10 May WHAT IS THE FIRM’S ANNUAL ADJUSTED CASH FLOW FROM ASSETS WITHOUT DEBT FINANCING?
Cost of CapitalQuestion 1Question textRomeo Inc. has a debt-equity ratio of 1.5 a share price of $5 and 500 000 shares outstanding. What is Romeo’s market firm value?Select one:a. $2 500 000b. $3 750 000c. $5 250 000d. $6 250 000e. $7 500 000Question 2Sierra Corporation has just paid a dividend of $2 per share and its dividends are expected to grow at a steady rate of 7% for the foreseeable future. The firm’s shares are currently selling for $30 per share with an equity beta of 1.2. The risk-free rate is 5% and expected market return is 13%. What is the firm’s estimated cost of equity if we were to calculate it as the average of the costs of equity from the dividend growth model and the security market line?Select one:a. 14.13%b. 14.20%c. 14.37%d. 14.60%e. 14.89%Question 3Tango Enterprises has issued 100 000 coupon bonds with maturity of 10 years. Each bond sells for $1 060. The bonds pay semi-annual coupons of 8% on face value of $1 000. What is Tango’s cost of debt?Select one:a. 3.29%b. 3.57%c. 6.57%d. 7.15%e. 7.28%Question 4An issue of preferred shares has a par value of $95 per share with a dividend on par of 8%. If the preferred shares are currently selling for $150 per share what is the percentage cost of preferred shares?Select one:a. 5.07%b. 5.33%c. 8.00%d. 12.63%e. 15.79%Question 5Unbelievable Deals Inc. has the following capital structure and marginal tax rate of 38%. What is its WACC?Debt:· 100 000 coupon bonds· 10-year maturity· Face value of $1 000· Semi-annual coupon rate of 8%· Bond price of $1 060Common shares:· Risk-free rate = 5%· Expected market risk premium = 8%· Beta = 1.2· Number of common shares = 3 000 000· Common share price = $30Preferred shares:· Par value = $95· Dividends = $12· Share price = $150· Number of preferred shares = 100 000Select one:a. 7.14%b. 8.00%c. 9.02%d. 10.39%e. 11.56%Question 6Van Bran Inc. is looking into financing a $32 million project with an equity issue. If the firm’s underwriter charges a spread of 5% on equity issues what is the gross amount that must be raised in Van Bran’s equity issue?Select one:a. $32 000 000b. $32 568 620c. $33 264 980d. $33 600 000e. $33 684 210Question 8Walter Inc. had net income of $350 000 debt-equity ratio of 0.5 book value of assets of $5 million and 100 000 common shares outstanding. The company just paid a dividend per share of $2. What is Walter’s estimated growth rate?Select one:a. 4.5%b. 5.0%c. 6.0%d. 7.5%e. 10.5%Question 9A firm is anticipated to generate an EBIT of $2 million with depreciation of $200 000 change in NWC of $120 000 and capital spending of $350 000 per year. The firm’s marginal tax rate is 35%. What is the firm’s annual adjusted cash flow from assets without debt financing?Select one:a. $430 000b. $630 000c. $1 030 000d. $1 730 000e. $1 970 000
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