Romeo Inc. has a debt-equity ratio of 1.5, a share price of $5

Question 1

Romeo Inc. has a debt-equity ratio of 1.5, a share price of $5, and 500,000 shares outstanding. What is Romeo’s market firm value?

Select one:

a. $2,500,000

b. $3,750,000

c. $5,250,000

d. $6,250,000

e. $7,500,000

Question 2

Sierra Corporation has just paid a dividend of $2 per share, and its dividends are expected to grow at a steady rate of 7% for the foreseeable future. The firm’s shares are currently selling for $30 per share, with an equity beta of 1.2. The risk-free rate is 5% and expected market return is 13%. What is the firm’s estimated cost of equity if we were to calculate it as the average of the costs of equity from the dividend growth model and the security market line?

Select one:

a. 14.13%

b. 14.20%

c. 14.37%

d. 14.60%

e. 14.89%

Question 3

Tango Enterprises has issued 100,000 coupon bonds, with maturity of 10 years. Each bond sells for $1,060. The bonds pay semi-annual coupons of 8% on face value of $1,000. What is Tango’s cost of debt?

Select one:

a. 3.29%

b. 3.57%

c. 6.57%

d. 7.15%

e. 7.28%

Question 4

An issue of preferred shares has a par value of $95 per share, with a dividend on par of 8%. If the preferred shares are currently selling for $150 per share, what is the percentage cost of preferred shares?

Select one:

a. 5.07%

b. 5.33%

c. 8.00%

d. 12.63%

e. 15.79%

Question 5

Unbelievable Deals Inc. has the following capital structure and marginal tax rate of 38%. What is its WACC?

Debt:

· 100,000 coupon bonds

· 10-year maturity

· Face value of $1,000

· Semi-annual coupon rate of 8%

· Bond price of $1,060

Common shares:

· Risk-free rate = 5%

· Expected market risk premium = 8%

· Beta = 1.2

· Number of common shares = 3,000,000

· Common share price = $30

Preferred shares:

· Par value = $95

· Dividends = $12

· Share price = $150

· Number of preferred shares = 100,000

Select one:

a. 7.14%

b. 8.00%

c. 9.02%

d. 10.39%

e. 11.56%

Question 6

Van Bran Inc. is looking into financing a $32 million project with an equity issue. If the firm’s underwriter charges a spread of 5% on equity issues, what is the gross amount that must be raised in Van Bran’s equity issue?

Select one:

a. $32,000,000

b. $32,568,620

c. $33,264,980

d. $33,600,000

e. $33,684,210

Here’s the SOLUTION

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