21) The cost associated with each additional dollar of financing for investment projects is
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A. [removed] the incremental return |
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B. [removed] the marginal cost of capital |
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C. [removed] risk-free rate |
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D. [removed] beta |
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22) The XYZ Company is planning a $50 million expansion. The expansion is to be financed by selling $20 million in new debt and $30 million in new common stock. The before-tax required rate of return on debt is 9%, and the required rate of return on equity is 14%. If the company is in the 40% tax bracket, what is the marginal cost of capital?
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A. [removed] 14.0% |
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B. [removed] 9.0% |
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C. [removed] 10.6% |
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D. [removed] 11.5% |
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23) Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt–10%; preferred stock–11%; and common stock–18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?
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A. [removed] 18.0% |
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B. [removed] 13.0% |
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C. [removed] 10.0% |
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D. [removed] 14.2% |
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24) Lever Brothers has a debt ratio (debt to assets) of 40%. Management is wondering if its current capital structure is too conservative. Lever Brothers’ present EBIT is $3 million, and profits available to common shareholders are $1,560,000, with 342,857 shares of common stock outstanding. If the firm were to instead have a debt ratio of 60%, additional interest expense would cause profits available to stockholders to decline to $1,440,000, but only 228,571 common shares would be outstanding. What is the difference in EPS at a debt ratio of 60% versus 40%?
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A. [removed] $1.75 |
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B. [removed] $2.00 |
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C. [removed] $3.25 |
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D. [removed] $4.50 |
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25) Zybeck Corp. projects operating income of $4 million next year. The firm’s income tax rate is 40%. Zybeck presently has 750,000 shares of common stock which have a market value of $10 per share, no preferred stock, and no debt. The firm is considering two alternatives to finance a new product: (a) the issuance of $6 million of 10% bonds, or (b) the issuance of 60,000 new shares of common stock. If Zybeck issues common stock this year, what will be the projected EPS next year?
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A. [removed] $4.94 |
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B. [removed] $2.96 |
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C. [removed] $5.33 |
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D. [removed] $3.20 |
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26) _________ risk is generally considered only a paper gain or loss.
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A. [removed] Transaction |
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B. [removed] Translation |
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C. [removed] Economic |
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D. [removed] Financial |
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27) Capital markets in foreign countries
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A. [removed] offer lower returns than those obtainable in the domestic capital markets |
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B. [removed] provide international diversification |
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C. [removed] in general are becoming less integrated due to the widespread availability of interest rate and currency swaps |
|
|
D. [removed] have been getting smaller in the past decade |
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28) Buying and selling in more than one market to make a riskless profit is called
|
A. [removed] profit maximization |
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B. [removed] arbitrage |
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|
C. [removed] international trading |
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|
D. [removed] an efficient market |
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29) What keeps foreign exchange quotes in two different countries in line with each other?
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A. [removed] Cross rates |
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B. [removed] Forward rates |
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|
C. [removed] Arbitrage |
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|
D. [removed] Spot rates |
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30) One reason for international investment is to reduce
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A. [removed] portfolio risk |
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B. [removed] price-earnings (P/E) ratios |
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|
C. [removed] advantages in a foreign country |
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|
D. [removed] exchange rate risk |
