1. To be accepted, projects that are unusually risky should have to earn IRRs that are ____ those earned by a firm’s typical projects.
a) equal to
b) higher than
c) lower than
d) similar to
2. Dudek Manufacturing's common stock is currently selling for $45/share. Their most recent dividend (annual) was $2.50, and is expected to grow at 5% per year indefinitely. What is Dudek's cost of retained earnings?
a) 10.56%
b) 10.83%
c) 12.14%
d) 13.00%
e) 17.14%
3. Groves, Inc. pays an annual dividend of $1.22, which is expected to grow at a rate of 5 percent each year. The firm is in a fairly risky business and has a beta of 1.45. The return on the market is 13.5 percent, and the risk-free rate is 9.3 percent. What is the cost of Groves' equity from retained earnings?
a) 19.6%
d) 13.5%
c)15.4%
d) 6.1%
4. Wright Express (WE) has a capital structure that's 30% debt and 70% equity. The firm is considering a project that requires an investment of $2.6 million. To finance this project, WE plans to issue 10-year bonds with a coupon rate of 12% and a yield to investors of 12.4%. If the current risk-free rate is 7% and the expected market return is 14.5%, what is Wright's WACC if its beta is 1.2 and it is subject to a marginal tax rate of 40%?
a) 14.9%
b) 12.4%
c) 13.4%
d) 16.0%
5. The following information pertains to the capital structure of a firm:
Debt: One thousand bonds with a face value of $1,000 and a 10-year term were issued three years ago with a coupon rate of 10%. Today the bonds are selling to yield 10%.
Preferred stock: Ten thousand shares of preferred stock are outstanding with a $9 annual dividend and a $100 face value. Today the shares are selling to yield a 9% return.
Common equity: 100 thousand shares of common stock are outstanding at a current market price of $30 per share.
Develop the firm's market-value based capital structure.