1.Please refer to the information for FM Foods above. Estimate FM’s after-tax cost of equity capital.
6.9%
7.9%
A). 12.2%
17.5%
None of the options are correct.
2.Please refer to the information for FM Foods above. Estimate FM’s after-tax cost of debt.Multiple Choice
2.2%
A). 4.1%
4.5%
6.3%
7.0%
3.Please refer to the information for FM Foods above. Estimate the appropriate weight of equity to be used when calculating FM’s weighted-average cost of capital.Multiple Choice
None of the options are correct.
11.5%
19.3%
80.7%
A). 88.5%
100.0%
4.Please refer to the information for FM Foods above. Estimate the appropriate weight of debt to be used when calculating FM’s weighted-average cost of capital.Multiple Choice
None of the options are correct.
A). 11.5%
19.3%
80.7%
88.5%
100.0%
5.Please refer to the information for FM Foods above. Estimate FM’s weighted-average cost of capital.Multiple Choice
None of the options are correct.
6.5%
6.6%
A). 11.3%
11.4%
11.5%
6.Please refer to the information for FM Foods above. FM is contemplating an average-risk investment costing $100 million and promising an annual after-tax cash flow of $15 million in perpetuity. Which of the following statements are correct?
- FM should reject the project because the IRR is greater than the firm’s WACC.
- FM should accept the project because the IRR is greater than the firm’s WACC.
- FM should accept the project because the NPV is greater than zero.
- FM should reject the project because the NPV is less than zero.
Multiple Choice
None of the options are correct.
1 only
2 only
4 only
1 and 4 only
A). 2 and 3 only
7.Honest Abe is a chain of furniture retail stores. Integral Designs is a furniture maker and a supplier to Honest Abe. Honest Abe has a beta of 1.38 and Integral Designs has a beta of 1.12. The risk-free rate of return is 3.5% and the market risk premium is 8%. Based only on this information, what cost of equity should Honest Abe use when calculating the weighted-average cost of capital for a project that involves the manufacturing of furniture?Multiple Choice
None of the options are correct.
A). 12.46%
12.92%
13.50%
14.08%
14.54%
8.A firm is considering an average-risk project with an IRR of 6%. The firm’s pre-tax cost of debt is 5%, its cost of equity is 12%, and its tax rate is 20%. The firm’s debt ratio (D/(D+E)), in market values, is 0.5. The firm shouldMultiple Choice
A). reject the project regardless of the financing method.
accept the project only if it can be completely financed with equity.
accept the project only if it can be completely financed with debt.
accept the project regardless of the financing method.
9.Unitron Corporation is considering project Z, which costs $50 million and offers an annual after-tax cash flow of $7.5 million in perpetuity. The project is in an industry that has greater market risk than Unitron’s typical projects. Unitron’s company weighted-average cost of capital, based on its typical projects, is 15%. Should Unitron Corporation accept project Z?Multiple Choice
A). No, because the NPV of the project is negative.
Yes, because the NPV of the project is positive.
Yes, because a zero-NPV project is marginally acceptable.
No, because a zero-NPV project is a waste of resources.
10.Company X has 2 million shares of common stock outstanding at a book value of $2 per share. The stock trades for $3 per share. It also has $2 million in face value of debt that trades at 90% of par. What is the appropriate debt ratio (D/(D+E)) to use for calculating Company X’s weighted-average cost of capital?Multiple Choice
33.3%
A). 23.1%
25.0%
31.0%
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