FIN 326: Intermediate Corporate Finance
QUIZ 2
SUMMER 2014
Name_________________________________________________________________________

• Please show all work, calculation, or explanation to receive full credit and circle the correct answer.

(The following information applies to Problems 1-4)

The Collins Group, a leading producer of custom automobile accessories, has hired you to estimate the firm’s weighted average cost of capital. The balance sheet and some other information are provided below.

Assets
Current assets $ 38,000,000
Net plant, property, and equipment 101,000,000
Total assets $139,000,000

Liabilities and Equity
Accounts payable $ 10,000,000
Accruals 9,000,000
Current liabilities $ 19,000,000
Long-term debt (40,000 bonds, $1,000 par value) 40,000,000
Total liabilities $ 59,000,000
Common stock (10,000,000 shares) 30,000,000
Retained earnings 50,000,000
Total shareholders’ equity 80,000,000
Total liabilities and shareholders’ equity $139,000,000

1. The Collins Group’s bond with $1,000 par value 20-year, 7.25% annual
coupon rate with semiannual coupon payment is selling or $875. What is the best estimate of the after-tax cost of debt if the firm’s tax rate is 40%?

a. 4.64%
b. 4.88%
c. 5.14%
d. 5.40%
e. 5.67%


2. The stock’s beta is 1.25, and the yield on a 20-year Treasury bond is 5.50%.
The required return on the stock market is 11.50%. Based on the CAPM,
what is the firm’s cost of common stock?

a. 11.15%
b. 11.73%
c. 12.35%
d. 13.00%
e. 13.65%

3. Which of the following is the best estimate for the weight of debt for use in calculating the firm’s WACC? The debt is selling for $875 per bond and the stock is selling or 15.25 per share

a. 18.67%
b. 19.60%
c. 20.58%
d. 21.61%
e. 22.69%


4. What is the best estimate of the firm’s WACC?

a. 10.85%
b. 11.19%
c. 11.53%
d. 11.88%
e. 12.24%


7. The management of California Fluoride Industries (CFI) is planning next year’s capital budget. The company’s earnings and dividends are growing at a constant rate of 4 percent. The last dividend, D0, was $0.80; and the current equilibrium stock price is $8.73. CFI can raise new debt at a 12 percent before tax cost. CFI is at its optimal capital structure, which is 35 percent debt and 65 percent equity, and the firm’s marginal tax rate is 40 percent. CFI has the following independent, indivisible, and equally risky investment opportunities:


Project Cost Rate of Return
A $ 18,000 9%
B 16,000 11%
C 13,000 15%
D 23,000 13%

What is CFI’s optimal capital budget?

a. $70,000 b. $36,000 c. $34,000 d. $47,000 e. $0


8. Radiator Products Company (RPC) is at its optimal capital structure of 75 percent common equity and 25 percent debt. RPC’s WACC is 12.50 percent. RPC has a marginal tax rate of 40 percent. Next year’s dividend is expected to be $2.50 per share, and RPC has a constant growth in earnings and dividends of 5 percent. The cost of common equity used in the WACC is based on retained earnings, while the before tax cost of debt is 10 percent. What is RPC’s current equilibrium stock price?

a. $12.73 b. $17.23 c. $25.83 d. $20.37 e. $23.70

Punctual Essays
Calculate your paper price
Pages (550 words)
Approximate price: -

Why Work with Us

Top Quality and Well-Researched Papers

We always make sure that writers follow all your instructions precisely. You can choose your academic level: high school, college/university or professional, and we will assign a writer who has a respective degree.

Professional and Experienced Academic Writers

We have a team of professional writers with experience in academic and business writing. Many are native speakers and able to perform any task for which you need help.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.

Essays

Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

Admissions

Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

Reviews

Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

Reviews

Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.