Reference no: EM132492504

Question 1: A firm has a market value equal to its book value. The firm has excess cash of $5,000 and other assets of $9,500. Equity is worth $100,000. The firm has 250 shares of stock outstanding. What will the stock price per share be if firm's ROA is 5% and the firm pays out 75% of its excess cash as a cash dividend?

Select one:

A. $380

B. $385

C. $400

Question 2: A bond investment is available that pays a tax-free 8%. The corporate tax rate is 35%. Ignoring risk, what is the pre-tax return on taxable bonds?

Select one:

A. 5.20%

B. 12.3%

C. 8.47%

Question 3: Star, Inc., Firm is debating whether or not to convert its all-equity capital structure to one that is 35% debt. Currently there are 6,000 shares outstanding and the price per share is $58. EBIT is expected to remain at $33,000 per year forever. The interest rate on new debt is 8%, and there are no taxes.

Ms. Brown, a shareholder of the firm, owns 100 shares of stock. What is her cash flow under the current capital structure, assuming the firm has a dividend payout rate of 100%?

Select one:

A. $550

B. $5.50

C. $5,800

Question 4: Star, Inc., Firm is debating whether or not to convert its all-equity capital structure to one that is 35% debt. Currently there are 6,000 shares outstanding and the price per share is $58. EBIT is expected to remain at $33,000 per year forever. The interest rate on new debt is 8%, and there are no taxes.

What will Ms. Brown's cash flow be under the proposed capital structure of the firm? Assume that she keeps all 100 shares.

Select one:

A. $5,500

B. $596.31

C. $5,800

Question 5: The Do-All-Right Marketing Research firm has promised payments to its bondholders that total $100. The company believes that there is a 85% chance that the cash flow will be sufficient to meet these claims. However, there is a 15% chance that cash flows will fall short, in which case total earnings are expected to be $65. If the bonds sell in the market for $84, what is an estimate of the bankruptcy costs? Assume a cost of debt of 5%.

Select one:

A. $43.67

B. $15.66

C. $21.33

Question 6: You own 30% of Westcoast, Inc. You have decided to retire and want to sell your shares in this closely held, all equity firm. The other shareholders have agreed to have the firm borrow $2 million to purchase your 2,000 shares of stock. What is the total value of this firm today if you ignore taxes?

Select one:

A. $4.58 million

B. $5.76 million

C. $6.67 million

Question 7: MM Proposition I with taxes supports the theory that:

Select one:

A. a firm's weighted average cost of capital increases as the debt-equity ratio of the firm rises.

B. there is a positive linear relationship between the amount of debt in a levered firm and its value.

C. the value of an unlevered firm is equal to the value of a levered firm plus the value of the interest tax shield.

Question 8: An investment cost $12,000 with expected cash flows of $4,000 for 7 years. The discount rate is 15.2382%. The IRR is ___ for the project, thus we should ____ the project.

Select one:

A. 27.12%, accept

B. 12.59%, accept

C. 12.59%, reject

Question 9: Longmont Inc. has a cost of equity of 12% and a pre-tax cost of debt of 6%. The required return on the assets is 10%. What is the firm's debt-equity ratio based on MM Proposition II with no taxes?

Select one:

A. 0.55

B. 0.50

C. 0.45

Question 10: The Wojewodzki Co. has just paid a cash dividend of $2 per share. Investors require a 16% return from investments such as this. If the dividend is expected to grow at a steady 8% per year, what is the current market value of the stock?

Select one:

A. $25

B. $26

C. $27