FINC 324 Exam Questions & Answers

FINC 324 Exam Questions & Answers Capital budgeting decisions that include both investment and financing decisions can be analyzed by: I) Adjusting the present value II) Adjusting the discount rate III) Ignoring financing mix - D. I and II only Total market value of a firm (V): [D = market value of debt; E = market value of equity] - A 3. The after-tax weighted average cost of capital is determined by: A. Multiplying the weighted average after tax cost of debt by the weighted average cost of equity B. Adding the weighted average before tax cost of debt to the weighted average cost of equity C. Adding the weighted average after tax cost of debt to the weighted average cost of equity D. Dividing the weighted average before tax cost of debt to the weighted average cost of equity - C 4. The after-tax weighted average cost of capital (WACC) is calculated as: A. WACC = rD (D/V) + rE (E/V); (where V = D + E) B. WACC = rD (1 - TC)(D/V) + rE (E/V); (where V = D + E) C. WACC = rD (D/V) + rE (1 - TC)(E/V); (where V = D + E) D. None of the above - B 5. In calculating the weighted average cost of capital, the values used for D, E and V are: A. book values B. liquidating values C. market values D. none of the above - C Given the following data for Vinyard Corporation: D=1000 V=4000 E=3000 V=4000 Calculate the proportions of debt (D/V) and equity (E/V) for the firm that you would use for estimating the weighted average cost of capital (WACC): A. 40% debt and 60% equity B. 50% debt and 50% equity C. 25% debt and 75% equity D. none of the given values - C. Use market values: D/V = 1,000/4,000 =0.25 (25%); E/V = 3,000/4,000 = 0.75 (75%) Given the following data for Golf Corporation: market price/share = $12; Book value/share = $10; Number of shares outstanding = 100 million; market price/bond = $800; Face value/bond = $1,000; Number of bonds outstanding = 1 million; Calculate the proportions of debt (D/V) and equity (E/V) for the firm that you would use for estimating the weighted average cost of capital (WACC): A. 40% debt and 60% equity B. 50% debt and 50% equity C. 45.5% debt and 54.5% equity D. none of the given values - A. Use market values (in Millions): E = (12) * (100) = $1,200; D = (800) * (1) = $800; V = D + E = $2,000 D/V = 800/2,000 = 0.4 (40%); E/V = 1,200/2,000 = 0.6 (60%) Given the following data: Cost of debt = rD = 6%; Cost of equity = rE = 12.1%; Marginal tax rate = 35%; and the firm has 50% debt and 50% equity. Calculate the after-tax weighted average coat of capital (WACC):