1. Madison Square Stores has a $20 million bond issue outstanding that currently has a market value of $18.6 million. The bonds mature in 6.5 years and pay semiannual interest payments of $35 each. What is the firm's pretax cost of debt?
4.21 percent
8.42 percent
7.58 percent
7.74 percent
7.80 percent
2. You are analyzing a project and have developed the following estimates. The depreciation is $52,000 a year and the tax rate is 34 percent. What is the worst-case operating cash flow?
-$32,509
-$19,288
-$4,225
$27,556
$48,106
3. Corporate shareholders:
are proportionately liable for the firm's debts.
are protected from all losses.
have the ability to change the corporation's bylaws.
receive tax-free distributions since all profits are taxed at the corporate level.
have basically no control over the actual corporation.
4. The equity multiplier is equal to:
one plus the debt-equity ratio.
one plus the total asset turnover.
total debt divided by total equity.
total equity divided by total assets.
one divided by the total asset turnover
5. Which one of the following statements is correct? Assume the pretax cost of debt is less than the cost of equity.
A firm may change its capital structure if the government changes its tax policies.
A decrease in the dividend growth rate increases the cost of equity.
A decrease in the systematic risk of a firm will increase the firm's cost of capital.
A decrease in a firm's debt-equity ratio will decrease the firm's cost of capital.
The cost of preferred stock decreases when the tax rate increases.
6. A stock produced returns of 16 percent, 9 percent, and 21 percent over three of the past four years, respectively. The arithmetic
average for the past four years is 10 percent. What is the standard deviation of the stock's returns for the four-year period?
6.82 percent
8.54 percent
9.09 percent
10.83 percent
11.75 ercent
7. The 7 percent annual coupon bonds of IPO, Inc. are selling for $1,021. The bonds have a face value of $1,000 and mature in seven
years. What is the yield to maturity?
6.42 percent
6.62 percent
6.66 percent
6.68 percent
6.70 ercent
8. Which one of the following is a capital structure decision?
Determining the optimal inventory level
Establishing the preferred debt-equity level
Selecting new equipment to purchase
Setting the terms of sale for credit sales
Determining when suppliers should be paid
9. Western Steer purchased some three-year MACRS property three years ago. What is the current book value of this equipment if the
original cost was $58,000? The MACRS allowance percentages are as follows, commencing with year 1: 33.33, 44.45, 14.81, and 7.41
percent.
$0
$1,122
$4,298
$7,863
$8,886
10. A firm has a cost of equity of 13 percent, a cost of preferred of 11 percent, and an aftertax cost of debt of 6 percent. Given this,
which one of the following will increase the firm's weighted average cost of capital?
Increasing the firm's tax rate
Issuing new bonds at par
Redeeming shares of common stock
Increasing the firm's beta
Increasing the debt-equity ratio