Overview
Grey's Pharmaceuticals has a new project that will require funding of $4 million. The company has decided to pursue an all-debt scenario. Grey's has made an agreement with four lenders for the needed financing. These lenders will advance the following amounts and interest rates:
What is the weighted average cost of capital for the $4,000,000?
Question 1 options:8.532 | |
8.203 | |
9.829 | |
9.175 | |
10.105 |
Kenny Enterprises has just issued a bond with a par value of $1,000, a maturity of twenty years, and an 8% coupon rate with semiannual payments. What is the cost of debt for Kenny Enterprises if the bond sells at $1,080?
Question 2 options:7.99% | |
7.24% | |
6.54% | |
6.69% | |
6.84% |
Dunder-Mifflin, Inc. (DMI) is selling 600,000 bonds to raise money for the publication of new magazines in the coming year. The bonds will pay a coupon rate of 12% on semiannual payments and will mature in thirty years. Its par value is $100. What is the cost of debt to DMI if the bonds raise $66,000,000?
Question 3 options:10.56% | |
11.93% | |
10.87% | |
11.40% | |
10.22% |
Dunder-Mifflin, Inc. hires an investment banker for the sale of the 600,000 bonds from Problem 4. The investment banker charges a 2% fee on each bond sold. What is the cost of debt to DMI if the following are the proceeds before the banker's fees are deducted? (Use information from the previous problem)
$45,000,000?
Question 4 options:16.86% | |
17.17% | |
14.12% | |
15.06% | |
16.38% |
Dunder-Mifflin, Inc. hires an investment banker for the sale of the 600,000 bonds from Problem 4. The investment banker charges a 2% fee on each bond sold. What is the cost of debt to DMI if the following are the proceeds before the banker's fees are deducted?
$54,000,000?
Question 5 options:11.52% | |
13.04% | |
13.64% | |
15.38% | |
14.84% |
Kyle is raising funds for his company by selling preferred stock. The preferred stock has a par value of $100 and a dividend rate of 6%. The stock is selling for $80 in the market. What is the cost of preferred stock for Kyle?
Question 6 options:7.32% | |
7.73% | |
8.22% | |
7.68% | |
7.5% |
Kyle hires Wilson Investment Bankers to sell the preferred stock from previous problem. Wilson charges a fee of 3% on the sale of preferred stock. What is the cost of preferred stock for Kyle using the investment banker?
Question 7 options:7.73% | |
8.08% | |
9.05% | |
7.59% | |
8.44% |
Stan is expanding his business and will sell common stock for the needed funds. If the current risk-free rate is 4% and the expected market return is 12%, what is the cost of equity for Stan if the beta of the stock is 1.05?
Question 8 options:12.9% | |
12.4% | |
12.7% | |
11.2% | |
13.8% |
Stan is expanding his business and will sell common stock for the needed funds. If the current risk-free rate is 4% and the expected market return is 12%, what is the cost of equity for Stan if the beta of the stock is 1.20?
Question 9 options:11.2% | |
13.6% | |
12.65% | |
13.25% | |
14.17% |
Stan had to delay the sale of common stock. Previously, the current risk-free rate was 4% and the expected market return was 12%. When he finally did sell the stock, the risk-free rate had fallen to 3%, but the expected return on the market had risen to 13%. What was the effect on the cost of equity by waiting six months, using a beta of 1.05?
Question 10 options:.7% | |
1.1% | |
1.3% | |
.9% | |
.5% |
Stan had to delay the sale of common stock. Previously, the current risk-free rate was 4% and the expected market return was 12%. When he finally did sell the stock, the risk-free rate had fallen to 3%, but the expected return on the market had risen to 13%. What was the effect on the cost of equity by waiting six months, using a beta of 1.20?
Question 11 options:1.4 | |
1.8 | |
1.2 | |
1.0 | |
1.6 |
The CFO of DMI is trying to determine the company's WACC. Brad, a promising MBA, says that the company should use book value to assign the WACC components percentages. Angela, a long-time employee and experienced financial analyst, says the company should use market value to assign the components. The after-tax cost of debt is at 7%, the cost of preferred stock is at 11%, and the cost of equity is at 14%.
