Charles Darwin University

ACCOUNTING

Week 8 Quiz 1

1)Never-crash Airline has a capital structure that consists of 30% debt and 70% equity. The company's cost of debt is 7%. The company has a beta of 1.9. The risk free rate equals 4.5% and the expected return on the market portfolio is 15%. What is the Never- crash Airline's after tax cost of debt if their marginal tax rate equals 34%?

a.  7.00%

b.  4.62%

c.  2.38%

d.  4.50%

2. Which of the following is considered a type of real options
   1. expansion option
   2. abandonment option
   3. flexibility option
   4. all of the above

3. Find the breakeven point given the following information: sale price per unit = $50, variable cost per unit = $35; fixed costs =

$50,000. a.  2,298

b.  3,000

c.  3,333

d.  4,000

4. Bavarian Sausage, Inc. has a cost equity of 22% and a beta of 1.8. The expected market return is 14%. What is the risk-free rate?
   1. 4%

b.  22%

c.  8%

d.  12%

5. Everything     else     being     equal     a     higher corporate tax rate...
   1. will increase the WACC  of a firm with debt and equity in its capital structure
   2. will not affect the WACC of a firm with debt in its capital structure
   3. will decrease the WACC of a firm with some debt in its capital structure
   4. will decrease the WACC of a firm with only equity in its capital structure

6. The following data have been computed for a firm: when sales are $20,000, EBIT is

$5,000 and operating leverage  is  2.5. Suppose sales increase to $23,000; what is the new level of EBIT?

a.  $1,875

b.  $6,875

c.   $3,000

d.  $8,435

7. Running Shoes, Inc. has 2 million shares of stock outstanding. The stock currently sells for $12.50 per share. The firm’s debt is publicly traded and was recently quoted at 90% of face value. It has a total face value of

$10 million, and it is currently priced to yield 8%. The risk free rate is 2% and the market risk premium is 8%. You’ve estimated that the  firm has a beta of 1.20. The corporate tax rate is 40%. What is the  WACC  for Running Shoes, Inc.?

a.  7.97%

b.  9.15%

c.   9.58%

d.  9.80%

8. Running Shoes, Inc. has 2 million shares of stock outstanding. The stock currently sells for $12.50 per share. The firm’s debt is publicly traded and was recently quoted at 90% of face value. It has a total face value of

$10 million, and it is currently priced to yield 8%. The risk free rate is 2% and the market risk premium is 8%. You’ve estimated that the firm has a beta of 1.20. The corporate tax rate is 40%.  What is the cost of equity? a. 9.20%

b.  9.60%

c.   10.40%

d.  11.60%

9. Never-crash Airline has a capital structure that consists of 30% debt and 70% equity. The company's cost of debt is 7%. The company has a beta of 1.9. The risk free rate equals 4.5% and the expected return on the market portfolio is 15%. What is Never-crash Airline's WACC, if their marginal tax rate equals 34%?

a.  19.22%

b.  24.45%

c.   18.50%

d.  4.62%

10. A firm has a capital structure of 25% debt and 75% equity. Debt can be issued at a return of 9%, while the cost of equity for the firm is 12%. The firm is considering a $50 million expansion of their production facility. The project has the same risk as the firm overall and will earn $10 million per year for 7 years. What is the NPV of the expansion if the tax rate facing the firm is 40%?
    1. -$1.9 million
    2. -$1.4 million
    3. $0.4 million
    4. $1.4 million

11. Never-crash Airline has a capital structure that consists of 30% debt and 70% equity.