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# HW-1308 Finance MCQ Set-7

Jensen Motorsports has a new project that will require the company to borrow $3,000,000. Jensen's has made an agreement with three lenders for the needed financing. Citizens' Bank will give $1,500,000 and wants 10% interest on the loan. Visitors' Bank will give $1,000,000 and wants 12% interest on the loan. Peoples' Bank will give $500,000 and wants 13% interest on the loan. What is the Weighted Average Cost of Capital (WACC) for this $3,000,000?

A. 10.55%

B. 11.17%

C. 11.66%

D. 12.16%

The Weighted Average Cost of Capital (WACC) is ¬¬¬¬__________ .

A. the average of the cost of each financing component, weighted by the proportion of each component

B. the cost of capital for the firm as a whole

C. made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity

D. all of the above

Use the security market line to determine the required rate of return for the following firm's stock. The firm has a beta of 0.80, the required return in the market place is 12.50%, and the risk-free rate of return is 3.50%.

A. 13.50%

B. 10.70%

C. 7.20%

D. 2.80%

The __________ is the cost of each financing component multiplied by that component's percent of the total funding amount.

A. Net Present Value (NPV)

B. Internal Rate of Return (IRR)

C. cost of capital

D. cost of debt

Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm's existing capital structure. If the cost of debt is 9.00%, the cost of preferred stock is 12.00%, the cost of common stock is 16.00%, and the Weighted Average Cost of Capital (WACC) adjusted for taxes is 14.00%, what is the Net Present Value (NPV. of the project, given the expected cash flows listed here?

Category T0 T1 T2 T3

Investment -$2,000,000

Net Working Capital (NWC. -$250,000 $250,000

Operating Cash Flow $850,000 $850,000 $850,000

Salvage $50,000

Total Incremental Cash Flow -$2,250,000 $850,000 $850,000 $1,150,000

A. -$74,121

B. $499,604

C. $2,175,879

D. $2,479,604

Red Rider Custom Built Bikes (RRB. Inc. has a new project that will require the company to borrow $1,000,000. RRB has made an agreement with three lenders for the needed financing. Valley Bank will give $500,000 and wants 9% interest on the loan. Mountain View Bank will give $300,000 and wants 11% interest on the loan. Desert Bank will give $200,000 and wants 12% interest on the loan. What is the Weighted Average Cost of Capital (WACC) for this $1,000,000?

A. 10.67%

B. 10.20%

C. 10.00%

D. 9.67%

Which of the statements below is NOT true?

A. Preferred stock is a form of hybrid equity financing.

B. Retained earnings are a form of hybrid equity financing.

C. Common stock is a form of equity financing.

D. Corporate bonds are a form of debt financing

Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?

A. Rd ÷ (1 + Tc)

B. Rd ÷ (1 - Tc)

C. Rd × (1 - Tc)

D. Rd × (1 + Tc)

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $39.50. You anticipate that the economy will grow steadily at a rate of 3.00% per year for the foreseeable future. What is the market required rate of return on your firm's preferred stock?

A. 10.82%

B. 10.59%

C. 7.59%

D. There is not enough information to answer this question

The following information comes from the Galaxy Construction balance sheet. The value of common stock is $10,000, retained earnings equal $7,000, total common equity equals $17,000, preferred stock has a value of $3,000, and long-term debt totals $15,000. If the cost of debt is 8.00%, preferred stock has a cost of 10.00%, common stock has a cost of 12.00%, and the firm has a corporate tax rate of 30%, calculate the firm's Weighted Average Cost of Capital (WACC) adjusted for taxes.

A. 10.11%

B. 10.00%

C. 9.09%

D. There is not enough information to answer this question

Use the security market line to determine the required rate of return for the following firm's stock. The firm has a beta of 1.25, the required return in the market place is 10.50%, the standard deviation of returns for the market portfolio is 25.00%, and the standard deviation of returns for your firm is also 25.00%.

A. 13.13%

B. 10.50%

C. 31.25%

D. There is not enough information to answer this question

The cost of debt could be which of the following?

A. the required return on money borrowed as a long-term loan from a bank

B. the required return on money borrowed from a venture capitalist

C. the yield-to-maturity on money raised by selling bonds

D. All of the choices above could be considered the cost of debt

Which of the following would be classified as debt lenders for a firm?

A. preferred shareholders, banks, and nonbank lenders

B. nonbank lenders, common shareholders, and commercial banks

C. preferred shareholders, common shareholders, and suppliers

D. suppliers, nonbank lenders, and commercial banks

Of the following, which is NOT a source of funds for a company?

A. common shareholders

B. commercial banks

C. preferred stockholders

D. All are sources of funds for companies

In capital budgeting, the __________ is the appropriate discount rate to use when calculating the Net Present Value (NPV) of an average-risk project.

