Finance Questions
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A firm is considering a project that will generate perpetual cash flows of $50,000 per year beginning next year. The project has the same risk as the firm's overall operations. If the firm's WACC is 12.0%, and its debt-to-equity ratio is 1.33, what is the most it could pay for the project and still earn its required rate of return? A. $313,283B. $375,094C. $416,667D. $554,167
What is the company cost of capital for a firm financed with 30% debt if the debt requires a 10% return and equity requires a 16% return? A. 11.8%B. 13.3%C. 14.2%D. 14.8%
Which of the following statements is incorrect concerning the equity component of the WACC? A. The value of retained earnings is not included.B. Market values should be used in the calculations.C. Preferred equity has a separate component.D. There is a tax shield such as with debt.
What is the after-tax cost of preferred stock that sells for $10.00 per share and offers a $1.20 dividend when the tax rate is 35%? A. 4.20%B. 7.80%C. 8.33%D. 12.00%
If a firm earns the WACC as an average return on its average-risk assets, then: A. equityholders will be satisfied, but bondholders will not.B. bondholders will be satisfied, but equityholders will not.C. all investors will earn their minimum required rate of return.D. the firm is investing in only positive NPV projects.
Which component is more likely to be biased if book values are used in the calculation of WACC rather than market values? A. Debt.B. Preferred stock.C. Common stock.D. All categories should be equally biased.
What would you estimate to be the required rate of return for equity investors if a stock sells for $40.00 and will pay a $4.40 dividend that is expected to grow at a constant rate of 5%? A. 7.6%B. 12.0%C. 12.6%D. 16.0%
Which of the following changes would tend to increase the company cost of capital for a traditional firm? A. Decrease the proportion of equity financing.B. Increase the market value of the debt.C. Decrease the proportion of debt financing.D. Decrease the market value of the equity.
How much is added to a firm's weighted-average cost of capital for 45% debt financing with a required rate of return of 10% and a tax rate of 35%? A. 1.29%B. 2.93%C. 3.50%D. 4.50%
What is the expected growth rate in dividends for a firm in which shareholders require an 18% rate of return and the dividend yield is 10%? A. 1.8%B. 5.2%C. 8.0%D. 28.0%
What dividend is paid on preferred stock if investors require a 9% rate of return and the stock has a market value of $54.00 per share and a book value of $50.00 per share? A. $2.92B. $4.50C. $4.68D. $4.86
Why is debt financing said to include a tax shield for the company? A. Taxes are reduced by the amount of the debt.B. Taxes are reduced by the amount of the interest.C. Taxable income is reduced by the amount of the debt.D. Taxable income is reduced by the amount of the interest.
The weighted-average cost of capital, after tax, for a firm with a 65/35 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be: A. 7.02%.B. 8.63%.C. 10.80%.D. 13.80%.
What appears to be the targeted debt ratio of a firm that issues $15 million in bonds and $35 million in equity to finance its new capital projects? A. 15.00%B. 30.00%C. 35.00%D. 70.00%
What is the pretax cost of debt for a firm in the 35% tax bracket that has a 10% after-tax cost of debt? A. 5.85%B. 12.15%C. 15.38%D. 25.71%
The company cost of capital for a firm with a 65/35 debt/equity split, 8% cost of debt, 15% cost of equity, and a 35% tax rate would be: A. 7.02%.B. 9.12%.C. 10.45%.D. 13.80%.
Compare the after-tax returns for a corporation that invests in preferred stock with a 12% dividend versus a common stock with no dividend but a 16% capital gain. The corporation's tax rate is 35%. The:
Gains arised from entities activities
Decrease in economic benefit, excludes distributions to equity partners.
Increase in economic benefit from the entity's revenue and gains
