Question

#1. A firm should use as much non-financial liability financing as it can if

A) a firm should try to limit the amount of non-financial liability financing it uses

B) there is an operational linkage involved

C) arbitrageurs can easily and quickly undo choices that are suboptimal

D)its risk-adjusted cost of capital is below that of other sources of financing

#2. A bondʹs promised rate of return will be

A) greater than or equal to the firmʹs overall weighted average cost of capital

B)less than its expected rate of return, but greater than the expected return on equity

C)less than or equal to its expected rate of return, but greater than the expected return on equity

D) greater than or equal to its expected rate of return

#3. The M&M dividend proposition states that

A) the higher a firmʹs dividends, the greater the shareholder value

B) the higher a firmʹs dividends, the greater the firm value

C)a firm should borrow money if necessary to maintain a stable dividend policy

D) shareholder value is unaffected by a firmʹs dividend policy

#4. A firm is financed with debt that has a market beta of 0.3 and equity that has a market beta of 1.2. The risk-free rate is 3%, and the equity premium is 5%. The overall cost of capital for the firm is 8%. What is the firmʹs debt-equity ratio?

A) 74.8%

B) 25.2%

C) 25.0%

D) 28.6%

#5. A firm is worth $100 million and has a cost of capital of 11%. It is all equity financed. If the firm sells $30 million of debt with a 7% promised return and uses it to repurchase part of the firmʹs stock, what will the firmʹs cost of capital then be?

A) Not determinable

B) 11.0%

C) 10.4%

D) 9.8%

Answer #1

1.

2. D-greater than or equal to its expected rate of return

3. D-greater than or equal to its expected rate of return

4.

5. d-9.8%

Intial Cost of Capital = Equity cost +Debt Cost

11% + 0% =11%

Revised Scenario, where are Debt capital of 30$ million was issued and buyback of equivalent amount in stock of 100$ Million

Therefore Revised Capital Equity =Intial capital-Buy back capital =100-30 =70

Debt Capital = 30

Particular Amount Weightage Cost of capital Weightage cost of capital

Equity 70 0.7 11% 7.7(11%*0.7)

dEBT 30 0.3 7% 2.1(7%*0.3)

TOTAL WEIGHTAGE COST OF CAPITAL = 7.7+2.1=9.8%

#11 The cost of a firmʹs equity
A)is independent of the firmʹs capital structure
B) can be substantially higher than the firmʹs weighted average
cost of
capital
C) must always be less than the firmʹs weighted average cost of
capital
D) will always be higher than the stated interest rate on the
financial debt of the firm
#12 Assume a firm is financed with $1000 debt that has a market
beta of 0.4 and $3000 equity. The risk -free rate...

A bondʹs promised rate of return will be:
a - greater than or equal to its expected rate of return
b - less than its expected rate of return, but greater than the
expected return on equity
c - less than or equal to its expected rate of return, but
greater than the expected return on
equity
d - greater than or equal to the firmʹs overall weighted average
cost of capital

Which of the following is true regarding a reasonable choice for
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Choices ==v
a) If the firm is expected to decrease its debt ratio, you
should use the expected return on the firmʹs equity, E(requity)
b) If the firm is expected to maintain a constant debt ratio,
you should use the firmʹs weighted average cost of capital,
WACC
c) If the firm is expected to increase its debt ratio, you...

Chapters 7, 9
& 10 Exam
2.
The weighted average cost of capital
A)
typically involves a proportionate weighting of the return on
equity and the return on debt.
B)
reflects a discount rate that implies the use of all debt for
financing.
C)
is used to value the equity of the firm.
D)
never changes once it is determined.
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Problems:
1.
Umpqua Energy Holdings is financed forty percent with debt and
sixty percent with equity. Umpqua’s
expected...

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as the equity beta for an all-equity firm, but not the same as the
equity beta for a “levered” firm). Assume the average rate of
return on the market is 6% and the risk-free rate is 1%. The cost
of debt for the company is...

Suppose a firm financed a $150 million perpetual debt and with
10 million shares each worth $1. The expected return on the debt is
8% and the expected return on equity is 16%. The tax rate is 40%.
What is the company's cost of capital financed with debt and what
is the value of the firm if it were solely financed by equity?

Marley's Plumbing Shops has found that its common equity capital
shares have a beta equal to 1.5 while the risk-free return is 8
percent and the expected return on the market is 14 percent. Its
cost of debt financing is 12 percent. The firm is financed with
$120,000,000 of common shares (market value) and $80,000,000 of
debt.
What is the proportion of debt and equity?
What is the CAPM?
What is the after-tax weighted average cost of capital for
Marley's,...

A firm has a WACC of 10%. It is financed with 30% debt and 70%
equity. The firm s cost of debt is 12% and its tax rate is 40%. If
the firm s dividend growth rate is 6% and its current stock price
is $40, what is the value of the next dividend the firm is expected
to pay?
A. $5.0 B. $4.0 C. $3.0 D. $2.0 E. $1.0

If a firm increases its use of debt financing, do you think the
cost of capital will go up or down or remains unchanged?
(discuss)
Choose one publicly traded stock that has not been chosen by any
other students and estimate its expected rate of return according
to CAPM. (Best Buy)

Please show work/formulas and financial calculator steps, if
used. Answer as much as you can
(The following information applies to Problems 1-4)
The Collins Group, a leading producer of custom automobile
accessories, has hired you to estimate the firm's weighted average
cost of capital. The balance sheet and some other information are
provided below.
Assets
Current
assets
$ 38,000,000
Net plant, property, and
equipment
101,000,000
Total
assets
$139,000,000
Liabilities and Equity
Accounts
payable
$ 10,000,000
Accruals
9,000,000
Current
liabilities
$...

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