A. Weighted Average Cost of Capital (WACC)

B. Internal Rate of Return (IRR)

C. cost of debt

D. cost of Equity

__________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.

A. Capital structure

B. Cost of capital

C. Working capital management

D. Net Present Value (NPV)

Richard works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate Weighted Average Cost of Capital (WACC) for an average-risk project in the expansion division. Richard finds two publicly traded stand alone firms that produce the same products as his new division. The average of the two firms' betas is 1.25. Further, he determines that the expected return on the market portfolio is 13.00% and the risk-free rate of return is 4.00%. Richard's firm finances 50% of its projects with equity and 50% with debt, and has a before-tax cost of debt of 9% and a corporate tax rate of 30%. What is the WACC for the new line of business?

A. about 12.64%

B. about 13.00%

C. about 10.78%

D. about 11.29%

The formula for the Weighted Average Cost of Capital (WACC) adjusted is __________

Cost of equity*wt of equity + cost of pref stock*wt of pref stock + wt of debt*cost of debt*(1-tax rate)

Red Rider Bike Shop (RRBS) has an adjusted Weighted Average Cost of Capital (WACC) of 8.56%. The company has a capital structure consisting of 60% equity and 40% debt, a cost of equity of 11.00%, a before-tax cost of debt of 7.00%, and a tax rate of 30%. RRBS is considering expanding by building a new shop in a distant city and considers the project to be riskier than the current operation. RRBS has an existing beta of 1.0, the required return on the market portfolio to be 11.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.30. Given this information, and assuming the cost of debt will not change if RRBS undertakes the new project, what adjusted WACC should be used in decision-making?

A. 8.56%

B. 9.84%

C. 10.00%

D. 11.24%

Your firm has issued a 20-year $1,000.00 par value semiannual 10% coupon bond that sells for $1,000 in the market place. The proceeds from the sale of the bond issue are $975.00 per bond. What is your firm's yield to maturity on this new bond issue? Use a financial calculator to determine your answer.

A. 5.15%

B. 10.16%

C. 10.30%

D. 10.00%

Estimating _________ is one part of managing short-term cash needs. The second part is estimating _________ .

A. cash inflow; accounts payable

B. cash inflow; cash outflow

C. accounts receivable; cash outflow

D. accounts receivable; cash inflow

Answer will be sent on email.

A. 10.55%

B. 11.17%

C. 11.66%

D. 12.16%

The Weighted Average Cost of Capital (WACC) is ¬¬¬¬__________ .

A. the average of the cost of each financing component, weighted by the proportion of each component

B. the cost of capital for the firm as a whole

C. made up of three financing components: the cost of debt, the cost of preferred stock, and the cost of equity

D. all of the above

Use the security market line to determine the required rate of return for the following firm's stock. The firm has a beta of 0.80, the required return in the market place is 12.50%, and the risk-free rate of return is 3.50%.

A. 13.50%

B. 10.70%

C. 7.20%

D. 2.80%

The __________ is the cost of each financing component multiplied by that component's percent of the total funding amount.

A. Net Present Value (NPV)

B. Internal Rate of Return (IRR)

C. cost of capital

D. cost of debt

Your firm has an average-risk project under consideration. You choose to fund the project in the same manner as the firm's existing capital structure. If the cost of debt is 9.00%, the cost of preferred stock is 12.00%, the cost of common stock is 16.00%, and the Weighted Average Cost of Capital (WACC) adjusted for taxes is 14.00%, what is the Net Present Value (NPV. of the project, given the expected cash flows listed here?

Category T0 T1 T2 T3

Investment -$2,000,000

Net Working Capital (NWC. -$250,000 $250,000

Operating Cash Flow $850,000 $850,000 $850,000

Salvage $50,000

Total Incremental Cash Flow -$2,250,000 $850,000 $850,000 $1,150,000

A. -$74,121

B. $499,604

C. $2,175,879

D. $2,479,604

Red Rider Custom Built Bikes (RRB. Inc. has a new project that will require the company to borrow $1,000,000. RRB has made an agreement with three lenders for the needed financing. Valley Bank will give $500,000 and wants 9% interest on the loan. Mountain View Bank will give $300,000 and wants 11% interest on the loan. Desert Bank will give $200,000 and wants 12% interest on the loan. What is the Weighted Average Cost of Capital (WACC) for this $1,000,000?

A. 10.67%

B. 10.20%

C. 10.00%

D. 9.67%

Which of the statements below is NOT true?

A. Preferred stock is a form of hybrid equity financing.

B. Retained earnings are a form of hybrid equity financing.

C. Common stock is a form of equity financing.

D. Corporate bonds are a form of debt financing

Which of the following is the proper way to adjust the cost of debt to estimate the after-tax cost of debt?

