11/21/22, 7:50 PM Quiz 2: [1221_INFIMAN_EB2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

Quiz 2
Due Nov 21 at 8:30pm Points 135 Questions 45
Available Nov 21 at 5:50pm - Nov 21 at 8:30pm 2 hours and 40 minutes
Time Limit 150 Minutes

Instructions
1. The exam is designed to show only one question at a time. Once an item is answered, there is no
going back or revisiting the question item. You cannot also move forward to the succeeding questions
unless you have answered or want to skip the question on hand.

2, This exam is good for only 2.5 hours and gives a 30pts bonus.

3. This is a closed notes, closed books exam.

4. Look out for further instructions that are question specific. If there are, these are elaborated usually
towards the end of the question.

Attempt History
Attempt Time Score
LATEST Attempt 1 112 minutes 125 out of 135

 Correct answers are hidden.

Score for this quiz: 125 out of 135

Submitted Nov 21 at 7:50pm
This attempt took 112 minutes.

Question 1 3 / 3 pts

Stock A and Stock B both have an expected return of 10 percent and a

standard deviation of 25 percent. Stock A has a beta of 0.8 and Stock B
has a beta of 1.2. The correlation coefficient, r, between the two stocks is
0.6. Portfolio P is a portfolio with 50 percent invested in Stock A and 50

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percent invested in Stock B. Which of the following statements is most

correct?

Portfolio P has a standard deviation of 25 percent and a beta of 1.0.

Portfolio P has a coefficient of variation equal to 2.5.

Portfolio P has less market risk than Stock A but more market risk than
Stock B.

Portfolio P has more market risk than Stock A but less market risk than
Stock B.

Question 2 3 / 3 pts

Under tax conditions and bankruptcy considerations, which of the

following statements is most correct?

Since debt financing is cheaper than equity financing, increasing a

company's debt ratio will always reduce the company's WACC.

Increasing a company's debt ratio will typically reduce the marginal costs
of both debt and equity financing; however, it still may raise the company's
WACC.

Increasing amount of debt will not always lead to an increase in the

valuation of the company

A company can be 100% debt financed.

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Since debt financing raises the firm's financial risk, increasing a company's
debt ratio will always increase the company's WACC.

Question 3 3 / 3 pts

Stock X, Stock Y, and the market have had the following returns over the
past four years.

Year Market X Y

1999 11% 10% 12%

2000 7 4 -3

2001 17 12 21

2002 -3 -2 -5

The risk-free rate is 7 percent. The market risk premium is 5 percent.

What is the contribution of Stock Y to the riskiness of a well-diversified
portfolio as measured by the beta coefficient? Use 4 decimal places

1.3349

Question 4 3 / 3 pts

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Glo-Garci Records has assets currently worth or valued at $100M. It is

currently 100% financed by equity (which means that current market value
of the company is also $100M). Belonging to the 50% tax bracket, it plans
to issue debt at interest of 10% that will finance half the current market
value of its assets. It currently has 2 million shares of common stock. If
debt will be issued, the number of common stocks outstanding will be
slashed by half.

What will be the new estimated market price of its common stock shares
after issuance of the debt instrument?

75

Question 5 3 / 3 pts

Which of the following statements is most correct?

The bond-yield-plus-risk-premium approach to estimating a firm's cost of

common equity involves adding a subjectively determined risk premium to
the market risk-free bond rate.

Suppose a firm is losing money and thus, is not paying taxes, and that this
situation is expected to persist for a few years whether or not the firm uses
debt financing. Then the firm's after-tax cost of debt will equal its before-
tax cost of debt.

The reason that a cost is assigned to retained earnings is because these

funds are already earning a return in the business; the reason does not
involve the opportunity cost principle.

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The component cost of preferred stock is expressed as kp(1 - T), because

preferred stock dividends are treated as fixed charges, similar to the
treatment of debt interest.

Question 6 3 / 3 pts

. A money manager is managing the account of a large investor. The

investor holds the following stocks:

Stock Amount Invested Estimated Beta

A $2,000,000 0.80

B 5,000,000 1.10

C 3,000,000 1.40

D 5,000,000 ????

The portfolio's required rate of return is 17 percent. The risk-free rate, kRF,
is 7 percent and the return on the market, kM, is 14 percent. What is Stock
D's estimated beta? Use 4 decimal places

2.0257

Question 7 3 / 3 pts

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Which of the following statements is correct?

Business risk is differentiated from financial risk by the fact that financial
risk reflects only the use of debt, while business risk reflects both the use
of debt and such factors as sales variability, cost variability, and operating
leverage.

The optimal capital structure is the one that simultaneously (1) maximizes
the price of the firm's stock, (2) minimizes its WACC, and (3) maximizes its
EPS.

If corporate tax rates were decreased while other things were held
constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital
structure were correct, this would tend to cause corporations to increase
their use of debt.

If corporate tax rates were decreased while other things were held
constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital
structure were correct, this would tend to cause corporations to decrease
their use of debt.

Question 8 3 / 3 pts

Company A and Company B have the same total assets, operating

income (EBIT), tax rate, and business risk. Company A, however, has a
much higher debt ratio than Company B. Company A's basic earning
power (BEP) exceeds its cost of debt financing (kd). Which of the
following statements is most correct?

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Company A has a higher times interest earned (TIE) ratio than Company
B.

Company B will have its ROE magnified due to debt.

Company A has a higher return on equity (ROE) than Company B, and its
risk, as measured by the standard deviation of ROE, is also higher than
Company B's.

Company A has a higher return on assets (ROA) than Company B.

Company A will feel the negative impact of financial leverage.

Question 9 3 / 3 pts

Quick Launch Rocket Company, a satellite launching firm, expects its

sales to increase by 50 percent in the coming year as a result of NASA's
recent problems with the space shuttle. The firm's current EPS is $3.25.
Its degree of operating leverage is 1.6, while its degree of financial
leverage is 2.1. What is the firm's projected EPS for the coming year
using the DTL approach? Use 2 decimal places

8.71

Question 10 3 / 3 pts

A dividend form of payment used by companies to bring down the stock

price after a sharp price run-up because it is believed that there is an

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optimal price range for stocks. Involves giving additional free shares of
stocks to existing shareholders.

Stock Tender

Stock Split

Cash Dividends

Stock buyback

Question 11 3 / 3 pts

A firm estimates that its proposed capital budget will force it to issue new
common stock, which has a greater cost than the cost of retained
earnings. The firm, however, would like to avoid issuing costly new
common stock. Which of the following steps would mitigate the firm's
need to raise new common stock?

Decreasing the company's dividend payout ratio in the incoming year.

Reducing the company's debt ratio for the upcoming year.

Increasing the company's proposed capital budget.

Increasing the company's dividend payout ratio for the upcoming year.

Question 12 3 / 3 pts

Which of the following is correct?

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Wide variations in capital structures exist between industries and also

between individual firms within industries and are influenced by unique firm
factors including managerial attitudes.

The drug industry has a high debt to common equity ratio because their
earnings are very stable and thus, can support the large interest costs
associated with higher debt levels.

Utilities generally have very high common equity ratios due to their need
for vast amounts of equity-supported capital.

Generally, debt to total assets ratios do not vary much among different
industries although they do vary for firms within a particular industry.

Question 13 3 / 3 pts

Stock X, Stock Y, and the market have had the following returns over the
past four years.

Year Market X Y

1999 11% 10% 12%

2000 7 4 -3

2001 17 12 21

2002 -3 -2 -5

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The risk-free rate is 7 percent. The market risk premium is 5 percent.

What is the required rate of return for a portfolio that consists of $14,000
invested in Stock X and $6,000 invested in Stock Y? Use 4 decimal
places

0.1158

Question 14 3 / 3 pts

Which of the following statements is likely to encourage a firm to increase

its debt ratio in its capital structure?

Management believes that the firm's stock is overvalued.

Its corporate tax rate declines.

It has very small operating leverage.

Its sales become less stable over time.

It has more intangible assets.

Question 15 3 / 3 pts

The risk-free rate is 6 percent. Stock A has a beta of 1.0, while Stock B
has a beta of 2.0. The market risk premium (kM - kRF) is positive. Which of
the following statements is most correct?

Stock B's required rate of return is twice that of Stock A

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If Stock A's required return is 11 percent, the market risk premium is 5

percent.

If the risk-free rate increases (but the market risk premium stays
unchanged), Stock B's required return will increase by more than Stock
A's.

Stock B will pull down the required return of a portfolio have an overall risk
similar to average market risk.

Question 16 3 / 3 pts

A decrease in a firm's willingness to pay dividends is likely to result from

an increase in its

Profitable investment opportunities

Earnings stability

Access to capital markets

Collection of accounts receivable

Question 17 3 / 3 pts

Which of the following statements is most correct?

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Investors can interpret a stock repurchase by a firm as a signal that the

firm's managers believe the stock is over-priced.

Stock dividends provide investors with additional shares of stock, not cash,
yet many investors must pay cash in the form of taxes on the value of the
stock dividends. For this reason, stock dividends are rarely used today.

Companies can repurchase shares either (1) to change their capital

structures or (2) to distribute cash to stockholders without paying cash
dividends. In the second situation, tax considerations will probably play a
key role in the decision to repurchase stock versus to pay more cash
dividends.

The bird-in-the-hand theory of dividend policy could be rejected

immediately if personal income taxes were abolished.

Question 18 3 / 3 pts

Assume a new law is passed that restricts investors to holding only one
asset. A risk-averse investor is considering two possible assets as the
asset to be held in isolation. The assets' possible returns and related
probabilities (that is, the probability distributions) are as follows:

Asset X Asset Y

Prob. k Prob. k

0.10 -3% 0.05 -3%

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0.10 2 0.10 2

0.25 5 0.30 5

0.25 8 0.30 8

10
0.30 10 0.25

Which asset should be preferred?

Either one, since the expected returns are the same

Asset Y, since its beta is probably lower.

Asset X, since its standard deviation is lower.

Asset Y, since its coefficient of variation is lower and its expected return is
higher.

Asset X, since its expected return is higher.

Question 19 3 / 3 pts

A theory about investor preferring dividends or not that goes well with the
common saying "each person to his or her own".

Clientele Theory

Tax Preference Theory

Bird-in-the-Hand Theory

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Dividend Irrelevance Theory

Dividend Stability Theory

Question 20 3 / 3 pts

If debt levels greater than 70% is deemed to risky for bankruptcy, select
the optimal capital structure for Minnow Entertainment Company.

Debt = 40%; Equity = 60%; EPS = $2.95; Value per Share = $26.50

Debt = 50%; Equity = 50%; EPS = $3.05; Value per Share = $28.90

Debt = 60%; Equity = 40%; EPS = $3.18; Value per Share = $31.20

Debt = 70%; Equity = 30%; EPS = $3.31; Value per Share = $28.00

Debt = 80%; Equity = 20%; EPS = $3.42; Value per Share = $24.40

Question 21 3 / 3 pts

Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the
following statements must be true about these securities?

The required return on Stock A will be greater than that on Stock B.

The required return on Stock B will be greater than that on Stock A.

Stock A would be a more desirable addition to a portfolio than Stock B.

Stock B would be a more desirable addition to a portfolio than Stock A.

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Question 22 3 / 3 pts

Glo-Garci Records has assets currently worth or valued at $100M. It is

currently 100% financed by equity (which means that current market value
of the company is also $100M). Belonging to the 50% tax bracket, it plans
to issue debt at interest of 10% that will finance half the current market
value of its assets. It currently has 2 million shares of common stock. If
debt will be issued, the number of common stocks outstanding will be
slashed by half.

Assuming no bankruptcy considerations, what will be the new value of the

company if it issues debt to finance the company?

125,000,000

Question 23 3 / 3 pts

Inflation, recession, and high interest rates are economic events that are
characterized as

Components of the beta coefficient measure

Diversifiable market risk

Non-diversifiable market risk

Company-specific risk that can be diversified away

Systematic risk that can be diversified away

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Question 24 3 / 3 pts

PQR Manufacturing Corporation has $1,500,000 in debt outstanding. The

company's before-tax cost of debt is 10 percent. Sales for the year totaled
$3,500,000 and variable costs were 60 percent of sales. Net income was
equal to $600,000 and the company's tax rate was 40 percent. If PQR's
degree of total leverage is equal to 1.40, what is its degree of operating
leverage? Use 2 decimal places

1.22

Question 25 3 / 3 pts

In a portfolio of three different stocks, which of the following is always or

necessarily false?

The riskiness of the portfolio is less than the riskiness of each stock held in
isolation.

It will form an opportunity set that is an area instead of just being a curve.

