Alpha Products maintains a capital structure of 40% debt and 60% common equity. To finance its capital budget for next year, the firm will sell $50 million of 11% debentures at par and finance the balance of its $125 million capital budget with retained earnings. Next year Alpha expects net income to grow 7% to $140 million, and dividends also are expected to increase 7% to $1.40 per share and to continue growing at that rate for the foreseeable future. The current market value of Alpha's stock is $30. If the firm has a marginal tax rate of 40%, what is its weighted cost of capital for the coming year? a.11.67% b.9.84% c.9.64% d.8.63%
MCQ'S:
6) Alpha Products maintains a capital structure of 40% debt and 60% common equity. To finance its capital budget for next year, the firm will sell $50 million of 11% debentures at par and finance the balance of its $125 million capital budget with
a.11.67%
b.9.84%
c.9.64%
d.8.63%
7) If a firm sells assets, generating cash flows, the cost of these funds is __.
a.the firm's
b.zero
c.the firm's cost of cash flows
d.the firm's weighted cost of capital
8) Calculate the weighted average cost of capital for Limp Linguini Noodle Makers Inc. under the following conditions:
*The capital structure is 40% debt and 60% equity.
*The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket.
*The firm’s beta is 1.7.
*The risk-free rate is 7% and the market risk premium is 6%.
a.18.7%
b.17.2%
c.12%
d.15.12%
9) 1st Bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you?
a.10.47%
b.10.45%
c.10.38%
d.10.42%
10)
a.does not affect profits
b.is a
c.does not affect cash flows
d.is not a
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