# Finance for Pavan1001 Only

R&B issues 2 million shares of \$16 cumulative preferred stock at a price of \$41 per share. Issue costs are \$2 per share.  What is the cost of the preferred stock?  Round your answer to the nearest whole %

The weighted average cost of capital (WACC) should be used for evaluating

 A. Projects which are similar to the firm s usual projects (same risk) B. All projects (regardless of risk) C. Projects which are very different from the firm s usual projects (safer or riskier)

DPL estimates that the yield on their debt is 8%. The equity has a beta of .875. The risk-free return is 5% and the market risk premium is 10%. What is the weighted average cost of capital (WACC) for the firm if they have 19M in debt and 31M in equity? Assume the tax rate is 40%.

 A. 11.57% B. 9.74% C. 7.64% D. 10.35%

Conglomo Inc. has a cost of capital of 17%.  This is based on a risk-free rate of 4%, a market risk premium of 10% and the firm’s average beta of 1.3.  This is a breakdown of the firm’s divisions:

 1/3 is Automotive Retailer Beta = 2.0 1/3 is Computer Manufacturer Beta = 1.3 1/3 is Electric Utility Beta = 0.6

When evaluating a new electrical utility investment, what required return should Conglomo use?

 A. 24% B. 17% C. 10% D. 14%

Wiley Wilds has 1200 bonds outstanding that are selling for \$990 each.  The firm also has 2500 shares of preferred stock at a price of \$28 per share.  The common stock has a price of \$37 per share with 28,000 shares outstanding.  Find the weight of the common stock that you would use in the weighted average cost of capital (WACC).

 A. 45% B. 50% C. 43% D. 52%

A firm has an asset beta of 1 and a company cost of capital of 15%. A new project comes along with a beta of 2 and an expected return (IRR) of 24%. Putting the project s beta into the CAPM gives the project a return of 25% based on project risk. The firm should

 A. Accept the project because the IRR is greater than the company cost of capital B. Accept the project because the CAPM return is greater than the IRR C. Reject the project because the CAPM return is greater than the IRR D. Reject the project because the IRR is greater than the company cost of capital

Combo Inc. is a big conglomerate with two divisions. One division (MIN) is in mining and another is in transportation (TRAN). MIN has a weighted average cost of capital (WACC) of 14%. TRAN has a WACC of 10%. Which of the following statements is correct?

 A. Combo’s WACC will be greater than 14% B. Combo should use 10% for evaluating all projects C. Combo should use 14% for evaluating all projects D. Combo should use a different WACC for each division

If regression of the stock’s returns against the market gives you an r-square of .77, then

 77% of the variance in the stock is explained by changes in the market 77% of the variance in the stock is unique to the stock You cannot use beta for estimating the stock return

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