# FIN/571 Wk 2 – Practice: Wk 2 Practice Questions

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FIN/571 Wk 2 – Practice: Wk 2 Practice Questions

# FIN/571 Wk 2 – Practice: Wk 2 Practice Questions

## FIN/571 Wk 2 – Practice: Wk 2 Practice Questions

1. How much will a firm need in cash flow before tax and interest to satisfy debtholders and equity holders if the tax rate is 21%, there is \$15.8 million in common stock requiring a 10% return, and \$6 million in bonds requiring a 6% return?

Multiple Choice

• \$1,392,000
• \$1,488,000
• \$2,360,000
• \$2,480,000

Plasti-tech Inc. is financed 60% with equity and 40% with debt. Currently, its debt has a pretax interest rate of 12%. Plasti-tech’s common stock trades at \$15.00 per share and its most recent dividend was \$1.00. Future dividends are expected grow by 4%. If the tax rate is 21%, what is Plasti-tech’s WACC?

Multiple Choice

• 7.39%
• 9.57%
• 10.35%
• 11.20%

If the tax rate is 21%, what is the cost of preferred stock that sells for \$10 per share and pays a \$1.20 dividend?

Multiple Choice

• 4.20%
• 7.80%
• 8.33%
• 12.00%

For a company that pays no corporate taxes, its WACC will be equal to:

Multiple Choice

• the expected return on its assets.
• the expected return on its debt.
• the total value of its assets.
• the expected return on its equity.

If a firm has twice as much equity as debt in its capital structure, then the firm is financed with:

Multiple Choice

• 75.0% debt.
• 66.7% equity.
• 40.0% debt.
• 33.3% equity.

What proportion of a firm is equity financed if the WACC is 14%, the before-tax cost of debt is 10.77%, the tax rate is 21%, and the required return on equity is 18%?

Multiple Choice

• 54.00%
• 57.86%
• 70.26%
• 77.78%

What dividend is paid on preferred stock if investors require a 9% rate of return and the stock has a market value of \$54 per share and a book value of \$50 per share?

Multiple Choice

• \$2.92
• \$4.50
• \$4.68
• \$4.86

What is the WACC for a firm with 40% debt, 20% preferred stock, and 40% equity if their respective costs are 6% after tax, 12%, and 18%? The firm’s tax rate is 21%.

Multiple Choice

• 9.48%
• 11.16%
• 12.00%
• 15.60%

A firm is financed 55% by common stock, 10% by preferred stock and 35% by debt. The required return is 15% on the common, 10% on the preferred, and 8% on the debt. If the tax rate is 21% what is the WACC?

Multiple Choice

• 10.72%
• 11.46%
• 11.70%
• 12.05%

What would you estimate as the cost of equity if a stock sells for \$40, pays a \$4.25 dividend, and is expected to grow at a constant rate of 5%?

Multiple Choice

• 17.46%
• 14.52%
• 12.69%
• 15.63%

A private placement avoids which one of the following costs?

Multiple Choice

• Depression in the stock price
• Registration with the SEC
• Legal costs

An investor can earn 20% on underpriced IPOs, but will lose 10% on overpriced IPOs. If he is awarded \$2,000 worth of shares in an overpriced IPO, how much of the underpriced issue must he be awarded in order to gain \$500 total?

Multiple Choice

• \$1,500
• \$2,500
• \$3,500
• \$10,000

Assume the issuer incurs \$2 million in other expenses to sell 4 million shares at \$55 each to an underwriter and the underwriter sells the shares at \$59 each. By the end of the first day’s trading, the issuing company’s stock price had risen to \$68. What is the cost of underpricing?

Multiple Choice

• \$20 million
• \$32 million
• \$36 million
• \$40 million

A firm has just issued \$250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm’s equity given that its market value of equity was \$1 billion before the new issue.

Multiple Choice

• \$7.5 million
• \$30.0 million
• \$33.3 million
• \$37.5 million

What direct expense is required to market stock if the issuer incurs \$1 million in other expenses to sell 3 million shares at \$30 each to an underwriter and the underwriter sells the shares at \$32 each?

Multiple Choice

• 7.29%
• 7.88%
• 8.65%
• 9.02%

Which one of these terms applies to a public company offering new shares to the general public?

Multiple Choice

• Rights offer
• Initial public offering
• Venture capital offer
• General cash offer

If an underwriter charges the public \$40 per share for a new issue after having promised the issuer \$38 per share, the spread per share is:

Multiple Choice

• \$1.
• \$2.
• \$38.
• \$40.

Private placement of debt securities occurs more frequently in:

Multiple Choice

• smaller-sized firms.
• larger-sized firms.
• firms that are using venture capitalists.
• combination with convertible bonds.

Money that is offered to finance a new business is known as:

Multiple Choice

• a general cash offer.
• venture capital.
• a private placement.
• a rights issue.

Which one of the following is least likely to explain why entrepreneurs contribute their personal funds to start-up projects? Their contribution:

Multiple Choice

• acts as a signal to venture capitalists.
• repays debt held by the venture capitalist.
• retains a portion of the firm’s equity.
• provides incentive to expend effort.

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FIN/571 Wk 2 – Practice: Wk 2 Practice Questions