Financial Statements Analysis Essay Sample
Dr. Sudhakar Raju Financial Statements Analysis ( FN 6450 ) PRACTICE EXAM QUESTIONS ON WACC 1. The return stockholders require on their investing in a house is called the: a. dividend output. B. cost of equity. c. capital additions yield. d. cost of capital. e. income return.
2. The cost of capital: a. will diminish as the hazard degree of a house increases. b. is chiefly dependent upon the beginning of the financess used for a undertaking. c. implies a undertaking will bring forth a positive net nowadays value merely when the rate of return on the undertaking is less than the preset cost of capital. d. remains changeless for all undertakings undertaken by the same house. E. depends on how the financess are traveling to be utilized.
3. Which of the undermentioned statements are right refering the security market line ( SML ) attack to finding the cost of equity for a house? I. The SML attack considers the sum of unsystematic hazard associated with a house.
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II. The SML attack can be applied to more houses than the dividend growing theoretical account can. III. The SML attack considers merely future information. IV. The SML attack assumes the reward-to-risk ratio is changeless. a. I and III merely B. II and IV merely c. III and IV merely d. I. II. and III merely e. I. II. III. and IV
4. The pre-tax cost of debt for a house: A. is based on the output to adulthood on the firm’s outstanding bonds. b. is equal to the voucher rate for the latest bond issue. c. is tantamount to the current output on the outstanding bonds of the house. d. is based on the output to adulthood that existed when the presently outstanding bonds were originally issued. e. has to be estimated as it can non be straight observed in the market.
5. The capital construction weights used in calculating the leaden mean cost of capital: a. are based on the book values of entire debt and entire equity. B. are based on the market value of the firm’s debt and equity securities. c. are computed utilizing the book value of the long-run debt and the book value of equity. d. remain changeless over clip unless the house issues new securities. e. are restricted to the firm’s debt and common stock.
6. DTK. Inc. uses both preferable and common stock every bit good as long-run debt to finance its operations. An addition in which one of the followers will increase the capital construction weight of debt. all else equal? a. market monetary value of the common stock b. figure of portions of preferable stock outstanding c. book value of the outstanding portions of common stock D. figure of bonds outstanding e. figure of portions of stock outstanding
7. The leaden mean cost of capital for a house is the: a. price reduction rate which the house should use to all of the undertakings it undertakes. B. rate of return a house must gain on its bing assets to keep the current value of its stock. c. voucher rate the house should anticipate to pay on its following bond issue. d. upper limit rate which the house should necessitate on any undertakings it undertakes. e. required rate which every project’s internal rate of return must transcend. 8. Which one of the undermentioned statements is right refering the leaden mean cost of capital ( WACC ) ? A. The WACC may diminish as a firm’s debt-equity ratio additions. B. When calculating the WACC. the weight assigned to the preferable stock is based on the voucher rate multiplied by the par value of the stock. c. A firm’s WACC will diminish as the corporate revenue enhancement rate lessenings. d. The weight of the common stock used in the calculation of the WACC is based on the figure of portions outstanding multiplied by the book value per portion. e. The WACC will stay changeless unless a house retires some of its debt.
9. Flotation costs should: a. be ignored when analysing a undertaking because floatation costs are non an existent cost of the undertaking. b. be averaged over the life of the undertaking thereby cut downing the hard currency flows for each twelvemonth of the undertaking. c. merely be considered when two undertakings have the same net nowadays value. D. be included in the initial cost of a undertaking before the net present value of the undertaking is computed. e. be ignored wholly when internal equity support is utilised.
