Objective type problems on capital structure and cost of capital

1.   You form a portfolio by investing equally in A (beta=0.8), B (beta=1.2), the risk-free asset, and the market portfolio. What is your portfolio beta?

1. 0.67
2. 0.75
3. 0.95
4. 1.12
5. 1.15

2.  The Pancratz Company bonds are currently selling for $1,041.30. These bonds mature in seven years, pay semi-annual interest and have a yield-to-maturity of 6.75%. What is the coupon rate?

1. 6.50%
2. 6.75%
3. 7.00%
4. 7.25%
5. 7.50%

3.   Tami Industries issued dividends totalling $0.60 last year. For the next two years, they expect dividends to increase by 50% annually and then remain constant thereafter. How much is one share of Tami Industries stock worth today if you require a 9% rate of return?

1. $13.45
2. $13.77
3. $14.59
4. $15.00
5. $15.14

4.  Ray just paid $8,239 for 100 shares of 6% preferred stock. What rate of return will she earn?

1. 4.94%
2. 7.28%
3. 8.24%
4. 10.94%
5. 713.73%

5.   Which of the following are not considered, either directly or indirectly, in WACC?

1. The marginal tax rate of the firm
2. The amount of equity financing as a percent of the total financing
3. The risk-free rate of return
4. The risk tolerance level of investors
5. None of the above (i.e. All of the above are considered in WACC.)

6.   A firm currently has a debt-equity ratio of .50, an after-tax cost of debt of 8%, and a cost of equity of 12%. The firm changes its debt-equity ratio to .40, all else constant. This change will:

1. Increase the total debt level of the firm.
2. Decrease the firm's WACC.
3. Increase the cost of equity financing.
4. Cause the NPV of projects under consideration to decrease.
5. Not affect the firm's capital budgeting decisions.

7.  The cost of preferred stock is based on the:

1. Average yield-to-maturity of the outstanding securities.
2. After tax average coupon rate.
3. Annual stated dividend multiplied by (1 - Tc).
4. Perpetuity rate of return on the security.
5. Stated dividend adjusted for any flotation costs.

8.  Arturo's Manufacturing is considering two mutually exclusive projects. The company has a required rate of return of 13.5% on projects of this nature. Project A costs $100,000 and has an IRR of 14.5%. Project B costs $150,000 and has an IRR of 14%. Which project should be accepted and why?

1. Project A because it costs less and has a higher IRR than Project B
2. Project A because it has the highest IRR of the two projects and exceeds the required return
3. Project B because it has the largest net present value
4. Project B because it has the lower IRR of the two projects
5. Both projects because both project IRRs are greater than the required return

9.  A project has an initial cash outlay of $16,500. Cash inflows are $5,200 in year 1, $6,800 in year 2, and $8,100 in year 3. What is the net present value if an 8.30% discount rate is applied to this project?

1. $333.33
2. $466.04
3. $475.88
4. $574.76
5. $601.13

10.   A company owns a building that is totally paid for. This building has been sitting idle for the past three years. Now the company is trying to analyze a project that would include the use of this building. Which of the following costs should be included in that analysis?

1. The property taxes paid on the building over the past three years
2. The insurance paid on the building over the past three years
3. The current market value of the building
4. The cost to survey the lot to construct a drainage pond required for the project
5. All but A and B.