The return of the portfolio is equal to one of the stocks return.

None of the given statements is false.

The minimum variance portfolio is still the leftmost backward bending

portion of the opportunity set when expected return (y-axis) is plotted vis-a-
vis the risk (x-axis).

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Incorrect Question 26 0 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it

uses to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth Preferred Stock Mkt.

7% $90/share
Rate Value

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

Assume that StarCafe is contemplating an investment for the

enhancement of its stores: wireless Internet service within each café. In
addition to charging for its use, management believes this enhancement

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will increase customer traffic and average amount spent per customer.
The estimated cost of implementation is $27 million and the expected net
increase in annual after-tax cash flow is $3 million in the first year,
growing 3% a year in perpetuity. It is believed that this project has a
similar risk to the other enhancement projects it carried out since the last
5 years. However if this new project is to be pushed through, additional
2,000 shares of common stock would have to be issued at the current
market price.

What is the net present value of the proposed wireless internet service
project?

(Please type in the complete numerical figure: so 100000 for instance is

correct but 100T will be marked wrong by canvas.)

8,600,495.81

Question 27 3.75 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it

uses to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

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Long Term Gov’t 5% Outstanding Preferred 1,000

Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth Preferred Stock Mkt.

7% $90/share
Rate Value

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

What is the cost in percentage of common equity using CAPM? (Use 3

decimal places)

13.625

Incorrect Question 28 0 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it

uses to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Coupon Interest Rate 12% @ Dividend Payout Ratio

25%
on Bond-Debt (10 yrs $1000 par based on Earnings
to maturity) per unit

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Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth Preferred Stock Mkt.

7% $90/share
Rate Value

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

Assume that StarCafe is contemplating an investment for the

enhancement of its stores: wireless Internet service within each café. In
addition to charging for its use, management believes this enhancement
will increase customer traffic and average amount spent per customer.
The estimated cost of implementation is $27 million and the expected net
increase in annual after-tax cash flow is $3 million in the first year,
growing 3% a year in perpetuity. It is believed that this project has a
similar risk to the other enhancement projects it carried out since the last
5 years. However if this new project is to be pushed through, additional
2,000 shares of common stock would have to be issued at the current
market price.

What is the WACC with the issuance of new common stocks? (Use 3
decimal places)

0.114

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Question 29 3.75 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it

uses to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth Preferred Stock Mkt.

7% $90/share
Rate Value

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

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Assume that StarCafe is contemplating an investment for the

enhancement of its stores: wireless Internet service within each café. In
addition to charging for its use, management believes this enhancement
will increase customer traffic and average amount spent per customer.
The estimated cost of implementation is $27 million and the expected net
increase in annual after-tax cash flow is $3 million in the first year,
growing 3% a year in perpetuity. It is believed that this project has a
similar risk to the other enhancement projects it carried out since the last
5 years. However if this new project is to be pushed through, additional
2,000 shares of common stock would have to be issued at the current
market price.

What is the percentage cost of new common equity? (Use 3 decimal

places)

14.738

Question 30 3.75 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it

uses to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

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Long Term Gov’t 5% Outstanding Preferred 1,000

Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth Preferred Stock Mkt.

7% $90/share
Rate Value

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

What is the company's WACC? (Use 3 decimal places)

0.112

Question 31 3.75 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it

uses to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Coupon Interest Rate 12% @ Dividend Payout Ratio

25%
on Bond-Debt (10 yrs $1000 par based on Earnings
to maturity) per unit
Company beta 1.25

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Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth Preferred Stock Mkt.

7% $90/share
Rate Value

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

What is the cost in percentage of common equity using dividend growth

rate model? (Use 3 decimal places)

13.809

Question 32 3.75 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it

uses to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

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Coupon Interest Rate 12% @ Dividend Payout Ratio 25%

on Bond-Debt (10 yrs $1000 par based on Earnings
to maturity) per unit
Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth Preferred Stock Mkt.

7% $90/share
Rate Value

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

What is the per unit market value in dollars of the company's outstanding
bond-debt?

850.33

Question 33 3.75 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it

uses to evaluate new investment projects. Management has collected the
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following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth Preferred Stock Mkt.

7% $90/share
Rate Value

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

What is the current cost in percentage of preferred stocks?

10

Question 34 2.5 / 2.5 pts

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Datacore Company is thinking of an expansion with capitalization

amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
15,000 shares @ 8,000 shares @
Preferred Stocks
$8/share $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How many additional shares of common stocks are needed for Plan 2?
Please take note of your answer for the succeeding questions.

38,800

65,000

55,000

48,800

None from the choices

Question 35 2.5 / 2.5 pts

Datacore Company is thinking of an expansion with capitalization

amounting to US$ 750,000. Datacore is evaluating two financing plans.

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The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
Preferred Stocks 15,000 shares @ $8/share 8,000 shares @ $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How much will be the EBIT @ EPS=0 for Plan 1 ? Please take note of
your answer for the succeeding questions.

$173,833.333

$270,000.00

None from the choices

$163,833.333

P260,000.00

Incorrect Question 36 0 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

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What is the best option for the company?

Option 3

All of the choices

Option 2

Option 1

None from the choice

Question 37 2.5 / 2.5 pts

Datacore Company is thinking of an expansion with capitalization

amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
Preferred Stocks 15,000 shares @ $8/share 8,000 shares @ $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How much interests are to be paid for Plan 2? Please take note of your
answer for the succeeding questions.

$70,000

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$60,000

$85,000

None from the choices

$50,000

Question 38 2.5 / 2.5 pts

Datacore Company is thinking of an expansion with capitalization

amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
Preferred Stocks 15,000 shares @ $8/share 8,000 shares @ $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How much will be the EBIT @ EPS=0 for Plan 2 ? Please take note of
your answer for the succeeding questions.

$260,000.00

$173,833.333

$163,833,333

$270,000.00

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None from the choices

Question 39 2.5 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

How much interests are to be paid for Option 1? Please take note of your
answer for the succeeding questions.

PhP 1.3M

PhP 1.1M

PhP 1.4M

PhP 1.2M

None from the choices

Question 40 2.5 / 2.5 pts

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Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

How much dividends are to be paid for Option 2? Please take note of
your answer for the succeeding questions.

PhP 1.10M

PhP 0.28M

PhP 0.18M

None from the choices

PhP 1.2M

Question 41 2.5 / 2.5 pts

Datacore Company is thinking of an expansion with capitalization

amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

Plan 1 Plan

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Bonds US$300,000 @ 10% US$450,000 @9%

Preferred Stocks 15,000 shares @ $8/share 8,000 shares @ $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How much dividends are to be paid for Plan 2? Please take note of your
answer for the succeeding questions.

$46,000

None from the choices

$120,000

$110,000

$56,000

Question 42 2.5 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

How much will be the EBIT @ EPS=0 for Option 3? Please take note of
your answer for the succeeding questions.

PhP 0.6M
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PhP 0.7M

PhP 0.5M

None from the choices

PhP 0.4M

Question 43 2.5 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

Compute for the EPS @ EBIT = 4 M for Option 2 Please take note of
your answer for the succeeding questions.

None from the choices

1.16

1.36

1.56

0.84

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Question 44 2.5 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

How much value of EBIT will be the indifference point of the Options 2
and 3?Please take note of your answer for the succeeding questions.

PhP -19.4M

PhP 19.4M

PhP -18.4M

None from the choices

PhP 18.4M

Question 45 2.5 / 2.5 pts

Datacore Company is thinking of an expansion with capitalization

amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

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Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
15,000 shares @ 8,000 shares @
Preferred Stocks
$8/share $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How much interests are to be paid for Plan 1? Please take note of your
answer for the succeeding questions.

$80,500

$50,000

None from the choices

$60,000

$70,000

Quiz Score: 125 out of 135

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Quiz 2 AnimoSpace Support

Due Mar 17 at 8:30pm Points 115.04 Questions 36 Available Mar 17 at 5:50pm - Mar 17 at 8:30pm 2 hours and 40 minutes Time Limit 150 Minutes

This quiz was locked Mar 17 at 8:30pm.

Attempt History
Attempt Time Score
LATEST Attempt 1 140 minutes 63.34 out of 115.04

 Correct answers are hidden.

Score for this quiz: 63.34 out of 115.04

Submitted Mar 17 at 8:11pm
This attempt took 140 minutes.

Incorrect
Question 1 0 / 3 pts

Stock X, Stock Y, and the market have had the following returns over the past four years.

Year Market X Y

1999 11% 10% 12%

2000 7 4 -3

2001 17 12 21

2002 -3 -2 -5

The risk-free rate is 7 percent. The market risk premium is 5 percent.

What is the required rate of return for a portfolio that consists of $14,000 invested in Stock X and $6,000 invested in Stock Y? Use 4 decimal places

0.0553

Question 2 3 / 3 pts

Inflation, recession, and high interest rates are economic events that are characterized as

Non-diversifiable market risk

Company-specific risk that can be diversified away

Diversifiable market risk

Systematic risk that can be diversified away

Course Chat 
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AnimoSpace Support
Components of the beta coefficient measure

Incorrect
Question 3 0 / 3 pts

. A money manager is managing the account of a large investor. The investor holds the following stocks:

Stock Amount Invested Estimated Beta

A $2,000,000 0.80

B 5,000,000 1.10
Send
C 3,000,000 1.40

D 5,000,000 ????

The portfolio's required rate of return is 17 percent. The risk-free rate, kRF, is 7 percent and the return on the market, kM, is 14 percent. What is Stock D's estimated beta? Use 4 decimal places

0.6752

Question 4 3 / 3 pts

Which of the following statements is most correct?

The bird-in-the-hand theory of dividend policy could be rejected immediately if personal income taxes were abolished.

Investors can interpret a stock repurchase by a firm as a signal that the firm's managers believe the stock is over-priced.

Companies can repurchase shares either (1) to change their capital structures or (2) to distribute cash to stockholders without paying cash dividends. In the second situation, tax considerations will probably play a key role in the decision to repurchase stock
versus to pay more cash dividends.

Stock dividends provide investors with additional shares of stock, not cash, yet many investors must pay cash in the form of taxes on the value of the stock dividends. For this reason, stock dividends are rarely used today.

Question 5 3 / 3 pts

Which of the following statements is likely to encourage a firm to increase its debt ratio in its capital structure?

Its sales become less stable over time.

Its corporate tax rate declines.

It has more intangible assets.

Management believes that the firm's stock is overvalued.

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It has very small operating leverage.

Question 6 3 / 3 pts

A firm estimates that its proposed capital budget will force it to issue new common stock, which has a greater cost than the cost of retained earnings. The firm, however, would like to avoid issuing costly new common stock. Which of the
following steps would mitigate the firm's need to raise new common stock?

Increasing the company's dividend payout ratio for the upcoming year.

Reducing the company's debt ratio for the upcoming year.

Increasing the company's proposed capital budget.

Decreasing the company's dividend payout ratio in the incoming year.

Question 7 3 / 3 pts

The risk-free rate is 6 percent. Stock A has a beta of 1.0, while Stock B has a beta of 2.0. The market risk premium (kM - kRF) is positive. Which of the following statements is most correct?

If Stock A's required return is 11 percent, the market risk premium is 5 percent.

Stock B will pull down the required return of a portfolio have an overall risk similar to average market risk.

If the risk-free rate increases (but the market risk premium stays unchanged), Stock B's required return will increase by more than Stock A's.

Stock B's required rate of return is twice that of Stock A

Question 8 3 / 3 pts

Assume a new law is passed that restricts investors to holding only one asset. A risk-averse investor is considering two possible assets as the asset to be held in isolation. The assets' possible returns and related probabilities (that is, the
probability distributions) are as follows:

Asset X Asset Y

Prob. k Prob. k

0.10 -3% 0.05 -3%

0.10 2 0.10 2

0.25 5 0.30 5

0.25 8 0.30 8

10
0.30 10 0.25

Which asset should be preferred?

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AnimoSpace Support
Either one, since the expected returns are the same

Asset Y, since its coefficient of variation is lower and its expected return is higher.

Asset X, since its expected return is higher.

Asset Y, since its beta is probably lower.

Asset X, since its standard deviation is lower.

Question 9 3 / 3 pts

From the information below, select the optimal capital structure for Minnow Entertainment Company.

