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Question
California Best (CB), a sport shoe store, expects an operating income of $2.3 million this year. CB has no long-term debt. The firm is considering as expansion project. The current risk-free rate of return is 7% and the current market risk premium is 8.3%. If CB's beta is 20% greater than the overall market, what is the firm's cost of capital? Assume that CB has a marginal tax rate of 40%.a. 8.3%
b. 16.96%
c. 9.96%
d. 15.3%
Answer
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Related questions
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a. 6.25%
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Q:
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Q:
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Q:
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Q:
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b. multiplied by 1 plus the percentage stock dividend rate
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Q:
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Q:
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d. common stock at par
Q:
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a. register with the Securities Exchange Commission (SEC)
b. have assets in excess of $500,000
c. have 10 continuous profitable quarters
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Q:
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b. that dividends may only be paid out of retained earnings
c. that dividends may not be paid when the firm is insolvent
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Q:
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c. Milton Friedman
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Q:
Explain the pecking order theory.
Q:
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Q:
Sulzar's capital structure consists only of common stock (20 million shares), but the firm is planning a major expansion which will require $100 million of new capital. Sulzar has a choice of obtaining the needed capital through the sale of 5 million shares of common stock at $20 per share or the sale of $100 million of first mortgage bonds that would have a coupon rate of 9%. If Sulzar has a marginal tax rate of 40%, calculate the EBIT-EPS indifference point.
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Q:
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b. the indifference point decreases
c. the indifference point does not change
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Q:
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Q:
The optimal capital structure is a function of ____.
a. corporate income taxes
b. financial distress costs
c. agency costs
d. All of these are correct.
Q:
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b. contains all equity
c. contains both debt and equity
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Q:
As more debt is added to the capital structure of a firm, the cost of debt capital
a. initially rises slowly, then falls beyond some point
b. increases at a steady rate throughout the entire range
c. beyond some point, becomes greater than the cost of equity
d. initially rises slowly, then increases rapidly beyond some point
Q:
Perfect capital markets imply the following:
a. there are no transactions costs for buying and selling securities
b. relevant information is readily available for individuals and is costless to obtain
c. all investors can borrow and lend at the same rate
d. All of these answers are correct.
Q:
Two prominent finance researchers (Modigliani and Miller) showed that
a. the firm's optimal capital structure consists of approximately equal proportions of debt and equity
b. the value of the firm is independent of its capital structure in perfect capital markets with no income taxes
c. the firm's cost of capital is minimized when its capital structure consists of approximately equal proportions of debt and equity
d. the value of the firm is independent of its capital structure in perfect capital markets with income taxes
Q:
Chirping Charlie Canary Farms has fixed operating costs of $10,000. It is trying to determine its breakeven point in dollars for its special bird seed. The sale price for each bag of bird seed is $25 and its variable cost per bag is $15. The firm's operating breakeven point in dollars is:
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c. $6,250
d. $25,000
Q:
Borkstran has sales of $7.8 million, a variable cost ratio of 0.6, EBIT of $1.1 million, and a degree of combined leverage of 3.4. What is Borkstran's degree of financial leverage?
a. 1.20
b. 0.73
c. 2.29
d. 0.84
Q:
Kenzel has an EPS of $4.20 and sales are $9 million. If the firm has a degree of operating leverage of 4.0 and a degree of financial leverage of 5.2, forecast EPS if the firm expects a 4% sales decline.
a. $0.71
b. $3.49
c. $4.03
d. $3.33