FINC 3313-Source of capital target market proportions
Subject: Business   / Finance
Question
Source of capital target market proportions
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long-term debt 60%
common stock equity 40
A firm has determined it’s optimal structure which is composed of the following sources and target market value proportions
Debt: The firm can sell a 15-year, $1,000 par value, 8% bond for $1,026
Common stock: the firm’s beta is 1.33, the market rate is 14% and the risk free rate is 5%
Additionally, the firm has a marginal tax rate of 40%
the firm’s before-tax cost of debt is _________.
a. 12.7%
b. 10.6%
c. 7.7%
d. 11.2%
The firm’s after-tax cost of debt is_________
a. 7.7%
b. 7%
c. 6%
d. 4.6%
Based on the above information, the weighted average cost of capital is _______
a. 10.9%
b. 11.6%
c. 12.1%
d. 9.6%
The firm’s cost of a new issue of common stock is _______
a. 10.2%
b. 14.3%
c. 17%
d. 16.7%
Based on a market price of $50, how many shares should be sold?
a. 180,000
b. 300,000
c. 500,000
d, 120,000
Based on the market price of the bonds and current capital structure, how many bonds must be sold?
a. 23,384
b. 14,612
c. 14,620
d. 8,772
The firm is considering investing in 2 projects A and B
A B
Start up $15,000,000 $25,000,000
Years 1-5 $3,000,000 $ 2,000,000
years 6-10 $2,000,000 $5,000,000
The NPV for project A is:
a. $533,230
b. -$149,798
c. $128,691
d. $1,333,019
The IRR for project A is:
a. 9.4%
b. 1.18%
c. 11.8%
d. 14.4%
Based on the NPV, which project(s) should you accept:
a. neither
b. both
c. a
d. b
The NPV for project B is:
a. $4,478,840
b.$44,768,408
c. $5,231,592
d. -$5,231,592
The IRR for project B is:
a. 5.42%
b. 11.8%
c. 0%
d. 9.4%
BAsed on IRR, which project(S) should you accept:
a. b
b. both
c. a
d. neither