Debt = 70%; Equity = 30%; EPS = $3.31; Value per Share = $30.00

Debt = 60%; Equity = 40%; EPS = $3.18; Value per Share = $31.20

Debt = 50%; Equity = 50%; EPS = $3.05; Value per Share = $28.90

Debt = 40%; Equity = 60%; EPS = $2.95; Value per Share = $26.50

Debt = 80%; Equity = 20%; EPS = $3.42; Value per Share = $30.40

Question 10 3 / 3 pts

Quick Launch Rocket Company, a satellite launching firm, expects its sales to increase by 50 percent in the coming year as a result of NASA's recent problems with the space shuttle. The firm's current EPS is $3.25. Its degree of
operating leverage is 1.6, while its degree of financial leverage is 2.1. What is the firm's projected EPS for the coming year using the DTL approach? Use 2 decimal places

8.71

Question 11 3 / 3 pts

Which of the following statements is correct?

Business risk is differentiated from financial risk by the fact that financial risk reflects only the use of debt, while business risk reflects both the use of debt and such factors as sales variability, cost variability, and operating leverage.

The optimal capital structure is the one that simultaneously (1) maximizes the price of the firm's stock, (2) minimizes its WACC, and (3) maximizes its EPS.

If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to increase their use of debt.

If corporate tax rates were decreased while other things were held constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital structure were correct, this would tend to cause corporations to decrease their use of debt.

Question 12 3 / 3 pts

A theory about investor preferring dividends or not that goes well with the common saying "each person to his or her own".

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Dividend Irrelevance Theory

Bird-in-the-Hand Theory

Tax Preference Theory

Dividend Stability Theory

Clientele Theory

Question 13 3 / 3 pts

Under tax conditions and bankruptcy considerations, which of the following statements is most correct?

A company can be 100% debt financed.

Since debt financing is cheaper than equity financing, increasing a company's debt ratio will always reduce the company's WACC.

Increasing amount of debt will not always lead to an increase in the valuation of the company

Since debt financing raises the firm's financial risk, increasing a company's debt ratio will always increase the company's WACC.

Increasing a company's debt ratio will typically reduce the marginal costs of both debt and equity financing; however, it still may raise the company's WACC.

Question 14 3 / 3 pts

Company A and Company B have the same total assets, operating income (EBIT), tax rate, and business risk. Company A, however, has a much higher debt ratio than Company B. Company A's basic earning power (BEP) exceeds its
cost of debt financing (kd). Which of the following statements is most correct?

Company A has a higher return on equity (ROE) than Company B, and its risk, as measured by the standard deviation of ROE, is also higher than Company B's.

Company A will feel the negative impact of financial leverage.

Company A has a higher return on assets (ROA) than Company B.

Company B will have its ROE magnified due to debt.

Company A has a higher times interest earned (TIE) ratio than Company B.

Question 15 3 / 3 pts

In a portfolio of three different stocks, which of the following is always or necessarily false?

None of the given statements is false.

The riskiness of the portfolio is less than the riskiness of each stock held in isolation.

It will form an opportunity set that is an area instead of just being a curve.

The return of the portfolio is equal to one of the stocks return.

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The minimum variance portfolio is still the leftmost backward bending portion of the opportunity set when expected return (y-axis) is plotted vis-a-vis the risk (x-axis).

Incorrect Question 16 0 / 3 pts

Glo-Garci Records has assets currently worth or valued at $100M. It is currently 100% financed by equity (which means that current market value of the company is also $100M). Belonging to the 50% tax bracket, it plans to issue debt at
interest of 10% that will finance half the current market value of its assets. It currently has 2 million shares of common stock. If debt will be issued, the number of common stocks outstanding will be slashed by half.

What will be the new estimated market price of its common stock shares after issuance of the debt instrument?

100

Question 17 3 / 3 pts

Which of the following statements is most correct?

The component cost of preferred stock is expressed as kp(1 - T), because preferred stock dividends are treated as fixed charges, similar to the treatment of debt interest.

Suppose a firm is losing money and thus, is not paying taxes, and that this situation is expected to persist for a few years whether or not the firm uses debt financing. Then the firm's after-tax cost of debt will equal its before-tax cost of debt.

The reason that a cost is assigned to retained earnings is because these funds are already earning a return in the business; the reason does not involve the opportunity cost principle.

The bond-yield-plus-risk-premium approach to estimating a firm's cost of common equity involves adding a subjectively determined risk premium to the market risk-free bond rate.

Question 18 3 / 3 pts

Stock A and Stock B both have an expected return of 10 percent and a standard deviation of 25 percent. Stock A has a beta of 0.8 and Stock B has a beta of 1.2. The correlation coefficient, r, between the two stocks is 0.6. Portfolio P is a
portfolio with 50 percent invested in Stock A and 50 percent invested in Stock B. Which of the following statements is most correct?

Portfolio P has a standard deviation of 25 percent and a beta of 1.0.

Portfolio P has more market risk than Stock A but less market risk than Stock B.

Portfolio P has a coefficient of variation equal to 2.5.

Portfolio P has less market risk than Stock A but more market risk than Stock B.

Incorrect Question 19 0 / 3 pts

Glo-Garci Records has assets currently worth or valued at $100M. It is currently 100% financed by equity (which means that current market value of the company is also $100M). Belonging to the 50% tax bracket, it plans to issue debt at
interest of 10% that will finance half the current market value of its assets. It currently has 2 million shares of common stock. If debt will be issued, the number of common stocks outstanding will be slashed by half.

Assuming no bankruptcy considerations, what will be the new value of the company if it issues debt to finance the company?

47.5

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Question 20 3 / 3 pts

PQR Manufacturing Corporation has $1,500,000 in debt outstanding. The company's before-tax cost of debt is 10 percent. Sales for the year totaled $3,500,000 and variable costs were 60 percent of sales. Net income was equal to
$600,000 and the company's tax rate was 40 percent. If PQR's degree of total leverage is equal to 1.40, what is its degree of operating leverage? Use 2 decimal places

1.22

Question 21 3 / 3 pts

Stock X, Stock Y, and the market have had the following returns over the past four years.

Year Market X Y

1999 11% 10% 12%

2000 7 4 -3

2001 17 12 21

2002 -3 -2 -5

The risk-free rate is 7 percent. The market risk premium is 5 percent. What is the contribution of Stock Y to the riskiness of a well-diversified portfolio as measured by the beta coefficient? Use 4 decimal places

1.3349

Question 22 3 / 3 pts

A dividend form of payment used by companies to bring down the stock price after a sharp price run-up because it is believed that there is an optimal price range for stocks. Involves giving additional free shares of stocks to existing
shareholders.

Stock buyback

Stock Split

Cash Dividends

Stock Tender

Incorrect Question 23 0 / 3 pts

Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the following statements must be true about these securities?

Stock A would be a more desirable addition to a portfolio than Stock B.

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The required return on Stock A will be greater than that on Stock B.

Stock B would be a more desirable addition to a portfolio than Stock A.

The required return on Stock B will be greater than that on Stock A.

Question 24 3 / 3 pts

A decrease in a firm's willingness to pay dividends is likely to result from an increase in its

Access to capital markets

Earnings stability

Profitable investment opportunities

Collection of accounts receivable

Question 25 3 / 3 pts

Which of the following is correct?

Wide variations in capital structures exist between industries and also between individual firms within industries and are influenced by unique firm factors including managerial attitudes.

Generally, debt to total assets ratios do not vary much among different industries although they do vary for firms within a particular industry.

Utilities generally have very high common equity ratios due to their need for vast amounts of equity-supported capital.

The drug industry has a high debt to common equity ratio because their earnings are very stable and thus, can support the large interest costs associated with higher debt levels.

Question 26 3.34 / 3.34 pts

The DEF Company was weighing three financing options for a diversification program which would require $50 million and provide greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2 million is currently paid. Preferred stock obligations amount to $1.8 million per year. Common shares outstanding is 2 million shares. Income tax bracket of the
company is 46%.

Use 3 decimal places in your computations. What would be the EPS at an EBIT of $34M under Plan 2?

5.646

Incorrect Question 27 0 / 3.34 pts

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The DEF Company was weighing three financing options for a diversification program which would require $50 million and provide greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2 million is currently paid. Preferred stock obligations amount to $1.8 million per year. Common shares outstanding is 2 million shares. Income tax bracket of the
company is 46%.

Use 3 decimal places in your computations. Which plan should the company choose if it projects future EBIT to stay above the $20M dollar mark?

Plan 1

Plan 2

Plan 3

Incorrect Question 28 0 / 3.34 pts

The DEF Company was weighing three financing options for a diversification program which would require $50 million and provide greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2 million is currently paid. Preferred stock obligations amount to $1.8 million per year. Common shares outstanding is 2 million shares. Income tax bracket of the
company is 46%.

Use 3 decimal places in your computations. What would be the EBIT value for the irrelevant indifference point (expressed in millions)?

40.648

Incorrect Question 29 0 / 3.34 pts

The DEF Company was weighing three financing options for a diversification program which would require $50 million and provide greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2 million is currently paid. Preferred stock obligations amount to $1.8 million per year. Common shares outstanding is 2 million shares. Income tax bracket of the
company is 46%.

Use 3 decimal places in your computations. What would be the EBIT value for the relevant indifference point (expressed in millions)?

91.667

Incorrect Question 30 0 / 3.34 pts

The DEF Company was weighing three financing options for a diversification program which would require $50 million and provide greater stability in sales and profits. The options were as follows:

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1. One million common shares at $50 net to the company. AnimoSpace Support
2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2 million is currently paid. Preferred stock obligations amount to $1.8 million per year. Common shares outstanding is 2 million shares. Income tax bracket of the
company is 46%.

Use 3 decimal places in your computations. What would be the EPS at an EBIT of $34M under Plan 3?

5.71

Incorrect Question 31 0 / 3.34 pts

The DEF Company was weighing three financing options for a diversification program which would require $50 million and provide greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2 million is currently paid. Preferred stock obligations amount to $1.8 million per year. Common shares outstanding is 2 million shares. Income tax bracket of the
company is 46%.

Use 3 decimal places in your computations. What would be the EPS at an EBIT of $34M under Plan 1?

3.516

Incorrect Question 32 0 / 4 pts

An increasing number of Puredell customers have expressed the need for deliveries to clients who do not have the inventory capacity to handle large loads. Several of Purdell’s customers have indicated that Puredell needs to offer this
service, or they will be forced to seek a delivery company that does have the capability to offer it. For this Puredell has to launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s marketing manager and on cost estimates compiled by accounting. Based on these estimates, the project is expected to have an IRR of 12.47%. The risk
associated with expansion is not appreciably different than that faced by the firm at present. The total cost of the new fleet and containers is $2,360,000.

Market information necessary for calculating Puredell’s marginal cost of capital was readily available. First, the company’s current capital structure of 42% debt, 6% preferred stock and 52% common equity appeared to be consistent with
optimality at the firm’s marginal tax rate of 31%. The firm had deviated above and below the current proportions but management is convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell could issue bonds at 12% in the current market. Puredell had $128,000 in retained
earnings it could tap before having to issue new shares of common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock, expected to grow at an average of 5% for at least another decade. The preferred stock pays a dividend of $1.37. Current share prices are $9.69 per common share
and $11.50 per preferred share. There is a $0.70 per share issue cost for common stock and $0.60 per share for preferred stock. Assume new issuance of stocks will be issued at current market prices. (Any flotation cost will be deducted
from the value per share.)

The stock market’s compound return, based on a widely diversified portfolio, was 14.8 for the past 15 years and the firm’s historical beta was 1.20. Average treasury yields were about 5.02% for treasury bonds. Financial analyst
estimates Puredell’s stocks to bear around 7% premium over and above its bonds. Use 4 decimal places in all the computations.

What will be the cost (ks) of common stocks using DCF technique, the company needs to issue to finance the new fleet and containers?

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0.1774

Incorrect Question 33 0 / 4 pts

An increasing number of Puredell customers have expressed the need for deliveries to clients who do not have the inventory capacity to handle large loads. Several of Purdell’s customers have indicated that Puredell needs to offer this
service, or they will be forced to seek a delivery company that does have the capability to offer it. For this Puredell has to launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s marketing manager and on cost estimates compiled by accounting. Based on these estimates, the project is expected to have an IRR of 12.47%. The risk
associated with expansion is not appreciably different than that faced by the firm at present. The total cost of the new fleet and containers is $2,360,000.

Market information necessary for calculating Puredell’s marginal cost of capital was readily available. First, the company’s current capital structure of 42% debt, 6% preferred stock and 52% common equity appeared to be consistent with
optimality at the firm’s marginal tax rate of 31%. The firm had deviated above and below the current proportions but management is convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell could issue bonds at 12% in the current market. Puredell had $128,000 in retained
earnings it could tap before having to issue new shares of common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock, expected to grow at an average of 5% for at least another decade. The preferred stock pays a dividend of $1.37. Current share prices are $9.69 per common share
and $11.50 per preferred share. There is a $0.70 per share issue cost for common stock and $0.60 per share for preferred stock. Assume new issuance of stocks will be issued at current market prices. (Any flotation cost will be deducted
from the value per share.)

