Corporate Finance

A company has a cost of equity of 12%, a pre-tax cost of debt of 8%, a tax rate of 25%, and a debt-to-total-capital ratio of 40%. What is the weighted average cost of capital (WACC)?

Which of the following best describes the concept of the time value of money?

What is the primary goal of financial management according to modern corporate finance theory?

A firm is considering issuing new debt to repurchase outstanding equity. According to Modigliani-Miller with taxes, this action would:

A company can raise capital by issuing bonds at par with a coupon rate of 6%. The company's marginal tax rate is 30%. What is the after-tax cost of debt?

Which of the following is an advantage of using debt financing over equity financing?

A company's stock has a beta of 1.3. The risk-free rate is 4% and the expected market return is 10%. Using the Capital Asset Pricing Model (CAPM), what is the required return on equity?

A company is evaluating a leveraged recapitalization. Currently it is all-equity financed with a market value of $100 million. If it borrows $40 million at 5% interest (tax rate 25%) and uses the proceeds to repurchase shares, what is the new total firm value according to Modigliani-Miller with taxes?

A company has the following capital structure: $5 million in debt (cost 7%), $3 million in preferred stock (cost 9%), and $12 million in common equity (cost 14%). The tax rate is 30%. What is the WACC?

A firm has an operating cycle of 90 days, an accounts payable deferral period of 40 days, and an inventory conversion period of 55 days. If the firm wants to reduce its cash conversion cycle by 10 days, which action would be most effective?

The cost of equity is typically higher than the cost of debt because:

Which of the following is a source of short-term financing?

The dividend discount model (DDM) calculates the cost of equity as:

Financial leverage refers to:

The weighted average cost of capital (WACC) represents:

A share repurchase (buyback) program:

The cash conversion cycle measures:

Operating leverage is highest when a company has:

In the Capital Asset Pricing Model (CAPM), beta measures:

The Modigliani-Miller (MM) theorem without taxes states that:

Which of the following is an equity instrument?

A company's optimal capital structure is the mix of debt and equity that:

Preferred stock is considered a hybrid security because:

A line of credit is best described as:

The pecking order theory of capital structure suggests that firms prefer financing in which order?

Days sales outstanding (DSO) measures:

A hostile takeover occurs when:

The risk-free rate in CAPM is typically represented by:

Trade credit is a form of:

Which of the following would decrease a company's WACC, all else being equal?

A dividend reinvestment plan (DRIP) allows shareholders to:

Working capital is defined as:

In a leveraged buyout (LBO), the acquisition is primarily funded with:

The market risk premium in CAPM is defined as:

Factoring of accounts receivable involves:

A synergy in a merger refers to:

The degree of financial leverage (DFL) is measured as:

Which of the following statements about common stock is true?

The agency problem in corporate finance arises from:

A zero-coupon bond:

A company has 60% equity and 40% debt in its capital structure. The cost of equity is 14%, the before-tax cost of debt is 7%, and the tax rate is 30%. What is the WACC?

Using the CAPM, if the risk-free rate is 3%, the market return is 11%, and a stock's beta is 1.5, what is the required rate of return on the stock?

A company's stock currently sells for $40, and next year's expected dividend is $2. The dividend growth rate is 6%. Using the Gordon Growth Model, what is the cost of equity?

According to MM Proposition II (with taxes), as a firm increases its debt ratio:

A company has EBIT of $500,000 and interest expense of $100,000. What is the degree of financial leverage (DFL)?

The cost of retaining earnings differs from the cost of issuing new common stock because:

A company has annual sales of $3,650,000 and average accounts receivable of $500,000. What is the days sales outstanding (DSO)?

Which of the following anti-takeover defenses involves giving existing shareholders the right to purchase additional shares at a discount if a hostile bidder acquires a certain percentage of shares?

A company's operating cycle is 90 days and its payables deferral period is 35 days. What is the cash conversion cycle?

A bond with a face value of $1,000 pays a 5% annual coupon and has 10 years to maturity. If the market interest rate is 6%, the bond will sell at:

The trade-off theory of capital structure suggests that the optimal capital structure balances:

A company has a DOL (degree of operating leverage) of 3.0 and a DFL (degree of financial leverage) of 1.5. What is the degree of total leverage (DTL)?

Which of the following would increase a company's cash conversion cycle?

The cost of preferred stock is calculated as:

In a horizontal merger, the combining firms are:

A firm has total assets of $2,000,000, total debt of $800,000, and total equity of $1,200,000. What is the debt-to-equity ratio?

The Miller-Orr model is used to determine:

A company is considering issuing $10 million in bonds at 8% interest with a tax rate of 25%. What is the annual after-tax cost of this debt?

Which of the following is a reason a company might prefer to pay dividends rather than repurchase shares?

If a company's beta increases from 1.0 to 1.4, and the market risk premium is 7% with a risk-free rate of 3%, by how much does the required return on equity increase?

The signaling theory of dividends suggests that:

The economic order quantity (EOQ) model in working capital management minimizes:

A conglomerate merger involves combining firms that are:

A company has a target capital structure of 30% debt and 70% equity. If the after-tax cost of debt is 4.2% and the cost of equity is 12%, what is the WACC?

Which of the following best describes the concept of financial distress costs?

