1. You own a stock that has an expected return of 15.72 percent and a beta of 1.33. The U.S. Treasury bill is yielding 3.82 percent and the inflation rate is 2.95 percent. What is the expected rate of return on the market?
a. 12.07 percent b. 12.77 percent c. 13.64 percent d. 14.09 percent
2. For a risky security to have a positive expected return but less risk than the overall market, the security must have a beta:
a. of zero. b. that is > 0 but < 1. c. of one. d. that is > 1.
3. The weighted average cost of capital is defined as the weighted average of a firm's:
a. return on all of its investments. b. cost of equity, cost of preferred, and its aftertax cost of debt. c. pretax cost of debt and its preferred and common equity securities. d. common and preferred stock.
4. An increase in a levered firm’s tax rate will: a. decrease the cost of preferred stock.
b. increase both the cost of preferred stock and debt. c. decrease the firm’s cost of capital. d. increase the firm’s WACC.
5. A firm has multiple divisions of similar nature, yet varying degrees of risk. Which one of the following would be the most appropriate, yet relatively easy, means of assigning discount rates to each of its numerous proposed investments?
a. Assign every project a rate equal to the firm's cost of equity b. Assign every investment a random rate that varies between the firm's cost of debt and its cost of equity c. Assign every project a rate equal to the firm's WACC plus or minus a subjective adjustment d. Assign every project a rate equal to the market rate of return at the time of the proposal
6. The 7.5 percent preferred stock of Rock Bottom Floors is selling for $84 a share. What is the firm's cost of preferred stock if the tax rate is 35 percent and the par value per share is $100? a. 7.50 percent b. 8.13 percent c. 8.93 percent d. 9.14 percent
7. Musical Charts just paid an annual dividend of $1.84 per share. This dividend is expected to increase by 2.1 percent annually. Currently, the firm has a beta of 1.12 and a stock price of $31 a share. The riskfree rate is 4.3 percent and the market rate of return is 13.2 percent. What is the cost of equity capital for this firm?
a. 13.28 percent b. 11.21 percent c. 12.29 percent d. 11.95 percent
8. K's Bridal Shoppe has 4,000 shares of common stock outstanding at a price of $13 a share. It also has 500 shares of preferred stock outstanding at a price of $22 a share. There are 50 bonds outstanding that have a semiannual coupon payment of $25. The bonds mature in four years, have a face value of $1,000, and sell at 98 percent of par. What is the capital structure weight of the common stock?
a. 48.20 percent b. 49.68 percent c. 48.15 percent d. 46.43 percent
9. Western Electric has 21,000 shares of common stock outstanding at a price per share of $61 and a rate of return of 15.6 percent. The firm has 11,000 shares of $8 preferred stock outstanding at a price of $48 a share. The outstanding debt has a total face value of $275,000 and currently sells for 104 percent of face. The yield to maturity on the debt is 8.81 percent. What is the firm's weighted average cost of capital if the tax rate is 35 percent?
a. 14.52 percent b. 13.44 percent c. 14.19 percent d. 14.37 percent
10. Kelly's uses the firm's WACC as the required return for some of its projects. For other projects, the firms uses a rate equal to WACC plus one percent, while another set of projects is assigned rates equal to WACC minus some amount. Which one of the following factors should be the key factor the firm uses to determine the amount of the adjustment it will make when assigning a discount rate to a specific project?
a. The current market rate of interest
b. Actual source of funds used to finance the project
c. The perceived risk level of project
d. The firm’s current debt-equity ratio