The stock market’s compound return, based on a widely diversified portfolio, was 14.8 for the past 15 years and the firm’s historical beta was 1.20. Average treasury yields were about 5.02% for treasury bonds. Financial analyst
estimates Puredell’s stocks to bear around 7% premium over and above its bonds. Use 4 decimal places in all the computations.

What will be the proportion or weightage of bonds (separate from the CBT extended credit) used in the company's capital structure after financing the new fleet and containers?

0.4101

Incorrect Question 34 0 / 4 pts

An increasing number of Puredell customers have expressed the need for deliveries to clients who do not have the inventory capacity to handle large loads. Several of Purdell’s customers have indicated that Puredell needs to offer this
service, or they will be forced to seek a delivery company that does have the capability to offer it. For this Puredell has to launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s marketing manager and on cost estimates compiled by accounting. Based on these estimates, the project is expected to have an IRR of 12.47%. The risk
associated with expansion is not appreciably different than that faced by the firm at present. The total cost of the new fleet and containers is $2,360,000.

Market information necessary for calculating Puredell’s marginal cost of capital was readily available. First, the company’s current capital structure of 42% debt, 6% preferred stock and 52% common equity appeared to be consistent with
optimality at the firm’s marginal tax rate of 31%. The firm had deviated above and below the current proportions but management is convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell could issue bonds at 12% in the current market. Puredell had $128,000 in retained
earnings it could tap before having to issue new shares of common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock, expected to grow at an average of 5% for at least another decade. The preferred stock pays a dividend of $1.37. Current share prices are $9.69 per common share
and $11.50 per preferred share. There is a $0.70 per share issue cost for common stock and $0.60 per share for preferred stock. Assume new issuance of stocks will be issued at current market prices. (Any flotation cost will be deducted
from the value per share.)

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AnimoSpace Support

The stock market’s compound return, based on a widely diversified portfolio, was 14.8 for the past 15 years and the firm’s historical beta was 1.20. Average treasury yields were about 5.02% for treasury bonds. Financial analyst
estimates Puredell’s stocks to bear around 7% premium over and above its bonds. Use 4 decimal places in all the computations.

What will be the cost (kp) of preferred stocks the company needs to issue to finance the new fleet and containers?

0.1202

Incorrect Question 35 0 / 4 pts

An increasing number of Puredell customers have expressed the need for deliveries to clients who do not have the inventory capacity to handle large loads. Several of Purdell’s customers have indicated that Puredell needs to offer this
service, or they will be forced to seek a delivery company that does have the capability to offer it. For this Puredell has to launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s marketing manager and on cost estimates compiled by accounting. Based on these estimates, the project is expected to have an IRR of 12.47%. The risk
associated with expansion is not appreciably different than that faced by the firm at present. The total cost of the new fleet and containers is $2,360,000.

Market information necessary for calculating Puredell’s marginal cost of capital was readily available. First, the company’s current capital structure of 42% debt, 6% preferred stock and 52% common equity appeared to be consistent with
optimality at the firm’s marginal tax rate of 31%. The firm had deviated above and below the current proportions but management is convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell could issue bonds at 12% in the current market. Puredell had $128,000 in retained
earnings it could tap before having to issue new shares of common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock, expected to grow at an average of 5% for at least another decade. The preferred stock pays a dividend of $1.37. Current share prices are $9.69 per common share
and $11.50 per preferred share. There is a $0.70 per share issue cost for common stock and $0.60 per share for preferred stock. Assume new issuance of stocks will be issued at current market prices. (Any flotation cost will be deducted
from the value per share.)

The stock market’s compound return, based on a widely diversified portfolio, was 14.8 for the past 15 years and the firm’s historical beta was 1.20. Average treasury yields were about 5.02% for treasury bonds. Financial analyst
estimates Puredell’s stocks to bear around 7% premium over and above its bonds. Use 4 decimal places in all the computations.

What will be the company's WACC after financing the new fleet and containers? Note the company will maximize the use of the CBT extended credit before issuing bonds. Estimate ks by using DCF, CAPM and Bond Yield+ Risk
Premium approaches.

2.43

Incorrect Question 36 0 / 4 pts

An increasing number of Puredell customers have expressed the need for deliveries to clients who do not have the inventory capacity to handle large loads. Several of Purdell’s customers have indicated that Puredell needs to offer this
service, or they will be forced to seek a delivery company that does have the capability to offer it. For this Puredell has to launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s marketing manager and on cost estimates compiled by accounting. Based on these estimates, the project is expected to have an IRR of 12.47%. The risk
associated with expansion is not appreciably different than that faced by the firm at present. The total cost of the new fleet and containers is $2,360,000.

Market information necessary for calculating Puredell’s marginal cost of capital was readily available. First, the company’s current capital structure of 42% debt, 6% preferred stock and 52% common equity appeared to be consistent with
optimality at the firm’s marginal tax rate of 31%. The firm had deviated above and below the current proportions but management is convinced that this is the best capital mix.

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Central Banking Trust (CBT) had extended relatively cheap pre-approved credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell could issue bonds at 12% in the current market. Puredell had $128,000 in retained
earnings it could tap before having to issue new shares of common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock, expected to grow at an average of 5% for at least another decade. The preferred stock pays a dividend of $1.37. Current share prices are $9.69 per common share
and $11.50 per preferred share. There is a $0.70 per share issue cost for common stock and $0.60 per share for preferred stock. Assume new issuance of stocks will be issued at current market prices. (Any flotation cost will be deducted
from the value per share.)

The stock market’s compound return, based on a widely diversified portfolio, was 14.8 for the past 15 years and the firm’s historical beta was 1.20. Average treasury yields were about 5.02% for treasury bonds. Financial analyst
estimates Puredell’s stocks to bear around 7% premium over and above its bonds. Use 4 decimal places in all the computations.

What will be the cost (ks) of common stocks using CAPM technique?

5.2214

Quiz Score: 63.34 out of 115.04

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Quiz 2
Due Dec 16 at 8:30pm Points 115.04 Questions 36
Available Dec 16 at 5:50pm - Dec 16 at 8:30pm about 3 hours
Time Limit 150 Minutes

Attempt History
Attempt Time Score
LATEST Attempt 1 148 minutes 76.7 out of 115.04

 Correct answers are hidden.

Score for this quiz: 76.7 out of 115.04

Submitted Dec 16 at 8:24pm
This attempt took 148 minutes.

Question 1 3 / 3 pts

Inflation, recession, and high interest rates are economic events that are
characterized as

Company-specific risk that can be diversified away

Non-diversifiable market risk

Components of the beta coefficient measure

Systematic risk that can be diversified away

Diversifiable market risk

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Incorrect
Question 2 0 / 3 pts

Glo-Garci Records has assets currently worth or valued at $100M. It is

currently 100% financed by equity (which means that current market value
of the company is also $100M). Belonging to the 50% tax bracket, it plans
to issue debt at interest of 10% that will finance half the current market
value of its assets. It currently has 2 million shares of common stock. If
debt will be issued, the number of common stocks outstanding will be
slashed by half.

What will be the new estimated market price of its common stock shares
after issuance of the debt instrument?

22.5

Send

Question 3 3 / 3 pts

The risk-free rate is 6 percent. Stock A has a beta of 1.0, while Stock B
has a beta of 2.0. The market risk premium (kM - kRF) is positive. Which of
the following statements is most correct?

If the risk-free rate increases (but the market risk premium stays
unchanged), Stock B's required return will increase by more than Stock
A's.

Stock B will pull down the required return of a portfolio have an overall risk
similar to average market risk.

Stock B's required rate of return is twice that of Stock A

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If Stock A's required return is 11 percent, the market risk premium is 5

percent.

Incorrect Question 4 0 / 3 pts

In a portfolio of three different stocks, which of the following is always or

necessarily false?

The minimum variance portfolio is still the leftmost backward bending

portion of the opportunity set when expected return (y-axis) is plotted vis-a-
vis the risk (x-axis). Send

It will form an opportunity set that is an area instead of just being a curve.

None of the given statements is false.

The riskiness of the portfolio is less than the riskiness of each stock held in
isolation.

The return of the portfolio is equal to one of the stocks return.

Question 5 3 / 3 pts

Which of the following statements is correct?

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12/16/21, 8:25 PM Quiz 2: [1211_INFIMAN_ER1] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

If corporate tax rates were decreased while other things were held
constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital
structure were correct, this would tend to cause corporations to increase
their use of debt.

Business risk is differentiated from financial risk by the fact that financial
risk reflects only the use of debt, while business risk reflects both the use
of debt and such factors as sales variability, cost variability, and operating
leverage.

If corporate tax rates were decreased while other things were held
constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital
structure were correct, this would tend to cause corporations to decrease
their use of debt.

Send

The optimal capital structure is the one that simultaneously (1) maximizes
the price of the firm's stock, (2) minimizes its WACC, and (3) maximizes its
EPS.

Incorrect
Question 6 0 / 3 pts

Stock X, Stock Y, and the market have had the following returns over the
past four years.

Year Market X Y

1999 11% 10% 12%

2000 7 4 -3

2001 17 12 Course21
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2002 -3 -2 -5

The risk-free rate is 7 percent. The market risk premium is 5 percent.

What is the contribution of Stock Y to the riskiness of a well-diversified
portfolio as measured by the beta coefficient? Use 4 decimal places

0.3

Question 7 3 / 3 pts

Send
From the information below, select the optimal capital structure for
Minnow Entertainment Company.

Debt = 60%; Equity = 40%; EPS = $3.18; Value per Share = $31.20

Debt = 70%; Equity = 30%; EPS = $3.31; Value per Share = $30.00

Debt = 40%; Equity = 60%; EPS = $2.95; Value per Share = $26.50

Debt = 50%; Equity = 50%; EPS = $3.05; Value per Share = $28.90

Debt = 80%; Equity = 20%; EPS = $3.42; Value per Share = $30.40

Question 8 3 / 3 pts

Company A and Company B have the same total assets, operating

income (EBIT), tax rate, and business risk. Company A, however, has a
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much higher debt ratio than Company B. Company A's basic earning
power (BEP) exceeds its cost of debt financing (kd). Which of the
following statements is most correct?

Company B will have its ROE magnified due to debt.

Company A will feel the negative impact of financial leverage.

Company A has a higher times interest earned (TIE) ratio than Company
B.

Company A has a higher return on assets (ROA) than Company B.

Company A has a higher return on equity (ROE) than Company B, and its
risk, as measured by the standard deviation of ROE, is also higher than Send
Company B's.

Question 9 3 / 3 pts

Stock X, Stock Y, and the market have had the following returns over the
past four years.

Year Market X Y

1999 11% 10% 12%

2000 7 4 -3

2001 17 12 21

2002 -3 -2 -5
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The risk-free rate is 7 percent. The market risk premium is 5 percent.

What is the required rate of return for a portfolio that consists of $14,000
invested in Stock X and $6,000 invested in Stock Y? Use 4 decimal
places

0.1158

Question 10 3 / 3 pts

Send
Which of the following statements is likely to encourage a firm to increase
its debt ratio in its capital structure?

Management believes that the firm's stock is overvalued.

Its sales become less stable over time.

Its corporate tax rate declines.

It has more intangible assets.

It has very small operating leverage.

Question 11 3 / 3 pts

Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the
following statements must be true about these securities?
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12/16/21, 8:25 PM Quiz 2: [1211_INFIMAN_ER1] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

The required return on Stock A will be greater than that on Stock B.

Stock B would be a more desirable addition to a portfolio than Stock A.

The required return on Stock B will be greater than that on Stock A.

Stock A would be a more desirable addition to a portfolio than Stock B.

Question 12 3 / 3 pts

Which of the following statements is most correct?

Send
The reason that a cost is assigned to retained earnings is because these
funds are already earning a return in the business; the reason does not
involve the opportunity cost principle.

Suppose a firm is losing money and thus, is not paying taxes, and that this
situation is expected to persist for a few years whether or not the firm uses
debt financing. Then the firm's after-tax cost of debt will equal its before-
tax cost of debt.

The component cost of preferred stock is expressed as kp(1 - T), because

preferred stock dividends are treated as fixed charges, similar to the
treatment of debt interest.

