return is 3.1 percent and the market risk
premium is 7.6 percent. What discount rate should Decker’s use if it considers a project that
involves the manufacturing of furniture?
A) 13.97 percent
B) 12.92 percent
C) 13.50 percent
D) 14.08 percent
E) 14.54 percent
91) River Walk Tours is expected to have an EBIT of $184,000 next year. Depreciation, the
increase in net working capital, and capital spending are expected to be $11,000, $1,500, and
$13,000, respectively. All are expected to grow at 6 percent per year for three years. After Year
4, the adjusted cash flow from assets is expected to grow at 2.5 percent indefinitely. The
company’s WACC is 9.2 percent and the tax rate is 21 percent. What is the terminal value of the
company’s cash flows?
A) $2,740,563
B) $2,584,798
C) $1,711,052
D) $2,008,051
E) $2,123,008
57
92) Franktown Motors is expected to have an EBIT of $687,400 next year. Depreciation, the
increase in net working capital, and capital spending are expected to be $48,000, $7,000, and
$42,000, respectively. All cash flow items are expected to grow at 6 percent per year for four
years. After Year 5, the CFA* is expected to grow at 2.1 percent indefinitely. The company
currently has $3.2 million in debt and 250,000 shares outstanding. The company’s WACC is 9.9
percent and the tax rate is 21 percent. What is the price per share of the company’s stock?
A) $17.82
B) $18.74
C) $12.07
D) $20.12
E) $16.47
93) Bleakly Enterprises has a capital structure of 56 percent common stock, 4 percent preferred
stock, and 40 percent debt. The flotation costs are 3.7 percent for debt, 4.8 percent for preferred
stock, and 5.2 percent for common stock. The corporate tax rate is 21 percent. What is the
weighted average flotation cost?
A) 5.83 percent
B) 5.20 percent
C) 4.42 percent
D) 5.67 percent
E) 4.58 percent
94) Deep Hollow Markets has a target capital structure of 35 percent debt, 5 percent preferred
stock, and 60 percent common stock. The flotation costs are 8.6 percent for common stock, 6.2
percent for preferred stock, and 3.8 percent for debt. The corporate tax rate is 21 percent. What is
the weighted average flotation cost?
A) 7.17 percent
B) 6.48 percent
C) 6.62 percent
D) 6.80 percent
E) 7.11 percent
95) The Daily Brew has a debt-equity ratio of .57. The firm is analyzing a new project that
requires an initial cash outlay of $260,000 for equipment. The flotation cost is 9.1 percent for
equity and 4.4 percent for debt. What is the initial cost of the project including the flotation
costs?
A) $302,400
B) $318,924
C) $280,758
D) $256,700
E) $333,333
96) You are evaluating a project that requires $324,000 in external financing. The flotation cost
of equity is 8.4 percent and the flotation cost of debt is 5.1 percent. What is the initial cost of the
project including the flotation costs if you maintain a debt-equity ratio of .35?
A) $352,842
B) $349,021
C) $350,439
D) $355,551
E) $346,646
97) Western Wear is considering a project that requires an initial investment of $602,000. The
firm maintains a debt-equity ratio of .55 and has a flotation cost of debt of 4.9 percent and a
flotation cost of equity of 10.2 percent. The firm has sufficient internally generated equity to
cover the equity portion of this project. What is the initial cost of the project including the
flotation costs?
A) $612,652
B) $618,406
C) $686,005
D) $697,747
E) $656,636
98) Yesteryear Productions is considering a project with an initial costs of $318,000. The firm
maintains a debt-equity ratio of .60 and has a flotation cost of debt of 5.2 percent and a flotation
cost of equity of 11.1 percent. The firm has sufficient internally generated equity to cover the
equity cost of this project. What is the initial cost of the project including the flotation costs?
A) $349,019
B) $324,324
C) $312,386
D) $318,513
E) $324,706
99) Suppose ALK Co. needs $13.8 million to build a new assembly line. The target debt-equity
ratio is .48. The flotation cost for new equity is 9.6 percent, but the floatation cost for debt is
only 5.1 percent. What is the true cost of building the new assembly line after taking flotation
costs into account?
A) $17,306,191
B) $15,022,949
C) $16,318,414
D) $15,719,310
E) $16,666,667