(2 points) The Fantastic Stuff Co. currently has debt with a market value of $400 million outstanding. The debt consists of 10% annual coupon bonds which have a maturity of 10 years and are currently...

1. (2 points) The Fantastic Stuff Co. currently has debt with a market value of $400 million outstanding. The debt consists of 10% annual coupon bonds which have a maturity of 10 years and are currently priced at $1,211 per bond. The par value of each bond is $1,000. The firm also has an issue of 3 million preferred shares outstanding with a market price of $15.00. The preferred shares pay an annual dividend of $1.38. Fantastic also has 20 million shares of common stock outstanding with a price of

$26.00 per share. The firm is expected to pay a $2.34 common dividend one year from today, and that dividend is expected to increase by 6% per year forever. Fantastic is subject to a 40% marginal tax rate.

1. What is the firm’s after tax cost of debt?
2. What is the firm’s cost of preferred stock?
3. What is the firm’s cost of common stock?
4. What is the firm’s weighted average cost of capital?

1. (2 points) Polk Automotive sells about 3,000 engines a year. The cost of placing an order with its supplier is $1,000, and the inventory carrying costs are $208 for each engine. Polk likes to maintain safety stock of 20 engines at all times.
   1. What is the firm’s EOQ?
   2. How many orders will the firm need to place this year?
   3. What is the average inventory for the season?

1. (2 points) You are trying to value a company. Following is the information for that company as well as the information for a comparable company:

Company you are valuing	Comparable company
Value of debt = $7.5 million	Stock price = $45.00
Est. EBITDA next year = $9 million	Number of shares outstanding = 6.5 million
Est income next year = $3 million	Value of debt = $35 million
Est. EBITDA next year = $32 million
Est income next year = $10 million

1. Estimate the enterprise value of the company you are evaluating using the P/E multiples
2. Estimate the enterprise value of the company you are evaluating using the enterprise value/EBITDA multiples.

Question #4 (1 point)
When a firm follows a flexible current asset management strategy, they invest the minimum possible in cash, marketable securities, and inventory and has strict terms of sale intended to limit credit sales and accounts receivable.
True
False
Question #5 (1 point)
Stonebridge Inc. is going to borrow $700,000 from its bank at an APR of 7%. The bank requires its customers to maintain a 20% compensating balance. What is the effective interest rate on this bank loan?
8.25%
7.75%
7.00%
8.75%
Question #6 (1 point)
Amanda Books, Inc. has borrowed $40 million and is required to pay its lenders $3 million in interest this year. If Amanda is in the 35% marginal tax bracket, then what is the after tax cost of debt in interest?
5.9%
4.9%
5.2%
5.5%
Question #7 (1 point)
Montgomery Corporation’s advisors indicate that the risk-free rate equals 2%; the firm’s beta equals 1.5; and the market return equals 8%. What is Montgomery Corp.’s required return on common stock?
10%
11%
12%
13%
Question #8 (1 point)
Ryan's Jewelry Inc. finances 50% of his business with common stock, 10% with preferred stock and 40% with debt. If the cost of common stock is 15%, the cost of preferred stock is 16%, and the after-tax cost of debt financing is 9%, what is Ryan's weighted average cost of capital?
12.7%
13.2%
10.5%
7.5%
Question #9 (1 point)
Alloa Corporation is contemplating issuance of a 6% preferred stock that they expect to sell for $35 per share. The cost of issuing and selling the stock will be $5 per share. What is the cost of Alloa’s preferred stock?
8%
7%
6%
9%
Question #10 (1 point)
The ability of a company to convert assets into cash quickly without suffering a financial loss is called
convertability
asset turnover utilization
working capital efficiency
liquidity
Question #11 (1 point)
Rickroll Inc. is expected to pay a dividend of $1.80 one year from today on its common shares. That dividend is expected to increase by 4% every year thereafter. If the price of Rickroll is $22.50, what is Rickroll's cost of common stock?
12%
8%
10%
6%
Question #12 (1 point)
The length of time from the point at which a company pays for raw materials until the point at which it receives cash from the sale of finished goods made from those materials is known as the
cash conversion cycle
krebs cycle
operating cycle
spin cycle
Question #13 (1 point)
Assume a company anticipates selling 2,500 units a year. Each order will cost the company $25 to place; and the price per unit is $8 with a 25% carrying cost to maintain the average inventory. Please find the EOQ.
500
1000
250
750