# Important information about Multiple Choice

10. Suppose the RiskFree Rate is 8%, the Expected Return this year on the S&P 500 stock market index is 13%, and the stock of Joe's Junkyard has a Beta of 1.4. Given these conditions what is the required rate of return for Joe's stock?

a. 8%

b. 13%

c. 15%

d. 21%

11. To raise money to finance the capital budget projects you've been evaluating, your firm plans to borrow money at an interest rate of 14%, before-tax. If your firm's effective tax rate is 40%, what is the aftertax cost in percent of the new loan?

a. 15.96%

b. 14.40%

c. 14.00%

d. 8.40%

e. 5.60%

12.

Here is a condensed version of your firm's balance sheet:

If your firm's aftertax cost of debt is 6%, the cost of preferred stock is 10%, and the cost of common stock is 11%, what is the Weighted Average Cost of Capital (WACC)?

a. 9%

b. 8%

c. 9.4%

13. Michigan Mattress Company is considering the purchase of land and the construction of a new plant. The land, which would be bought immediately (at t = 0), has a cost of $100,000 and the building, which would be erected at the end of the first year (t = 1), would cost $500,000. It is estimated that the firm's after-tax cash flow will be $100,000 starting at the end of the second year, and that this incremental inflow would increase at a 10 percent rate annually over the next 10 years. What is the approximate payback period?

a. two years

b. four years

c. six years

d. eight years

e. ten years

18. If you constructed a set of pro forma financial statements for 2005 and found that projected Total Assets exceeded projected Total Liabilities and Equity by $11,250, you would know that:

a. your forecasting method is inaccurate

b. your forecasting assumptions or calculations must be in error, because projected Assets and projected Liabilities and Equity must always balance

c. you must arrange for $11,250 in additional financing

d. your firm will have $11,250 of excess funds available in 2005

20. Consider the following condensed Income Statement:

2004

Sales $8,000,000

COGS 6,500,000

Gross Profit 1,500,000

Sales growth in 2005 is expected to be 15%

If COGS is assumed to vary directly with sales, then Gross Profit for 2005 will be:

a. $7,475,000

b. $1,725,000

c. $1,200,000

d. $1,500,000

24. Stone's Stones and Rocks buys on terms of 2/10, net 30 from its suppliers. If it pays on the 8th day, taking the discount, what is the percent cost of the trade credit that it receives?

a. 91.84%

b. 33.39%

c. 2%

d. 0%

#### Solution Summary

The solution explains some multiple choice questions in finance relating to required rate of return, after tax cost, WACC, payback period