Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Please answer the following MCQs and T or Fs from 30 till 34
Transcribed Image Text:Question 30
Question 32
A firm with a 14 percent WACC is evaluating two
projects for this year's capital budget. After-tax
cash flows, including depreciation, are as
The rate of return investors require on the firm's
common equity using new equity is known as
cost of retained earnings (Ks).
follows?
Year Project (A) Project (B)
$(6000)
$2000
Select one:
$(18000)
$5600
1
2
$2000
$5600
$5600
$5600
3
$2000
True
4
$2000
$2000
$5600
False
The Net Present Value for project A is equal to
a. $ 1219.2
Question 33
b. $ 864
The Global Advertising Co, has a present capital
structure (Which the co. feels is optimal) of 45%
c. $ 23.25
long term debt, 10% preferred stock, and 45%
common equity?
for the coming year, the company has
determined that it's optimal capital budget can
be externally financed with 90$M of 10%, first
mortgage bonds sold at par.
20$M of preferred stock costing the company
12%.
d. $ 29.6
Question 31
The financial manager had collected the following
information regarding Modern Furniture Co.?
Modern Furniture capital structure is 70 percent
equity, 30 percent debt.
The yield to maturity on the Modern Furniture
bonds is 9 percent.
Modern Furniture year-end dividend is forecasted
to be $0.80 a share.
The company's common stock in presently
selling at $28 and next year common dividend D1
is expected to be 2$ a share.
The co. has 3OM common stock, net income from
next year's is expected to be 120$ M.
The Co. past annual growth in earnings and
dividend has been 4%.
Modern Furniture expects that its dividend will
grow at a constant rate of 9 percent a year.
Modern Furniture stock price is $25.
Modern Furniture tax rate is 40 percent.
However, a 6% annual growth in earnings and
dividend is expected for the foreseeable future.
The cost of issuing new common stock is equal
to 5% (Flotation costs).
The co. marginal tax rate is 40%.
Calculate the company's weighted average cost
of capital for the coming year.
The firm payout ratio is 100 percent. Its
investment bankers anticipate that the total
flotation cost will equal 10 percent of the amount
issued. Assume the company accounts for
flotation costs by adjusting the cost of capital.
Given this information, calculate the company's
WACC.
a. 9.869%
a. 13.55%
b. 12.869%
b. 10.78%
c. 11.869%
c. 10.41%
d. 7.869%
d. 12.56%
Question 34
The acceptance criteria for internal rate of return
method is WACC(K) > IRR.
Select one:
True
False
O O O O
O O
O O
O O O O
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