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Question(s) / Instruction(s):

A 6 percent preferred stock is selling for $72.10 a share. What is the cost of preferred if the par value is $100 per share?

a.            6%

b.            6.67%

c.             8.32%

d.            8.59%

 

 

2.            The Chicken Coup Restaurant is expected to pay an annual dividend of $2.20 a share next year. The company recently announced that future dividends will increase by 2.8 percent annually. The current market price is $33.60 a share. What is the cost of equity?

a.            9.29%

b.            9.35%

c.             9.53%

d.            9.59%

 

 

3.            Delta Marina stock has a beta of 1.36 and a standard deviation of 26.48 percent. The market risk premium is 8.48 percent and the risk-free rate is 4.1 percent. What is the cost of equity?

a.            10.56%

b.            11.60%

c.             14.48%

d.            15.63%

 

 

4.            A firm has a debt-equity ratio of 0.45 and a tax rate of 34 percent. Its cost of equity is 11.2 percent and its pre-tax cost of debt is 7.9 percent. What is the firm’s WACC?

a.            9.06%

b.            9.20%

c.             9.34%

d.            9.41%

 

 

5.            Garfield and Moore has 130,000 shares of common stock outstanding at a price per share of $41.20. There are 12,000 shares of preferred stock outstanding at a price of $58 a share. The firm also has 2,500 bonds outstanding that are currently selling at par. Each bond has a $1,000 face value. What weight should be assigned to the preferred stock when computing this firm’s WACC?

a.            0.08

b.            0.12

c.             0.16

d.            0.21

 

 

6.            The Blue Moon is considering a 4-year project that requires an investment of $3.2 million for new equipment. This equipment will be depreciated straight-line to zero over the life of the project and will be worthless thereafter. The project is expected to produce cash inflows of $1.12 million a year for 4 years. The firm’s WACC is 13 percent. Management uses the subjective approach for setting required returns for projects and has set the adjustment for this project at +0.75 percent. What is the NPV of this project?

a.            $58,882.52

b.            $80,153.66

c.             $84,316.79

d.            $131,407.88

 

 

7.            Burleigh’s has a debt-equity ratio of 0.55, a beta of 1.18, a stock price of $39 a share, and a tax rate of 35 percent. The firm just paid an annual dividend of $2.32 a share and plans to increase that amount by 2 percent annually in the future. The firm has a pre-tax cost of debt of 8.1 percent. The risk-free rate is 4.3 percent and the market rate of return is 13.6 percent. What is Burleigh’s WACC?

a.            9.36%

b.            9.40%

c.             9.87%

d.            9.92%

 

 

8              A firm desires a WACC of 8 percent. Its cost of equity is 12.6 percent and its pre-tax cost of debt is 6.9 percent. The firm does not issue preferred stock. The tax rate is 35 percent. What must the debt-equity ratio of the firm be if it is to achieve its target WACC?

a.            0.76

b.            0.94

c.             1.06

d.            1.31

 

               

9.            Sweet Treats creates high-quality chocolates which it sells to food wholesalers. The company is considering                                        selling its chocolates directly to the public via the internet. Management feels the proposed project involves a                                            completely different set of risks than its current production operations and is therefore concerned about using                                  the company’s WACC as the required return for the project. Given this concern, what would be the firm’s                                             best pproach to setting the discount rate for this project?

a.            use its own WACC as the project’s required rate of return

b.            use the overall market rate of return as the project’s required rate

c.             use the pure play approach

d.            use the subjective approach


 

 

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