CI TE9 Test2

Q. Dot.Com has determined that it could issue $1,000 face value bonds with an 8% coupon paid semi-annually and a five-year maturity at $900 per bond. If Dot.Com’s marginal tax rate is 38%, its after-tax cost of debt is closest to:

• A. 6.2%.
• B. 6.4%.
• C. 6.6%.

None

• A. –C$6.11 million
• B. –C$5.66 million
• C. C$2.33 million

Q. An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10%. What is the internal rate of return?

• A. 28.39%.
• B. 28.59%.
• C. 28.79%.

Q. The Fulcrum Company produces decorative swivel platforms for home televisions. If Fulcrum produces 40 million units, it estimates that it can sell them for $100 each. Variable production costs are $65 per unit and fixed production costs are $1.05 billion. Which of the following statements is most accurate? Holding all else constant, the Fulcrum Company would:

• A. generate positive operating income if unit sales were 25 million.
• B. have less operating leverage if fixed production costs were 10 percent greater than $1.05 billion.
• C. generate 20 percent more operating income if unit sales were 5 percent greater than 40 million.

A company that wants to determine its cost of equity gathers the following information: Rate of return on 3-month Treasury bills 3.0%/ Rate of return on 10-year Treasury bonds 3.5%/ Market risk premium 6.0%/ The company’s equity beta 1.6/ Dividend growth rate 8.0%/ Using the capital asset pricing model (CAPM) approach, the cost of equity (%) for the company is closest to: Corporate tax rate 35%/

• A. 12.6%.
• B. 7.5%.
• C. 13.1%.

None

• A. 1.33.
• B. 2.67.
• C. 3.00.

Q. Catherine Ndereba is an energy analyst tasked with evaluating a crude oil exploration and production company. The company previously announced that it plans to embark on a new project to drill for oil offshore. As a result of this announcement, the stock price ran up by 10%. After conducting her analysis, Ms. Ndereba concludes that the project does indeed have a positive NPV. Which statement is true?

• A. The stock price should remain where it is because Ms. Ndereba’s analysis confirms that the recent run-up was justified.
• B. The stock price should go even higher now that an independent source has confirmed that the NPV is positive.
• C. The stock price could remain steady, move higher, or move lower.

None

• A. 7.65%.
• B. 9.23%.
• C. 10.17%.

None

• A. a higher degree of total leverage.
• B. a lower sensitivity of operating income to changes in units sold.
• C. the same sensitivity of operating income to changes in net income.

Q. Which of the following represents a principal–agent conflict between shareholders and management?

• A. Risk tolerance
• B. Multiple share classes
• C. Accounting and reporting practices