FIN/571 Wk 2 – Practice: Wk 2 Practice Questions
How much will a firm need in cash flow before tax and interest to satisfy debtholders and equity holders if the tax rate is 21%, there is $15.8 million in common stock requiring a 10% return, and $6 million in bonds requiring a 6% return?
Multiple Choice
$1,392,000
$1,488,000
$2,360,000
$2,480,000
Plasti-tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt has a pretax interest rate of 12%. Plasti-tech’s common stock trades at $15.00 per share and its most recent dividend was $1.00. Future dividends are expected grow by 4%. If the tax rate is 21%, what is Plasti-tech’s WACC?
Multiple Choice
7.39%
9.57%
10.35%
11.20%
If the tax rate is 21%, what is the cost of preferred stock that sells for $10 per share and pays a $1.20 dividend?
Multiple Choice
4.20%
7.80%
8.33%
12.00%
For a company that pays no corporate taxes, its WACC will be equal to:
Multiple Choice
the expected return on its assets.
the expected return on its debt.
the total value of its assets.
the expected return on its equity.
If a firm has twice as much equity as debt in its capital structure, then the firm is financed with:
Multiple Choice
75.0% debt.
66.7% equity.
40.0% debt.
33.3% equity.
What proportion of a firm is equity financed if the WACC is 14%, the before-tax cost of debt is 10.77%, the tax rate is 21%, and the required return on equity is 18%?
Multiple Choice
54.00%
57.86%
70.26%
77.78%
What dividend is paid on preferred stock if investors require a 9% rate of return and the stock has a market value of $54 per share and a book value of $50 per share?
Multiple Choice
$2.92
$4.50
$4.68
$4.86
What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if their respective costs are 6% after tax, 12%, and 18%? The firm’s tax rate is 21%.
Multiple Choice
9.48%
11.16%
12.00%
15.60%
A firm is financed 55% by common stock, 10% by preferred stock and 35% by debt. The required return is 15% on the common, 10% on the preferred, and 8% on the debt. If the tax rate is 21% what is the WACC?
Multiple Choice
10.72%
11.46%
11.70%
12.05%
What would you estimate as the cost of equity if a stock sells for $40, pays a $4.25 dividend, and is expected to grow at a constant rate of 5%?
Multiple Choice
17.46%
14.52%
12.69%
15.63%
A private placement avoids which one of the following costs?
Multiple Choice
Depression in the stock price
Administration costs
Registration with the SEC
Legal costs
An investor can earn 20% on underpriced IPOs, but will lose 10% on overpriced IPOs. If he is awarded $2,000 worth of shares in an overpriced IPO, how much of the underpriced issue must he be awarded in order to gain $500 total?
Multiple Choice
$1,500
$2,500
$3,500
$10,000
Assume the issuer incurs $2 million in other expenses to sell 4 million shares at $55 each to an underwriter and the underwriter sells the shares at $59 each. By the end of the first day’s trading, the issuing company’s stock price had risen to $68. What is the cost of underpricing?
Multiple Choice
$20 million
$32 million
$36 million
$40 million
A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm’s equity given that its market value of equity was $1 billion before the new issue.
Multiple Choice
$7.5 million
$30.0 million
$33.3 million
$37.5 million
What direct expense is required to market stock if the issuer incurs $1 million in other expenses to sell 3 million shares at $30 each to an underwriter and the underwriter sells the shares at $32 each?
Multiple Choice
7.29%
7.88%
8.65%
9.02%
Which one of these terms applies to a public company offering new shares to the general public?
Multiple Choice
Rights offer
Initial public offering
Venture capital offer
General cash offer
If an underwriter charges the public $40 per share for a new issue after having promised the issuer $38 per share, the spread per share is:
Multiple Choice
$1.
$2.
$38.
$40.
Private placement of debt securities occurs more frequently in:
Multiple Choice
smaller-sized firms.
larger-sized firms.
firms that are using venture capitalists.
combination with convertible bonds.
Money that is offered to finance a new business is known as:
Multiple Choice
a general cash offer.
venture capital.
a private placement.
a rights issue.
Which one of the following is least likely to explain why entrepreneurs contribute their personal funds to start-up projects? Their contribution:
Multiple Choice
acts as a signal to venture capitalists.
repays debt held by the venture capitalist.
retains a portion of the firm’s equity.
provides incentive to expend effort.
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FIN/571 Wk 2 – Practice: Wk 2 Practice Questions