Running Shoes, Inc.
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
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