Algo Inc. is considering changing its capital structure as shown in the below table:

1. Which of the following statements is INCORRECT?*

6 points

a. The target beta levered is higher than the current one by 0.263.

b. The beta unlevered is lower than the new beta levered by 0.771.

c. The new cost of equity is 14.70%.

d. The old after-tax cost of debt is 5.6%

e. None of the above

2. What is the company's old WACC?*

4 points

a. 10.61%

b. 11.02%

c. 9.69%

d. 12.36%

e. None of the above

3. By how much would the WACC change if it moves to the new capital structure?*

5 points

a. It would increase by 0.41%

b. It would decrease by 0.22%

c. It would increase by 0.69%.

d. It would decrease by 1.97%

e. None of the above

Stars Inc. is considering changing its capital structure, by issuing additional bonds and using the proceeds to repurchase and retire some common stock at book value. The CFO has gathered the following data:

1. Complete the following statement: "Beta unlevered is ______ than ______ by _______"*

6 points

a. Lower, the current beta levered; 0.11.

b. Higher, the new beta levered; 1.08.

c. Lower, the new beta levered; 0.48.

d. Higher, the current beta levered; 0.37.

e. None of the above

2. Which of the following statements is CORRECT?*

4 points

a. The old cost of equity is equal to 11.88%, it is higher than the new cost of equity by 1.73%.

b. The old cost of equity is equal to 13.61%, it is lower than the new cost of equity by 1.73%.

c. The old cost of equity is equal to 11.88%, it is lower than the new cost of equity by 1.73%.

d. The new cost of equity is equal to 13.61%, it is lower than the old cost of equity by 1.73%.

e. None of the above

1. EditCo has recently reported a value of operations of $720 million and a Free Cash Flow of $30.12 million. This FCF is expected to grow at a constant growth rate "g". Assume that EditCo's weighted average cost of capital is 12%, and that it has 10 million shares outstanding. Determine the growth rate "g".*

5 points

a. 7.50%

b. 16.89%

c. 8.16%

d. 15.53%

e. None of the above

2. Estetico Inc. has recently published the following data:*

4 points

a. 30%

b. 70%

c. 55%

d. 45%

e. None of the above

3. Melt Inc. currently has 1.5 million shares outstanding selling at $140 each. It has also reported a DPS of $10.55 per share. The management thinks that the price and the DPS are too high, and they must be reduced through a split. The CFO has provided you with the following analysis:*

6 points

a. Split 7-for-2

b. Split 5-for-2

c. Split 4-for-2

d. Split 6-for-2

e. None of the above

4. Fabulous Home is a company that produces and sells homeware. It has estimated the following data for the upcoming year:*

4 points

a. $19

b. $20

c. $21

d. $22

e. None of the above

5. Armada Inc. has recently reported an EBIT of $1,850,000. During the year, Armada Inc. has sold 17,000 bags for $150 each. The variable costs per unit were equal to $25. The company thinks of changing its production process by increasing the variable costs per unit by $10 and increasing the output by 10,500 bags. What is the firm's incremental profit?*

5 points

a. $1,752,500

b. $1,037,500

c. $1,587,500

d. $1,902,500

e. None of the above

6. Watches Inc. is a company that produces and sells watches. During 2020, the company has sold each mirror for $120. The variable costs per unit were equal to $14. As a result, the company has reported a profit of $110,000. The company wants to introduce increase the quality of its watches. Therefore, the selling price and the variable costs per unit would be increased by 20% and 10% respectively. Also, the profits would be increased by 22%. Assuming that Assuming that the quantity sold (Q) and the fixed costs (F) remain constant before and after the introduction of the new features. What are the company's approximate fixed cost (F) and quantity sold (Q)?*

6 points

a. F= $3,405 and Q= 1,080 units

b. F= $3,504 and Q= 1,070 units

c. F= $3,045 and Q= 1,800 units

d. F= $3,540 and Q= 1,700 units

e. None of the above

7. LKB INC. has reported a $2.2 million EBIT at the end of 2018. It had sold 500 tables at a price of $102 each. The total fixed costs were equal to $600,000. The variable costs per unit were equal to $24. LKB INC. wants to buy a new equipment that could increase the output by 100, increase the price and the variable costs by $18 and $6 respectively. Should LKB INC. buy the new equipment?*