The bond-yield-plus-risk-premium approach to estimating a firm's cost of

common equity involves adding a subjectively determined risk premium to
the market risk-free bond rate.

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Question 13 3 / 3 pts

Which of the following is correct?

Utilities generally have very high common equity ratios due to their need
for vast amounts of equity-supported capital.

Wide variations in capital structures exist between industries and also

between individual firms within industries and are influenced by unique firm
factors including managerial attitudes.

Send
The drug industry has a high debt to common equity ratio because their
earnings are very stable and thus, can support the large interest costs
associated with higher debt levels.

Generally, debt to total assets ratios do not vary much among different
industries although they do vary for firms within a particular industry.

Question 14 3 / 3 pts

A theory about investor preferring dividends or not that goes well with the
common saying "each person to his or her own".

Dividend Stability Theory

Bird-in-the-Hand Theory
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Dividend Irrelevance Theory

Tax Preference Theory

Clientele Theory

Question 15 3 / 3 pts

A dividend form of payment used by companies to bring down the stock

price after a sharp price run-up because it is believed that there is an
optimal price range for stocks. Involves giving additional free shares of
stocks to existing shareholders.

Send
Stock Split

Stock buyback

Cash Dividends

Stock Tender

Incorrect Question 16 0 / 3 pts

Glo-Garci Records has assets currently worth or valued at $100M. It is

currently 100% financed by equity (which means that current market value
of the company is also $100M). Belonging to the 50% tax bracket, it plans
to issue debt at interest of 10% that will finance half the current market
value of its assets. It currently has 2 million shares of common stock. If
debt will be issued, the number of common stocks outstanding will be
slashed by half.
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12/16/21, 8:25 PM Quiz 2: [1211_INFIMAN_ER1] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

Assuming no bankruptcy considerations, what will be the new value of the

company if it issues debt to finance the company?

52.5

Question 17 3 / 3 pts

Quick Launch Rocket Company, a satellite launching firm, expects its

sales to increase by 50 percent in the coming year as a result of NASA's
recent problems with the space shuttle. The firm's current EPS is $3.25.
Its degree of operating leverage is 1.6, while its degree of financial
leverage is 2.1. What is the firm's projected EPS for the coming year
Send
using the DTL approach? Use 2 decimal places

8.71

Question 18 3 / 3 pts

Stock A and Stock B both have an expected return of 10 percent and a

standard deviation of 25 percent. Stock A has a beta of 0.8 and Stock B
has a beta of 1.2. The correlation coefficient, r, between the two stocks is
0.6. Portfolio P is a portfolio with 50 percent invested in Stock A and 50
percent invested in Stock B. Which of the following statements is most
correct?

Portfolio P has a standard deviation of 25 percent and a beta of 1.0.

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12/16/21, 8:25 PM Quiz 2: [1211_INFIMAN_ER1] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

Portfolio P has less market risk than Stock A but more market risk than
Stock B.

Portfolio P has more market risk than Stock A but less market risk than
Stock B.

Portfolio P has a coefficient of variation equal to 2.5.

Question 19 3 / 3 pts

PQR Manufacturing Corporation has $1,500,000 in debt outstanding. The Send

company's before-tax cost of debt is 10 percent. Sales for the year totaled
$3,500,000 and variable costs were 60 percent of sales. Net income was
equal to $600,000 and the company's tax rate was 40 percent. If PQR's
degree of total leverage is equal to 1.40, what is its degree of operating
leverage? Use 2 decimal places

1.22

Question 20 3 / 3 pts

Assume a new law is passed that restricts investors to holding only one
asset. A risk-averse investor is considering two possible assets as the
asset to be held in isolation. The assets' possible returns and related
probabilities (that is, the probability distributions) are as follows:

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Asset X Asset Y

Prob. k Prob. k

0.10 -3% 0.05 -3%

0.10 2 0.10 2

0.25 5 0.30 5

0.25 8 0.30 8

10
0.30 10 0.25

Which asset should be preferred?

Send

Asset X, since its standard deviation is lower.

Asset X, since its expected return is higher.

Asset Y, since its coefficient of variation is lower and its expected return is
higher.

Asset Y, since its beta is probably lower.

Either one, since the expected returns are the same

Question 21 3 / 3 pts

. A money manager is managing the account of a large investor. The

investor holds the following stocks:
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Stock Amount Invested Estimated Beta

A $2,000,000 0.80

B 5,000,000 1.10

C 3,000,000 1.40

D 5,000,000 ????

The portfolio's required rate of return is 17 percent. The risk-free rate, kRF,
is 7 percent and the return on the market, kM, is 14 percent. What is Stock
D's estimated beta? Use 4 decimal places
Send

2.0257

Question 22 3 / 3 pts

Under tax conditions and bankruptcy considerations, which of the

following statements is most correct?

A company can be 100% debt financed.

Increasing a company's debt ratio will typically reduce the marginal costs
of both debt and equity financing; however, it still may raise the company's
WACC.

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Since debt financing raises the firm's financial risk, increasing a company's
debt ratio will always increase the company's WACC.

Since debt financing is cheaper than equity financing, increasing a

company's debt ratio will always reduce the company's WACC.

Increasing amount of debt will not always lead to an increase in the

valuation of the company

Incorrect Question 23 0 / 3 pts

Send

Which of the following statements is most correct?

Companies can repurchase shares either (1) to change their capital

structures or (2) to distribute cash to stockholders without paying cash
dividends. In the second situation, tax considerations will probably play a
key role in the decision to repurchase stock versus to pay more cash
dividends.

Investors can interpret a stock repurchase by a firm as a signal that the

firm's managers believe the stock is over-priced.

The bird-in-the-hand theory of dividend policy could be rejected

immediately if personal income taxes were abolished.

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Stock dividends provide investors with additional shares of stock, not cash,
yet many investors must pay cash in the form of taxes on the value of the
stock dividends. For this reason, stock dividends are rarely used today.

Question 24 3 / 3 pts

A firm estimates that its proposed capital budget will force it to issue new
common stock, which has a greater cost than the cost of retained
earnings. The firm, however, would like to avoid issuing costly new
common stock. Which of the following steps would mitigate the firm's
need to raise new common stock?

Send

Increasing the company's proposed capital budget.

Reducing the company's debt ratio for the upcoming year.

Increasing the company's dividend payout ratio for the upcoming year.

Decreasing the company's dividend payout ratio in the incoming year.

Question 25 3 / 3 pts

A decrease in a firm's willingness to pay dividends is likely to result from

an increase in its

Profitable investment opportunities

Earnings stability
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Access to capital markets

Collection of accounts receivable

Question 26 3.34 / 3.34 pts

The DEF Company was weighing three financing options for a

diversification program which would require $50 million and provide
greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2 Send
million is currently paid. Preferred stock obligations amount to $1.8 million
per year. Common shares outstanding is 2 million shares. Income tax
bracket of the company is 46%.

Use 3 decimal places in your computations. What would be the EPS at an

EBIT of $34M under Plan 1?

5.304

Question 27 3.34 / 3.34 pts

The DEF Company was weighing three financing options for a

diversification program which would require $50 million and provide
greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
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3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2

million is currently paid. Preferred stock obligations amount to $1.8 million
per year. Common shares outstanding is 2 million shares. Income tax
bracket of the company is 46%.

Use 3 decimal places in your computations. What would be the EBIT

value for the irrelevant indifference point (expressed in millions)?

30.92

Incorrect Question 28 0 / 3.34 pts

Send

The DEF Company was weighing three financing options for a

diversification program which would require $50 million and provide
greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2

million is currently paid. Preferred stock obligations amount to $1.8 million
per year. Common shares outstanding is 2 million shares. Income tax
bracket of the company is 46%.

Use 3 decimal places in your computations. Which plan should the

company choose if it projects future EBIT to stay above the $20M dollar
mark?

Plan 3

Plan 1

Plan 2
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Question 29 3.34 / 3.34 pts

The DEF Company was weighing three financing options for a

diversification program which would require $50 million and provide
greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2

million is currently paid. Preferred stock obligations amount to $1.8 million
per year. Common shares outstanding is 2 million shares. Income tax
bracket of the company is 46%.
Send
Use 3 decimal places in your computations. What would be the EBIT
value for the relevant indifference point (expressed in millions)?

17.28

Question 30 3.34 / 3.34 pts

The DEF Company was weighing three financing options for a

diversification program which would require $50 million and provide
greater stability in sales and profits. The options were as follows:

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2

million is currently paid. Preferred stock obligations amount to $1.8 million
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per year. Common shares outstanding is 2 million shares. Income tax

bracket of the company is 46%.

Use 3 decimal places in your computations. What would be the EPS at an

EBIT of $34M under Plan 2?

5.581

Question 31 3.34 / 3.34 pts

The DEF Company was weighing three financing options for a

diversification program which would require $50 million and provide
greater stability in sales and profits. The options were as follows: Send

1. One million common shares at $50 net to the company.

2. 500,000 shares of preferred stock paying 9.5% dividend.
3. $50 million of 8.5% interest paying bonds.

The current capital structure contained debt on which interest of $1.2

million is currently paid. Preferred stock obligations amount to $1.8 million
per year. Common shares outstanding is 2 million shares. Income tax
bracket of the company is 46%.

Use 3 decimal places in your computations. What would be the EPS at an

EBIT of $34M under Plan 3?

6.809

Incorrect Question 32 0 / 4 pts

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12/16/21, 8:25 PM Quiz 2: [1211_INFIMAN_ER1] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

An increasing number of Puredell customers have expressed the need for

deliveries to clients who do not have the inventory capacity to handle
large loads. Several of Purdell’s customers have indicated that Puredell
needs to offer this service, or they will be forced to seek a delivery
company that does have the capability to offer it. For this Puredell has to
launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s

marketing manager and on cost estimates compiled by accounting. Based
on these estimates, the project is expected to have an IRR of 12.47%.
The risk associated with expansion is not appreciably different than that
faced by the firm at present. The total cost of the new fleet and containers
is $2,360,000.

Send
Market information necessary for calculating Puredell’s marginal cost of
capital was readily available. First, the company’s current capital structure
of 42% debt, 6% preferred stock and 52% common equity appeared to be
consistent with optimality at the firm’s marginal tax rate of 31%. The firm
had deviated above and below the current proportions but management is
convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved

credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell
could issue bonds at 12% in the current market. Puredell had $128,000 in
retained earnings it could tap before having to issue new shares of
common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock,
expected to grow at an average of 5% for at least another decade. The
preferred stock pays a dividend of $1.37. Current share prices are $9.69
per common share and $11.50 per preferred share. There is a $0.70 per
share issue cost for common stock and $0.60 per share for preferred
stock. Assume new issuance of stocks will be issued at current market
prices. (Any flotation cost will be deducted from the value per share.)
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12/16/21, 8:25 PM Quiz 2: [1211_INFIMAN_ER1] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

The stock market’s compound return, based on a widely diversified

portfolio, was 14.8 for the past 15 years and the firm’s historical beta was
1.20. Average treasury yields were about 5.02% for treasury bonds.
Financial analyst estimates Puredell’s stocks to bear around 7% premium
over and above its bonds. Use 4 decimal places in all the computations.

What will be the company's WACC after financing the new fleet and
containers? Note the company will maximize the use of the CBT extended
credit before issuing bonds. Estimate ks by using DCF, CAPM and Bond
Yield+ Risk Premium approaches.

0.1269

Send
Incorrect Question 33 0 / 4 pts

An increasing number of Puredell customers have expressed the need for

deliveries to clients who do not have the inventory capacity to handle
large loads. Several of Purdell’s customers have indicated that Puredell
needs to offer this service, or they will be forced to seek a delivery
company that does have the capability to offer it. For this Puredell has to
launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s

marketing manager and on cost estimates compiled by accounting. Based
on these estimates, the project is expected to have an IRR of 12.47%.
The risk associated with expansion is not appreciably different than that
faced by the firm at present. The total cost of the new fleet and containers
is $2,360,000.

Market information necessary for calculating Puredell’s marginal cost of

capital was readily available. First, the company’s current capital structure
of 42% debt, 6% preferred stock and 52% common equity
Course appeared to be
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consistent with optimality at the firm’s marginal tax rate of 31%. The firm
had deviated above and below the current proportions but management is
convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved

credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell
could issue bonds at 12% in the current market. Puredell had $128,000 in
retained earnings it could tap before having to issue new shares of
common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock,
expected to grow at an average of 5% for at least another decade. The
preferred stock pays a dividend of $1.37. Current share prices are $9.69
per common share and $11.50 per preferred share. There is a $0.70 per
share issue cost for common stock and $0.60 per share for preferred
stock. Assume new issuance of stocks will be issued at current market Send
prices. (Any flotation cost will be deducted from the value per share.)

