Final Exam Fin 301 Fall 2017 Name 1. In capital budgeting, theis the appropriate

Question

Final Exam Fin 301 Fall 2017 Name 1. In capital budgeting, theis the appropriate discount rate to use when calculating the NPV of a project. A. WACC B. IRR C. cost of debt D. beta E. cost of equity A. IRRs B. Financing sources C. Initial investments D. Rates of return E. Current ratios Kroger's before-tax cost of bond is 9.5 percent. What is the after-tax cost of bond if Kroger's tax rate is 35%? 3. A. 6.38% B. 5.95% C. 5.53% D. 4.88% E.6.18% 4. You bought a share of stock for $5 per share. After holding the stock for 9 years, you sold the stock for $42 per share. What is the holding period return and effective annual returm on A. 881%, 41.63% B. 740%, 30.48% C. 740%, 28.43% D. 881%, 30.48% E. 740%, 26.68% You bought MedTech Corp stock for $54 per share last year. After receiving a $2 per share dividend, you sold the stock for $64 this year. What is your percent return? 5. A. 22.22% B. 18.52% C. 30.00% D. 25.00% E. 23.02% Gary bought a share of stock for $15.75 that paid a dividend of $0.45, and sold three months later for 17.35. What was his dollar profit or loss? 6. A. $3.15 B. S3.35 C. $4.15 D. $2.05 E. $3.05 7. IMB Inc. has a 15-year bond selling for $850 and pays a 7 percent coupon semi-annually. What would be IMB's annual before-tax cost of debt (bond), if investment banking fe is $50? A. 8.82% B. 8.15% C. 10.39% D. 9.21% E. 9.53%

Explanation / Answer

1) IN capital budgeting, Weighted average cost of capital is used as an appropriate discount rate to calculate NPV as it reflects the approrpiate cost of raising the initial investment and the cost of investing the funds geenrated.
Option A

2) WACC is calculated by Wd*Kd + We*Ke + Wp*Kp
SO, it is the average of all financing sources
Option B

3) After tax cost of debt = Before tax cost of debt*(1-Tax rate)
= 9.5*(1-0.35)
= 6.175% or 6.18%
Option E

4) Holding period return = Selling price-Purchase price/Purchase price *100
= $42-$5/$5 *100
= 740%

Effective annual return = [1+ (42-5/5 *100)]1/9 -1
= (8.4)1/9 - 1
= 1.2668-1 or 0.2668 or 26.68%
Option E

5) % return = Dividend + Difference in price/Opening price *100
= $2+($64-$54)/$54 *100
= 22.22%
Option A

6) Dollar profit= Change in price + Dividends
= $17.35-$15.75 + $0.45
= $2.05
Option D

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