10. Cameron Industries is expected to pay an one-year dividend of $ 1. 30 a portion following month. The market monetary value of the stock is $ 24. 80 and the growing rate is 3 per centum. What is the firm’s cost of equity? a. 7. 58 per centum B. 7. 91 per centum C. 8. 24 per centum d. 8. 40 per centum e. 8. 76 per centum
11. Old Country Lemonade has a beta of. 9. a stock monetary value of $ 28. and late paid an one-year dividend of $ 1. 10 a portion. The dividend growing rate is 3 per centum. The market has an 11 per centum rate of return and a hazard premium of 7 per centum. What is the mean expected cost of equity for Old Country Lemonade? a. 7. 05 per centum B. 8. 67 per centum c. 9. 13 per centum d. 10. 30 per centum e. 11. 33 per centum
12. HBS. Inc. has a growing rate of 6 per centum and is every bit every bit hazardous as the market. The stock is presently selling for $ 15 a portion. The overall stock market has a 12 per centum rate of return and a hazard premium of 9 per centum. What is the expected rate of return on HBS’s stock? a. 6 per centum B. 9 per centum C. 12 per centum d. 15 per centum e. 18 per centum Re = ( . 12. 09 ) + ( 1. 00. 09 ) = 12. 00 per centum
13. The Collection Co. has a current beta of 1. 6. The market hazard premium is 7 per centum and the riskless rate of return is 3 per centum. By how much will the cost of equity addition if the company expands their operations such that their company beta rises to 1. 9? a. 0. 30 per centum B. 0. 90 per centum c. 1. 50 per centum D. 2. 10 per centum e. 2. 70 percent Increase in cost of equity = ( 1. 9 1. 6 ) . 07 = 2. 10 per centum
14. The Lawson Company has a seven-year bond outstanding with a 6 per centum voucher. Interest payments are paid semi-annually. The face sum of the bond is $ 1. 000. This bond is presently selling for 101 per centum of its face value. What is the company’s pre-tax cost of debt? a. 4. 33 per centum B. 4. 49 per centum c. 5. 68 per centum D. 5. 82 per centum e. 5. 91 per centum
15. Ellie’s Boutique has a bond issue outstanding that matures in 14 old ages. The bonds pay involvement semi-annually. Currently. the bonds are quoted at 98 per centum of face value and carry an 8 per centum voucher. The firm’s revenue enhancement rate is 35 per centum. What is the firm’s aftertax cost of debt? a. 2. 88 per centum B. 5. 36 per centum c. 5. 45 per centum d. 8. 24 per centum e. 10. 72 per centum
16. Antonio’s Pizzeria has 8 per centum preferable stock outstanding that sells for $ 71 a portion. This stock was originally issued at $ 58 per portion. What is Antonio’s cost of preferable stock? a. 8. 00 per centum B. 10. 50 per centum C. 11. 27 per centum d. 13. 79 per centum e. 16. 00 per centum CPS = ( . 08 $ 100 ) / $ 71 = 11. 27 per centum
17. The Seasing Company has 1. 500 bonds outstanding that are selling for $ 1. 060 each. The company besides has 5. 000 portions of preferable stock at a market monetary value of $ 32 each. The common stock is priced at $ 26 a portion and there are 36. 000 portions outstanding. What is the weight of the common stock as it relates to the firm’s weighted mean cost of capital? a. 6 per centum B. 35 per centum c. 41 per centum d. 54 per centum e. 60 per centum
18. Highpark Industrial has a $ 500. 000 bond issue outstanding that is selling at 96 per centum of face value. Highpark besides has 6. 500 portions of preferable stock and 22. 000 portions of common stock outstanding. The preferable stock has a market monetary value of $ 50 a portion compared to a monetary value of $ 35 a portion for the common stock. What is the weight of the preferable stock as it relates to the firm’s weighted mean cost of capital? a. 9 per centum B. 13 per centum c. 17 per centum D. 21 per centum e. 26 per centum
19. The Basket Weavers Company has 100. 000 bonds outstanding that are selling at par value. Chemical bonds with similar features are giving 7. 5 per centum. The company besides has 1 million portions of 10. 5 per centum preferable stock outstanding and 5 million portions of common stock outstanding. The preferable stock sells for $ 56 per portion. The common stock has a beta of 1. 2 and sells for $ 38 a portion. The U. S. Treasury measure is giving 3 per centum and the return on the market is 12 per centum. The corporate revenue enhancement rate is 34 per centum. What is Basket Weaver’s weighted mean cost of capital? a. 10. 71 per centum B. 12. 04 per centum c. 12. 78 per centum d. 14. 02 per centum e. 14. 85 per centum
