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Homework answers / question archive / The yield-to-maturity of a firm's bond is 8

- The yield-to-maturity of a firm's bond is 8.5%. The firm has a beta of 1.3 and a tax rate of 34%. The market risk premium is 8.4% and the risk-free rate is 3.8%. What is the firm's WACC if the firm has a capital structure that is 40% debt financed?

A.

10.74%

B.

11.08%

C.

11.61%

D.

11.38% - If a firm has twice as much equity as debt in its capital structure, then the firm is financed with:

A.

75.0% debt.

B.

66.7% equity.

C.

40.0% debt.

D.

33.3% equity. - If a firm has three times as much equity as debt in its capital structure, then the firm is financed with:

A.

25.0% debt.

B.

90.0% equity.

C.

40.0% debt.

D.

33.3% debt. - If a company's cost of capital is less than the required return on equity, then the firm:

A.

is financed with more than 50% debt.

B.

is perceived to be safe.

C.

has debt in its capital structure.

D.

is all equity financed. - The company cost of capital is the return that is expected on a portfolio of the company's:

A.

existing securities.

B.

equity securities.

C.

debt securities.

D.

proposed securities. - A firm with a beta of 1.22 just paid its annual dividend of $5.64 a share. The dividends increase at a rate of 2% annually. The risk-free rate is 3.5%, the market rate of return is 12.4%, and the dividend discount rate is 11.6%. What is the best estimate of the firm's cost of equity if the firm's stock currently sells for $60 a share using an average of methods?

A.

12.97%

B.

14.33%

C.

11.60%

D.

13.38% - What is the WACC for a firm financed with 30% debt if the debt requires an after-tax return of 10% and equity requires a 16% return?

A.

11.8%

B.

13.3%

C.

14.2%

D.

14.8% - Which one of the following changes would tend to increase the WACC for a traditional firm?

A.

Decrease the proportion of equity financing

B.

Increase the market value of the debt

C.

Decrease the proportion of debt financing

D.

Decrease the market value of the equity - A firm is considering expanding its current operations and has determined the internal rate of return on that expansion is 12.2%. The firm's WACC is 11.8%. Given this, you know the:

A.

project will have a lower debt-equity ratio than the firm's current operations.

B.

appropriate discount rate for the project is between 11.8% and 12.2%.

C.

project has slightly more risk than the firm's current operations.

D.

expansion should be undertaken as it has a positive net present value. - A firm has 12,500 shares of stock outstanding that sell for $42 each. The book value of equity is $400,000. The firm has also issued $250,000 face value of debt that is currently quoted at 101.2. What value should be used as the weight of equity when computing WACC?

A.

67.48%

B.

72.09%

C.

61.54%

D.

69.74%

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