FINA 5320 - Midterm Math Questions with
Correct Answers
The cost of equity of Caro Corporation is 9.4 percent, the expected return on the
market is 13.6 percent, and the risk-free rate is 3.8 percent. What is the firm's debt-
equity ratio if its asset beta is .36? Assume there is no preferred stock.
.59
Zachary Confections has a yield to maturity on its debt of 7.8 percent, a cost of equity of
12.4 percent, and a cost of preferred stock of 8 percent. The firm has 105 shares of
common stock outstanding at a market price of $22 per share. There are 25 shares of
preferred stock outstanding at a market price of $45 per share. The bond issue has a
total face value of $1,500 and sells at 98 percent of face value. If the tax rate is 21
percent, what is the weighted average cost of capital assuming all interest is tax
deductible?
9.52%
Clark, Incorporated has an asset beta of .57, the risk-free rate is 4.3 percent, and the
market risk premium is 7.7 percent. What is the equity beta if the firm has a debt-
equity ratio of .56?
.89
A firm has an equity beta of 1.2, the risk-free rate is 3.4 percent, the market return is
15.7 percent, and the pretax cost of debt is 9.4 percent. The debt-equity ratio is .47. If
you apply the common beta assumptions, what is the firm's asset beta?
.82
, Edelman's net cash flows for the next three years are projected at $72,000, $78,000, and
$84,000, respectively. After that, the cash flows are expected to increase by 3.2 percent
annually. The aftertax cost of debt is 6.2 percent and the cost of equity is 11.4 percent.
What is the value of the firm if it is financed with 40 percent debt and 60 percent
equity?
$1,279,623
The cost of equity for Chang Corporation is 8.4 percent and the debt-equity ratio is .6.
The expected return on the market is 10.4 percent and the risk-free rate is 3.8 percent.
Using the common assumption for the debt beta, what is the asset beta?
.44
Dylan & Lee is an all-equity firm with a beta of .88. What will the firm's equity beta be
if the firm switches to a debt-equity ratio of .23?
1.08
Jillian Retail can issue equity at a flotation cost of 8.76 percent and debt at 5.93 percent.
The firm currently has a debt-equity ratio of .37 but prefers a ratio of .35. What should
this firm use as its weighted average flotation cost?
8.03%
Brick and Mortar has 200 shares of common stock outstanding at a market price of $37
per share. The firm recently paid an annual dividend in the amount of $1.20 per share
and has a dividend growth rate of 4 percent. The firm also has 5 bonds outstanding with
a face value of $1,000 per bond that are selling at 99 percent of par. The bonds have a
coupon rate of 6 percent and a yield to maturity of 6.7 percent. All interest is tax
deductible. If the tax rate is 21 percent, what is the weighted average cost of capital?
Correct Answers
The cost of equity of Caro Corporation is 9.4 percent, the expected return on the
market is 13.6 percent, and the risk-free rate is 3.8 percent. What is the firm's debt-
equity ratio if its asset beta is .36? Assume there is no preferred stock.
.59
Zachary Confections has a yield to maturity on its debt of 7.8 percent, a cost of equity of
12.4 percent, and a cost of preferred stock of 8 percent. The firm has 105 shares of
common stock outstanding at a market price of $22 per share. There are 25 shares of
preferred stock outstanding at a market price of $45 per share. The bond issue has a
total face value of $1,500 and sells at 98 percent of face value. If the tax rate is 21
percent, what is the weighted average cost of capital assuming all interest is tax
deductible?
9.52%
Clark, Incorporated has an asset beta of .57, the risk-free rate is 4.3 percent, and the
market risk premium is 7.7 percent. What is the equity beta if the firm has a debt-
equity ratio of .56?
.89
A firm has an equity beta of 1.2, the risk-free rate is 3.4 percent, the market return is
15.7 percent, and the pretax cost of debt is 9.4 percent. The debt-equity ratio is .47. If
you apply the common beta assumptions, what is the firm's asset beta?
.82
, Edelman's net cash flows for the next three years are projected at $72,000, $78,000, and
$84,000, respectively. After that, the cash flows are expected to increase by 3.2 percent
annually. The aftertax cost of debt is 6.2 percent and the cost of equity is 11.4 percent.
What is the value of the firm if it is financed with 40 percent debt and 60 percent
equity?
$1,279,623
The cost of equity for Chang Corporation is 8.4 percent and the debt-equity ratio is .6.
The expected return on the market is 10.4 percent and the risk-free rate is 3.8 percent.
Using the common assumption for the debt beta, what is the asset beta?
.44
Dylan & Lee is an all-equity firm with a beta of .88. What will the firm's equity beta be
if the firm switches to a debt-equity ratio of .23?
1.08
Jillian Retail can issue equity at a flotation cost of 8.76 percent and debt at 5.93 percent.
The firm currently has a debt-equity ratio of .37 but prefers a ratio of .35. What should
this firm use as its weighted average flotation cost?
8.03%
Brick and Mortar has 200 shares of common stock outstanding at a market price of $37
per share. The firm recently paid an annual dividend in the amount of $1.20 per share
and has a dividend growth rate of 4 percent. The firm also has 5 bonds outstanding with
a face value of $1,000 per bond that are selling at 99 percent of par. The bonds have a
coupon rate of 6 percent and a yield to maturity of 6.7 percent. All interest is tax
deductible. If the tax rate is 21 percent, what is the weighted average cost of capital?
