Exam Iii Essay

3798 Words Aug 4th, 2012 16 Pages
Fin 221 Spring 2011 Exam 3
Multiple Choice Identify the choice that best completes the statement or answers the question. 1. MAD Inc. is evaluating the following four independent, investment opportunities: Project A B C D Cost $300,000 150,000 200,000 400,000 IRR 14% 10% 13% 11%

MAD’s target capital structure is 60 percent debt and 40 percent equity. The yield to maturity on the company’s new debt will be 10 percent. MAD’s beta is 1.7, the risk free rate is 4% and the required market return is 12%. If the company’s tax rate is 30 percent, then which of the projects will be accepted? A) Projects A, B, C, and D B) Projects A, C, and D C) Project A D) Projects A and C 2. Which of the following will decrease the WACC of any given firm that
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The company estimates that it will have to issue new common stock to help fund this year's projects. The flotation cost on new common stock issued is 10 percent, and the company's tax rate is 40 percent. What is the company's weighted average cost of capital, WACC? A) 11.31% B) 9.89% C) 7.48% D) 10.30% E) 10.73% 9. Project A has a 10 percent cost of capital and the following cash flows:

Year
0 1 2 3 4

Project A Cash Flow
-$300 100 150 200 50

What is Project A's discounted payback? A) 2.43 years B) 2.57 years C) 2.50 years D) 2.36 years E) 2.25 years 10. Wyden Brothers has no retained earnings. The company uses the CAPM to calculate the cost of equity capital. The company's capital structure consists of common stock, preferred stock, and debt. Which of the following events will reduce the company's WACC? A) An increase in expected inflation. B) An increase in the company's beta. C) A reduction in the market risk premium. D) An increase in the flotation costs associated with issuing new common stock. E) An increase in the flotation costs associated with issuing preferred stock. 11. Which of the following has the obligation to sell the underlying stock when a stock option is exercised? A) the writer of a call option B) the owner of a call option C) the writer of a put option D) the owner of a put option 12. Sandbox Inc. is considering

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