# FIN 326 Intermediate Corporate Finance Quiz 2

FIN 326: Intermediate Corporate FinanceQUIZ 2SUMMER 2014Name_________________________________________________________________________â¢ 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.AssetsCurrent assets \$ 38,000,000Net plant, property, and equipment 101,000,000Total assets \$139,000,000Liabilities and EquityAccounts payable \$ 10,000,000Accruals 9,000,000Current liabilities \$ 19,000,000Long-term debt (40,000 bonds, \$1,000 par value) 40,000,000Total liabilities \$ 59,000,000Common stock (10,000,000 shares) 30,000,000Retained earnings 50,000,000Total shareholders’ equity 80,000,000Total liabilities and shareholders’ equity \$139,000,0001. The Collins Groupâ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 firmâs tax rate is 40%?a. 4.64%b. 4.88%c. 5.14%d. 5.40%e. 5.67% 2. The stockâ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 firmâs WACC? The debt is selling for \$875 per bond and the stock is selling or 15.25 per sharea. 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 yearâs capital budget. The companyâ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 firmâ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 CFIâ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. RPCâs WACC is 12.50 percent. RPC has a marginal tax rate of 40 percent. Next yearâ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 RPCâs current equilibrium stock price? a. \$12.73 b. \$17.23 c. \$25.83 d. \$20.37 e. \$23.70

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