The stock market’s compound return, based on a widely diversified

portfolio, was 14.8 for the past 15 years and the firm’s historical beta was
1.20. Average treasury yields were about 5.02% for treasury bonds.
Financial analyst estimates Puredell’s stocks to bear around 7% premium
over and above its bonds. Use 4 decimal places in all the computations.

What will be the proportion or weightage of bonds (separate from the CBT
extended credit) used in the company's capital structure after financing
the new fleet and containers?

0.85

Incorrect
Question 34 0 / 4 pts

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12/16/21, 8:25 PM Quiz 2: [1211_INFIMAN_ER1] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

An increasing number of Puredell customers have expressed the need for

deliveries to clients who do not have the inventory capacity to handle
large loads. Several of Purdell’s customers have indicated that Puredell
needs to offer this service, or they will be forced to seek a delivery
company that does have the capability to offer it. For this Puredell has to
launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s

marketing manager and on cost estimates compiled by accounting. Based
on these estimates, the project is expected to have an IRR of 12.47%.
The risk associated with expansion is not appreciably different than that
faced by the firm at present. The total cost of the new fleet and containers
is $2,360,000.

Send
Market information necessary for calculating Puredell’s marginal cost of
capital was readily available. First, the company’s current capital structure
of 42% debt, 6% preferred stock and 52% common equity appeared to be
consistent with optimality at the firm’s marginal tax rate of 31%. The firm
had deviated above and below the current proportions but management is
convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved

credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell
could issue bonds at 12% in the current market. Puredell had $128,000 in
retained earnings it could tap before having to issue new shares of
common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock,
expected to grow at an average of 5% for at least another decade. The
preferred stock pays a dividend of $1.37. Current share prices are $9.69
per common share and $11.50 per preferred share. There is a $0.70 per
share issue cost for common stock and $0.60 per share for preferred
stock. Assume new issuance of stocks will be issued at current market
prices. (Any flotation cost will be deducted from the value per share.)
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12/16/21, 8:25 PM Quiz 2: [1211_INFIMAN_ER1] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

The stock market’s compound return, based on a widely diversified

portfolio, was 14.8 for the past 15 years and the firm’s historical beta was
1.20. Average treasury yields were about 5.02% for treasury bonds.
Financial analyst estimates Puredell’s stocks to bear around 7% premium
over and above its bonds. Use 4 decimal places in all the computations.

What will be the cost (ks) of common stocks using DCF technique, the
company needs to issue to finance the new fleet and containers?

1.554

Incorrect
Question 35 0 / 4 pts
Send

An increasing number of Puredell customers have expressed the need for

deliveries to clients who do not have the inventory capacity to handle
large loads. Several of Purdell’s customers have indicated that Puredell
needs to offer this service, or they will be forced to seek a delivery
company that does have the capability to offer it. For this Puredell has to
launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s

marketing manager and on cost estimates compiled by accounting. Based
on these estimates, the project is expected to have an IRR of 12.47%.
The risk associated with expansion is not appreciably different than that
faced by the firm at present. The total cost of the new fleet and containers
is $2,360,000.

Market information necessary for calculating Puredell’s marginal cost of

capital was readily available. First, the company’s current capital structure
of 42% debt, 6% preferred stock and 52% common equity appeared to be
consistent with optimality at the firm’s marginal tax rate of 31%. The firm
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had deviated above and below the current proportions but management is
convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved

credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell
could issue bonds at 12% in the current market. Puredell had $128,000 in
retained earnings it could tap before having to issue new shares of
common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock,
expected to grow at an average of 5% for at least another decade. The
preferred stock pays a dividend of $1.37. Current share prices are $9.69
per common share and $11.50 per preferred share. There is a $0.70 per
share issue cost for common stock and $0.60 per share for preferred
stock. Assume new issuance of stocks will be issued at current market
prices. (Any flotation cost will be deducted from the value per share.) Send

The stock market’s compound return, based on a widely diversified

portfolio, was 14.8 for the past 15 years and the firm’s historical beta was
1.20. Average treasury yields were about 5.02% for treasury bonds.
Financial analyst estimates Puredell’s stocks to bear around 7% premium
over and above its bonds. Use 4 decimal places in all the computations.

What will be the cost (ks) of common stocks using CAPM technique?

0.0462

Incorrect Question 36 0 / 4 pts

An increasing number of Puredell customers have expressed the need for

deliveries to clients who do not have the inventory capacity to handle
large loads. Several of Purdell’s customers have indicated that Puredell
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needs to offer this service, or they will be forced to seek a delivery

company that does have the capability to offer it. For this Puredell has to
launch an investment project.

A cashflow analysis was done based on sales forecasts from Puredell’s

marketing manager and on cost estimates compiled by accounting. Based
on these estimates, the project is expected to have an IRR of 12.47%.
The risk associated with expansion is not appreciably different than that
faced by the firm at present. The total cost of the new fleet and containers
is $2,360,000.

Market information necessary for calculating Puredell’s marginal cost of

capital was readily available. First, the company’s current capital structure
of 42% debt, 6% preferred stock and 52% common equity appeared to be
consistent with optimality at the firm’s marginal tax rate of 31%. The firm
had deviated above and below the current proportions but management is Send
convinced that this is the best capital mix.

Central Banking Trust (CBT) had extended relatively cheap pre-approved

credit oat 8.5% for the expansion. The credit limit was $554,000. Puredell
could issue bonds at 12% in the current market. Puredell had $128,000 in
retained earnings it could tap before having to issue new shares of
common stock. Preferred stock could be issued, as well.

Puredell current dividend levels are $1.15 per share for common stock,
expected to grow at an average of 5% for at least another decade. The
preferred stock pays a dividend of $1.37. Current share prices are $9.69
per common share and $11.50 per preferred share. There is a $0.70 per
share issue cost for common stock and $0.60 per share for preferred
stock. Assume new issuance of stocks will be issued at current market
prices. (Any flotation cost will be deducted from the value per share.)

The stock market’s compound return, based on a widely diversified

portfolio, was 14.8 for the past 15 years and the firm’s historical beta was
1.20. Average treasury yields were about 5.02% for treasury bonds.
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Financial analyst estimates Puredell’s stocks to bear around 7% premium

over and above its bonds. Use 4 decimal places in all the computations.

What will be the cost (kp) of preferred stocks the company needs to issue
to finance the new fleet and containers?

0.0618

Quiz Score: 76.7 out of 115.04

Send

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

Quiz 2
Due Nov 19 at 11:30am Points 135 Questions 45
Available Nov 19 at 9am - Nov 19 at 11:30am 2 hours and 30 minutes
Time Limit 150 Minutes

Instructions
1. The exam is designed to show only one question at a time. Once an item is answered, there is no
going back or revisiting the question item. You cannot also move forward to the succeeding questions
unless you have answered or want to skip the question on hand. This will be until 11:30am only.

2, This exam is good for only 2.5 hours and gives a 30pts bonus.

3. This is a closed notes, closed books exam.

4. Look out for further instructions that are question specific. If there are, these are elaborated usually
towards the end of the question.

Attempt History
Attempt Time Score
LATEST Attempt 1 129 minutes 72.5 out of 135

 Correct answers are hidden.

Score for this quiz: 72.5 out of 135

Submitted Nov 19 at 11:29am
This attempt took 129 minutes.

Question 1 3 / 3 pts

Inflation, recession, and high interest rates are economic events that are
characterized as

Non-diversifiable market risk

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Systematic risk that can be diversified away 10/15/22

Diversifiable market risk DN Derrick

Nicdao 10/15/22 8:36 AM
Company-specific risk that can be diversified away INSTRUCTOR

pls vontact
Components of the beta coefficient measure ms.amor if
someone knows
her. thanks

Question 2 3 / 3 pts

Stock A and Stock B both have an expected return of 10 percent and a

standard deviation of 25 percent. Stock A has a beta of 0.8 and Stock B
has a beta of 1.2. The correlation coefficient, r, between the two stocks is
0.6. Portfolio P is a portfolio with 50 percent invested in Stock A and 50 Send
percent invested in Stock B. Which of the following statements is most
correct?

Portfolio P has less market risk than Stock A but more market risk than
Stock B.

Portfolio P has a standard deviation of 25 percent and a beta of 1.0.

Portfolio P has a coefficient of variation equal to 2.5.

Portfolio P has more market risk than Stock A but less market risk than
Stock B.

Question 3 3 / 3 pts

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10/15/22
The risk-free rate is 6 percent. Stock A has a beta of 1.0, while Stock B
has a beta of 2.0. The market risk premium (kM - kRF) isDN
positive. Which of
Derrick
the following statements is most correct?
Nicdao 10/15/22 8:36 AM
INSTRUCTOR

pls vontact
If Stock A's required return is 11 percent, the market risk premiumms.amor
is 5 if
percent.
someone knows
her. thanks

Stock B will pull down the required return of a portfolio have an overall risk
similar to average market risk.

If the risk-free rate increases (but the market risk premium stays
unchanged), Stock B's required return will increase by more than Stock
A's. Send

Stock B's required rate of return is twice that of Stock A

Incorrect
Question 4 0 / 3 pts

Which of the following statements is most correct?

Companies can repurchase shares either (1) to change their capital

structures or (2) to distribute cash to stockholders without paying cash
dividends. In the second situation, tax considerations will probably play a
key role in the decision to repurchase stock versus to pay more cash
dividends.

Investors can interpret a stock repurchase by a firm as a signal that the

firm's managers believe the stock is over-priced.

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10/15/22
Stock dividends provide investors with additional shares of stock, not cash,
yet many investors must pay cash in the form of taxes on the value of the
stock dividends. For this reason, stock dividends are rarelyDN
used Derrick
today.
Nicdao 10/15/22 8:36 AM
INSTRUCTOR

pls vontact
The bird-in-the-hand theory of dividend policy could be rejected
ms.amor if
immediately if personal income taxes were abolished.
someone knows
her. thanks

Incorrect
Question 5 0 / 3 pts

Stock X, Stock Y, and the market have had the following returns over the
past four years.
Send

Year Market X Y

1999 11% 10% 12%

2000 7 4 -3

2001 17 12 21

2002 -3 -2 -5

The risk-free rate is 7 percent. The market risk premium is 5 percent.

What is the contribution of Stock Y to the riskiness of a well-diversified
portfolio as measured by the beta coefficient? Use 4 decimal places

0.5

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10/15/22
Question 6 3 / 3 pts

DN
Derrick
A firm estimates that its proposed capital budget will force it toNicdao
issue 10/15/22
new 8:36 AM
INSTRUCTOR
common stock, which has a greater cost than the cost of retained
earnings. The firm, however, would like to avoid issuing costlypls
newvontact
common stock. Which of the following steps would mitigate the ms.amor
firm's if
need
to raise new common stock? someone knows
her. thanks

Increasing the company's dividend payout ratio for the upcoming year.

Decreasing the company's dividend payout ratio in the incoming year.

Increasing the company's proposed capital budget.

Reducing the company's debt ratio for the upcoming year.

Send

Question 7 3 / 3 pts

A dividend form of payment used by companies to bring down the stock

price after a sharp price run-up because it is believed that there is an
optimal price range for stocks. Involves giving additional free shares of
stocks to existing shareholders.

Stock buyback

Cash Dividends

Stock Split

Stock Tender

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10/15/22
3 / 3 pts
Question 8

Derrick DN
Nicdao
Stock X, Stock Y, and the market have had the following returns over10/15/22
the 8:36 AM
INSTRUCTOR
past four years.
pls vontact
Year Market X Y ms.amor if
someone knows
her. thanks
1999 11% 10% 12%

2000 7 4 -3

2001 17 12 21

2002 -3 -2 -5

Send

The risk-free rate is 7 percent. The market risk premium is 5 percent.

What is the required rate of return for a portfolio that consists of $14,000
invested in Stock X and $6,000 invested in Stock Y? Use 4 decimal
places

0.1158

Question 9 3 / 3 pts

Stock A has a beta of 1.5 and Stock B has a beta of 0.5. Which of the
following statements must be true about these securities?

Stock A would be a more desirable addition to a portfolio than Stock B.

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

The required return on Stock A will be greater than that on Stock 10/15/22
B.