DMI Company
Balance Sheet
(in thousands)
Current Assets: $32,000 Current Liabilities: $ 0
Long-Term Assets: $66,000 Long-Term Liabilities
Bonds Payable $54,000
Owner's Equity
Preferred Stock $12,000
Common Stock $32,000
Total Assets: $98,000 Total L & OE $98,000
Market Information
Debt Preferred Stock Common Stock
Outstanding 54,000 120,000 1,280,000
Market Price $1085 $95.40 $32.16
Calculate the WACC using book value weights.
Question 12 options:9.6325% | |
8.697% | |
9.8515% | |
9.7755% | |
8.5967% |
Calculate WACC using market value weights. (Rounded to nearest %).
Question 13 options:9.5% | |
10% | |
9% | |
8% | |
10.5% |
Clark Explorers, Inc., an engineering firm, has the following capital structure:
Using book value weights, find the adjusted WACC for Clark Explorers with a 15% tax rate.
Question 14 options:10.21% | |
11.18% | |
10.54% | |
10.29% | |
9.85% |
Clark Explorers, Inc., an engineering firm, has the following capital structure:
Using market value weights, find the adjusted WACC for Clark Explorers with a 15% tax rate.
Question 15 options:12.5756% | |
10.6457% | |
10.2432% | |
9.1371% | |
11.5049% |
Brawn Blenders has the following incremental cash flows for its new project:
Category | T0 | T1 | T2 | T3 |
Investment | –$4,000,000 | |||
NWC Change | –$300,000 | $300,000 | ||
Operating cash flow | $1,500,000 | $1,500,000 | $1,500,000 | |
Salvage | $250,000 |
What is the NPV of this project if the adjusted WACC is 8%?
Question 16 options:2,875 | |
2,005 | |
2,253 | |
2,479 | |
2,306 | |
2,654 |
What is the NPV of this project if the adjusted WACC is 10%?
Question 17 options:-125,678 | |
-146,432 | |
-156,499 | |
-164,542 | |
-137,546 |
Which projects should be accepted?
Question 18 options:Both | |
Neither | |
1st Project Only | |
2nd Project Only |
Leeward Sailboats is reviewing the following new boat line:
Category | T0 | T1 | T2 | T3 |
Investment | –$9,000,000 | |||
New working capital change | –$600,000 | $600,000 | ||
Operating cash flow | $3,200,000 | $3,800,000 | $4,500,000 | |
Salvage | $400,000 |
Find the IRR of the project.
Question 19 options:13.75% | |
13.11% | |
13.54% | |
13.32% | |
13.92% |
Thorpe and Company is currently an all-equity firm. It has 3 million shares selling for $28 per share. Its beta is 0.85, and the current risk-free rate is 2.5%. The expected return on the market for the coming year is 13%. Thorpe will sell corporate bonds for $28,000,000 and retire common stock with the proceeds. The bonds are twenty-year semiannual bonds with a 10% coupon rate and $1,000 par value. The bonds are currently selling for $1,143.08 per bond. When the bonds sell, the company's beta will increase to 0.95. What was Thorpe and Company's WACC before the bond sale? Hint: The weight of equity before selling the bond is 100%.
Question 20 options:11.023% | |
12.582% | |
10.606% | |
11.425% | |
9.874% |
BONUS: What is its adjusted WACC after the bond sale if the corporate tax rate is 40%? (Hint: the firm is no longer an all-equity firm because debt was used to purchase equity).
Question 21 options:8.9523% | |
10.0167% | |
10.9418% | |
9.9765% | |
9.5256% |
Vespucci is adding a project to the company portfolio and has the following information, the expected market return is 12%, the risk-free rate is 5%, and the expected return on the new project is 10%. What is the project's beta?
Question 22 options:.6988 | |
.5234 | |
.8067 | |
.6259 | |
.7143 |
Runway Fashions, Inc. is considering the following potential projects for the company but has only $1,000,000 in the capital budget. Which projects should it choose?
Question 23 options:Winter, Spring | |
Fall, Spring, Summer | |
Fall, Summer | |
Winter, Fall, Summer | |
All |