Exam on Finance: Weighted Average Cost of Capital and Capital Structure

Topics: Weighted average cost of capital, Corporate finance, Cost of capital Pages: 10 (1978 words) Published: August 26, 2013
Ryerson University

CFIN 401 Section 610
Midterm Exam Version A
Fall 2010
There are 2.0 hours in this exam.

Student Name____________________________
(Please Print)

Student Number_________________________________

1. This is a closed book exam. You may only have pens, pencils , a calculator and one cheat sheet double sided on 8 ½ by 11 paper at your desk. 2. Please fill out the scanner sheet as you go along in the exam. You will not be given extra time at the end of the exam to fill it out. 3. Select the best possible answer for each multiple-choice question 4. Each of the 40 MC questions is worth 1 mark

Marks: Available

Total 40_________

There are 10 pages in this exam.

1. You have invested $4,500 in an account that earns 8% compounded semi-annually. You plan on making additional payments of $75 per month into this account for the next five years. How much will your investment be worth in 5 years? a. $11,344

b. $12,153
c. $12,654
d. $13,321

2. You plan on buying a bottling machine for $2 million, which can be salvaged for $400,000 in 8 years. Your tax rate is 43% and the CCA rate is 30%. Your cost of capital is 13%. What is present value of the CCA tax sheild? a. $338,447

b. $378,521
c. $422,781
d.$458, 402
e. $520,348

3. You have the following two bonds that are identical except for coupon rate and price. What is the price of bond B?. Bond ABond B
Price $937.69 ? Years to maturity1010
Coupon rate (semi-annual)9%8%
Face Value$1000$1000
a. $811.21
b. $857.38
c. $891.52
e. $955.72

4. You have the following information on the following stock. P0 = $10.72.
g =3.5%
r = 12%
EPS0 = $2.2
What is the dividend payout ratio?
a. 0.3
b. 0.4
c. 0.5
d. 0.6
e. 0.7

5. Your firm is financed by 40% equity and 60% debt. The cost of equity is16% and the cost of debt is 7%. Your corporate tax rate is 37%. What is your weighted average cost of capital (WACC)? a. 7.77%

b. 8.09%
c. 8.78%
d. 9.05%
e. 9.58%

6. You need to finance a project that will cost $17 million. The floatation costs on raising the funds are 6%. How much money do you need to rise to be able to afford the project? a. $15,980,000

b. $16,827,203
c. $17,000,000
d. $17,308,221
e. $18,085,106

7. Duff Beer’s WACC is 10.8504%. Duff’s cost of equity is 17%, and their cost of debt is 9%. If Duff’s debt to equity ratio is 1.3, what is Duff’s tax rate? a.28%
c. 32%
d. 34%
e. 36%

Use the following information for questions 8-11. Megalo-Mart is financed by 2 classes of equity and one class of debt. Class A equity just paid a dividend of $1.45 which is expected to grow at 2.75% perpetually, and is priced at $13.24. Class B equity returns have a covariance with the market returns of 0.04125. The risk free rate is 4%, the expected return on the market is 12% and the variance of market returns is 3.75%. The debt has 20 years to maturity, with a coupon rate of 8% paid annually, a face value of $1000 and is selling at 95% of par. The debt to equity ratio is 0.8 and the class B equity has twice the value of the class A equity. The tax rate is 37%. The floatation costs of debt equal 3% and the floatation costs of both classes of equity is 5.5%. Megalo-Mart is planning to purchase a propane pump that costs $2 million

8. What is the cost of the class A equity?
a. 12.5%
b. 13%
d. 14%
e. 14.5%

9. What is the cost of the class B equity?
b. 12.8%
c. 13.2%
e. 14.2%

10. What is the WACC?
a. 7.2651%
b. 8.5438%
c. 9.7216%
d. 10.7014%
e. 11.3315%

11. How much does Megalo-Mart need to raise to purchase the propane pump? a. $2,091,808.06
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