Question 9 Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end

Question

Question 9

Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's WACC if all the equity used is from retained earnings?

Answer

7.07%

7.36%

7.67%

7.98%

8.29%

Question 10

You were hired as a consultant to Quigley Company, whose target capital structure is 35% debt, 10% preferred, and 55% common equity. The interest rate on new debt is 6.50%, the yield on the preferred is 6.00%, the cost of common from retained earnings is 11.25%, and the tax rate is 40%. The firm will not be issuing any new common stock. What is Quigley's WACC?

Answer

8.15%

8.48%

8.82%

9.17%

9.54%

Question 11

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive IRR.

Answer

True

False

Question 12

One advantage of the payback method for evaluating potential investments is that it provides information about a project's liquidity and risk.

Answer

True

False

Question 13

The regular payback method is deficient in that it does not take account of cash flows beyond the payback period. The discounted payback method corrects this fault.

Answer

True

False

Sorensen Systems Inc. is expected to pay a $2.50 dividend at year end (D1 = $2.50), the dividend is expected to grow at a constant rate of 5.50% a year, and the common stock currently sells for $52.50 a share. The before-tax cost of debt is 7.50%, and the tax rate is 40%. The target capital structure consists of 45% debt and 55% common equity. What is the company's WACC if all the equity used is from retained earnings?

Answer

7.07%

7.36%

7.67%

7.98%

8.29%

Explanation / Answer

Question 9: 7.98% Question 10: 9.54% Question 11: TRUE Question 12: TRUE Question 13: FALSE

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