BUSI 530 QUIZ 3 /BUSI530 QUIZ 3:LATEST-LIBERTY UNIVERSITY

BUSI 530 QUIZ 3 /BUSI530 QUIZ 3:LATEST-LIBERTY UNIVERSITY• BUSI 530 QUIZ 3 Question 1 2 out of 2 points What is the WACC for a firm with 40% debt, 20% preferred stock and 40% equity if the respective costs for these components are 6% after-tax, 12% after-tax, and 18% before-tax? The firm's tax rate is 35%. Answer • Question 2 2 out of 2 points Why is it important to include the tax effect into cost of capital computations for firms with debt financing? Answer Response Feedback: incorrect • Question 3 2 out of 2 points Changing the capital structure by adding debt will not: Answer Response Feedback: correct • Question 4 2 out of 2 points Which of the following statements is incorrect concerning the equity component of the WACC? Answer • Question 5 2 out of 2 points With respect to the WACC: Answer Response Feedback: incorrect • Question 6 2 out of 2 points Which of the following is NOT a cost to the firm of increasing debt financing: Answer • Question 7 2 out of 2 points What is the yield to maturity on Dotte Inc's bonds if its after-tax cost of debt is 10% and its tax rate is 35%? Answer 0.10 = rd(1 - 0.35) rd = 15.38% • Question 8 2 out of 2 points How much is added to a firm's weighted average cost of capital for 45% debt financing with a required rate of return of 10% and a tax rate of 35%? Answer • Question 9 2 out of 2 points A firm is considering a project that will generate perpetual cash flows of $50,000 per year beginning next year. The project has the same risk as the firm's overall operations. If the firm's WACC is 12.0%, and its debt-to-equity ratio is 1.33, what is the most it could pay for the project and still earn its required rate of return? Answer PV(Perpetuity) = $50,000/0.12 = $416,667 • Question 10 2 out of 2 points If a company's cost of capital is less than the required return on equity, then the firm: Answer • Question 11 2 out of 2 points Issue costs for equity are higher than those for debt for all of the following reasons except: Answer • Question 12 2 out of 2 points A firm has just issued $250 million of equity which caused its stock price to drop by 3%. Calculate the loss in value of the firm's equity given that its market value of equity was $1 billion before the new issue: Answer • Question 13 0 out of 2 points Studies show that recent returns on venture capital investments have been: Answer • Question 14 2 out of 2 points What is the primary reason for a reduction in share value after a successful rights issue? The new shares: Answer • Question 15 2 out of 2 points What is the market value placed on a firm in which an entrepreneur invests $1 million and a venture capitalist invests $3 million in first-stage financing for a 50% interest in the firm? Answer • Question 16 2 out of 2 points Which of the following statements is generally true concerning the costs of security issue? Answer • Question 17 2 out of 2 points A secondary offering IPO occurs when: Answer • Question 18 2 out of 2 points Which of the following is least likely to explain why entrepreneurs contribute their personal funds to start-up projects? Their contribution: Answer • Question 19 2 out of 2 points Which of the following is correct for stock issued under a firm commitment where the underwriter is to receive an 8% spread? Answer • Question 20 2 out of 2 points In regards to new issues of common stock, economists have found that the announcement of a new issue: Answer • Question 21 0 out of 2 points Given recent evidence concerning the CAPM, which of the following portfolios might be expected to plot above the security market line? Answer • Question 22 2 out of 2 points One of the easiest methods of diversifying away firm-specific risks is to: Answer • Question 23 2 out of 2 points In practice, the market portfolio is often represented by: Answer • Question 24 2 out of 2 points The average of beta values for all individual stocks is: Answer • Question 25 2 out of 2 points Investment projects that plot above the security market line would be considered to have: Answer • Question 26 0 out of 2 points Given the CAPM's noted difficulties, which of the following statements may be correct concerning a low price-earnings ratio stock? Answer • Question 27 0 out of 2 points What two elements are represented in security returns? Answer • Question 28 2 out of 2 points The correct opportunity cost for a project is determined to be 15% and the project is expected to generate $1 million in cash flows at the end of the next four years after an initial outlay of $3 million. Based on this information, the project would plot: Answer • Question 29 2 out of 2 points The slope of the security market line equals: Answer • Question 30 2 out of 2 points Which of the following statements is more likely to be correct concerning the statement, "Stock A has a higher expected return than Stock B"? Answer • Question 31 2 out of 2 points Funded debt refers to those liabilities that: Answer • Question 32 2 out of 2 points What will happen to retained earnings when a corporation issues 1,000 shares of $1 par stock for $10 per share? Answer • Question 33 0 out of 2 points A firm's internally generated funds are calculated by: Answer • Question 34 0 out of 2 points Which of the following statements is typically correct for a going-concern firm? Answer • Question 35 0 out of 2 points A company is about to issue new shares of stock. If the par value per share is $4.00, the price of the new shares will most likely be: Answer • Question 36 0 out of 2 points If 100 million shares of common stock are issued with a par value of $2 and additional paid in capital of $800 million, the total par value of the issued shares is: Answer • Question 37 2 out of 2 points What type of voting does a corporation have if there are two directors to elect and Director Jones received 50 votes from a shareholder who owns 100 shares? Answer • Question 38 2 out of 2 points With respect to bonds, when interest rates increase: Answer • Question 39 2 out of 2 points The value of retained earnings on the corporate balance sheet represents the amount of earnings: Answer • Question 40 2 out of 2 points Which of the following statements is correct about a corporation that borrows from its bank at "Prime plus one percent?" The interest rate: Answer • Question 41 2 out of 2 points One common reason for reporting standard deviations rather than variances is that standard deviations: Answer • Question 42 2 out of 2 points The fact that historical returns on Treasury bills are less volatile than common stock returns indicates that: Answer • Question 43 2 out of 2 points When high growth is expected in the economy, an investor should receive higher returns from: Answer • Question 44 2 out of 2 points What percentage return is achieved by an investor who purchases a stock for $30, receives a $1.50 dividend, and sells the share one year later for $28.50? Answer • Question 45 2 out of 2 points The incremental risk to a portfolio from adding another stock: Answer • Question 46 0 out of 2 points A stock investor owns a diversified portfolio of 15 stocks. What will be the likely effect on portfolio standard deviation from adding one more stock? Answer • Question 47 0 out of 2 points If a stock's returns are volatile, then the stock: Answer • Question 48 2 out of 2 points Which of the following concerns is likely to be most important to portfolio investors seeking diversification? Answer • Question 49 2 out of 2 points Averaging the deviations from the mean for a portfolio of securities will: Answer • Question 50 2 out of 2 points Which of the following security portfolios should offer the highest maturity premium? Answer