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Running Shoes Inc has 2 million shares of stock outstanding The stock currently sells for $1250 per share The firm’s debt is publicly traded and

Running Shoes, Inc. has 2 million shares of stock outstanding. The stock currently sells for $12.50 per share. The firm’s debt is publicly traded and was recently quoted at 90% of face value. It has a total face value of $10 million, and it is currently priced to yield 8%. The risk free rate is 2% and the market risk premium is 8%. You’ve estimated that the firm has a beta of 1.20. The corporate tax rate is 40%.

 

33.Refer to Running Shoes, Inc. What is the cost of equity?

a.9.20%

b.9.60%

c.10.40%

d.11.60%

 

 

 

34.What is the percentage of equity used by Running Shoes, Inc.?

a.74.63%

b.73.53%

c.72.46%

d.68.97%

 

 

 

 

35.What is the WACC for Running Shoes, Inc.?

a.7.97%

b.9.15%

c.9.58%

d.9.80%

 

 

 

36.A firm has a capital structure of 25% debt and 75% equity. Debt can be issued at a return of 9%, while the cost of equity for the firm is 12%. The firm is considering a $50 million expansion of their production facility. The project has the same risk as the firm overall and will earn $10 million per year for 7 years. What is the NPV of the expansion if the tax rate facing the firm is 40%?

a.-$1.9 million

b.-$1.4 million

c.$0.4 million

d.$1.4 million

 

 

 

 

37.A firm has a capital structure of 40% debt and 60% equity. Debt can be issued at a return of 10%, while the cost of equity for the firm is 15%. The firm is considering a $50 million expansion of their production facility. The project has the same risk as the firm overall and will earn $12 million per year for 6 years. What is the NPV of the expansion if the tax rate facing the firm is 40%?

a.-$0.4 million

b.-$0.2 million

c.$0 million

d.$0.2 million

 

 

 

38.Consider the following financial leverage information for ABC Corporation. The debt pays 10% annually in interest and the tax rate is 40%. For what EBIT will the EPS be equal for either capital structure?

 

All Equity Firm50% Debt/ 50% Equity Firm

Total Assets$500,000$500,000

Equity$500,000$250,000

# of shares100,00050,000

Debt$           0$250,000

Interest payment$           0              $  25,000

 

a.$25,000

b.$50,000

c.$75,000

d.$90,000

 

 

 

39.The operating leverage for ABC Corporation is currently 125%. Given the information below, what was the growth rate in sales for 2004?

 

CategoryValue

2003 EBIT$12 million

2004 EBIT$15 million

2003 Sales$30 million

2004 Sales$?? million

 

a.20%

b.18%

c.16%

d.12%

 

 

 

40.The EBIT for ABC Corporation for 2003 and 2004 is shown below. Sales grew at a rate of 10% for 2004. If 2003 sales were $25 million, what is the operating leverage for ABC?

 

CategoryValue

2003 EBIT$10      million

2004 EBIT$12.50 million

2003 Sales$25      million

2004 Sales$??      million

 

a.200%

b.225%

c.250%

d.275%

 

 

 

41.A project under consideration for a firm has several possible outcomes shown in the table below. Given the assumptions below, what is the expected NPV for the project?

 

ProjectChance ofNPV of

Outcome     Outcome     Outcome

GOOD40%$20.00

AVERAGE35%$2.00

BAD25%($30.00)

 

a.-$8.00

b.-$2.50

c.$1.20

d.$1.40

 

 

 

42.A project under consideration for a firm has several possible outcomes shown in the table below. Given the assumptions below, what is the expected NPV for the project?

 

ProjectChance ofNPV of

Outcome     Outcome     Outcome

GOOD25%$25.00

AVERAGE50%$6.00

BAD25%($40.00)

 

a.-$9.00

b.-$3.00

c.-$0.75

d.$1.20

Feb 13 2020 View more View Less

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