10 SHORT QUESTIONS – PRINCIPLE OF FINANCE CLASS – DUE DATE…

May 28, 2012

Question:

10 Short Questions – Principle of Finance Class – due date 5/27 at 23:59. Good Tip for rapid response.


1. The risk free rate of return is 2.5% and the market risk premium is 8%. Penn Trucking has a beta of 2.2 and a standard deviation of returns of 28%. Penn Trucking’s marginal tax rate is 35%. Analysts expect Penn Trucking’s dividends to grow by 6% per year for the foreseeable future. Using the capital asset pricing model, what is Penn Trucking’s cost of retained earnings? (Points : 1)
A 16.4%
B 17.7%
C 19.6%
D 20.1%


2. Kendall, Inc. has $15 million of outstanding bonds with a coupon rate of 10 percent. The yield to maturity on these bonds is 12.5 percent. If the firm’s tax rate is 30 percent, what is relevant cost of debt financing to Kendall, Inc.? (Points : 1)
A 13.75 percent
B 8.75 percent
C 7.00 percent
D 3.75 percent


3. A new machine can be purchased for $1,800,000. It will cost $35,000 to ship and $15,000 to fine-tune the machine. The new machine will replace an older version that is fully depreciated and will be sold for $200,000. The firm’s income tax rate is 35%. What is the initial outlay for capital budgeting purposes? (Points : 1)
A $1,580,000
B $1,630,000
C $1,650,000
D $1,720,000


4. Jones Company has a target capital structure of 30% debt, 15% preferred stock, and 55% common equity. The company’s after-tax cost of debt is 7%, its cost of preferred stock is 11%, its cost of retained earnings is 15%, and its cost of new common stock is 16%. The company stock has a beta of 1.5 and the company’s marginal tax rate is 35%. What is the company’s weighted average cost of capital if retained earnings are used to fund the common equity portion? (Points : 1)
A 11.20%
B 12.00%
C 13.80%
D 14.45%


5. Asian Trading Company paid a dividend yesterday of $5 per share (D0 = $4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company’s stock today is $29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal $2.50 per share. Asian Trading Company’s marginal tax rate is 35%. Based on the above information, the cost of new common stock is (Points : 1)
A 28.38%.
B 24.12%.
C 26.62%.
D 31.40%.


6. J & B Corp. is investing in a major capital budgeting project that will require the expenditure of $16 million. The money will be raised by issuing $2 million of bonds, $4 million of preferred stock, and $10 million of new common stock. The company estimates is after-tax cost of debt to be 7%, its cost of preferred stock to be 9%, the cost of retained earnings to be 14%, and the cost of new common stock to be 17%. What is the weighted average cost of capital for this project? (Points : 1)
A 12.20%
B 13.12%
C 13.75%
D 14.23%


7. Porky Pine Co. is issuing a $1,000 par value bond that pays 8.5% interest annually. Investors are expected to pay $1,100 for the 12-year bond. Porky will pay $50 per bond in flotation costs. What is the after-tax cost of new debt if the firm is in the 35% tax bracket? (Points : 1)
A 8.23%
B 4.55%
C 4.70%
D 7.45%


8. Five Rivers Casino is undergoing a major expansion. The expansion will be financed by issuing new 15-year, $1,000 par, 9% annual coupon bonds. The market price of the bonds is $1,070 each. Gamblers flotation expense on the new bonds will be $50 per bond. Gamblers marginal tax rate is 35%. What is the pre-tax cost of debt for the newly-issued bonds? (Points : 1)
A 8.76%
B 8.12%
C 7.49%
D 10.25%


9. J.B. Enterprises purchased a new molding machine for $85,000. The company paid $8,000 for shipping and another $7,000 to get the machine integrated with the company’s existing assets. J.B. must maintain a supply of special lubricating oil just in case the machine breaks down. The company purchased a supply of oil for $4,000. The machine is to be depreciated on a straight-line basis over its expected useful life of 8 years. J.B. is replacing an old machine that was purchased 6 years ago for $50,000. The old machine was being depreciated on a straight-line basis over a ten year expected useful life. The machine was sold for $15,000. J.B.’s marginal tax rate is 40%. What is the amount of the initial outlay? (Points : 1)
A $89,000
B $87,000
C $91,000
D $85,000


10. Clothier, Inc. has a target capital structure of 40% debt and 60% common equity, and has a 40% marginal tax rate. If Clothier’s yield to maturity on bonds is 7.5% and investors require a 15% return on Clothier’s common stock, what is the firm’s weighted average cost of capital? (Points : 1)
A 7.20%
B 10.80%
C 12.00%
D 12.25%

Answer:

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