Question 1
Table 9.2
A firm has determined its optimal structure which is composed of the following
sources and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond
for $1,050. A flotation cost of 2 percent of the face value would be required
in addition to the premium of $50.
Common Stock: A firm’s common stock is currently selling for $75
per share. The dividend expected to be paid at the end of the coming year is
$5. Its dividend payments have been growing at a constant rate for the last
five years. Five years ago, the dividend was $3.10. It is expected that to
sell, a new common stock issue must be underpriced $2 per share and the firm
must pay $1 per share in flotation costs. Additionally, the firm has a marginal
tax rate of 40 percent.
The firm’s cost of a new issue of common stock is ________. (See Table 9.2)
Answer
10.2 percent |
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14.3 percent |
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16.7 percent |
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17.0 |
Table 9.2
A firm has determined its optimal structure which is composed of the following
sources and target market value proportions.
Debt: The firm can sell a 15-year, $1,000 par value, 8 percent bond
for $1,050. A flotation cost of 2 percent of the face value would be required
in addition to the premium of $50.
Common Stock: A firm’s common stock is currently selling for $75
per share. The dividend expected to be paid at the end of the coming year is
$5. Its dividend payments have been growing at a constant rate for the last
five years. Five years ago, the dividend was $3.10. It is expected that to
sell, a new common stock issue must be underpriced $2 per share and the firm must
pay $1 per share in flotation costs. Additionally, the firm has a marginal tax
rate of 40 percent.
The firm’s before-tax cost of debt is ________. (See Table 9.2)
Answer
7.7 percent |
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10.6 percent |
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11.2 percent |
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12.7 percent |
Table 10.4
A firm is evaluating two projects that are mutually exclusive with initial
investments and cash flows as follows:
The new financial analyst does not like the payback approach (Table 10.4) and
determines that the firm’s required rate of return is 15 percent. His
recommendation would be to
Answer
accept projects A and B. |
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accept project A and reject B. |
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reject |
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reject both. |
What is the payback period for Tangshan Mining company’s new project if
its initial after tax cost is $5,000,000 and it is expected to provide
after-tax operating cash inflows of $1,800,000 in year 1, $1,900,000 in year 2,
$700,000 in year 3 and $1,800,000 in year 4?
Answer
4.33 years |
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3.33 years |
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2.33 years |
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None of these |
Should Tangshan Mining company accept a new project if its maximum
payback is 3.25 years and its initial after tax cost is $5,000,000 and it is
expected to provide after-tax operating cash inflows of $1,800,000 in year 1,
$1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
Answer
Yes. |
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No. |
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It depends. |
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None of these |
Which capital budgeting method is most useful for evaluating the
following project? The project has an initial after tax cost of $5,000,000 and
it is expected to provide after-tax operating cash flows of $1,800,000 in year
1, -$2,900,000 in year 2, $2,700,000 in year 3 and $2,300,000 in year 4?
Answer
NPV |
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IRR |
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Payback |
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Two of these |
A firm has common stock with a market price of $100 per share and an
expected dividend of $5.61 per share at the end of the coming year. A new issue
of stock is expected to be sold for $98, with $2 per share representing the
underpricing necessary in the competitive capital market. Flotation costs are
expected to total $1 per share. The dividends paid on the outstanding stock over
the past five years are as follows: