Time Remaining: 1. (TCO C) Firm organization Until this year, Cheers Inc. was organized as a partnership. This year, the partners have decided to organize the business as a corporation. As a result of this change in organizational form, choose the statement that is most correct and explain why? a. Cheers’ shareholders (the ex-partners) will now have limited liability. b. Cheers will now be subject to fewer regulations. c. Cheers will now pay less in taxes. d. Cheers’ investors will now find it more difficult to transfer ownership. e. Cheers will now find it more difficult to raise additional capital.(Points: 20)2. (TCO D) After-tax returnsWest Corporation has $50,000 which it plans to invest in marketable securities. The corporation is choosing between the following three equally risky securities: Alachua County tax-free municipal bonds yielding 6 percent; Exxon bonds yielding 9.5 percent; GM preferred stock with a dividend yield of 9 percent. West’s corporate tax rate is 35 percent. What is the after-tax return on the best investment alternative? (Assume the company chooses on the basis of after-tax returns.)(Points: 20)3. (TCO D) Bond value – semiannual payment Assume that you wish to purchase a 10-year bond that has a maturity value of $1,000 and makes semiannual interest payments of $50. If you require a 10 percent nominal yield to maturity on this investment, what is the maximum price you should be willing to pay for the bond? (Points: 25)4. (TCO E) Constant growth stock The last dividend paid by ABC Company was $2.00. ABC’s growth rate is expected to be a constant 4 percent. ABC’s required rate of return on equity (ks) is 9 percent. What is the current price of ABCs common stock? (Points: 25)5. (TCO B, F) NPVAs the director of capital budgeting for ABC Corporation, you are evaluating two mutually exclusive projects with the following net cash flows:Cash Flows A B -$200,000 -$125,0001 $65,000 $60,0002 $60,000 $40,0003 $50,000 $40,0004 $65,000 $35,0005 $50,000 $45,000If ABC Corporation’s cost of capital is 12 percent, defend which project would you choose.(Points: 25)6. (TCO G) Cash budgetABC Corporation’s budgeted monthly sales are $4,000. Forty percent of its customers pay in the first month and take the 3 percent discount. The remaining 60 percent pay in the month following the sale and don’t receive a discount. ABC’s bad debts are very small and are excluded from this analysis. Purchases for next month’s sales are constant each month at $2,000. Other payments for wages, rent, and taxes are constant at $500 per month. Construct a single month’s cash budget with the information given. What is the average cash gain or (loss) during a typical month for ABC Corporation? (Points: 20)7. (TCO B) Permanent assets financingWicker Corporation is determining whether to support $100,000 of its permanent current assets with a bank note or a short-term bond. The firm’s bank offers a two-year note where the firm will receive $100,000 and repay $118,810 at the end of two years. The firm has the option to renew the loan at market rates. Alternatively, Wicker can sell 8.5 percent coupon bonds with a 2-year maturity and $1,000 par value at a price of $973.97. How many percentage points lower is the interest rate on the less expensive debt instrument?(Points: 20)8. (TCO C)Whick of the following bank accounts has the highest effective return and why?A. An account which pays 10% nominal interest with monthly com-pounding.B. An account which pays 10% nominal interest with daily com-pounding.C. An account which pays 10% nominal interest with annual com-pounding.D. An account which pays 9% nominal interest with daily com-pounding.E. All of the investments above have the same effective annual return.(Points: 20)9. (TCO D)All treasury securiities has a yiel to maturity of 7%– so the yield curve is flat. If the yield to maturiy on all Treasuries were to decline to 6%, which of the following bonds would have the largest percentage increase in price and why?A. 15 year zero coupon Treasury bond.B. 12 year Treasury bond with a 10% annual coupon.C. 15 year Treasury bond with a 12 percent annual coupon.D. 2 year zero coupon Treasury bond.E. 2 year Treasury bond with a 15% annual coupon.(Points: 20)10. (TCO C) Payback periodHaig Aircraft is considering a project which has an up-front cost paid today at t = 0. The project will generate positive cash flows of $60,000 a year at the end of each of the next five years. The project’s NPV is $75,000 and the company’s WACC is 10 percent. What is the project’s simple, regular payback?(Points: 20)11. (TCO H) WACCA company has determined that its optimal capital structure consists of 40 percent debt and 60 percent equity. Given the following information, calculate the firm’s weighted average cost of capital. rd= 6%Tax rate = 40%P0 = $25Growth = 0%D0 = $2.00(Points: 25)
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