 |
| 1 | |
For a profitable firm, an increase in the marginal tax rate increases the cost of debt. |
| | A) | True |
| | B) | False |
|
|
|
| 2 | |
For the purpose of estimating a firm's cost of debt for a project, you can observe the yield-to-maturity on recently issued bonds with a similar rating and term-to-maturity. |
| | A) | True |
| | B) | False |
|
|
|
| 3 | |
Suppose that new information regarding future inflation in the U.S. causes investors to become less risk averse. The security market line (SML) approach indicates that, all else equal, most firms will see their cost of capital increase. |
| | A) | True |
| | B) | False |
|
|
|
| 4 | |
The cost of capital depends primarily on the source of funds, not the use. |
| | A) | True |
| | B) | False |
|
|
|
| 5 | |
A firm that uses its weighted average cost of capital (WACC) to evaluate all projects, regardless of their risk level, will tend to become riskier over time. |
| | A) | True |
| | B) | False |
|
|
|
| 6 | |
The appropriate discount rate to use when analyzing an investment project is: |
| | A) | the rate of return that will result in the highest net present value (NPV). |
| | B) | the internal rate of return (IRR) on that investment. |
| | C) | equal to the cost of capital based on the firm's existing assets. |
| | D) | the rate of return relevant to the risk level of the project. |
| | E) | the rate of interest the firm would pay if it sold bonds. |
|
|
|
| 7 | |
Which of the following statements are accurate concerning the security market line (SML) approach?
I. The SML applies only to firms with stable dividend growth rates.
II. Like the dividend growth model, the SML generally relies on using the past to predict the future.
III. Unlike the dividend growth model, the SML estimate is adjusted for risk.
IV. The quality of the estimate from the SML approach is sensitive to the quality of the estimates of the variables in the model. |
| | A) | I and III only |
| | B) | II and IV only |
| | C) | II and III only |
| | D) | II, III, and IV only |
| | E) | I, II, III, and IV |
|
|
|
| 8 | |
Suppose a firm uses a constant weighted average cost of capital (WACC) in determining the value of capital budgeting projects rather than using the security market line. The firm will tend to: |
| | A) | accept profitable, low-risk projects and reject unprofitable, high-risk projects. |
| | B) | accept profitable, low-risk projects and accept unprofitable, high-risk projects. |
| | C) | reject unprofitable, high-risk projects. |
| | D) | become more risky over time due to the continual acceptance of high-risk projects. |
| | E) | accept profitable, low-risk projects. |
|
|
|
| 9 | |
Which of the following can be a problem when estimating the cost of equity?
I. a beta based on historical information
II. dividend growth rate
III. market risk premium
IV. risk-free rate of interest |
| | A) | I and II only |
| | B) | I and IV only |
| | C) | II and III only |
| | D) | I, II, and III only |
| | E) | I, II, III, and IV |
|
|
|
| 10 | |
The bonds of Topstone Industries are currently selling for 103.3 percent of their face value. These bonds mature in 14 years and pay an annual coupon of 7 percent of face value. What is Topstone's pre-tax cost of debt? |
| | A) | 6.63 percent |
| | B) | 7.35 percent |
| | C) | 7.84 percent |
| | D) | 8.60 percent |
| | E) | 9.45 percent |
|
|
|
| 11 | |
KCE Corporation is currently operating at its target capital structure with market values of $140 million of equity and $155 million of debt. KCE plans to finance a new $25 million project while maintaining the current debt-equity ratio. How much new debt must be issued to fund the project? |
| | A) | $13.1 million |
| | B) | $18.5 million |
| | C) | $19.6 million |
| | D) | $24.8 million |
| | E) | $32.0 million |
|
|
|
| 12 | |
A firm has 1 million shares of common stock outstanding with a market price of $5.00 each. It has 2,500 bonds outstanding, each with a market value of $1,100. The bonds mature in 13 years, have a coupon rate of 10 percent, and pay coupons annually. The firm's beta is 1.3, the risk-free rate is 4.5 percent, the market risk premium is 7 percent, and the tax rate is 34 percent. What is the weighted average cost of capital (WACC)? |
| | A) | 5.45 percent |
| | B) | 6.53 percent |
| | C) | 9.49 percent |
| | D) | 10.81 percent |
| | E) | 11.65 percent |
|
|
|
| 13 | |
Suppose that two firms, A and B, are considering the same project. The project is in the same risk class as firm A's overall operations. The project has an IRR of 13.0 percent. Firm A has a beta of 1.2, while firm B's beta is 0.9. The risk-free rate is 4.5 percent and the market risk premium is 7.0 percent. Which firm(s) should accept the project? |
| | A) | firm A only |
| | B) | firm B only |
| | C) | both firms A and B |
| | D) | neither firm A nor B |
| | E) | The answer cannot be determined without more information. |
|
|
|
| 14 | |
Given the following information, what is the market value of XYZ Corporation?
| Common stock | 13.6 million shares outstanding, selling at $31 per share | | Bond issue 1 | $600 million total face value, selling at 98 percent of par | | Bond issue 2 | $150 million total face value, selling at $950 per bond |
|
| | A) | $697.52 million |
| | B) | $874.82 million |
| | C) | $987.24 million |
| | D) | $1,049.43 million |
| | E) | $1,152.10 million |
|
|
|
| 15 | |
Hartley Psychiatric, Inc., needs to purchase office equipment for its 2,000 drive-in therapy centers nationwide. The total cost of the equipment is $2,000,000. It is estimated that the aftertax cash inflows from the project will be $210,000 annually forever. Hartley has a debt-to-value ratio of 60 percent. The firm's cost of equity is 13 percent and its pre-tax cost of debt is 8 percent. The tax rate is 34 percent. What is Hartley's weighted average cost of capital (WACC)? |
| | A) | 6.09 percent |
| | B) | 8.37 percent |
| | C) | 8.95 percent |
| | D) | 9.05 percent |
| | E) | 9.91 percent |
|
|
.