FIN 571 Week 2 Practice
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1) Spock Enterprises has a market value of $100 million in debt outstanding. They also have a market value of equity of $400 million. Spock's total market value is ______ million.
2) Another name for the WACC is the ___________.
3) The weighted average cost of capital is the expected rate of return investors would demand on a portfolio of:
4) Vandalay Industries has $30 million of debt and $70 million of equity outstanding. The market cost of debt is 8% and the cost of equity is 14%. The firm has a 35% corporate tax rate. What is Vandalay's WACC?
5) The market value of a firm is equal to:
6) Order the following three components of the firm's capital structure from riskiest to least risky.
7) Which of the following statements regarding the company cost of capital are true?
8) The company cost of capital is calculated as a weighted average of the firm's _______ and _______.
9) True or false: it is acceptable to use book values of debt and equity to calculate the weights of debt and equity for the company cost of capital calculation.
10) A project requires a $1 million initial investment and has an expected after-tax cash flow of $2.4 million per year in perpetuity. The weighted-average cost of capital (WACC) is 13%. What is the net present value (NPV) of the project?
11) SkiFree Incorporated has $20 million of debt and $80 million of equity outstanding. The market cost of debt is 6% and the cost of equity is 12%. The firm has a 35% corporate tax rate. What is SkiFree's WACC?
12) Vandalay Industries has $30 million of debt, $10 million of preferred stock and $60 million of common stock outstanding. The market cost of debt is 8%, the cost of preferred is 9% and the cost of common equity is 14%. The firm has a 35% corporate tax rate. What is Vandalay's WACC?
13) When a project's cash flows are discounted at the WACC and the NPV is exactly zero, then those cash flows are _________ to give debtholders and shareholders the returns they require.
14) A project requires a $12 million initial investment and has expected after-tax cash flows of $2 million in perpetuity. The weighted-average cost of capital is 15%. What is the project's net present value (NPV)?
15) There are two costs of debt finance, the _______ cost and the _______ cost.
16) Increasing the amount debt makes debt ______ risky and equity _____ risky.
17) The WACC is the appropriate discount rate for use with ______ projects but should be adjusted ______ for higher risk ones
18) The WACC is the appropriate discount rate for use with ______ projects but should be adjusted ______ for lower risk ones.
19) The ______ cost of debt is the increase in the required return on common equity as the amount of debt borrowed increases.
20) If a firm uses its book value of debt instead of its market value of debt to calculate its WACC, then its WACC will likely be:
21) If the corporate tax rate is zero, then increasing the proportion of debt in a firm's capital structure causes the WACC to _______.
22) On a large and healthy firm, the use of yield to maturity as the cost of debt when calculating WACC is appropriate because
23) The WACC is the return the company needs to earn after tax in order to satisfy
24) True or false: the market value and book value of debt are often very similar, so many financial managers use book value in WACC calculations.
25) If the corporate tax rate is not zero, increasing the proportion of debt in the capital structure causes the WACC to _______.
26) The ________ is usually accepted as a firm's cost of debt capital for WACC calculations.
27) The firm's cost of equity is usually calculated using the _______ equation.
28) Preferred stock is valued like a perpetuity. The price of a preferred stock is therefore equal to:
29) To determine the equity value of an entire business, discount the firm's _____ using the ______ as the discount rate, then subtract the value of the firm's _____.
30) Potter National Bank has a beta of 1.8. The risk-free rate is currently quoted at 1.5% and the expected market risk premium is 7.5%. What is Potter's cost of equity?
31) Martin Co. has issued preferred stock with an annual dividend of $6.00. The current market price per share of this preferred stock is $47.00. What is the expected return on the Martin preferred stock?
32) What is one necessary condition to use WACC to value an entire business?
33) Providers of venture capital are:
34) The two rules of success in venture capital management are __________, and ___________.
35) An equity issue that makes a privately owned firm public is called a(n):
36) An investment bank that works with a company to plan and arrange its IPO is called a(n) ________.
37) Underwriters are compensated for the risk of issuing an IPO in the form of a(n) _________.
38) An investment bank that underwrites a security issue by buying the securities for less than the offering price and accepting the risk that the securities won't sell is using the ______ method.
39) Equity investment in high-risk, high-tech start-up private companies is called:
40) Wealthy individuals who personally provide equity investment to start-up firms are called ________.
41) The firm commitment method requires the investment bank to take on the risk of unsold securities and act as a(n) ______.
42) Statistically, the number of firms that provide venture capitalists with the large payoff they require is approximately _______.
43) The main motivation for a firm to undertake an IPO is that _________.
44) The difference between the public offer price and the price paid by the underwriter is known as the underwriter's Spread.The first public equity issue made by a firm is called a(n) ___.
45) The group of underwriters that is assembled to sell a very large issue of stock is referred to as a ________.
46) The type of underwriting used for risky issues of stock that may not sell out completely is called _________ underwriting.
47) The three roles usually played by underwriters for their client companies are _______, ________ and ________.
48) Firms looking to raise funds will file registration statements with the:
49) The most common method used in the U.S. to determine demand for and price of a stock in an IPO is called the ________ method
50) In firm commitment underwriting, the underwriters receive payment in the form of a _______ representing the difference between the price they pay the firm for the shares, and the price they charge investors for them.
51) In the U.S., underwriting of securities issues is dominated by ________.
52) An underwriter unwilling to take on the risk of firm commitment underwriting may issue an IPO on a _________ basis.
53) A document required by the SEC for new public issues that contains the issuing firm's financial information, financial history, and details of the existing business is known as the ___.
54) True or false: the advantage of the bookbuilding method is that it allows underwriters to reward investors whose bids are most helpful in setting the issue price.
55) Which of the following are three of the banks that dominate the underwriting industry in the United States?
56) True or false: flotation costs are higher for issuing equity than for issuing debt.
57) The type of underwriting used for risky issues of stock that may not sell out completely is called _________ underwriting.
58) Stock prices decline at the announcement of a new issue because investors believe that managers are signaling that the stock price is currently __________.
59) Any additional issue of stock by a company that is already publicly traded is called a __________.
60) A private placement allows a firm to sell securities to:
61) Which of the following statements best describes shelf registration?
62) The issue costs are higher for equity than for debt securities for which of the following reasons?
63) When a company sells an entire issue of securities to a small group of institutional investors like life insurance companies, pension funds, etc., it is called a(an):
64) Shelf registration is more often used for the:
65) True or false: flotation costs are higher for issuing equity than for issuing debt.