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Question 5:          

The coupon rate on an issue of debt is 12%. The yield to maturity on this issue is 14%. The corporate tax rate is 31%. What would be the approximate after-tax cost of debt for a new issue of bonds?

A)     4.34%

B)     3.72%

C)     9.66%

D)     8.28%

After Tax Cost of Debt = 14*(1-.31)=9.66%

So answer is C) 9.66%

Question 6          

Tobin's Barbeque has a bank loan at 8% interest and an after-tax cost of debt of 6%. What will the after-tax cost of debt be when the loan is due if a new loan is taken out yielding 10%?

A)     7.5%

B)     6%

C)     13.3%

D)     none of these

Tax rate is 2/8 = 25%

So after tax cost = 10*(1-.25)= 7.5%

So the answer is A) 7.5%

Question 7          

Lewis, Schultz and Nobel Development Corp. has an after-tax cost of debt of 6.3 percent. With a tax rate of 30 percent, what is the yield on the debt?

A)     4.41%

B)     9.0%

C)     1.89%

D)     21%

Yield on debt = 6.3/.70= 9%

So the answer is B) 9%

Question 12          

The net present value profile

A)     doesn't work if projects have a negative net present value.

B)     is a substitute for the IRR.

C)     graphically portrays the relationship between the discount rate and the net present value.

D)     two of the above.

C)     graphically portrays the relationship between the discount rate and the net present value.

|Question 13 |

Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals

|  |A) |for which it can obtain financing. |

|  |B) |that have a positive net present value. |

|  |C) |that have positive cash flows. |

|  |D) |that provide returns greater than the after-tax cost of debt. |

|  | |

|Information | |

Zinger Corporation manufactures industrial type sewing machines. Zinger Corp. received a very large order from a few European countries. In order to be able to supply these countries with its products, Zinger will have to expand its facilities. Of the required expansion, Zinger feels it can raise $75 million internally, through retained earnings. The firm's optimum capital structure has been 45% debt, 10% preferred stock and 45% equity. The company will try to maintain this capital structure in financing this expansion plan. Currently Zinger's common stock is traded at a price of $20 per share. Last year's dividend was $1.50 per share. The growth rate is 8%. The company's preferred stock is selling at $50 and has been yielding 6% in the current market. Flotation costs have been estimated at 8% of common stock and 3% of preferred stock. Zinger Corp. has bonds outstanding at 10%, but its investment banker has informed the company that interest rates for bonds of equal risk are currently yielding for 9%. Zinger's tax rate is 46%.

|Question 26 |

Compute the cost of debt, Kd (omit the percent sign and take your answer to two decimal places).

Your Answer: 9*(1-.46)= 4.86

|Question 27 |

Compute the cost of preferred stock, Kp (omit the percent sign and take your answer to two decimal places).

Your Answer: 3/(50*.97)= 6.19%

|Question 28 |(1 point) Save |

Compute the cost of equity financing, Ke (omit the percent sign and take your answer to two decimal places).

Your Answer: =16.10 Interenal Finacing

|Question 29 |

Calculate the weighted average cost of capital (omit the percent sign and take your answer to two decimal places).

Your Answer: WACC= .45*16.1 + .45*4.86 + .1*6.19 = 10.05

|Question 30 |

How large a capital structure can the firm support with retained earnings financing (rounded to the nearest million)?

|  |A) |$75 Million |

|  |B) |$150 Million |

|  |C) |$167 Million |

|  |D) |This project would require the firm issue additional shares of stock in order to maintain the desired capital structure. |

|Information | |

The Accidental Petroleum Company is trying to determine its weighted average cost of capital for use in making a number of investment decisions. The firm's bonds were issued 6 years ago and have 14 years left until maturity. They carried an 8% coupon rate, and are currently selling for $962.50.

The firm's preferred stock carries a $4.60 dividend and is currently selling at $42.50 per share. Accidental's investment banker has stated that issue costs for new preferred will be 50 cents per share.

The firm has significant retained earnings, but will also need to sell new common stock to finance the projects it is now considering. Accidental Petroleum common stock is expected to pay a $2.50 per share dividend next year, and is expected to maintain an 8% growth rate for the foreseeable future. The stock is currently priced at $50 per share, but new common stock will have flotation costs of 60 cents per share.

|Question 31 |

Calculate the cost of debt, Kd (omit the percent sign and take your answer to two decimal places).

|Your Answer: 8.47 |

|Question 32 |

Calculate the cost of preferred stock, Kp (omit the percent sign and take your answer to two decimal places).

Your Answer: 10.95

|Question 33 |

Calculate the cost of new common stock, Kn (omit the percent sign and take your answer to two decimal places).

13.06

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