A company's stock has a beta of 0.8. This means the stock is:

A rights offering allows:

When a company uses more debt in its capital structure, the cost of equity typically increases because:

The breakeven point in EBIT (indifference point) between two financing plans is the EBIT level at which:

A company pays suppliers on average in 40 days, collects from customers in 50 days, and holds inventory for 60 days. What is the cash conversion cycle?

The residual dividend model suggests that dividends should be paid:

Flotation costs are best described as:

A company has 50% equity and 50% debt. Its cost of equity is 13%, and its pre-tax cost of debt is 8%. The tax rate is 25%. What is the WACC?

Compared to a stock dividend, a stock split:

Which of the following is NOT a motive for mergers and acquisitions?

A company has sales of $1,000,000, variable costs of $600,000, and fixed costs of $200,000. What is the degree of operating leverage (DOL)?

A banker's acceptance is best described as:

Under the MM theory with taxes, the value of a levered firm equals:

Which of the following working capital strategies is considered aggressive?

A company currently has no debt and a cost of equity of 10%. It is considering issuing debt at 5% to repurchase equity. Ignoring taxes and bankruptcy costs, according to MM Proposition I (no taxes), what happens to the firm's WACC?

A company has $5 million in debt at 8% interest and $10 million in equity. The unlevered cost of equity is 12%, and the tax rate is 30%. Using MM Proposition II with taxes, what is the cost of levered equity?

A company is evaluating two financing plans. Plan A: Issue 100,000 shares of common stock at $50 per share. Plan B: Issue $3,000,000 in 10% bonds and 40,000 shares at $50 per share. The company currently has 200,000 shares outstanding and no existing debt. The tax rate is 40%. At what EBIT level will EPS be the same under both plans?

A company's current stock price is $60. It just paid a dividend of $3.00. The dividend is expected to grow at 20% for the next 3 years and then 5% thereafter. Using the multi-stage DDM, what is the approximate cost of equity? (Assume the terminal value is calculated at the end of year 3.)

An unlevered firm has a value of $20 million. It plans to issue $8 million of permanent debt at 6%. The corporate tax rate is 25%, and the present value of expected bankruptcy costs associated with this debt level is $500,000. What is the value of the levered firm under the adjusted trade-off theory?

A company has the following capital structure (at market value): $3 million in bonds with a yield to maturity of 8%, $1 million in preferred stock with a cost of 10%, and $6 million in common equity with a cost of 14%. The tax rate is 30%. What is the WACC using market value weights?

A company with $2 million in EBIT has $5 million in debt at 8% interest. There are 500,000 shares outstanding priced at $30 each. The tax rate is 40%. What is the company's EPS and P/E ratio?

A company wants to minimize its cash conversion cycle. Currently: inventory turnover is 6 times, receivables turnover is 8 times, and payables turnover is 12 times. What is the CCC in days (use 360 days)?

A firm is considering a recapitalization where it will borrow $50 million at 6% and use the proceeds to repurchase shares at $25 per share. The firm currently has 10 million shares outstanding, no debt, and a tax rate of 30%. Under MM with taxes, what is the increase in firm value from the recapitalization?

A company has an unlevered beta of 0.9. It has a debt-to-equity ratio of 0.6 and a tax rate of 25%. Using the Hamada equation, what is the levered beta?

A firm is all-equity financed with 1,000,000 shares at $50 each, giving a total firm value of $50 million. It announces a plan to borrow $15 million at 7% and repurchase shares. The tax rate is 35%. Under MM with taxes, what is the new share price after the announcement but before the repurchase?

Continuing the previous scenario, after the repurchase at $55.25 per share, how many shares are repurchased and how many remain outstanding?

A company is evaluating the cost of forgoing a trade discount. Credit terms are 2/10, net 60. What is the approximate annualized cost of forgoing the discount?

A company has a levered beta of 1.6, a debt-to-equity ratio of 1.0, and a tax rate of 30%. What is the unlevered beta?

A company is comparing two dividend policies. Policy A pays a 40% payout ratio with a stock price of $50 and cost of equity of 12%. Policy B pays a 60% payout ratio with a stock price of $55 and cost of equity of 13%. If EPS is $5.00, which policy maximizes shareholder value and why?

A firm has EBIT of $10 million, depreciation of $2 million, capital expenditures of $3 million, and an increase in net working capital of $1 million. The tax rate is 30%. What is the free cash flow to the firm (FCFF)?

A company's WACC is 10%. It is evaluating a project in a different risk class with a project beta of 1.5. The risk-free rate is 4% and the market return is 12%. Should the company use its WACC or a risk-adjusted rate for this project?

A company with an enterprise value of $500 million has $200 million in debt, $50 million in cash, and 20 million shares outstanding. What is the equity value per share?

A firm currently has $100 million in assets, $40 million in debt, and $60 million in equity. It plans to increase debt to $70 million (retiring $30 million of equity). If the cost of debt is 5% (pre-tax), cost of equity before recapitalization is 11%, the tax rate is 25%, and using MM Proposition II, what is the new cost of equity after recapitalization?

A company's optimal cash balance under the Baumol model is determined by the formula: C* = sqrt(2 x T x F / K), where T is total cash needed, F is the fixed cost per transaction, and K is the opportunity cost of holding cash. If annual cash needs are $2,400,000, transaction cost is $100, and the opportunity cost is 6%, what is the optimal cash transfer?

A company acquires a target for $120 million. The target's pre-acquisition market value was $90 million and its book value of net assets is $70 million. The fair value of identifiable net assets is $85 million. Under acquisition accounting, what is the goodwill recorded?