Charles Darwin University ACCOUNTING Week 8 Quiz 1 1)Never-crash Airline has a capital structure that consists of 30% debt and 70% equity

Question

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%

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

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

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%

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

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

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%

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%

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%

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

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 cost of equity?

a. 33.00%

b. 7.05%

c. 24.45%

d. 28.50%

As a result of a company's 15% increase in sales, their EBIT increased by 25%. What is the company's operating leverage?

a. 2.33

b. 1.67

c. 1.50

d. 3.33

Hollywood Productions has a $4 contribution margin for the new DVD they are releasing to the general public. The DVD sells for $20. If the fixed costs to produce the DVD were

$500,000, how many units must be sold for Hollywood Productions to break even?

1. 25,000 units
2. 31,250 units
3. 75,000 units
4. 125,000 units

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%. Assuming no taxes, what is Never-crash Airline's WACC?
1. 7%

b. 19.22%

c. 24.45%

d. 17.12%

The appropriate cost of capital for a project depends on . . .
1. the type of assets used in the project (that is, whether they are current or fixed assets)
2. the interest rate on the firm's outstanding long-term bonds
3. the type of security issued to finance the project
4. the risk associated with the project

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 percentage of equity used by Running Shoes, Inc.?

a. 74.63%

b. 73.53%

c. 72.46%

d. 68.97%

Operating leverage describes the relationship between...
1. EBIT and sales
2. taxes and sales
3. debt and equity
4. fixed costs and variable costs

A manager who wants to find out at which point a project's profits and costs are equal will conduct a
1. sensitivity analysis
2. scenario analysis
3. breakeven analysis
4. none of the above