1) Taylor s has a beta of .78 and a debt-to-equity ratio of .2. The market rate of return is 10.6 percent, the tax rate is 34 percent, and the risk-free rate is 1.4 percent. The pretax cost of debt is 6.1 percent. What is the firm's WACC?
- 8.08%
- 7.67%
- 8.16%
- 9.96%
- 7.82%
2) Which one of these statements is true?
- The betas used in the CAPM must be greater than 1 but less than 2.
- By convention, the market is given a beta of zero.
- There is zero chance of default on a U.S. Treasury bill.
- A U.S. Treasury bill has a beta of zero.
- The rate of return on a U.S. Treasury bill is used as the value of RM in the CAPM.
3) A firm with high operating leverage is best defined as a firm that has:
- a high debt-to-equity ratio.
- high fixed costs relative to variable costs.
- a low, relatively stable beta.
- high variable costs relative to fixed costs.
- a high sales/assets ratio.
4) The beta of a firm is more likely to be high under which two conditions?
- High cyclical business activity and high operating leverage
- High cyclical business activity and low operating leverage
- Low cyclical business activity and low financial leverage
- Low cyclical business activity and low operating leverage
- Low operating and financial leverage
5) Which of the following are the two primary advantages of CAPM?
I. Simplicity
II. Absence of estimation error
III. Applicability to both dividend and non-dividend paying firms
IV. Explicit adjustment for risk
- I and II
- II and III
- I and III
- III and IV
- I and IV
6) A firm s cost of debt will decrease when:
- market interest rates increase.
- the coupon rate on the firm's bonds increase.
- tax rates increase.
- inflation rates increase
- interest is paid semiannually versus annually.
7) The terminal value of a firm is based on which one of these assumptions?
- The growth rate of the future cash flows will exceed the firm's WACC.
- All future cash flows will be constant.
- The cash flows after Time T will diminish on an annual basis.
- The cash flows will increase in the future at a constant perpetual rate.
- The firm will be sold at Time T for the stated terminal value.
8) A firm has a beta of 1.3 and a debt-to-equity ratio of .4. The market rate of return is 11.6 percent, the tax rate is 32 percent, and the risk-free rate is 3.3 percent. The pretax cost of debt is 7.2 percent. What is the firm's WACC?
- 11.46%
- 8.90%
- 10.41%
- 9.96%
- 12.12%
9) Zee s Toy Store needs $187,000 for expansion. The firm has a target capital structure of 40 percent debt and 60 percent external equity. The flotation cost of debt is 5.5 percent compared to 9.5 percent for equity. What amount does the firm need to raise?
- $201,773.00
- $199,716.00
- $203,040.17
- $193,333.33
- $186,111.75
10) Asian Foods needs $65,000 for a new project. The firm has a target capital structure of 25 percent debt and 75 percent external equity. The flotation cost of debt is 5.25 percent compared to 10.15 percent for equity. What amount does the firm need to raise?
- $70,801.25
- $76,211.17
- $71,369.75
- $69,497.79
- $59,674.09
11) Golden Eagle has 1,500 bonds outstanding with a $1,000 par value, a 5 percent coupon, 14 years to maturity, semiannual interest payments, and a market price equal to 98 percent of par. The firm also has 50,000 shares of common stock outstanding at a price per share of $43 and a beta of 1.1. The risk-free rate is 3 percent, the market risk premium is 7.5 percent, and the tax rate is 35 percent. What is the firm's WACC? (When computing WACC, round your cost of debt to 4 decimal places when expressed as a decimal value.)
- 9.03%
- 8.79%
- 8.54%
- 8.05%
- 8.18%