Chapter 10 and 11
Practice Quiz 1-Answer Key
1. Percy Motors has a target capital structure of 40 percent debt and 60 percent equity. The yield to maturity on the company’s outstanding bonds is 9 percent, and the company’s tax rate is 40 percent. Percy’s CFO has calculated the company’s WACC as 9.96 percent. What is the company’s cost of common equity?
A. 11%
B. 12%
C. 13%-ANSWER
D. 14%
2. Trivoli Industries plans to issue some $100 par preferred stock with an 11 percent dividend. The stock is selling on the market for $97.00, but Trivoli must pay flotation costs of 5 percent of the market price, so the net price of the firm will receive is $92.15 per share. What is Trivoli’s cost of preferred stock with flotation considered?
A. 9.23%
B. 10.27%
C. 10.92
D. 11.94%-ANSWER
3. Hook Industries has a capital structure that consists solely of debt and common equity. The company can issue debt at 11 percent. Its stock currently pays a $2 dividend per share and the stock’s price is currently $24.75. The company’s dividend is expected to grow at a constant rate of 7 percent per year; its tax rate is 35 percent; and the company estimates that its WACC is 13.95 percent. What percentage of the company’s capital structure consists of debt financing?
A. 16%
B. 18%
C. 20%-ANSWER
D. 22%
4. Project K has a cost of $52,125, its expected net cash inflows are $12,000 per year for 8 years, and its cost of capital is 12 percent. What is the project’s NPV?
A. $7,486.68-ANSWER
B. $7,753.78
C. $8,368.46
D. $8,621.88
5. Using the above information, what is the project’s IRR?
A. 14%
B. 15%
C. 16%-ANSWER
D. 17%