20. Cruiseliners. Inc. has 230. 000 portions of common stock outstanding at a market monetary value of $ 40 a portion. Following one-fourth. Cruiseliners’ is expected to pay an one-year dividend in the sum of $ 1. 80 per portion. The dividend growing rate is 3 per centum. Cruiseliners’ besides has 8. 000 bonds outstanding with a face value of $ 1. 000 per bond. The bonds carry a 9 per centum voucher. pay involvement yearly. and mature in 5. 093 old ages. The bonds are selling at 102 per centum of face value. The company’s revenue enhancement rate is 35 per centum. What is Cruiseliners’ leaden mean cost of capital? a. 5. 4 per centum B. 6. 6 per centum c. 7. 5 per centum d. 8. 5 per centum e. 9. 6 per centum
21. Great Sound Music. Inc. has 20. 000 portions of common stock outstanding at a market monetary value of $ 26 a portion. This stock was originally issued at $ 19 per portion. The house besides has a bond issue outstanding with a entire face value of $ 300. 000 which is selling for 97 per centum of face value. The cost of equity is 10 per centum while the after revenue enhancement cost of debt is 5 per centum. The house has a beta of 1. 2 and a revenue enhancement rate of 35 per centum. What is Great Sound’s weighted mean cost of capital? a. 7. 07 per centum B. 7. 58 per centum c. 7. 83 per centum d. 8. 16 per centum E. 8. 21 per centum
WACC = [ ( $ 520. 000 / $ 811. 000 ) . 08206 = 8. 21 per centum
. 10 ] + [ ( $ 291. 000 / $ 811. 000 )
. 05 ] = . 06412 + . 01794 =
22. Hilltop. Inc. has a capital construction which is based on 30 percent debt. 10 per centum preferable stock. and 60 per centum common stock. The pre-tax cost of debt is 8 per centum. the cost of preferred is 9 per centum. and the cost of common stock is 11 per centum. The company’s revenue enhancement rate is 34 per centum. The company is sing a undertaking that is every bit every bit hazardous as the overall house. This undertaking has initial costs of $ 250. 000 and hard currency influxs of $ 94. 000 a twelvemonth for three old ages. What is the jutting net present value of this undertaking? a. $ 15. 823. 76 B. $ 12. 414. 07 c. $ 9. 127. 53 d. $ 1. 083. 19 e. $ 15. 823. 76
23. Keller’s Korner is sing a new undertaking they consider to be a small riskier than their current operations. Thus. direction has decided to add an extra 2. 5 per centum to their company’s overall cost of capital when measuring this undertaking. The undertaking has an initial hard currency spending of $ 30. 000 and jutting hard currency influxs of $ 12. 000 in twelvemonth one. $ 20. 000 in twelvemonth two. and $ 8. 000 in twelvemonth three. The steadfast uses 40 per centum debt and 60 per centum common stock as their capital construction. The company’s cost of equity is 14 per centum while the aftertax cost of debt for the house is 7 per centum. What is the jutting net present value of the new undertaking? A. $ 1. 467. 38 B. $ 2. 360. 46 c. $ 2. 783. 50 d. $ 3. 904. 59 e. $ 3. 561. 58
24. The Warren Co. has a capital construction which is based on 20 percent debt. 35 per centum preferable stock. and 45 per centum common stock. The floatation costs are 9 per centum for common stock. 10 per centum for preferable stock. and 5 per centum for debt. The corporate revenue enhancement rate is 34 per centum. What is the leaden mean floatation cost? a. 6. 79 per centum B. 7. 55 per centum c. 8. 21 per centum D. 8. 55 per centum e. 9. 05 percent Average floatation cost = ( . 45 = 8. 55 per centum. 09 ) + ( . 35. 10 ) + ( . 20. 05 ) = . 0405 + . 035 + . 01 = . 0855
25. Harmon. Inc. has a debt-equity ratio of. 80. The house is analysing a new undertaking which requires an initial hard currency spending of $ 300. 000 for new equipment. The floatation cost for new equity is 9 per centum and for debt 4. 5 per centum. What is the initial cost of the undertaking including the floatation costs? a. $ 317. 125 B. $ 320. 856 c. $ 321. 000 D. $ 322. 581 e. $ 325. 912