Exam 3 Practice

Topics: Net present value, Internal rate of return, Corporate finance Pages: 14 (3427 words) Published: July 1, 2012
Finance 333
Practice Examination 3

1.Given the following information on S & G Inc. capital structure, compute the company's weighted average cost of capital. Type of Percent of Before Tax Capital Capital Structure Component Cost Bonds 40% 7.5%

Preferred Stock 5% 11%
Common Stock (Internal Only) 55% 15%
The company's marginal tax rate is 40%.

2.In general, the most expensive source of capital is:
a.preferred stock
b.new common stock
d.retained earnings

3.Sonderson Corporation is undertaking a capital budgeting analysis. The firm's beta is 1.5. The rate on 6 month t-bills is 5%, and the return on the S&P 500 index is 12%. The firm can issue external equity with flotation costs of 14%. What is the appropriate cost for retained earnings in determining the firm's cost of capital? a.0


4.The cost of preferred stock is equal to:
a.the preferred stock dividend divided by market price b.the preferred stock dividend divided by its par value c.(1 - tax rate) times the preferred stock dividend divided by net price d.preferred stock dividend divided by the net market price

5.The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9 percent and the required rate of return on equity is 14 percent. If the company is in the 40 percent tax bracket, what is the firm's cost of capital? a.14.0


6.In capital budgeting analysis, when computing the weighted average cost of capital, the CAPM approach is typically used to find the component cost of which type of capital? a.Debt
b.Preferred stock
c.Internal equity
d.External equity

7.Risk arising from the variability in return on assets is referred to as ____________ risk. a.Financial

8.XYZ Corporation is trying to determine the appropriate cost of preferred stock to use in determining the firm's cost of capital. This firm's preferred stock is currently selling for $36.00, and pays a perpetual annual dividend of $2.60 per share. Underwriters of a new issue of preferred stock would charge $6 per share in flotation costs. The firm's tax rate is 30%. Compute the cost of new preferred stock for XYZ. a.7.2%


9.All the following variables are used in computing the cost of debt except: a.maturity value of the debt
b.market price of the debt
c.number of years to maturity
d.risk-free rate

10.The cost of external equity capital is greater than the cost of retained earnings because of: a.flotation costs on new equity
b.capital gains tax on new equity
c.both a and b
d.the costs are the same

11.Shawhan Supply plans to maintain its optimal capital structure of 30 percent debt, 20 percent preferred stock, and 50 percent common stock far into the future. The required return on each component is; after tax cost of debt--10 percent; preferred stock--11 percent; common stock--18 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged? a.18.0 percent

b.13.0 percent
c.10.0 percent
d.14.2 percent

12.The Huang Company has an optimal capital structure of 40 percent debt and 60 percent equity....
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