6 points

a. LKB INC. should buy the new equipment since the new breakeven quantity is higher than the old one by 1,025 units.

b. LKB INC. should not buy the new equipment since the new breakeven quantity is lower than the old one by 1,025 units.

c. LKB INC. should buy the new equipment since the new breakeven quantity is lower than the old one by 1,025 units.

d. LKB INC. should not buy the new equipment since the new breakeven quantity is higher than the old one by 1,025 units.

e. None of the above.

8. Lipstick Co. currently has 12 million shares outstanding. It raised $550 million in new debt and used this to buy back stocks. After the recap, Lipstick Co. stock price is $80 per share. What is Lipstick Co.'s number of shares outstanding after the recap?*

4 points

a. 6.875 million shares

b. 5.125 million shares

c. 4.291 million shares

d. 7.236 million shares

e. None of the above

9. Balencia Co. is a company that produces and sells electronic devices. It is located in Brasilia. The company is planning to expand its operations to Rio de Janeiro without changing its current capital structure. The CFO of Balencia Co. has provided you with the following information:*

6 points

a. $16 million; $4.2/share; $1.94/share.

b. $16 million; $4.2/share and $2.27/share.

c. $24 million; $1.94/share; $5.3/share.

d. $21 million; $5.3/share; $1.94/share.

e. None of the above.

10. Hallo Inc. is planning to expand its business and open a crowdfunding platform in USA. Its current capital structure consists of 30% debt and 70% equity. The company's forecasted EPS and DPS are respectively equal to $4.2 and $2.4 per share. Assume that the company has 300,000 shares outstanding and that its target debt to total assets ratio is 10% higher than its current one. What is the value of the forecasted capital budget?*

6 points

a. $900,000

b. $1,350,000

c. $675,000

d. $771,429

e. None of the above

11. Align Inc. has provided you with the following data:*

7 points

a. The company's net income is less than its taxable income by $1,575,000.

b. The company's dividend payout ratio is 70.9%

c. The company's retained earnings are less than its dividends by $1,749,000.

d. The company's EPS is higher than its DPS by $0.294 per share.

e. None of the above

12. Charm Inc. currently has 1.2 million shares outstanding each selling for $60. It is contemplating a 5-for-2 stock split. The firm believes that its total market value would increase by 6% following the split due to the improved liquidity. What is Charm Inc.'s expected price after the split?*

5 points

a. $23.60

b. $24.00

c. $25.44

d. $22.64

e. None of the above

13. Fed Inc. has currently reported a value of operations of $550 million. Fed Inc. has 8 million shares outstanding. Also, it has $54 million, $85 million and $32 million of preferred stocks, debt, and short-term investments respectively. The firm plans to use its short-term investments to repurchase some of its common stocks. Assume that the firm has no other non-operating assets. What is the intrinsic stock price immediately before and immediately after the repurchase?*

4 points

a. Immediately before the repurchase, the intrinsic value of equity is $433 million, however, immediately after the repurchase, it is equal to $465 million.

b. Immediately before the repurchase, the intrinsic value of equity is $379 million, however, immediately after the repurchase, it is equal to $411 million.

c. Immediately before the repurchase, the intrinsic value of equity is $443million, however, immediately after the repurchase, it is equal to $411 million.

d. Immediately before the repurchase, the intrinsic value of equity is $411 million, however, immediately after the repurchase, it is equal to $465 million.

e. None of the above

14. You were provided with the following data for companies T and C:*

4 points

a. T; C; $397,402.60

b. C; T; $705,982.91

c. C; T; $1,198,290.60

d. T; C; $801,645.23

e. None of the above

15. VilCo Company has provided you with the following data:*

3 points

a. 3105 shares

b. 3025 shares

c. 2180 shares

d. 2389 shares

e. None of the above