# Multiple choice

1. J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently, the yield to maturity on these bonds is 14%. If the firm's tax rate is 40%, what is the cost of debt to J & B?

a. 12.0%

b. 14.0%

c. 8.4%

d. 5.6%

2. Shawhan Supply plans to maintain its optimal capital structure of 30% debt, 20% preferred stock, and 50% common stock far into the future. The required return on each component is: debt-10%; preferred stock-11%; and common stock-18%. Assuming a 40% marginal tax rate, what after-tax rate of return must Shawhan Supply earn on its investments if the value of the firm is to remain unchanged?

a. 18.0%

b. 13.0%

c. 10.0%i

d. 14.2%

3. Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected to pay $918 for the 10-year bond. Bender will have to pay $33 per bond in flotation costs. What is the cost of debt if the firm is in the 34% tax bracket?

a. 7.23%

b. 9.01%

c. 9.23%

d. 11.95%

4. Armadillo Mfg. Co. has a target capital structure of 50% debt and 50% equity. They are planning to invest in a project which will necessitate raising new capital. New debt will be issued at a before-tax yield of 12%, with a coupon rate of 10%. The equity will be provided by internally generated funds. No new outside equity will be issued. If the required rate of return on the firm's stock is 15% and its marginal tax rate is 40%, compute the firm's cost of capital.

a. 13.5%

b. 12.5%

c. 7.2%

d. 11.1%

5. Given the following information, determine the risk-free rate.

Cost of equity = 12%

Beta = 1.50

Market risk premium = 3%

a. 8.0%

b. 7.5%

c. 7.0%

d. 6.5%

6. What is the present value of $12,500 to be received 10 years from today? Assume a discount rate of 8% compounded annually and round to the nearest $10.

a. $5,790

b. $11,574

c. $9,210

d. $17,010

#### Solution Summary

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