, Question 1
A firm's bonds currently trade at a yield to maturity of 6.5%. The firm faces a
25% marginal tax rate and finances with 40% debt and 60% common equity. If
the after-tax cost of debt is used in the WACC calculation, what is the after-tax
cost of debt?
A. 6.50%
B. 4.88%
C. 3.25%
D. 2.60%
Correct Answer: B - 4.88%
RATIONALE
After-tax cost of debt = YTM × (1 tax rate) = 6.5% × 0.75 = 4.875%,
rounded to 4.88%. Option A ignores the tax shield; option C
incorrectly applies the tax rate to the equity weight; option D
double-counts the tax effect.
Question 2
A project requires an initial outlay of $250,000 and generates annual after-tax
cash flows of $70,000 for five years. If the firm's required rate of return is 10%,
what is the project's net present value (NPV)?
A. $15,329
B. $12,080
C. $18,500
D. $10,000
Correct Answer: A - $15,329
Page 2
, RATIONALE
PV of annuity = $70,000 × PVIFA(10%,5) = $70,000 × 3.7908 =
$265,356; NPV = $265,356 $250,000 = $15,356, closest to $15,329.
The other options reflect incorrect annuity factors or ignoring
discounting.
Question 3
A stock just paid a dividend of $2.00. Dividends are expected to grow at 5%
indefinitely, and the required return is 11%. Using the Gordon growth model,
what is the intrinsic value per share?
A. $33.33
B. $35.00
C. $38.18
D. $40.00
Correct Answer: B - $35.00
RATIONALE
Next dividend D1 = $2.00 × 1.05 = $2.10; P0 = D1 / (r g) = $2.10 /
(0.11 0.05) = $35.00. Option A uses the current dividend without
growth; option C uses an incorrect denominator; option D applies
growth incorrectly.
Question 4
A company's current assets are $500,000 and current liabilities are $250,000. If
the company uses $50,000 of cash to pay off short-term debt, what is the new
current ratio?
A. 2.00
B. 2.25
C. 1.80
D. 2.50
Correct Answer: B - 2.25
Page 3
A firm's bonds currently trade at a yield to maturity of 6.5%. The firm faces a
25% marginal tax rate and finances with 40% debt and 60% common equity. If
the after-tax cost of debt is used in the WACC calculation, what is the after-tax
cost of debt?
A. 6.50%
B. 4.88%
C. 3.25%
D. 2.60%
Correct Answer: B - 4.88%
RATIONALE
After-tax cost of debt = YTM × (1 tax rate) = 6.5% × 0.75 = 4.875%,
rounded to 4.88%. Option A ignores the tax shield; option C
incorrectly applies the tax rate to the equity weight; option D
double-counts the tax effect.
Question 2
A project requires an initial outlay of $250,000 and generates annual after-tax
cash flows of $70,000 for five years. If the firm's required rate of return is 10%,
what is the project's net present value (NPV)?
A. $15,329
B. $12,080
C. $18,500
D. $10,000
Correct Answer: A - $15,329
Page 2
, RATIONALE
PV of annuity = $70,000 × PVIFA(10%,5) = $70,000 × 3.7908 =
$265,356; NPV = $265,356 $250,000 = $15,356, closest to $15,329.
The other options reflect incorrect annuity factors or ignoring
discounting.
Question 3
A stock just paid a dividend of $2.00. Dividends are expected to grow at 5%
indefinitely, and the required return is 11%. Using the Gordon growth model,
what is the intrinsic value per share?
A. $33.33
B. $35.00
C. $38.18
D. $40.00
Correct Answer: B - $35.00
RATIONALE
Next dividend D1 = $2.00 × 1.05 = $2.10; P0 = D1 / (r g) = $2.10 /
(0.11 0.05) = $35.00. Option A uses the current dividend without
growth; option C uses an incorrect denominator; option D applies
growth incorrectly.
Question 4
A company's current assets are $500,000 and current liabilities are $250,000. If
the company uses $50,000 of cash to pay off short-term debt, what is the new
current ratio?
A. 2.00
B. 2.25
C. 1.80
D. 2.50
Correct Answer: B - 2.25
Page 3
