FNAN 522 Midterm EXAM
QUESTIONS WITH CORRECT
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d. MV of equity: $98.06 million; MV of debt: $21.72 million - ANSWER ✓ Book
Co. has 1.9 million shares of common equity with a par (book) value of $1.05,
retained earnings of $30.4 million, and its shares have a market value of $51.61 per
share. It also has debt with a par value of $21.5 million that is trading at 101% of
par. What is the market value of its equity? What is the market value of its debt?
a. MV of equity: $98.06 million; MV of debt: $23.84 million
b. MV of equity: $51.61 million million; MV of debt: $21.50 million
c. MV of equity: $97.68 million; MV of debt: $21.72 million
d. MV of equity: $98.06 million; MV of debt: $21.72 million
b. 4.49% - ANSWER ✓ Laurel, Inc., has debt outstanding with a coupon rate of
5.9% and a yield to maturity of 6.9%. Its tax rate is 35%. What is Laurel's effective
(after-tax) cost of debt? NOTE: Assume that the debt has annual coupons.
a. 5.9%
b. 4.49%
c. 6.9%
d. 1.0%
d. 10.2% - ANSWER ✓ Dewyco has preferred stock trading at $49 per share. The
next preferred dividend of $5 is due in one year. What is Dewyco's cost of capital
for preferred stock?
a. 0.098%
b. 5.0%
c. 9.8%
d. 10.2%
, d. 7.7% - ANSWER ✓ Steady Company's stock has a beta of 0.25. If the risk-free
rate is 5.9% and the market risk premium is 7.2%, what is an estimate of Steady
Company's cost of equity?
a. 8.0%
b. 4.3%
c. 15.1%
d. 7.7%
d. 11.8% - ANSWER ✓ CoffeeCarts has a cost of equity of 15.4%, has an
effective (aka after-tax) cost of debt of 3.5%, and is financed 70% with equity and
30% with debt. What is this firm's WACC?
a. 5.1%
b. 13.6%
c. 9.4%
d. 11.8%
d. 9.65% - ANSWER ✓ Pfd Company has debt with a yield to maturity of 7.8%, a
cost of equity of 12.9%, and a cost of preferred stock of 8.9%. The market values
of its debt, preferred stock, and equity are $10.4 million, $3.3 million, and $16.2
million, respectively, and its tax rate is 38%. What is this firm's after-tax WACC?
a. 15.8%
b. 6.89%
c. 11.36%
d. 9.65%
b. 11.67% - ANSWER ✓ A company has issued preferred stock that are valued at
$75 a share. The preferred dividend is $5. The company's growth rate is 5%. What
is the cost of the company's preferred stock?
a. 1.67%
b. 11.67%
c. 5%
d. 6.67%
QUESTIONS WITH CORRECT
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d. MV of equity: $98.06 million; MV of debt: $21.72 million - ANSWER ✓ Book
Co. has 1.9 million shares of common equity with a par (book) value of $1.05,
retained earnings of $30.4 million, and its shares have a market value of $51.61 per
share. It also has debt with a par value of $21.5 million that is trading at 101% of
par. What is the market value of its equity? What is the market value of its debt?
a. MV of equity: $98.06 million; MV of debt: $23.84 million
b. MV of equity: $51.61 million million; MV of debt: $21.50 million
c. MV of equity: $97.68 million; MV of debt: $21.72 million
d. MV of equity: $98.06 million; MV of debt: $21.72 million
b. 4.49% - ANSWER ✓ Laurel, Inc., has debt outstanding with a coupon rate of
5.9% and a yield to maturity of 6.9%. Its tax rate is 35%. What is Laurel's effective
(after-tax) cost of debt? NOTE: Assume that the debt has annual coupons.
a. 5.9%
b. 4.49%
c. 6.9%
d. 1.0%
d. 10.2% - ANSWER ✓ Dewyco has preferred stock trading at $49 per share. The
next preferred dividend of $5 is due in one year. What is Dewyco's cost of capital
for preferred stock?
a. 0.098%
b. 5.0%
c. 9.8%
d. 10.2%
, d. 7.7% - ANSWER ✓ Steady Company's stock has a beta of 0.25. If the risk-free
rate is 5.9% and the market risk premium is 7.2%, what is an estimate of Steady
Company's cost of equity?
a. 8.0%
b. 4.3%
c. 15.1%
d. 7.7%
d. 11.8% - ANSWER ✓ CoffeeCarts has a cost of equity of 15.4%, has an
effective (aka after-tax) cost of debt of 3.5%, and is financed 70% with equity and
30% with debt. What is this firm's WACC?
a. 5.1%
b. 13.6%
c. 9.4%
d. 11.8%
d. 9.65% - ANSWER ✓ Pfd Company has debt with a yield to maturity of 7.8%, a
cost of equity of 12.9%, and a cost of preferred stock of 8.9%. The market values
of its debt, preferred stock, and equity are $10.4 million, $3.3 million, and $16.2
million, respectively, and its tax rate is 38%. What is this firm's after-tax WACC?
a. 15.8%
b. 6.89%
c. 11.36%
d. 9.65%
b. 11.67% - ANSWER ✓ A company has issued preferred stock that are valued at
$75 a share. The preferred dividend is $5. The company's growth rate is 5%. What
is the cost of the company's preferred stock?
a. 1.67%
b. 11.67%
c. 5%
d. 6.67%
