Shahbaaz Syed; StudentID:

gjan17gl50

Strengths and Improvement Opportunities

CF2 Quiz2
Course: Corporate Finance 2 GMBA-GMBA Term 2 - Jan 2017‡Instructor: Sailee Parodkar ‡Questions: 10

My Score
(8/10)

QUESTION POINTS
CORRECT INCORRECT PARTIAL CREDIT
The Tree House has a
1 The Tree House has a pre-tax cost of debt of 7.9 percent and a return on assets of 11.7 percent. The debt-equity 1/1
ratio is 0.50. Assuming Case 1, What is the cost of equity according to M&M proposition 2?
Original Order: 9
ᅞA: 11.87 percent
ᅞB: 12.33 percent
ᅞC: 12.47 percent
ᅞD: 12.98 percent
ᅚE: 13.60 percent
A firm is considerin
2 A firm is considering two different capital structures. The first option is an all-equity firm with 32,000 shares of 0/1
stock. The second option is 20,000 shares of stock plus some debt. Ignoring taxes, the break-even level of
earnings before interest and taxes between these two options is $48,000. How much money is the firm
considering borrowing if the interest rate is 8 percent?
Original Order: 3
ᅞA: $175,000
ᅚB: $225,000
ᅞC: $250,000
ᅞD: $275,000
ᅞE: $300,000
Ernst Electrical has
3 Ernst Electrical has 9,000 shares of stock outstanding and no debt. The new CFO is considering issuing $80,000 1/1
of debt and using the proceeds to retire 1,500 shares of stock. The coupon rate on the debt is 7.5 percent. What is
the break-even level of earnings before interest and taxes between these two capital structure options?
Original Order: 10
ᅚA: $36,000
ᅞB: $21,000
ᅞC: $24,000
ᅞD: $18,500
ᅞE: $32,500
Christmas Ornaments,
4 Christmas Ornaments, Inc. is an all-equity firm with a total market value of $386,000 and 15,000 shares of stock 1/1
outstanding. Management is considering issuing $75,000 of debt at an interest rate of 8 percent and using the
proceeds on a stock repurchase. As an all-equity firm, management believes the earnings before interest and
taxes (EBIT) will be $31,000 if the economy is normal, $12,000 if it is in a recession, and $37,000 if the economy
booms. Ignore taxes. What will the EPS be if the economy falls into a recession and the firm maintains its all-
equity status?
Original Order: 5
ᅞA: $0.08
ᅚB: $0.80
ᅞC: $1.21
ᅞD: $1.67
ᅞE: $2.07
 The use of personal
5 The use of personal borrowing and lending by an individual to adjust his or her overall exposure to financial 1/1
leverage is referred to as:
Original Order: 8
ᅞA: M&M Proposition I
ᅞB: Capital restructuring
ᅚC: Homemade leverage
ᅞD: Personal Leverage
ᅞE: M&M Proposition II
ABC Inc is planning
6 ABC Inc is planning to invest $100,000 in a new project and considering to raise $40,000 in equity by issuing new 0/1
shares at a cost of 10%, $40,000 in debt at a cost of 5% and the rest from the retained earnings. What discount
rate would to firm use in NPV analysis if the tax rate is 30%?
Original Order: 7
ᅞA: 5%
ᅚB: 5.4%
ᅞC: 10%
ᅞD: 3.5%
ᅞE: Cannot be determined
The Five and Dime St
7 The Five and Dime Store has a cost of equity of 15.8 percent, a pre-tax cost of debt of 7.7 percent, and a tax rate of 1/1
35 percent. What is the firm's weighted average cost of capital if the debt-equity ratio is 0.40?
Original Order: 6
ᅞA: 10.18%
ᅞB: 11.72%
ᅞC: 12.27%
ᅚD: 12.72%
ᅞE: 11.18%
Four years ago, the
8 Four years ago, the Morgan Co. issued 15-year, 7.0 percent semi-annual coupon bonds at par. Today, the bonds 1/1
are quoted at 101.6. What is this firm's post-tax cost of debt, given the tax rate is 30%?
Original Order: 2
ᅞA: 6.79 %
ᅞB: 13.75%
ᅞC: 8.5%
ᅞD: 1.89%
ᅚE: 4.75%
The common stock of
9 The common stock of Contemporary Interiors has a beta of 1.05 and a standard deviation of 27.4 percent. The 1/1
market rate of return is 10.2 percent and the risk-free rate is 5.5 percent. What is the cost of equity for this firm?
Original Order: 4
ᅞA: 18.66%
ᅞB: 12.6%
ᅞC: 18.76%
ᅚD: 10.44%
ᅞE: 15.6%
Smith and Weston has
10 Smith and Weston has 55,000 shares of common stock outstanding at a price of $31 a share. It also has 3,000 1/1
shares of preferred stock outstanding at a price of $62 a share. The firm has 8 percent, 12-year bonds outstanding
with a total face value of $400,000. The bonds are currently quoted at 101.2 percent of face and pay interest semi-
annually. What is the capital structure weight of the firm's preferred stock if the tax rate is 35 percent?
Original Order: 1
ᅚA: 8.10 percent
ᅞB: 15.20 percent
ᅞC: 15.67 percent
ᅞD: 16.84 percent
ᅞE: 17.63 percent

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