Question

Please show workings. Thank you

1 Company A has a capital structure as shown below. Calculate its weighted average cost of capital.
K Dollars
Retained Earnings 13.25% 5,000
Common Stock 10.35% 13,500
Preferred Stock 7.25% 2,500
Debt (before tax) 6.81% 6,375
27,375
a 11.05%
b 10.52%
c 10.27%
d 9.77%
2 A bond with a $1,000 par value has an 6.25% coupon rate. It will mature in 5 years, and
coupon payments are made semi-annually. The current price is 873.50.
What is the bond's YTM…..you can solve for IRR
a 10.305%
b 9.486%
c 8.325%
d 8.090%
3 Refer to the previous question. If the bond issuer's marginal tax rate is 33%
What is the after-tax cost of debt.
a 4.560%
b 5.420%
c 6.355%
d 7.250%
4 Emerald Company's current dividend rate is $1.05. Ten years ago it was $.38. Based on this
time period, calculate the dividend growth rate.
Solve for "g". Same as solving for "r" for grandma's house….from TVM Exercises
a 6.04%
b 8.76%
c 9.25%
d 10.70%
5 Using the information from the previous question, if Emerald's stock price is currently $35,
and assuming markets are efficient, calculate Emerald's required rate for it's stock.
Use Dividend Growth Model (Gordon Model) rearrange and solve for r.
a 6.05% or 6.35%
b 9.16% or 10.12%
c 13.70% or 14.02%
d 15.25% or 15.67%

An investment realized the total returns over the last eight years

1 6.70%

2. 3.20%

3. 9.50%

4. 4.50%

5. 7.25%

6. -6.25%

7. 5.00%

8. 8.00%

Calculate the geometric average

a.4.738%

b.4.701%

c.4.672%

d. 4.633%

2. When stock prices changes around the declaration date indicate that important information is contained

in its dividend announcements. This would validate the _______________________ hypothesis

a. dividend irrelevance

b. bird in hand

c.information content

d. clientele

e. residual dividend policy

3. Stocks that pay very little, if any dividends, like Tesla are generally called

a. growth stocks

b. value stocks

c. premium stocks

d. income stocks

4. When investors prefer to have the firm reinvest earnings rather than pay them out in dividends if the rate of return

the firm can earn on reinvested earnings exceeds the rate investors, on average, can themselves obtain, is the basis of

a. dividend irrelevance

b.bird in hand

c.information content

d.clientele

e. residual dividend policy

5. MetalBend Corp Issues bonds with a $10,000 par value and a 7.75% coupon rate. The bonds mature in 8 years, and

coupon payments are "semi -annual". If yields on bonds of similar risk are expected to be 8.5% in four (4) years,

what will the value of the bonds be then

a. 9,726.66

b. 9,732.10

c.9,743.07

d. 9,750.11

e. 9,758.35

6. Which of the following statements is correct?

a. The tax code encourages companies to pay dividends rather than retain earnings.

b. If a company uses the residual dividend model to determine its dividend payments, dividends payout will tend

to increase whenever its profitable investment opportunities increase.

c. The stronger management thinks the clientele effect is, the more likely the firm is to adopt a strict version of the

residual dividend model.

d. Large stock repurchases financed by debt tend to increase earnings per share, but they also increase the firm’s

financial risk.

e. A dollar paid out to repurchase stock is taxed at the same rate as a dollar paid out in dividends. Thus, both

companies and investors are indifferent between distributing cash through dividends and stock repurchase programs.

7 The optimal dividend policy

a. strikes a balance between current dividends and future growth so as to maximize stock price

b.ensures all investors, including preferred stock holders and debt holders receive distributions

c.pays all earnings out in the form of dividend distributions

d. does not pay any distribution because the firm can receive a higher return on investment than shareholders

can earn for themselves

e. is calculated by subtracting all debt expenses from earnings, and distributing the difference to common stock

holders

8. MetalBend Corp Issues bonds with a $1,000 par value and a 7.25% coupon rate. The bonds mature in 8 years, and

coupon payments are "semi-annual". The bond is currently priced at 888.65. Calculate the bonds YTM (IRR).

a.9.75%

b.9.73%

c.9.71%

d. 9.45%

e. 9.25%

ABC Manufacturing Company will invest in a stamping plant in Madison Ohio. The plant requires an

initial outlay of $60,000,000. Net cash inflows from the project are expected to be $40,000,000 for the first

year, $35,000,000 for year 2 and 3, and $15,000,000 for years 4 through 10, at which time the stamping plant

will be sold for scrap for $10,000,000. If the stamping plant's cost of capital is 10%:

9. What is the projects NPV (closest answer)

a.95,305,252

b. 90,306,434

c.82,325,306

d.75,316,220

10. What is the project's IRR (closest answer)

a. 50.36%

b.51.26%

c.53.05%

d. 54.25%

Answer 1

1. d 9.77%

А B C Dollars 2 Retained Earnings 13.25% 5000 3 Common Stock 10.35% 13500 4 Preferred Stock 7.25% 2500 5 Debt (before tax) 6.81% 6375 27375 7 weighted average cost of capital = D E Weight Weighted cost 0.182648 0.024200913 0.493151 0.051041096 0.091324 0.006621005 0.232877 0.015858904 9.77%


1 2 Retained Earnings 3 Common Stock 4 Preferred Stock 5 Debt (before tax) 6 7 weighted average cost of capital = B C K Dollars 0.1325 5000 0.1035 13500 0.0725 2500 0.0681 6375 =SUM(C2:05) D E Weight Weighted cost =C2/$C$6 =D2*B2 =C3/$C$6 =D3*B3 =C4/$C$6 =D4*B4 =C5/$C$6 =D5*B5 =SUM(E2:E5) 9

I can only answer 1 question at a time, so I am answering only question 1. Please do rate me and mention doubts, if any, in the comments section.