1. Elements in the cost of new debt calculation are
a. interest on coupon payment b. tax rate c. proceeds from debt issue d. all of the above
2. Lennix Corporation has a beta of 3.0. The current T-bill rate is 2% and the stock market’s historical return has exceeded the risk-free rate by 8%. The cost of equity for Lennix is
a. 24% b.26% c. 28% d.30%
3. Cornwallis Company has replacement value assets of 100 and liabilities of 65. The replacement value of Cornwallis is
a. 100 b. 65 c. 35 d. none
4. Essex Corporation is planning an equity issue to finance a new product. Essex plans to issue 100,000 shares of stock. Projected EPS after completion of the project is $12 and the total shares outstanding will be 200,000. What are the projected after-tax earnings after completion of the project?
a. $2 mil b. $2.4 mil c. $2.6 mil d. none
5. Dusty Company is planning an equity issue to finance a new product. Dusty plans to issue 100,000 shares of stock. Projected EPS after completion of the project is $10 and the total shares outstanding will be 200,000. What are the projected after-tax earnings after completion of the project?
a. $1 mil b. $2 mil c. $3 mil d. $4 mil
6. Stinson Corporation is planning an equity issue to finance a new product. Stinson plans to issue 100,000 shares of stock. Projected EPS after completion of the project is $9 and the total shares outstanding will be 200,000. What are the projected after-tax earnings after completion of the project?
a. $1.4 mil b. $1.6 mil c. $1.8 mil d. none
7. Jensen Corporation is planning a bond issue to finance a new product. Jensen plans to issue 2000 bonds with a face value of $1000 each and a coupon rate of 12%. The tax rate is 40%. Projected earnings after completion of the project are $2 million and shares outstanding will be 200,000. What is the projected EPS after completion of the project?
a. $5.18 b. $5.28 c. $5.38 d. none
8. Breakeven EBIT balances the interest cost of debt with
a. The dilution from issuing additional shares b. The tax advantage of debt c. neither