DNthanDerrick
Stock B would be a more desirable addition to a portfolio Stock A.
Nicdao 10/15/22 8:36 AM
The required return on Stock B will be greater than that on Stock A.
INSTRUCTOR

pls vontact
ms.amor if
someone knows
her. thanks
Question 10 3 / 3 pts

Quick Launch Rocket Company, a satellite launching firm, expects its

sales to increase by 50 percent in the coming year as a result of NASA's
recent problems with the space shuttle. The firm's current EPS is $3.25.
Its degree of operating leverage is 1.6, while its degree of financial
leverage is 2.1. What is the firm's projected EPS for the coming year using
the DTL approach? Use 2 decimal places Send

8.71

Question 11 3 / 3 pts

A decrease in a firm's willingness to pay dividends is likely to result from

an increase in its

Collection of accounts receivable

Profitable investment opportunities

Earnings stability

Access to capital markets

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10/15/22
Question 12 3 / 3 pts

Derrick DN
Nicdao 10/15/22 8:36 AM
. A money manager is managing the account of a large investor. The
INSTRUCTOR

investor holds the following stocks:

pls vontact
ms.amor if
someone knows
her. thanks
Stock Amount Invested Estimated Beta

A $2,000,000 0.80

B 5,000,000 1.10

C 3,000,000 1.40

Send
D 5,000,000 ????

The portfolio's required rate of return is 17 percent. The risk-free rate, kRF,
is 7 percent and the return on the market, kM, is 14 percent. What is Stock
D's estimated beta? Use 4 decimal places

2.0257

Question 13 3 / 3 pts

Under tax conditions and bankruptcy considerations, which of the

following statements is most correct?

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10/15/22
Since debt financing raises the firm's financial risk, increasing a company's
debt ratio will always increase the company's WACC.
DN Derrick
Nicdao 10/15/22 8:36 AM
INSTRUCTOR
A company can be 100% debt financed.
pls vontact
ms.amor if
Since debt financing is cheaper than equity financing, increasing someone
a knows
company's debt ratio will always reduce the company's WACC. her. thanks

Increasing amount of debt will not always lead to an increase in the

valuation of the company

Increasing a company's debt ratio will typically reduce the marginal costs of
both debt and equity financing; however, it still may raise the company's Send
WACC.

Question 14 3 / 3 pts

Which of the following is correct?

Wide variations in capital structures exist between industries and also

between individual firms within industries and are influenced by unique firm
factors including managerial attitudes.

The drug industry has a high debt to common equity ratio because their
earnings are very stable and thus, can support the large interest costs
associated with higher debt levels.

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10/15/22
Generally, debt to total assets ratios do not vary much among different
industries although they do vary for firms within a particular industry.
DN Derrick
Nicdao 10/15/22 8:36 AM
INSTRUCTOR

Utilities generally have very high common equity ratios due to their
plsneed
vontact
for vast amounts of equity-supported capital. ms.amor if
someone knows
her. thanks

Incorrect Question 15 0 / 3 pts

Glo-Garci Records has assets currently worth or valued at $100M. It is

currently 100% financed by equity (which means that current market value
of the company is also $100M). Belonging to the 50% tax bracket, it plans Send
to issue debt at interest of 10% that will finance half the current market
value of its assets. It currently has 2 million shares of common stock. If
debt will be issued, the number of common stocks outstanding will be
slashed by half.

What will be the new estimated market price of its common stock shares
after issuance of the debt instrument?

54.5

Question 16 3 / 3 pts

Which of the following statements is most correct?

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10/15/22
The reason that a cost is assigned to retained earnings is because these
funds are already earning a return in the business; the reason does not
DN Derrick
involve the opportunity cost principle.
Nicdao 10/15/22 8:36 AM
INSTRUCTOR

pls vontact
The bond-yield-plus-risk-premium approach to estimating a firm'sms.amor
cost of if
common equity involves adding a subjectively determined risk premium
someoneto knows
the market risk-free bond rate.
her. thanks

The component cost of preferred stock is expressed as kp(1 - T), because

preferred stock dividends are treated as fixed charges, similar to the
treatment of debt interest.

Suppose a firm is losing money and thus, is not paying taxes, and that this Send
situation is expected to persist for a few years whether or not the firm uses
debt financing. Then the firm's after-tax cost of debt will equal its before-tax
cost of debt.

Question 17 3 / 3 pts

Which of the following statements is correct?

The optimal capital structure is the one that simultaneously (1) maximizes
the price of the firm's stock, (2) minimizes its WACC, and (3) maximizes its
EPS.

If corporate tax rates were decreased while other things were held
constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital
structure were correct, this would tend to cause corporations to decrease
their use of debt.
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10/15/22
Business risk is differentiated from financial risk by the fact that financial
risk reflects only the use of debt, while business risk reflects both the use
DN Derrick
of debt and such factors as sales variability, cost variability, and operating
leverage. Nicdao 10/15/22 8:36 AM
INSTRUCTOR

pls vontact
ms.amor if
If corporate tax rates were decreased while other things were held someone knows
constant, and if the Modigliani-Miller tax-adjusted tradeoff theory of capital
her. thanks
structure were correct, this would tend to cause corporations to increase
their use of debt.

Question 18 3 / 3 pts

Send
PQR Manufacturing Corporation has $1,500,000 in debt outstanding. The
company's before-tax cost of debt is 10 percent. Sales for the year totaled
$3,500,000 and variable costs were 60 percent of sales. Net income was
equal to $600,000 and the company's tax rate was 40 percent. If PQR's
degree of total leverage is equal to 1.40, what is its degree of operating
leverage? Use 2 decimal places

1.22

Question 19 3 / 3 pts

If debt levels greater than 70% is deemed to risky for bankruptcy, select
the optimal capital structure for Minnow Entertainment Company.

Debt = 80%; Equity = 20%; EPS = $3.42; Value per Share = $24.40

Debt = 60%; Equity = 40%; EPS = $3.18; Value per Share = $31.20
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10/15/22
Debt = 40%; Equity = 60%; EPS = $2.95; Value per Share = $26.50

DN = $28.00
Debt = 70%; Equity = 30%; EPS = $3.31; Value per Share Derrick
Nicdao 10/15/22 8:36 AM
Debt = 50%; Equity = 50%; EPS = $3.05; Value per Share = $28.90
INSTRUCTOR

pls vontact
ms.amor if
someone knows
her. thanks
Question 20 3 / 3 pts

A theory about investor preferring dividends or not that goes well with the
common saying "each person to his or her own".

Clientele Theory

Dividend Irrelevance Theory Send

Bird-in-the-Hand Theory

Tax Preference Theory

Dividend Stability Theory

Question 21 3 / 3 pts

Assume a new law is passed that restricts investors to holding only one
asset. A risk-averse investor is considering two possible assets as the
asset to be held in isolation. The assets' possible returns and related
probabilities (that is, the probability distributions) are as follows:

Asset X Asset Y

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Prob. k Prob. k
10/15/22

0.10 -3% 0.05 -3%

DN Derrick
Nicdao 10/15/22 8:36 AM
0.10 2 0.10 2 INSTRUCTOR

pls vontact
0.25 5 0.30 5 ms.amor if
someone knows
0.25 8 0.30 8 her. thanks

10
0.30 10 0.25

Which asset should be preferred?

Asset Y, since its beta is probably lower. Send

Asset X, since its standard deviation is lower.

Asset X, since its expected return is higher.

Either one, since the expected returns are the same

Asset Y, since its coefficient of variation is lower and its expected return is
higher.

Question 22 3 / 3 pts

Which of the following statements is likely to encourage a firm to increase

its debt ratio in its capital structure?

It has very small operating leverage.

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

Management believes that the firm's stock is overvalued. 10/15/22

Its corporate tax rate declines. DN Derrick

Nicdao 10/15/22 8:36 AM
It has more intangible assets. INSTRUCTOR

pls vontact
Its sales become less stable over time. ms.amor if
someone knows
her. thanks

Question 23 3 / 3 pts

Company A and Company B have the same total assets, operating

income (EBIT), tax rate, and business risk. Company A, however, has a
much higher debt ratio than Company B. Company A's basic earning
power (BEP) exceeds its cost of debt financing (kd). Which of the following Send
statements is most correct?

Company A has a higher return on equity (ROE) than Company B, and its
risk, as measured by the standard deviation of ROE, is also higher than
Company B's.

Company A has a higher times interest earned (TIE) ratio than Company
B.

Company B will have its ROE magnified due to debt.

Company A has a higher return on assets (ROA) than Company B.

Company A will feel the negative impact of financial leverage.

Incorrect
Question 24 0 / 3 pts
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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

In a portfolio of three different stocks, which of the following is always or

10/15/22
necessarily false?

DN Derrick
Nicdao 10/15/22 8:36 AM
The minimum variance portfolio is still the leftmost backward bendingINSTRUCTOR
portion of the opportunity set when expected return (y-axis) is plotted vis-a-
vis the risk (x-axis). pls vontact
ms.amor if
someone knows
The return of the portfolio is equal to one of the stocks return.her. thanks

It will form an opportunity set that is an area instead of just being a curve.

None of the given statements is false.

The riskiness of the portfolio is less than the riskiness of each stock held in
isolation. Send

Incorrect
Question 25 0 / 3 pts

Glo-Garci Records has assets currently worth or valued at $100M. It is

currently 100% financed by equity (which means that current market value
of the company is also $100M). Belonging to the 50% tax bracket, it plans
to issue debt at interest of 10% that will finance half the current market
value of its assets. It currently has 2 million shares of common stock. If
debt will be issued, the number of common stocks outstanding will be
slashed by half.

Assuming no bankruptcy considerations, what will be the new value of the

company if it issues debt to finance the company?

30.5

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10/15/22
Incorrect
Question 26 0 / 3.75 pts

Derrick DN
Nicdao 10/15/22 8:36 AM
StarCafe Corporation is reviewing the cost of equity and the WACC it uses
INSTRUCTOR

to evaluate new investment projects. Management has collected the

pls vontact
following information as of September 30, 2001:
ms.amor if
someone knows
Current Cost of Bond her. thanks
14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Outstanding Units of Send

Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth
7% Preferred Stock Mkt. Value $90/share
Rate

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

Assume that StarCafe is contemplating an investment for the

enhancement of its stores: wireless Internet service within each café. In
addition to charging for its use, management believes this enhancement
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will increase customer traffic and average amount spent per customer.
10/15/22
The estimated cost of implementation is $27 million and the expected net
increase in annual after-tax cash flow is $3 million in the first year, growing
DN Derrick
3% a year in perpetuity. It is believed that this project has a similar risk to
Nicdao 10/15/22 8:36 AM
the other enhancement projects it carried out since the last 5 years.
INSTRUCTOR
However if this new project is to be pushed through, additional 2,000
pls market
shares of common stock would have to be issued at the current vontact
price. ms.amor if
someone knows
What is the WACC with the issuance of new common stocks?her.
(Use 3
thanks
decimal places)

3.421

Send
Incorrect
Question 27 0 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it uses
to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

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Market Risk Premium 6.9% Outstanding Common 10,000

10/15/22
Stock Shares

DN Derrick
Preferred Stock 9% @ $100
Nicdao
Common Stock Par Value $5 10/15/22 8:36 AM
Dividend par
INSTRUCTOR

pls vontact
Estimated Growth
7% ms.amor
Preferred Stock Mkt. Value if
$90/share
Rate someone knows
her. thanks
Common Stock Mkt.
$55/ share New Stock Floatation Cost 12%
Value

What is the current cost in percentage of preferred stocks?

32 Send

Incorrect
Question 28 0 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it uses
to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Tax Rate 40% Outstanding Units of 700

Bond-Debt
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Long Term Gov’t Outstanding Preferred 10/15/22

5% 1,000
Bond Rate Stock Shares
DN Derrick
Outstanding Common Nicdao 10/15/22 8:36 AM
Market Risk Premium 6.9% 10,000
INSTRUCTOR
Stock Shares
pls vontact
Preferred Stock 9% @ $100 ms.amor if
Common Stock Par Value $5 knows
someone
Dividend par
her. thanks

Estimated Growth
7% Preferred Stock Mkt. Value $90/share
Rate

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

Send
What is the cost in percentage of common equity using dividend growth
rate model? (Use 3 decimal places)

45

Incorrect
Question 29 0 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it uses
to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Coupon Interest Rate 12% @ Dividend Payout Ratio

25%
on Bond-Debt (10 yrs $1000 par based on Earnings
to maturity) per unit Course Chat 
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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

Company beta 1.25

10/15/22

Outstanding Units DN
of
Tax Rate 40% Derrick
700
Bond-Debt
Nicdao 10/15/22 8:36 AM
INSTRUCTOR
Long Term Gov’t Outstanding Preferred
5% pls 1,000
vontact
Bond Rate Stock Shares
ms.amor if
someone knows
Outstanding Common her. thanks
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth
7% Preferred Stock Mkt. Value $90/share
Rate

Send
Common Stock Mkt.
$55/ share New Stock Floatation Cost 12%
Value

Assume that StarCafe is contemplating an investment for the

enhancement of its stores: wireless Internet service within each café. In
addition to charging for its use, management believes this enhancement
will increase customer traffic and average amount spent per customer.
The estimated cost of implementation is $27 million and the expected net
increase in annual after-tax cash flow is $3 million in the first year, growing
3% a year in perpetuity. It is believed that this project has a similar risk to
the other enhancement projects it carried out since the last 5 years.
However if this new project is to be pushed through, additional 2,000
shares of common stock would have to be issued at the current market
price.