A. Rd ÷ (1 + Tc)

B. Rd ÷ (1 - Tc)

C. Rd × (1 - Tc)

D. Rd × (1 + Tc)

Your firm has preferred stock outstanding that pays a current dividend of $3.00 per year and has a current price of $39.50. You anticipate that the economy will grow steadily at a rate of 3.00% per year for the foreseeable future. What is the market required rate of return on your firm's preferred stock?

A. 10.82%

B. 10.59%

C. 7.59%

D. There is not enough information to answer this question

The following information comes from the Galaxy Construction balance sheet. The value of common stock is $10,000, retained earnings equal $7,000, total common equity equals $17,000, preferred stock has a value of $3,000, and long-term debt totals $15,000. If the cost of debt is 8.00%, preferred stock has a cost of 10.00%, common stock has a cost of 12.00%, and the firm has a corporate tax rate of 30%, calculate the firm's Weighted Average Cost of Capital (WACC) adjusted for taxes.

A. 10.11%

B. 10.00%

C. 9.09%

D. There is not enough information to answer this question

Use the security market line to determine the required rate of return for the following firm's stock. The firm has a beta of 1.25, the required return in the market place is 10.50%, the standard deviation of returns for the market portfolio is 25.00%, and the standard deviation of returns for your firm is also 25.00%.

A. 13.13%

B. 10.50%

C. 31.25%

D. There is not enough information to answer this question

The cost of debt could be which of the following?

A. the required return on money borrowed as a long-term loan from a bank

B. the required return on money borrowed from a venture capitalist

C. the yield-to-maturity on money raised by selling bonds

D. All of the choices above could be considered the cost of debt

Which of the following would be classified as debt lenders for a firm?

A. preferred shareholders, banks, and nonbank lenders

B. nonbank lenders, common shareholders, and commercial banks

C. preferred shareholders, common shareholders, and suppliers

D. suppliers, nonbank lenders, and commercial banks

Of the following, which is NOT a source of funds for a company?

A. common shareholders

B. commercial banks

C. preferred stockholders

D. All are sources of funds for companies

In capital budgeting, the __________ is the appropriate discount rate to use when calculating the Net Present Value (NPV) of an average-risk project.

A. Weighted Average Cost of Capital (WACC)

B. Internal Rate of Return (IRR)

C. cost of debt

D. cost of Equity

__________ refers to the way a company finances itself through some combination of loans, bond sales, preferred stock sales, common stock sales, and retention of earnings.

A. Capital structure

B. Cost of capital

C. Working capital management

D. Net Present Value (NPV)

Richard works for a firm that is expanding into a completely new line of business. He has been asked to determine an appropriate Weighted Average Cost of Capital (WACC) for an average-risk project in the expansion division. Richard finds two publicly traded stand alone firms that produce the same products as his new division. The average of the two firms' betas is 1.25. Further, he determines that the expected return on the market portfolio is 13.00% and the risk-free rate of return is 4.00%. Richard's firm finances 50% of its projects with equity and 50% with debt, and has a before-tax cost of debt of 9% and a corporate tax rate of 30%. What is the WACC for the new line of business?

A. about 12.64%

B. about 13.00%

C. about 10.78%

D. about 11.29%

The formula for the Weighted Average Cost of Capital (WACC) adjusted is __________

Cost of equity*wt of equity + cost of pref stock*wt of pref stock + wt of debt*cost of debt*(1-tax rate)

Red Rider Bike Shop (RRBS) has an adjusted Weighted Average Cost of Capital (WACC) of 8.56%. The company has a capital structure consisting of 60% equity and 40% debt, a cost of equity of 11.00%, a before-tax cost of debt of 7.00%, and a tax rate of 30%. RRBS is considering expanding by building a new shop in a distant city and considers the project to be riskier than the current operation. RRBS has an existing beta of 1.0, the required return on the market portfolio to be 11.00%, the risk-free rate to be 3.00%, and the beta for the new project to be 1.30. Given this information, and assuming the cost of debt will not change if RRBS undertakes the new project, what adjusted WACC should be used in decision-making?

A. 8.56%

B. 9.84%

C. 10.00%

D. 11.24%

Your firm has issued a 20-year $1,000.00 par value semiannual 10% coupon bond that sells for $1,000 in the market place. The proceeds from the sale of the bond issue are $975.00 per bond. What is your firm's yield to maturity on this new bond issue? Use a financial calculator to determine your answer.

A. 5.15%

B. 10.16%

C. 10.30%

D. 10.00%

Estimating _________ is one part of managing short-term cash needs. The second part is estimating _________ .

A. cash inflow; accounts payable

B. cash inflow; cash outflow

C. accounts receivable; cash outflow

D. accounts receivable; cash inflow

Answer will be sent on email.