# bus401 week 3 quiz

Question
1. Clothier, Inc. has a target capital structure of 40% debt and 60% common equity, and has a 40% marginal tax rate. If Clothier’s yield to maturity on bonds is 7.5% and investors require a 15% return on Clothier’s common stock, what is the firm’s weighted average cost of capital? (Points : 1) 7.20% 10.80% 12.00% 12.25% 2. Higgins Office Corp. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt–8 percent; preferred stock–12 percent; common equity–16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of return must Higgins Office Corp. earn on its investments if the value of the firm is to remain unchanged? (Points : 1) 12.40 percent 12.00 percent 11.12 percent 10.64 percent 3. Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal? (Points : 1) increase in accounts receivable cost of issuing new bonds if the project is financed by a new bond issue installation costs none of the above – all are considered 4. Asian Trading Company paid a dividend yesterday of \$5 per share (D0 = \$4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company’s stock today is \$29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal \$2.50 per share. Asian Trading Company’s marginal tax rate is 35%. Based on the above information, the cost of new common stock is (Points : 1) 28.38%. 24.12%. 26.62%. 31.40%. 5. Kendall, Inc. has \$15 million of outstanding bonds with a coupon rate of 10 percent. The yield to maturity on these bonds is 12.5 percent. If the firm’s tax rate is 30 percent, what is relevant cost of debt financing to Kendall, Inc.? (Points : 1) 13.75 percent 8.75 percent 7.00 percent 3.75 percent 6. Asian Trading Company paid a dividend yesterday of \$5 per share (D0 = \$4). The dividend is expected to grow at a constant rate of 8% per year. The price of Asian Trading Company’s stock today is \$29 per share. If Asian Trading Company decides to issue new common stock, flotation costs will equal \$2.50 per share. Asian Trading Company’s marginal tax rate is 35%. Based on the above information, the cost of retained earnings is (Points : 1) 28.38%. 24.12%. 26.62%. 31.40%. 7. Welltran Corp. can purchase a new machine for \$1,875,000 that will provide an annual net cash flow of \$650,000 per year for five years. The machine will be sold for \$120,000 after taxes at the end of year five. What is the net present value of the machine if the required rate of return is 13.5%. (Points : 1) \$558,378 \$513,859 \$473,498 \$447,292 8. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs \$95,000 and is expected to generate \$65,000 in year one and \$75,000 in year two. Project B costs \$120,000 and is expected to generate \$64,000 in year one, \$67,000 in year two, \$56,000 in year three, and \$45,000 in year four. Zellars, Inc.’s required rate of return for these projects is 10%. The net present value for Project B is (Points : 1) \$58,097. \$66,363. \$74,538. \$112,000. 9. If depreciation expense in year one of a project increases for a highly profitable company, (Points : 1) net income decreases and incremental free cash flow decreases. net income increases and incremental free cash flow increases. the book value of the depreciating asset increases at the end of year one. net income decreases and incremental free cash flow increases. 10. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs \$95,000 and is expected to generate \$65,000 in year one and \$75,000 in year two. Project B costs \$120,000 and is expected to generate \$64,000 in year one, \$67,000 in year two, \$56,000 in year three, and \$45,000 in year four. Zellars, Inc.’s required rate of return for these projects is 10%. The profitability index for Project B is (Points : 1) 1.55. 1.48. 1.39. 1.33.

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