What is the percentage cost of new common equity? (Use 3 decimal

places)

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10/15/22

Incorrect
Question 30 DN 0 / 3.75 pts
Derrick
Nicdao 10/15/22 8:36 AM
INSTRUCTOR

pls vontact
StarCafe Corporation is reviewing the cost of equity and the WACC it uses
to evaluate new investment projects. Management has collectedms.amor
the if
following information as of September 30, 2001: someone knows
her. thanks

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25
Send
Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth
7% Preferred Stock Mkt. Value $90/share
Rate

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

What is the company's WACC? (Use 3 decimal places)

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2.983 10/15/22

DN Derrick
Nicdao 10/15/22 8:36 AM
INSTRUCTOR

Incorrect Question 31 0 /vontact

pls 3.75 pts
ms.amor if
someone knows
her. thanks
StarCafe Corporation is reviewing the cost of equity and the WACC it uses
to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Dividend Payout Ratio

Coupon Interest Rate 12% @ 25%
based on Earnings Send
on Bond-Debt (10 yrs $1000 par
to maturity) per unit
Company beta 1.25

Outstanding Units of
Tax Rate 40% 700
Bond-Debt

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth
7% Preferred Stock Mkt. Value $90/share
Rate

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value
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10/15/22
Assume that StarCafe is contemplating an investment for the
DNeach
enhancement of its stores: wireless Internet service within café. In
Derrick
addition to charging for its use, management believes this enhancement
Nicdao 10/15/22 8:36 AM
will increase customer traffic and average amount spent per customer.
INSTRUCTOR

The estimated cost of implementation is $27 million and the expected net
pls vontact
increase in annual after-tax cash flow is $3 million in the first year, growing
ms.amor if
3% a year in perpetuity. It is believed that this project has a similar riskknows
someone to
the other enhancement projects it carried out since the last 5 her.
years.
thanks
However if this new project is to be pushed through, additional 2,000
shares of common stock would have to be issued at the current market
price.

What is the net present value of the proposed wireless internet service
project?

(Please type in the complete numerical figure: so 100000 for instance is

correct but 100T will be marked wrong by canvas.)
Send

300,000

Incorrect Question 32 0 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it uses
to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond

14.98% Current EPS $14
- Debt

Coupon Interest Rate 12% @ Dividend Payout Ratio

25%
on Bond-Debt (10 yrs $1000 par based on Earnings
to maturity) per unit
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Company beta 1.25

10/15/22

Outstanding Units DN
of
Tax Rate 40% Derrick
700
Bond-Debt
Nicdao 10/15/22 8:36 AM
INSTRUCTOR
Long Term Gov’t Outstanding Preferred
5% pls 1,000
vontact
Bond Rate Stock Shares
ms.amor if
someone knows
Outstanding Common her. thanks
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100

Common Stock Par Value $5
Dividend par

Estimated Growth
7% Preferred Stock Mkt. Value $90/share
Rate

Send
Common Stock Mkt.
$55/ share New Stock Floatation Cost 12%
Value

What is the cost in percentage of common equity using CAPM? (Use 3

decimal places)

Incorrect Question 33 0 / 3.75 pts

StarCafe Corporation is reviewing the cost of equity and the WACC it uses
to evaluate new investment projects. Management has collected the
following information as of September 30, 2001:

Current Cost of Bond 14.98% Current EPS $14

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

- Debt
10/15/22

Dividend Payout Ratio

DN Derrick
Coupon Interest Rate 12% @ 25%
based on Earnings
on Bond-Debt (10 yrs $1000 par Nicdao 10/15/22 8:36 AM
INSTRUCTOR
to maturity) per unit
Company beta 1.25
pls vontact
ms.amor if
Outstanding Units of someone knows
Tax Rate 40% 700
Bond-Debt her. thanks

Long Term Gov’t Outstanding Preferred

5% 1,000
Bond Rate Stock Shares

Outstanding Common
Market Risk Premium 6.9% 10,000
Stock Shares

Preferred Stock 9% @ $100 Send

Common Stock Par Value $5
Dividend par

Estimated Growth
7% Preferred Stock Mkt. Value $90/share
Rate

Common Stock Mkt.

$55/ share New Stock Floatation Cost 12%
Value

What is the per unit market value in dollars of the company's outstanding
bond-debt?

34

Question 34 2.5 / 2.5 pts

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

10/15/22

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

DN Derrick
interest rate of 6%. It wishes to finance a 10 million expansion and is
NicdaoOption
considering three options: Option 1, Additional debt at 8% interest, 10/15/22 8:36 AM

2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common

INSTRUCTOR

stock @ 20 pesos /share. The company presently has 1 million

plsshares
vontactof
common stocks outstanding and has a 40% tax bracket. If earnings
ms.amor if
someone
before interest and taxes is 4 million. Find the following: ( Answers knows
should
be rounded off to two decimal places.) her. thanks

How much will be the EBIT @ EPS=0 for Option 3? Please take note of
your answer for the succeeding questions.

PhP 0.7M

Send
PhP 0.5M

None from the choices

PhP 0.6M

PhP 0.4M

Incorrect Question 35 0 / 2.5 pts

Datacore Company is thinking of an expansion with capitalization

amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

Plan 1 Plan
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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

Bonds US$300,000 @ 10% US$450,000 @9%

10/15/22
Preferred Stocks 15,000 shares @ $8/share 8,000 shares @ $7/share
Common Stocks @US$ 6/share DN Derrick
@US$ 5/share
Nicdao 10/15/22 8:36 AM
Answer the questions as rounded off to three decimal places.
INSTRUCTOR

How much will be the EBIT @ EPS=0 for Plan 1 ? Please take
plsnote of
vontact
your answer for the succeeding questions. ms.amor if
someone knows
her. thanks
$163,833.333

$173,833.333

$270,000.00

P260,000.00

None from the choices

Send

Question 36 2.5 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

How much dividends are to be paid for Option 2? Please take note of
your answer for the succeeding questions.

None from the choices Course Chat 

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

PhP 1.2M 10/15/22

PhP 1.10M DN Derrick

Nicdao 10/15/22 8:36 AM
PhP 0.18M INSTRUCTOR

pls vontact
PhP 0.28M ms.amor if
someone knows
her. thanks

Question 37 2.5 / 2.5 pts

Datacore Company is thinking of an expansion with capitalization

amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume Send
tax rate to be at 40%.

Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
Preferred Stocks 15,000 shares @ $8/share 8,000 shares @ $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How much interests are to be paid for Plan 2? Please take note of your
answer for the succeeding questions.

$70,000

$60,000

None from the choices

$85,000

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

$50,000 10/15/22

DN Derrick
Nicdao 10/15/22 8:36 AM
INSTRUCTOR
Question 38 2.5 / 2.5 pts
pls vontact
ms.amor if
someone knows
Datacore Company is thinking of an expansion with capitalization
her. thanks
amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
Send
15,000 shares @ 8,000 shares @
Preferred Stocks
$8/share $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How much interests are to be paid for Plan 1? Please take note of your
answer for the succeeding questions.

$80,500

$70,000

$60,000

$50,000

None from the choices

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

10/15/22
Incorrect Question 39 0 / 2.5 pts

Derrick DN
Nicdao 10/15/22 8:36 AM
Datacore Company is thinking of an expansion with capitalization
INSTRUCTOR

amounting to US$ 750,000. Datacore is evaluating two financing plans.

pls vontact
The company currently has 30,000 shares of common stock and a Long
ms.amor if
Term Debt of US$ 500,000 with an annual interest rate of 8%.someone
Assumeknows
tax rate to be at 40%. her. thanks

Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
Preferred Stocks 15,000 shares @ $8/share 8,000 shares @ $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

Send
How much dividends are to be paid for Plan 2? Please take note of your
answer for the succeeding questions.

None from the choices

$56,000

$110,000

$46,000

$120,000

Incorrect Question 40 0 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

considering three options: Option 1, Additional debt at 8% interest, Option

10/15/22
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
DN Derrick
common stocks outstanding and has a 40% tax bracket. If earnings
Nicdao 10/15/22 8:36 AM
before interest and taxes is 4 million. Find the following: ( Answers should
INSTRUCTOR
be rounded off to two decimal places.)
pls vontact
ms.amor if
someone knows
How much value of EBIT will be the indifference point of the Options 2 and
her. thanks
3?Please take note of your answer for the succeeding questions.

PhP -18.4M

None from the choices

PhP 19.4M

Send
PhP 18.4M

PhP -19.4M

Question 41 2.5 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

How much interests are to be paid for Option 1? Please take note of your
answer for the succeeding questions.
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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

10/15/22

DN Derrick
None from the choices
Nicdao 10/15/22 8:36 AM
INSTRUCTOR
PhP 1.4M
pls vontact
PhP 1.2M ms.amor if
someone knows
her. thanks
PhP 1.3M

PhP 1.1M

Incorrect Question 42 0 / 2.5 pts

Send

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
stock @ 20 pesos /share. The company presently has 1 million shares of
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
be rounded off to two decimal places.)

Compute for the EPS @ EBIT = 4 M for Option 2 Please take note of your
answer for the succeeding questions.

1.36

0.84

1.56

1.16
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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

None from the choices 10/15/22

DN Derrick
Nicdao 10/15/22 8:36 AM
INSTRUCTOR
Incorrect Question 43 0 / 2.5 pts
pls vontact
ms.amor if
someone knows
Datacore Company is thinking of an expansion with capitalization
her. thanks
amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
Term Debt of US$ 500,000 with an annual interest rate of 8%. Assume
tax rate to be at 40%.

Plan 1 Plan
Bonds US$300,000 @ 10% US$450,000 @9%
Send
Preferred Stocks 15,000 shares @ $8/share 8,000 shares @ $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How much will be the EBIT @ EPS=0 for Plan 2 ? Please take note of
your answer for the succeeding questions.

$173,833.333

$260,000.00

$270,000.00

$163,833,333

None from the choices

Incorrect Question 44 0 / 2.5 pts

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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

Datacore Company is thinking of an expansion with capitalization

10/15/22
amounting to US$ 750,000. Datacore is evaluating two financing plans.
The company currently has 30,000 shares of common stock and a Long
DN
Term Debt of US$ 500,000 with an annual interest rate of 8%.Derrick
Assume
Nicdao 10/15/22 8:36 AM
tax rate to be at 40%.
INSTRUCTOR

pls vontact
ms.amor if
Plan 1 Plan
someone knows
Bonds US$300,000 @ 10% US$450,000 @9%
her. thanks
15,000 shares @ 8,000 shares @
Preferred Stocks
$8/share $7/share
Common Stocks @US$ 6/share @US$ 5/share

Answer the questions as rounded off to three decimal places.

How many additional shares of common stocks are needed for Plan 2?
Please take note of your answer for the succeeding questions.

Send

None from the choices

55,000

38,800

65,000

48,800

Incorrect Question 45 0 / 2.5 pts

Pioneer Company has a 10 Million Pesos in debt outstanding bearing an

interest rate of 6%. It wishes to finance a 10 million expansion and is
considering three options: Option 1, Additional debt at 8% interest, Option
2 Preferred stock with a 12 % dividend rate, Option 3 Sale of Common
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11/19/22, 11:31 AM Quiz 2: [1221_INFIMAN_EC2] - FUNDAMENTALS OF FINANCIAL MANAGEMENT FOR IES

stock @ 20 pesos /share. The company presently has 1 million shares of

10/15/22
common stocks outstanding and has a 40% tax bracket. If earnings
before interest and taxes is 4 million. Find the following: ( Answers should
DN Derrick
be rounded off to two decimal places.)
Nicdao 10/15/22 8:36 AM
INSTRUCTOR

What is the best option for the company? pls vontact

ms.amor if
someone knows
her. thanks
Option 1

All of the choices

Option 2

Option 3

None from the choice Send

Quiz Score: 72.5 out of 135

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